CH 2. IAS 24 Related Party Disclosures Flashcards
What is a related party?
A related party is defined as:
“a person or entity that is related to the entity that is preparing its financial statements” (IAS 24, para 9).
How do you determine a person is a related party?
(a) PERSON or a CLOSE MEMBER OF FAMILY is related to a reporting entity if that person:
(i) has control or joint control of the reporting entity
(ii) has significant influence over the reporting entity
(iii) is a member of the key management personnel of the reporting entity or of a parent entity.
Close members of the family of a person are defined:
as ‘those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include:
• Children and Domestic partner;
• (Step)Children of that person’s spouse or domestic partner; and
• Dependants of that person or that person’s spouse or domestic partner. ‘
In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.
How do you determine an Entity is a related party?
An entity is related to a reporting entity if any of the following conditions apply:
(i) Both Entities are members of the same group
(ii) One entity is an associate/joint venture of the other entity
(iii) Both entities are joint ventures of the same owner
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or on entity related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a related party “person”
{vii) A identified related person:
(i)has significant influence over the entity,
or
(ii)is a member of the key management personnel of the entity or parent entity
(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or the parent of the reporting entity.
Key Identifier of a related party is an unbroken chain of control, a position that would allow an individual to take advantage of a situation for personal gain.
Which parties does IAS24 explicitly note are not to be considered related parties?
IAS 24 notes that the following should not be considered related parties:
- two entities just because they have a director or other member of key management personnel in common
- two joint businesses just because they share joint control of a joint venture
- two associates with the same person with significant control
- customer or supplier with whom an entity transacts a significant volume of business.
What Disclosures are required for related parties?
IAS 24 requires that relationships between parents and subsidiaries should always be disclosed.
The name of the parent and, if different, the ultimate controlling party should be given.
Key management personnel
Total compensation granted to key management personnel should be disclosed and broken down into the following categories:
- short-term benefits
- pension benefits
- termination benefits
- share-based payment schemes.
Disclosure of transactions and balances Between related parties
If there have been transactions between related parties, and/or if there are balances outstanding between the parties, the following should be disclosed:
- Nature of the related party relationship
- Description of the transactions
- Amounts of the transactions
- Amounts and Details of any outstanding balances
- Allowances for receivables in respect of the outstanding balances
- The irrecoverable debt expense in respect of outstanding balances.
IAS 24 specifies that an entity may only disclose that related party transactions were made on terms equivalent to those that prevail in arm’s length transactions if such terms can be substantiated.
How are Government-related entities treated?
If the reporting entity is a government-related entity (ie government has control, joint control or significant influence),
There is an exemption available from full disclosure of transactions, outstanding balances and commitments with the government or with other entities related to the same government.
e.g British government and NHS or NHS with the DVLA.
However, if the exemption is applied, disclosure is required of:
- (a) The name of the government and nature of the relationship
-
(b) The nature and amount of each individually significant transaction
(plus a qualitative or quantitative indication of the extent of other transactions which are collectively, significant)
