IAS 24 requires certain disclosures about related parties as it wants to draw users’ attention to the possibility that entity’s financial position and profit or loss may have been affected by the existence of related parties (IAS 24.1).
Definition of a related party
Definition of a related party is set out in paragraph IAS 24.9 and is discussed below.
An entity as a related party
An entity is related to a reporting entity if any of the following conditions applies (IAS 24.9). See also a very useful diagram that follows.
- The entity and the reporting entity are members of the same group.
- One entity is an associate or joint venture of the other entity
- Both entities are joint ventures of the same third party.
- One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
- The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
- The entity is controlled or jointly controlled by a person identified as related party in previous section.
- A person having control or joint control of the reporting entity (or his close family member) has significant influence over the entity in question or is a member of the key management personnel of this entity (or of a parent of this entity).
- The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.
Example: parties related through other entities
The diagram below displays an example of related party web based on capital relationships:
A person as a related party
A person, or a close member of that person’s family, is related to a reporting entity if that person:
- has control, joint control or significant influence over the reporting entity or
- is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity (IAS 24.9). Applying this definition in practice is strongly correlated with local law and specific organisational structure of the entity. All executive and non-executive directors should be treated as members of key management personnel, but other persons may also qualify. For example, if a person regularly appears in other financial reports, such as management commentary, they probably should also be considered a member of key management personnel. Such a person need not be a ‘legal’ employee of the reporting entity. For example, CEO of a major subsidiary may also qualify provided that the above criteria are met.
If a person is related to the entity based on the above-mentioned criteria, all its close family members are also related parties. Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include (IAS 24.9):
- that person’s children and spouse or domestic partner;
- children of that person’s spouse or domestic partner; and
- dependants (i.e. someone depending financially) of that person or that person’s spouse or domestic partner.
As we can see, the web of related parties based on ‘personal’ relationships can be wide. In practice, no one is able to identify close family members except for the person in question, therefore these persons are usually asked by the reporting entity to declare whether their close family members as defined by IAS 24 carried out any transactions with the reporting entity. Moreover, the above list is non-exhaustive and an entity may identify e.g. a brother of a director as a related party.
Example: parties related through persons
The diagram below displays an example of related party web based on personal relationships:
Relationships between a parent and its subsidiaries should be disclosed irrespective of whether there have been transactions between them. An entity discloses the name of its parent and, if different, the ultimate controlling party. If neither the entity’s parent nor the ultimate controlling party produces consolidated financial statements available for public use, the name of the next most senior parent that does so should also be disclosed (IAS 24.13-16).
Compensation of key management personnel
An entity discloses key management personnel compensation in total and for each of the major categories of employee benefits as defined by IAS 19 and share-based payment (IAS 24.17). Employee benefits are all forms of consideration paid, payable or provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity. It also includes such consideration paid on behalf of a parent of the entity in respect of the entity. Compensation includes (IAS 24.9):
- short-term employee benefits, such as wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses and non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services);
- post-employment benefits such as pensions, other retirement benefits, post-employment life insurance and post-employment medical care;
- other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits
- termination benefits; and
- share-based payment.
Besides obvious items such as salaries and bonuses and other forms of direct remuneration (whether paid or accrued), this disclosure should also include benefits in-kind (medical care, housing etc), holiday accrual and actuarial costs for post-employment and other long-term benefits. Allocation of actuarial costs may be difficult or even impossible in practice, therefore a simplified approach is often followed. Many entities do not include such costs in their disclosure or disclose them only when actual payments are made.
For share-based payment arrangements it is possible that a compensation during a year will be negative when e.g. non-market vesting conditions apply. If this is the case, it may be useful to add explanatory comment on why the share-based payment compensation is negative.
As per general IAS 24 requirements, outstanding balances and commitments should also be disclosed for all related parties, so this includes key management personnel as well (IAS 24.18b). Outstanding balances can result from e.g. accrued bonuses or accrued holiday pay.
It is often the case that key management personnel of a group entity (usually parent) allocates some of its time to another group entity (usually a subsidiary) without any remuneration (e.g. as a non-executive director). Strictly speaking, a subsidiary should disclose this as a related party transaction, e.g. by allocating a notional expense based on estimated time spent by a given director. In my opinion, it is also possible to give a narrative disclosure stating e.g. that a director of a parent also works as a non-executive director at the reporting entity without additional remuneration. Another approach would be to consider that the responsibility of such a director is to represent parent’s interest in the subsidiary, and therefore it is the parent that benefits from his services, even if the director allocates some of its time to a subsidiary.
Local law often requires additional disclosures with respect to key management personnel, such as separate disclosure for each person. Many entities publish also a remuneration report, but usually outside of financial statements.
Paragraphs IAS 24.17A,18A cover instances where an entity obtains key management personnel services from a management entity.
Entities should disclose information about transactions with related parties necessary for users to understand the potential effect of the relationship on the financial statements. This information includes the nature of the related party relationship, the amount of the transaction, outstanding balances (including off-balance sheet commitments), guarantees, allowances and expenses for doubtful debts (IAS 24.18). A related party transaction is defined as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged (IAS 24.9). These disclosures should be made separately for categories of related parties as specified in IAS 24.19. Aggregating items of similar nature is allowed by the paragraph IAS 24.24. Separate disclosure of each individually significant transaction is not required (other than for government controlled entities in IAS 24.26b(i)).
As stated above, related party transaction should be disclosed even if nothing was charged for it (e.g. use of facilities, provision of guarantees, permission to operate under a brand name). The page on materiality mentions related party disclosures as one of the qualitative factors to be taken into account when assessing materiality. In other words, a transaction may be material, even if its amount is low. This is especially true with regards to key management compensation or for transactions made without payment (or on above/below market terms). Before making any disclosures relating to transactions carried out on above/below market terms, consult your colleagues from tax department, as such transactions may violate local tax law relating to transfer pricing.
Intragroup transactions within a group are eliminated on consolidation, therefore they should not be disclosed under IAS 24 in consolidated financial statements (IAS 27.4). However, consolidated financial statements of a sub-group should obviously include disclosures relating to related parties outside this sub-group.
When related party relationship changes during current or comparative period, disclosure of transactions relates only to the period when the related party relationship existed (this is not specifically addressed in IAS 24 though).
Off-balance sheet commitments
IAS 24.18b requires disclosure of commitments relating to related party transactions. Unfortunately, the term ‘commitment’ is not defined by IAS 24. Additionally, IAS 24.21i requires disclosure of ‘commitments to do something if a particular event occurs or does not occur in the future, including executory contracts (recognised and unrecognised)’.
A reference to IAS 24 can be found in IFRS 12 that requires (IFRS 12.23a) disclosure of commitments relating to joint ventures. Paragraph IFRS 12.B19 lists examples of such commitments and IFRS 12.B20 goes on to say that these examples illustrate some of the types of disclosure required by paragraph IAS 24.18. Additionally, disclosure of commitments to purchase fixed assets is required by IAS 16.74c and IAS 38.122e, no reference to IAS 24 is made there, but in the context of the previous references, entities can assume that these are also required as a part of related party disclosures.
In summary, extensive related party disclosure requirements relate also to off-balance sheet items, so make sure that these are not overlooked.
Paragraphs IAS 24.25-26 provides practical relief for entities that are controlled, jointly controlled or significantly influenced by the government. For transactions with the government or another entity with which the entity is related through the control etc. by the same government, the entity needs to provide a qualitative or quantitative indication of the extent of transactions that are collectively significant. Only each individually significant transaction requires a disclosure on its nature and amount. IAS 24.27 specifies factors that should be considered when assessing the significance of transactions.
Examples of related party disclosures
Below is an illustrative example of related party disclosures.
Related party relationships
Example Ltd. is controlled by Parent PLC, which is also an ultimate controlling party. Additionally, Lexa PLC has significant influence over Example Ltd. Example Ltd is a venturer in Ventures Ltd. and has several subsidiaries which are listed in note 2 to these separate financial statements.
RealEstateMasters Ltd. is also considered to be a related party as it is controlled by Mr John Smith, who is a CEO of Example Ltd.
Transactions and commitments
The following table provides the amount of transactions entered into by Example Ltd. with its related parties:
1. Transactions with subsidiaries of Example Ltd will not be shown in consolidated financial statements of Example Ltd, as they are eliminated on consolidation and hence do not impact consolidated accounts.
2. Identical table for comparative period should be provided as well.
Purchases from Parent PLC comprise mainly royalty fee for the use of Parent brand. Example Ltd. pays 1.5% of revenue earned under Parent brand. Sales to subsidiaries and associates of Parent PLC comprise mainly provision of shared accounting services charged on a cost-plus-margin basis.
Sales to subsidiaries of Example Ltd. and Ventures Ltd. comprise mainly consulting services. Charges are made on a per-hour basis and the rate is set on a cost-plus-margin basis.
Purchases from RealEstateMasters Ltd. are property rental fees. Rental is charged on a per square meter basis and is comparable to market fees.
Loans and dividends are presented below:
Loan from Parent PLC bears an interest of 6% p.a. and is repayable on 30 June 20X5.
Example Ltd. has also $5 million of contractual commitments for the acquisition of property, plant and equipment from Parent PLC.
Key management personnel compensation
Example Ltd. has an executive committee consisting of 4 members, and a non-executive committee consisting of 6 members. Members of both committees are considered to be key management personnel. The table below provides key management personnel compensation.
Remuneration policy for key management personnel can be found in the annual report (NB: remuneration policy is not required by IFRS, but is often a requirement of local law).