International Accounting

Standard- 24
Related Party
Disclosures
 Background
• Issued by the International Accounting Standards
Committee in July 1984.
• In April 2001 the International Accounting
Standards Board (IASB) adopted IAS 24 Related
Party Disclosures
• In December 2009 the IASB issued a revised IAS
24 to simplify the definition of ‘related party’ and
to provide an exemption from the disclosure
requirements for some government-related
entities.
 Objective
• The objective of this Standard is to ensure
that an entity’s financial statements contain the
disclosures necessary to draw attention to the
possibility that its financial position and profit or
loss may have been affected by the existence of
related parties and by transactions and
outstanding balances, including commitments,
with such parties.
 Scope
• This Standard shall be applied in:
(a) identifying related party relationships and
transactions;
(b) identifying outstanding balances, including
commitments, between an entity and its related parties;
(c) identifying the circumstances in which
disclosure of the items in (a) and (b) is required; and
(d) determining the disclosures to be made about
those items.
 Purpose of related party disclosures
• Related party relationships are a normal feature of commerce and
business.
• A related party relationship could have an effect on the profit or
loss and financial position of an entity.
• The profit or loss and financial position of an entity may be
affected by a related party relationship even if related party
transactions do not occur. The mere existence of the relationship
may be sufficient to affect the transactions of the entity with other
parties.
• For these reasons, knowledge of an entity’s transactions,
outstanding balances, including commitments, and relationships
with related parties may affect assessments of its operations by
users of financial statements, including assessments of the risks
and opportunities facing the entity.
 Example Showing Related Parties
Parent Director of Parent Close family of director

100% 50% 30%

Investor with Company-A Joint venture B Company C
significant
influence
70% 100% 50% 30%
30%

Directors Reporting Subsidiary D Joint venture E Associate F

Entity (See below) (See below)

Close family of 50% 50%

directors Joint venture Joint venture
investor
30% 100%
100% Sub-
Associate G Subsidiary H
subsidiary. J
Joint Venture E and Associate F
The IFRS definition of a related party does not include joint venture E and associate F
above. However, an associate or joint venture of key management personnel of the parent is
a related party under IAS 24.
 Definitions
The following terms are used in this Standard with the meanings
specified:
• A related party is a person or entity that is related to the entity that is preparing
its financial statements (in this Standard referred to as the ‘reporting entity’).
(a) A person or a close member of that person’s 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; or
(iii) is a member of the key management personnel of the reporting
entity or of a parent of the reporting entity.
(b) An entity is related to a reporting entity if any of the following
conditions applies:
(i) The entity and the reporting entity are members of the same group
(which means that each parent, subsidiary and fellow subsidiary is related to the
others).
(ii) One entity is an associate or joint venture of the other entity (or an
associate or joint venture of a member of a group of which the other
entity is a member).
 (iii) Both entities are joint ventures of the same third party.
(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 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.
(vi) The entity is controlled or jointly controlled by a person
identified in (a).
(vii) A person identified in (a)(i) has significant influence
over the entity or is a member of the key management personnel of
the entity (or of a parent of the entity).
A related party transaction is a transfer of resources, services or
obligations between a reporting entity and a related party, regardless
of whether a price is charged.
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:
(a) that person’s children and spouse or domestic partner;
(b) children of that person’s spouse or domestic partner; and
(c) dependents of that person or that person’s spouse or domestic partner.
Compensation includes all employee benefits (as defined in IAS 19 Employee
Benefits) including employee benefits to which IFRS 2 Share-based Payment
applies. 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:
(a) short-term employee benefits, such as wages, salaries and social security
contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if
payable within twelve months of the end of the period) and non-monetary benefits
(such as medical care, housing, cars and free or subsidized goods or services) for
current employees;
(b) post-employment benefits such as pensions, other retirement benefits,
post-employment life insurance and post-employment medical care;
 (c) other long-term employee benefits, including long-
service leave or sabbatical(vocational) leave, jubilee or other long-
service benefits, long-term disability benefits and, if they are not
payable wholly within twelve months after the end of the period,
profit-sharing, bonuses and deferred compensation;
(d) termination benefits; and
(e) share-based payment.
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.
Government refers to government, government agencies and
similar bodies whether local, national or international.
A government-related entity is an entity that is controlled, jointly
controlled or significant influence by a government.
The terms ‘control’, ‘jointly control’ and ‘significant influence’
are defined in IFRS 10, IFRS 11 Joint Arrangements and IAS 28
Investments in Associates and Joint Ventures and are used in this
Standard with the meanings specified in those IFRSs.
Control is the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities.
Significant influence is the power to participate in the financial
and operating policy decisions of an entity, but it is not control
over those policies. Significant influence may be gained by share
ownership, statue or agreement.
Joint control is the contractually agreed sharing of control over an
economic activity.
Management Control- Control can be achieved in three ways:
1. By Ownership- An entity can control other by owning more
than 50% voting power of another entity.
2. By way of controlling of the composition of the BOD.- An
entity controls another entity if it can control the composition
of the BOD of the other company/ governing body of another
entity other than the company
3. By way of substantial interest in voting power- an entity can
control another entity if by virtue of holding of substantial
voting power, it can direct the operating or the financial
policies of the other.
Example-1: Company A enjoys 60% voting
right in company B. It also enjoys 30% voting
right in company C.
1. Should companies B and C be treated as
parties related to company A?
2. How should entity A control composition of
the board of directors of B and C enterprises?
Example – 2 : Company A enjoys 60%
voting right in B Ltd. It also enjoys
20% voting right in C Ltd. Company B
enjoys 35% voting right in C Ltd. Is C
Ltd. a related party of A Ltd.?
 Example 03: X Limited sold to Y Limited goods
having a sales value of Rs. 25 lakhs during the
financial year ended 31.03. 2013. Mr. Anil the
Managing Director and Chief Executive of X
Limited owns nearly 100 percent of the capital of Y
Limited. The sales were made to Y Limited at the
normal selling price of X Limited. The Chief
Accountant of X Limited does not consider that these
sales should be treated any differently from any other
sales made by the company despite being made to
controlled company, because the sales were made at
normal and, that too, at arm’s length prices.

 Discuss the above issue from the view point of IAS-

24.
Example 07: XY Ltd. acquires a 19 percent
voting power in AB Ltd. XY Ltd. being the single
largest shareholder of AB Ltd. appoints the
Chairman and one other member of the Board of
Directors of AB Ltd. (out of a total of 12
directors). These nominees of XY Ltd. are not
directors of XY Ltd. By virtue of its
representation on the Board (through 2 nominees)
of AB Ltd. XY Ltd. participates in the financial
and operating policy decisions of the enterprise
taken at the board meetings.
Is AB Ltd. a related party of XY Ltd.?
Are non-executive directors of a company related
parties?
The term 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.
Non- executive directors are members who
participate in ‘planning, directing and controlling
activities. They are treated as “key management
personnel”.
Who are not related parties?
In the context of this Standard, the following are not related parties (Para
11of IAS 24):
(a) two entities simply because they have a director or other
member of key management personnel in common or because a member of
key management personnel of one entity has significant influence over the
other entity.
(b) two joint ventures simply because they share joint control of a
joint venture.
(c)
(i) providers of finance,
(ii) trade unions,
(iii) public utilities, and
(iv) departments and agencies of a government that does not
control, jointly control or significant influence the reporting entity, simply
by virtue of their normal dealings with an entity (even though they may
affect the freedom of action of an entity or participate in its decision-making
process).
(d) a customer, supplier, franchisor, distributor or general agent with
whom an entity transacts a significant volume of business, simply by virtue
of the resulting economic dependence.
List of Related party transactions:
Para 24 of IAS 24 gives the following examples of related party
transactions;
(a) purchases or sales of goods (finished or unfinished);
(b) purchases or sales of property and other assets;
(c) rendering or receiving of services;
(d) leases;
(e) transfers of research and development;
(f) transfers under license agreements;
(g) transfers under finance arrangements (including loans
and equity contributions in cash or in kind);
(h) provision of guarantees or collateral;
(i) commitments to do something if a particular event
occurs or does not occur in the future, including executory
contracts1 (recognized and unrecognized); and
(j) settlement of liabilities on behalf of the entity or by the
entity on behalf of that related party.
 Disclosures
Relationships Key management Related party Government-
transactions
between parents personnel related entities are
Only if there have been
and subsidiaries compensation transactions, disclose: exempt from the
Regardless of Disclose in total for The nature of related disclosure
whether there have the following party relationship requirements of
been transactions categories: Information about paragraph 18 in
transactions
Disclose name of Short-term relation to related
Information about
parent (or ultimate employee benefits outstanding balances to party transactions
controlling party). Post-employment understand the and outstanding
benefits potential effect on the balances, including
Other long-term Annual Financial commitments.
Statements
benefits
Information about
Termination impairment(mutilation)
benefits or bad debts with
Share-based related parties.
payments. Disclose related party
transactions for each
category of related
parties.