Day 28: IAS 24 – Related Party Disclosures
Introduction
International Accounting Standard (IAS) 24, “Related Party Disclosures,” provides guidance on the disclosure requirements for transactions and outstanding balances between related parties. The standard aims to ensure that financial statements provide transparent and comprehensive information about related party relationships and transactions, which is essential for investors and other stakeholders to make informed decisions.
Identifying Related Parties
A related party is an entity or individual that has a close relationship with the reporting entity, which can influence the financial decisions and transactions between them. IAS 24 defines related parties as follows:
- Persons or Close Members of Their Family: Individuals who have control or joint control over the reporting entity, or who are subject to the control of the reporting entity.
- Key Management Personnel: Individuals who have the authority and responsibility for planning, directing, and controlling the activities of the reporting entity, either directly or indirectly.
- Entities Controlled by the Reporting Entity: Subsidiaries, associates, and joint ventures of the reporting entity.
- Entities That Control the Reporting Entity: Parent entities and other entities that control the reporting entity.
- Associates and Joint Ventures: Entities in which the reporting entity has significant influence or joint control.
- Post-Employment Benefit Plans: Plans for the benefit of employees of the reporting entity, including pension funds and other post-employment benefit plans.
- Government and Related Entities: Government entities and other entities that have control or significant influence over the reporting entity.
Disclosure Requirements
IAS 24 requires entities to disclose information about related party relationships and transactions. The disclosure requirements include:
- Nature of the Relationship: A description of the nature of the relationship between the reporting entity and the related party.
- Amount of Transactions: The amount of transactions between the reporting entity and the related party, including the nature of the transactions and the terms and conditions.
- Outstanding Balances: The amount of outstanding balances between the reporting entity and the related party, including the terms and conditions.
- Provisions for Related Party Transactions: Information about any provisions made for related party transactions, including the nature and amount of the provisions.
- Key Management Personnel Compensation: Information about the compensation of key management personnel, including the nature and amount of the compensation.
- Transactions with Government Entities: Information about transactions with government entities, including the nature and amount of the transactions.
Examples of Related Party Disclosures
Example 1: Transactions with a Subsidiary
Suppose Company ABC has a subsidiary, Company XYZ. During the year, Company ABC sold goods to Company XYZ for $50 million. The outstanding balance at the end of the year is $20 million. The disclosure would include:
- Nature of the relationship: Company XYZ is a subsidiary of Company ABC.
- Amount of transactions: $50 million in goods sold.
- Outstanding balances: $20 million outstanding at the end of the year.
Example 2: Transactions with Key Management Personnel
Suppose Company ABC has key management personnel who received compensation of $2 million during the year. The disclosure would include:
- Nature of the relationship: Key management personnel of Company ABC.
- Amount of transactions: $2 million in compensation paid.
Example 3: Transactions with a Joint Venture
Suppose Company ABC has a joint venture, Company PQR. During the year, Company ABC provided services to Company PQR for $30 million. The outstanding balance at the end of the year is $10 million. The disclosure would include:
- Nature of the relationship: Company PQR is a joint venture of Company ABC.
- Amount of transactions: $30 million in services provided.
- Outstanding balances: $10 million outstanding at the end of the year.
Conclusion
IAS 24 provides a comprehensive framework for disclosing information about related party relationships and transactions. By understanding the requirements for identifying related parties and the disclosure requirements, entities can ensure that their financial statements provide transparent and useful information to investors and other stakeholders. Compliance with IAS 24 is essential for providing a clear view of the entity’s related party relationships and the potential impact of related party transactions on its financial position and performance.
FAQs
1. What is the purpose of IAS 24?
The purpose of IAS 24 is to provide guidance on the disclosure requirements for transactions and outstanding balances between related parties, ensuring transparency and comprehensive information in financial statements.
2. Who are considered related parties under IAS 24?
Related parties include persons or close members of their family, key management personnel, entities controlled by the reporting entity, entities that control the reporting entity, associates and joint ventures, post-employment benefit plans, and government and related entities.
3. What information must be disclosed about related party transactions?
Entities must disclose the nature of the relationship, the amount of transactions, outstanding balances, provisions for related party transactions, key management personnel compensation, and transactions with government entities.
4. Why are related party disclosures important?
Related party disclosures are important because they provide transparency and help stakeholders understand the potential impact of related party transactions on the entity’s financial position and performance.
Glossary
- Related Party: An entity or individual that has a close relationship with the reporting entity, which can influence the financial decisions and transactions between them.
- Key Management Personnel: Individuals who have the authority and responsibility for planning, directing, and controlling the activities of the reporting entity.
- Subsidiary: An entity that is controlled by the reporting entity.
- Joint Venture: An entity in which the reporting entity has joint control.
- Associate: An entity in which the reporting entity has significant influence.
- Post-Employment Benefit Plans: Plans for the benefit of employees of the reporting entity, including pension funds and other post-employment benefit plans.
- Government Entities: Entities that have control or significant influence over the reporting entity.
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