IAS 24 : Related Party Disclosures

Question 1

Related party relationships and transactions between related parties are a normal feature of commerce and business. Many entities carry on their business activities through subsidiaries, joint ventures, and associates and there are inevitably
transactions between these parties. The investor, in these circumstances, has the ability to affect the financial and operating policies of the investee. [IAS 24.5]

Answer 1

It is also common for entities under common control, which are not a group for financial reporting purposes, to
transact with each other. The disclosures considered necessary in such circumstances are addressed by IAS 24 – Related Party Disclosures.

Question 2

The related party issue

The problems posed by related party relationships and transactions are described in IAS 24 as follows:
‘A related party relationship could have an effect on the profit or loss and financial position of an entity. Related parties may enter into transactions that unrelated parties would not. For example, an entity that sells goods to its parent at cost might not sell on those terms to another customer. In addition, transactions between related parties may not be made at the same amounts as between unrelated parties.

Answer 2

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 example, a subsidiary may terminate relations with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same activity as the former trading partner. Alternatively, one party may refrain from acting because of the significant influence of another – for example, a subsidiary may be instructed by its parent not to engage in research and development.’ [IAS 24.6-7].

Question 3

Possible solutions - Re-measurement of related party transactions at fair values

One solution to the problems posed by related party relationships and transactions is to adjust the financial statements to value related party transactions as if they occurred with an independent third party and recognise any such transactions at an arm’s length
price.

Answer 3

However, the agreement for over thirty years is that it is often impossible to establish what would have been the terms of any non-arm’s length transaction had it
been negotiated on an arm’s length basis. This is because no comparable transactions may have taken place and, in any event, the transaction might never have taken place at all if it had been negotiated using different values.

Question 4

Possible solutions - Disclosure of transactions

Because of this problem, accounting standards internationally require disclosure of related party transactions and relationships, rather than adjustment of the financial statements. This approach is adopted by the IASB in IAS 24 which is a disclosure standard. IAS 24 does not establish any recognition or measurement requirements. Related party transactions are accounted for in accordance with the requirements of the IFRS applicable to the transaction. The disclosures required by IAS 24 are in addition to those required by other IFRSs. For example, a loan to a related party will also be subject to the disclosure requirements of IFRS 7 – Financial Instruments: Disclosures.

Answer 4

The purpose of disclosing information required by IAS 24 is to give users of the financial statements information about transactions and whether they are at market terms, outstanding balances, including commitments, and relationships with related parties that may affect their assessment of an entity’s operations, including assessments of the risks and opportunities facing an entity. [IAS 24.8].

Question 5

Objective

IAS 24 states that its objective ‘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’. [IAS 24.1].

Answer 5

Accordingly, IAS 24 requires disclosure of related party transactions and outstanding balances, including commitments, together with the names of any parties who control the reporting entity.

Question 6

Scope 1

IAS 24 applies 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. [IAS 24.2].

Answer 6

The standard explicitly requires disclosure of related party relationships, transactions and outstanding balances, including commitments, in both the consolidated and separate financial statements of a parent or investors with joint control of, or significant
influence over, an investee presented in accordance with IFRS 10 – Consolidated Financial Statements – or IAS 27 – Separate Financial Statements. The standard also
applies to individual financial statements. [IAS 24.3]

Question 7

Scope 2

All entities within a group that prepare their financial statements under IFRS must disclose related party transactions and outstanding balances with other entities in the group in the entity’s own financial statements. [IAS 24.4]. There are no disclosure exemptions for subsidiaries, or for parent companies that produce separate financial statements even where those separate financial statements are issued with the consolidated financial statements of the group of which they are a part. The IASB considers that the financial statements of an entity that is part of a consolidated group may include the effects of extensive intragroup transactions.

Answer 7

Therefore, it concluded that the disclosures required by IAS 24 are essential to understanding the financial
position and financial performance of such an entity and should be required for separate financial statements presented in accordance with IAS 27. The IASB also believes that disclosure of intragroup transactions is essential because external users of the financial statements need to be aware of the interrelationships between related parties, including the level of support provided by related parties, to assist in their economic decisions. [IAS 24.BC16-17].

Question 8

Scope 3

The standard notes that ‘intragroup related party transactions and outstanding balances are eliminated in the preparation of consolidated financial statements of the group’. [IAS 24.4]. This implies that disclosure of such transactions and balances is not required in the group’s consolidated financial statements since, so far as those financial statements are concerned, such items do not exist.

Answer 8

However, transactions and balances between an investment entity and those of its subsidiaries, held as part of an investment portfolio that are measured at fair value through profit or loss and not consolidated in accordance with IFRS 10 should be disclosed in the consolidated financial statements. [IAS 24.4].

Question 9

IDENTIFICATION OF A RELATED PARTY AND RELATED PARTY TRANSACTIONS

Answer 9

IDENTIFICATION OF A RELATED PARTY AND RELATED PARTY TRANSACTIONS

Question 10

A related party is defined as ‘a person or entity that is related to the entity that is preparing its financial statements (the “reporting entity”)’. [IAS 24.9]. The definition of related parties is reciprocal. The use of the word ‘party’ means that the disclosure applies to both individuals and to entities. The factors considered in the identification of a related party is consistent whether the controlling party is a person or an
entity.

Answer 10

The Standard applies the idea of an extended group. The extended group includes joint ventures and associates of the parent (that are related to the subsidiaries of the parent), joint ventures and associates of a parent’s subsidiary (that are related to the subsidiaries of the parent) and subsidiaries of an associate or a joint venture (that are related to
the parent).

Question 11

The standard contains a multi-part definition of ‘related party’ and the following are considered to be related parties of the reporting entity:

• certain persons or a close member of that person’s family;
• entities that are members of the same group;
• entities that are associates or joint ventures;
• entities that are joint ventures of the same third party;
• entities that are joint ventures and associates of the same third entity;

Answer 11

• post-employment benefit plans;
• entities under control or joint control of certain categories of persons or close members of such a person’s family;
• entities under significant influence of certain categories of persons or close members of such a person’s family;
• entities, or any member of the group of which they are a part, that provide key management personnel services; and
• government-related entities.

Question 12

The standard emphasises that attention should be directed to the substance of the relationship and not merely the legal form. [IAS 24.10].

Answer 12

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. [IAS 24.9].

Question 13

Persons or close members of a person’s family that are related parties 1

A person or close member of that person’s family is related to a reporting entity if that person:

(i) has control or joint control over 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. [IAS 24.9].

Answer 13

Close members of a 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:

(a) that person’s children and spouse or domestic partner;
(b) children of that person’s spouse or domestic partner; and
(c) dependants of that person or that person’s spouse or domestic partner. [IAS 24.9]

Question 14

Persons or close members of a person’s family that are related parties 2

The Interpretations Committee confirmed in May 2015 that the definition appears to provide no scope to argue that there are circumstances in which the specific family members described in (a) to (c) above are not related parties. Dependants are not limited to children and may include other relatives depending on the facts and circumstances.

Answer 14

The Interpretations Committee observed that the definition of close members of the family of a person:

• is expressed in a principle-based manner and involves the use of judgement to determine whether members of the family of a person (including that person’s parents) are related parties or not; and
• includes a list of family members that are always considered close members of the family of a person.

Question 15

Persons or close members of a person’s family that are related parties 3

The Interpretations Committee further noted that the list of family members that are always considered ‘close members’ is non-exhaustive and does not preclude other family members from being considered as close members of the family
of a person. Consequently, other family members, including parents or grandparents, could qualify as close members of the family depending on the assessment of specific facts and circumstances. Therefore, the Interpretations Committee determined that neither an Interpretation nor an amendment to the Standard was necessary and therefore decided not to add this issue to
its agenda.

Answer 15

IAS 24 does not elaborate on the meaning of ‘may be expected to influence, or be influenced by, that person’. A narrow interpretation is that the standard explicitly
mentions only those instances where such influence is expected without doubt. Thus, a relationship with, for example, siblings or relatives that are even more
distant would need to be assessed to determine whether there is evidence of sufficient influence. A broader interpretation would support the fact that the mere
existence of the family relationship is sufficient to trigger the disclosure requirements included in IAS 24.

Question 16

Persons or close members of a person’s family that are related parties 4

Relationships involving a person or close family members as investors are illustrated in the following examples, which are based on illustrative examples published by the IASB, which accompany, but are not part of IAS 24.

Answer 16

Example 35.1: Person as investor

Example 35.2: Close members of the family holding investments

• refer OneNote

Question 17

Persons or close members of a person’s family that are related parties - Control

The definition of ‘control’ in IAS 24 is a cross-reference to the definition in IFRS 10. IFRS 10 states that ‘an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee’. [IFRS 10 Appendix A].

Answer 17

…

Question 18

Persons or close members of a person’s family that are related parties - Joint control

The definition of ‘joint control’ in IAS 24 is a cross-reference to the definition in IFRS 11 – Joint Arrangements. IFRS 11 defines joint control as ‘the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control’. [IFRS 11 Appendix A].

Answer 18

In the definition of a related party, a joint venture includes subsidiaries of the joint venture. [IAS 24.12]. Therefore, for example, the subsidiary of a joint venture and the investor who has joint control are related to each other.

Question 19

Persons or close members of a person’s family that are related parties - Significant influence

The definition of ‘significant influence’ in IAS 24 is a cross-reference to the definition in IAS 28 – Investments in Associates and Joint Ventures. IAS 28 defines significant influence as ‘the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies’. [IAS 28.3].

Answer 19

In the definition of a related party, an associate includes subsidiaries of the associate. Therefore, for example, the subsidiary of an associate and the investor who has significant influence over the associate are related to each other. [IAS 24.12].

Question 20

Persons or close members of a person’s family that are related parties - Key management personnel

‘Key management personnel’ are those persons with authority and responsibility for planning, directing and controlling the activities of an entity, directly or indirectly,
including any director (whether executive or otherwise) of that entity. [IAS 24.9].

Answer 20

A related party includes all key management personnel of a reporting entity and of a parent of the reporting entity. This means that all key management personnel of all parents (i.e. the immediate parent, any intermediate parent and the ultimate parent) of a reporting entity are related parties of the reporting entity. When the reporting entity’s financial statements represent a group, key management personnel of subsidiaries might not be key management personnel of the group if those persons do not participate in the management of the group.

Question 21

Persons or close members of a person’s family that are related parties 5

Some entities may have more than one level of key management. For example, some entities may have a supervisory board, whose members have responsibilities similar to those of non-executive directors, as well as a board of directors that sets the overall operating strategy.

Answer 21

All members of either board will be considered to be key

management personnel

Question 22

Persons or close members of a person’s family that are related parties 6

The definition of key management personnel is not restricted to directors. It also includes other individuals with authority and responsibility for planning, directing and controlling the activities of an entity. The main intention of the definition is presumably to ensure that transactions with persons with responsibilities similar to those of directors, and the compensation paid to such persons, do not escape disclosure simply because they are not directors. Otherwise, there would be an obvious loophole in the standard.

Answer 22

For example, in some jurisdictions, a chief financial officer or a chief operating officer may not be directors but could meet the definition of key management
personnel. Other examples of the type of persons who are not directors but may meet the definition of key management personnel include a divisional chief executive or a director of a major trading subsidiary of the entity, but not of the entity itself, who nevertheless participates in the management of the reporting entity. A reference to individuals who are not directors in a reporting entity’s business review or management
discussion and analysis might indicate that those persons are considered to be key management personnel.

Question 23

Persons or close members of a person’s family that are related parties 7

‘Key management personnel’ are normally employees of the reporting entity (or of another entity in the same group). However, the definition does not restrict itself to employees.

Answer 23

Therefore, seconded staff and persons engaged under management or outsourcing contracts may also have a level of authority or responsibility such that they
are ‘key management personnel’.

Question 24

Persons or close members of a person’s family that are related parties 9

The definition of key management personnel refers to ‘persons’. In some jurisdictions, the term ‘person’ includes both a ‘corporate person’ and a ‘natural person’. Additionally, in some jurisdictions, a corporate entity must by law have the authority and responsibility for planning, directing and controlling the activities of an investment fund for the benefit of the fund’s investors in accordance with the fund’s constitution and relevant statutes (i.e. the corporate entity is the body acting as key management personnel). IAS 24 clarifies that if a reporting entity receives key management personnel services from another entity (described as a ‘management entity’) the disclosure requirements for key management personnel compensation (see 2.2.9 below) do not apply to the compensation paid or payable by the management entity to the management entity’s employees or directors. [IAS 24.17A]

Answer 24

Instead, amounts incurred for the service fee paid or payable by the reporting entity to the separate management entity for provision of key management personnel services are disclosed. [IAS 24.18A]. As
a result of identifying the management entity as a related party of the reporting entity, other transactions with the management entity, such as loans, are also disclosed by the reporting entity.

Question 25

Entities that are members of the same group 1 ‘An entity is related to a reporting entity if: (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) .’ [IAS 24.9(b)].

Answer 25

IAS 24 does not define group, parent and subsidiary. However, these terms are defined in IFRS 10 as follows: • a group is ‘a parent and its subsidiaries’; • a parent is ‘an entity that controls one or more entities’; and • a subsidiary as ‘an entity that is controlled by another entity’. [IFRS 10 Appendix A].

Question 26

Entities that are members of the same group 2 Therefore, all entities controlled by the same ultimate parent are related parties. This would include entities where the reporting entity holds less than a majority of the voting rights but which are subsidiaries as defined in IFRS 10. There are no exceptions to this rule.

Answer 26

Example 35.3: Entities that are members of the same group *refer OneNote

Question 27

Entities that are associates or joint ventures 1 ‘An entity is related to a reporting entity if: ... (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).’ [IAS 24.9(b)].

Answer 27

IAS 24 does not define associate or joint venture. However, these terms are defined in IAS 28 and IFRS 11. IAS 28 defines an associate as ‘an entity over which the investor has significant influence’. [IAS 28.3]. IFRS 11 defines a joint venture as ‘a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement’. [IFRS 11 Appendix A].

Question 28

Entities that are associates or joint ventures 2 Any entity that a reporting entity determines is an associate under IAS 28 or a joint venture under IFRS 11 is a related party. This requirement further applies to investments in associates or joint ventures held by a venture capital organisation, mutual fund, unit trust or similar entity including unit-linked insurance funds, even where the investment is accounted for at fair value through profit or loss under IFRS 9 – Financial Instruments – rather than under the equity method.

Answer 28

Likewise, any reporting entity that is an associate or joint venture of another entity must treat that investor entity as a related party.

Question 29

Entities that are associates or joint ventures 3 As noted above, in the definition of a related party, an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. Therefore, for example, an associate’s subsidiary and the investor that has significant influence over the associate are related to one another. [IAS 24.12].

Answer 29

The definition also means that an associate of a reporting entity’s parent is also a related party of the reporting entity. However, the definition does not cause investors in a joint venture or an associate to be related to each other (see Parties that are not related parties below). Investors in joint operations (as defined in IFRS 11) are also not related to each other.

Question 30

Entities that are associates or joint ventures 4 The application of these requirements is illustrated in the example below, which is based on an illustrative example accompanying IAS 24. The example mainly focuses on the application of the requirements to associate entities.

Answer 30

Example 35.4: Associates of the reporting entity’s group that are related parties *refer OneNote

Question 31

Entities that are associates or joint ventures - Joint operations IAS 24 defines ‘joint ventures’ of the reporting entity as related parties. The definition of a joint venture in IFRS 11 excludes joint operations, so that an investment in a joint operation is not a related party.

Answer 31

A transaction with a joint operation is either a transaction by the reporting entity with itself or a transaction with the other joint operator which would not be a related party unless it otherwise met the related party definition in IAS 24 for some other reason (e.g. because it was an entity controlled by a member of key management personnel).

Question 32

Entities that are joint ventures of the same third party 1 ‘An entity is related to a reporting entity if: ... (iii) Both entities are joint ventures of the same third party.’ [IAS 24.9(b)].

Answer 32

This is illustrated by the following example: Example 35.5: Entities that are joint ventures of the same third party *refer OneNote

Question 33

Entities that are joint ventures of the same third party 2 If, however, Entities S and A were only associates (rather than joint ventures) of the same third party then they would not be related parties. In the Basis for Conclusions to IAS 24, it was explained that a distinction was made between joint ventures and associates because the IASB considered that ‘significant influence’ was not as close a relationship as control or joint control. [IAS 24.BC19(a)].

Answer 33

As noted above, in the definition of a related party, a joint venture includes subsidiaries of the joint venture. Therefore, for example, a joint venture’s subsidiary and the investor that has joint control over the joint venture are related to each other. [IAS 24.12].

Question 34

Entities that are joint ventures and associates of the same third entity ‘An entity is related to a reporting entity if: ... (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.’ [IAS 24.9(b)].

Answer 34

This definition treats joint ventures in a similar manner to subsidiaries as illustrated in Examples 35.3 and 35.5 above and therefore an associate and a joint venture are related parties where they share the same investor. This is illustrated in the example below: Example 35.6: Entities that are joint ventures and associates of the same third entity *refer OneNote

Question 35

Post-employment benefit plans 1 ‘An entity is related to a reporting entity if: ... (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.’ [IAS 24.9(b)].

Answer 35

The standard does not indicate why a post-employment benefit plan is a related party of the entity. Presumably, the reason for including this category is that an entity sponsoring a post-employment benefit plan generally has at least significant influence over the plan.

Question 36

Post-employment benefit plans 2 The definition is quite wide-ranging and includes post-employment benefit plans of any entity related to the reporting entity. This includes, for example, post-employment benefit plans of an associate or joint venture of the reporting entity or a post employment benefit plan of an associate of the reporting entity’s parent.

Answer 36

Sponsoring employers are also related parties of a post-employment benefit plan.

Question 37

Entities under control or joint control of certain persons or close members of their family ‘An entity is related to a reporting entity if: ... (vi) The entity is controlled or jointly controlled by a person or close member of that person’s family who has control or joint control over the reporting entity, has significant influence over the reporting entity or is a member of key management personnel of the reporting entity.’ [IAS 24.9].

Answer 37

This is intended to cover situations in which an entity is controlled or jointly controlled by a person or close family member of that person and that person or close family member also controls, jointly controls, has significant influence over, or is a member of key management personnel of, the reporting entity. The situation whereby one company owns another is covered by Example 35.3 above. This is illustrated below: Example 35.7: Persons who control an entity and are a member of the key management personnel of another entity *refer OneNote

Question 38

Entities under significant influence of certain persons or close members of their family ‘An entity is related to a reporting entity if: ... (vii) A person or a close family member of that person who has control or joint control over the reporting entity 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).’ [IAS 24.9(b)].

Answer 38

This is the reciprocal of Entities under control or joint control of certain persons or close members of their family and is illustrated in Example 35.7 above. Entities that are significantly influenced by the same person or close member of that person’s family or who simply share the same key management personnel are not related parties in the absence of any control or joint control by those persons (see Parties that are not related parties below).

Question 39

Entities, or any member of the group of which they are a part, that provide key management personnel services ‘An entity is related to a reporting entity if: ... (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 to the parent of the reporting entity.’ [IAS 24.9(b)]. This is intended to cover situations in which an entity (described as a ‘management entity’), or a member of its group, provides key management personnel services to the reporting entity (see Disclosure of key management personnel compensation and Disclosure of expense incurred with management entity below)

Answer 39

It applies to the provision of key management personnel services by the separate management entity. Staff acting for the management entity that are responsible for planning, directing and controlling the activities of the reporting entity are not considered to be key management personnel of the reporting entity. It is not necessary to look through the management entity to determine natural persons as key management personnel. Example 35.8: Entities that provide key management personnel services to a reporting entity *refer OneNote

Question 40

Government-related entities 1 A ‘government-related entity’ is an entity that is controlled, jointly controlled or significantly influenced by a government. [IAS 24.9]. ‘Government’ in this context refers to government, government agencies and similar bodies whether local, national or international. [IAS 24.9]. This is the same as the definition used in IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance.

Answer 40

The Board decided that it would not provide a more comprehensive definition or additional guidance on how to determine what is meant by ‘government’. In the Board’s view, a more detailed definition could not capture every conceivable government structure across every jurisdiction. In addition, judgement is required by a reporting entity when applying the definition because every jurisdiction has its own way of organising government-related activities. [IAS 24.BC41]. This implies that there may well be diversity in practice across different jurisdictions in defining what is meant by ‘government’.

Question 41

Government-related entities 2 Where an entity is controlled, jointly controlled or significantly influenced by a government then relationships, transactions and outstanding balances, including commitments, with that government are related party transactions. Similarly, transactions and outstanding balances, including commitments, with other entities controlled, jointly controlled or significantly influenced by that government are related party transactions.

Answer 41

However, not all such transactions should be disclosed, only those that are material (see Related party transactions requiring disclosure below). Transaction may be for significant amounts be still be immaterial from an IAS 1 – Presentation of Financial Statements – perspective (e.g. telecommunication costs with a government-controlled operator when these are at market conditions). Related party transactions with government-related entities are subject to certain disclosure exemptions. These are discussed at Disclosures with government-related entities below.

Question 42

PARTIES THAT ARE NOT RELATED PARTY

Answer 42

PARTIES THAT ARE NOT RELATED PARTY

Question 43

Having included such a detailed definition of related parties, the standard clarifies that the following are not related parties: • 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; • two venturers simply because they share joint control over a joint venture;

Answer 43

• providers of finance, trade unions, public utilities and departments and agencies of a government that do not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with the entity (even though they may affect the freedom of action of an entity or participate in its decision-making process); and • 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. [IAS 24.11].

Question 44

The reason for these exclusions is that, without them, many entities that are not usually regarded as related parties could fall within the definition of related party. For example, a small clothing manufacturer selling 90% of its output to a single customer could be under the effective economic control of that customer.

Answer 44

These exclusions are effective only where these parties are ‘related’ to the reporting entity simply because of the relationship noted above. If there are other reasons why a party is a related party, the exclusions do not apply.

Question 45

Consider the following examples: • A water company that supplies the reporting entity is not a related party if the only link between the two is the supply of water. If, however, the water company is also an associate of the reporting entity, the exclusion does not apply; the two are related parties, and the transactions relating to the supply of water are disclosed if material.

Answer 45

• Two investors in the same entity are not related parties simply because one holds a controlling interest and the other shareholder (not in the group) holds a non-controlling interest in a subsidiary of the group. Even if the investor holding the non-controlling interest exercises significant influence over the subsidiary, provided it is not otherwise related to the controlling investor, it is not normally a related party of the controlling investor. However, the non-controlling investor might have significant influence over the group if the subsidiary was significant to the group in which case the group, including the controlling investor and the non-controlling investor are related parties.

Question 46

• Two entities are not related parties simply because they share common key management personnel. However, if the common member of key management personnel exerts control or joint control over one or more of the entities then they are related parties. See Entities under control or joint control of certain persons or close members of their family or Entities under significant influence of certain persons or close members of their family above.

Answer 46

• An administrator, custodian, broker and fund manager of the same fund are not related parties, to each other or to the fund to which they provide services simply because they each provide services to the fund, even if any of the parties are economically dependent upon the income from such services. However, any such party could meet the definition of ‘key management personnel’ of the fund if it provides key management personnel services (see Entities, or any member of the group of which they are a part, that provide key management personnel services above). In addition, any shared ownership (e.g. control, joint control, or significant influence) between such parties should be evaluated to determine if the parties are related.

Question 47

An interest in an unconsolidated structured entity as defined by IFRS 12 – Disclosure of Interests in Other Entities – held by a reporting entity does not make the structured entity a related party to the reporting entity unless it would otherwise meet the definition of a related party (e.g. because the structured entity is an associate of the reporting entity).

Answer 47

....

Question 48

DISCLOSURE OF CONTROLLING RELATIONSHIP

Answer 48

DISCLOSURE OF CONTROLLING RELATIONSHIP

Question 49

IAS 24 asserts that, in order to enable users of financial statements to form a view about the effects of related party relationships on an entity, it is appropriate to disclose the related party relationship when control exists, irrespective of whether there have been transactions between the related parties. [IAS 24.14]

Answer 49

Accordingly, the standard requires an entity to disclose: • the name of its parent and, if different; • the ultimate controlling party.

Question 50

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 must also be disclosed. [IAS 24.13].

Answer 50

The ‘next most senior parent’ is the first parent in the group above the immediate parent that produces consolidated financial statements available for public use. [IAS 24.16]. Consequently, in some circumstances, an entity may need to disclose the names of three parents.

Question 51

Disclosure must be made even if the parent or ultimate controlling party does not prepare financial statements. In the situation when the ultimate controlling party is an individual, rather than an entity, the reporting entity is likely to have to disclose the name of the next most senior parent in addition since the individual undoubtedly does not produce financial statements for public use.

Answer 51

IAS 1 also requires disclosure of the ‘ultimate parent’ of the group. [IAS 1.138(c)]. This is not necessarily synonymous with the ‘ultimate controlling party’ where that party is an individual. This is illustrated in the example below. Example 35.9: Disclosure of parent, ultimate parent and ultimate controlling party *refer OneNote.

Question 52

The ultimate controlling party could be a group of individuals or entities acting together. IAS 24 is silent on the issue of individuals or entities acting together to exercise joint control. However, IFRS 3 – Business Combinations – states that a group of individuals can be regarded as a controlling party when, as a result of contractual arrangements, they collectively have the power to govern that entity’s financial and operating policies so as to obtain benefits from its activities. [IFRS 3.B2]. In such circumstances, these entities or individuals should be identified as the controlling party

Answer 52

However, as discussed at Identification of a related party and related party transactions above, IAS 24 emphasises that attention should be directed to the substance of any related party relationship and not merely the legal form. It is likely that such an informal arrangement would at least give such individuals acting collectively significant influence over the reporting entity and as such, those individuals would be related parties to the reporting entity under IAS 24.

Question 53

The standard also clarifies that the requirement to disclose related party relationships between a parent and its subsidiaries is in addition to the disclosure requirements of IAS 27 and IFRS 12. [IAS 24.15]

Answer 53

IFRS 12 requires an entity to disclose information to enable users to understand the composition of a group – see Chapter 13 at 4.1.

Question 54

DISCLOSABLE TRANSACTIONS

Answer 54

DISCLOSABLE TRANSACTIONS

Question 55

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]. Read literally, this definition requires many transactions to be disclosed more than once.

Answer 55

For example, if an entity buys goods on credit from a related party and pays for them 30 days later, both the original purchase and the final payment represent a ‘transfer of resources ... between a reporting entity and a related party’ and, therefore on a literal reading, are required to be separately disclosed. However, we doubt that this reading is the IASB’s intention, and the nature of the disclosures required by IAS 24 seems to support this view.

Question 56

The definition of a related party transaction implies that transactions are disclosable only for the period in which parties are related. For example, where a reporting entity has disposed of a subsidiary during the reporting period, only transactions with the subsidiary up to the date of disposal are related party transactions in the financial statements of the reporting entity. Similarly, if a person became a member of key management personnel of a reporting entity during a reporting period, no disclosure is required of any remuneration paid to that person before that person’s appointment as key management personnel.

Answer 56

Likewise, transactions with a party in the comparative period are not disclosable as related party transactions if in the comparative period that party was not related to the reporting entity. Transactions with a party are not disclosable in the current year if the related party relationship had ceased before the beginning of the current period although, transactions in the comparative period are disclosed.

Question 57

The standard is unclear whether disclosure of outstanding balances at the reporting date is required in situations where an entity ceases to be a related party during the reporting period. In such situations, one view is that outstanding balances are not disclosable since the entity is not a related party as at the reporting date. A second view is that if the outstanding balances as at the reporting date comprise of amounts related to the transactions when the entities were related, such outstanding balances should be included in related party disclosures.

Answer 57

In our view, either view is acceptable but an entity should apply the approach that is necessary for users to understand the potential effect of the relationship on the financial statements. However, if an entity becomes a related party during the year, outstanding balances as at the reporting date, that include amounts related to transactions entered into when the entities were unrelated, are disclosable.

Question 58

There is no requirement in IAS 24 to disclose information about related party transactions in one comprehensive note. However, it may be more useful to users of the financial statements to present information this way.

Answer 58

IAS 1 requires that, except where a standard permits otherwise (which IAS 24 does not), comparative information in respect of the previous period must be disclosed for all amounts reported in the current period’s financial statements. [IAS 1.38].

Question 59

Materiality 1 In determining whether an entity discloses related party transactions in financial statements, the general concept of materiality is applied. IAS 24 does not refer specifically to materiality since this requirement is in IAS 1, which states that ‘an entity need not provide a specific disclosure required by an IFRS if the information is not material.’ [IAS 1.31]

Answer 59

Omissions or misstatements of items are material within IAS 1 ‘if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.’ [IAS 1.7].

Question 60

Materiality 2 This may have the effect that any related party transaction whose disclosure is considered sensitive (for tax reasons perhaps) is by definition material because it is expected by the reporting entity to influence a user of the financial statements. Therefore, it may not be possible to avoid disclosing such items on the grounds that they are quantitatively immaterial.

Answer 60

In addition, a transaction conducted at advantageous terms to either the related party or the reporting entity is more likely to be material than one conducted at arm’s length. Since IAS 24 requires disclosure of related party transactions irrespective of whether consideration is received, disclosure cannot be avoided on the argument that, since there is no consideration, the transaction must be immaterial.

Question 61

DISCLOSURE OF KEY MANAGEMENT PERSONNEL COMPENSATION

Answer 61

DISCLOSURE OF KEY MANAGEMENT PERSONNEL COMPENSATION

Question 62

IAS 24 requires disclosure of key management personnel compensation including the amount of outstanding balances and commitments.

Answer 62

Outstanding balances with key management personnel would include unpaid bonuses or liabilities under cash-settled share-based payment transactions.

Question 63

``` There is no requirement in IAS 24 to disclose individual key management personnel compensation. Instead, the standard requires an entity to disclose key management personnel compensation in total and for each of the following categories: • short-term employee benefits; • post-employment benefits; • other long-term benefits; • termination benefits; and • share-based payment. [IAS 24.17]. ```

Answer 63

``` IAS 24 (see Entities, or any member of the group of which they are a part, that provide key management personnel services above) clarifies that where an entity obtains key management personnel services from another entity (‘management entity’) it is not required to apply the requirements above to the compensation paid or payable by the management entity to the management entity’s employees or directors. [IAS 24.17A]. ```

Question 64

Compensation 1 ‘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 given by an entity, or on behalf of the entity, in exchange for services rendered to the entity. Employee benefits also include such consideration paid on behalf of a parent of the entity in respect of the entity. [IAS 24.9].

Answer 64

Therefore, the compensation disclosed by an entity in its financial statements is that which is for services to that entity, irrespective of whether it is paid by the reporting entity or by another entity or individual on behalf of the reporting entity. Further, the disclosures must include outstanding balances and commitments.

Question 65

Compensation 2 Under IAS 24, 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 subsidised goods or services) for current employees; (b) post-employment benefits such as pensions, other retirement benefits, postemployment life insurance and post-employment medical care;

Answer 65

(c) other long-term employee benefits, including long-service leave or sabbatical 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 reporting period, profit-sharing, bonuses and deferred compensation; (d) termination benefits; and (e) share-based payment. [IAS 24.9].

Question 66

Compensation 3 It is unclear from the standard the basis on which the amount for each of the categories above is determined. There are alternative views that the disclosure is the amount: * paid or payable by the entity (or on its behalf); * recognised as an expense under the relevant standard by the entity (or on its behalf); * attributed to the benefit for tax purposes; * due under contract by the entity (or due on its behalf); or * determined on some other basis.

Answer 66

It is observed in the Basis for Conclusions that the IASB noted that the guidance on compensation in IAS 19 is sufficient to enable an entity to disclose the relevant information, which suggests that the IASB is expecting the compensation amounts to be based on the expense recognised under the relevant standards. [IAS 24.BC10]. It is helpful to remember that the definition of compensation states that ‘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...’. [IAS 24.9].

Question 67

Short-term employee benefits As indicated at Compensation above, these include wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if expected to be settled wholly before twelve months after the end of the reporting period). Most of these should not cause difficulty, since the expense for such items under IAS 19 is generally equivalent to the amount payable for the period. The disclosures would also include outstanding balances and commitments.

Answer 67

Non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) must also be included within the amount disclosed for short-term employee benefits. [IAS 24.9]. In some cases, these might have been provided at no direct cost to the entity. In such circumstances it would appear reasonable to either attribute a value for non-monetary benefits (for example, the attributable tax benefit), so as to describe them quantitatively, or to describe such benefits qualitatively.

Question 68

Post-employment benefits 1 As indicated at Compensation above, these include pensions, other retirement benefits, post employment life insurance and post-employment medical care. The inclusion of this category confirms that amounts are disclosed while members of key management are providing services. If amounts were only disclosed when the benefits are payable, then in many cases there would be no disclosure since the individuals would no longer be members of key management.

Answer 68

The definition of related party transaction includes ‘obligations between a reporting entity and a related party’. This implies that post-employment benefit obligations, including commitments, between the reporting entity and the members of the key management during the period covered by the financial statements are disclosed. For defined contribution plans, it seems appropriate that the amount included is based on the total expense recognised under IAS 19, which is the equivalent of the contributions paid or payable to the plan for service rendered in the period.

Question 69

Post-employment benefits 2 The main issue related to defined benefit plans is to determine an appropriate calculation for the disclosable amount for the period. IAS 24 is silent on how the disclosable amount should be determined. Normally, for defined benefit plans, the expense recognised under IAS 19 differs from the contributions payable to the plan. Disclosing the contributions payable usually does not always reflect the benefits provided by the entity in exchange for the services rendered, particularly when the entity is benefitting from a contribution holiday. One approach to determine the disclosable amount would be to include an amount based on the total IAS 19 expense recognised in total comprehensive income.

Answer 69

The total amounts recognised under IAS 19 for defined benefit plans includes items such as interest, actuarial remeasurement gains and losses and the effects of curtailments and settlements. This approach requires an apportionment of the total expense to the extent that it relates to the individuals concerned. Another approach would be to determine the disclosable amount based only on the current service cost and, when applicable, past service cost related to those individuals on the grounds that the other items relate more to the overall plan than to the individuals. An entity should adopt a consistent accounting policy for determining the amounts disclosed.

Question 70

Other long-term benefits As indicated at Compensation above, these include long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not expected to be settled wholly before twelve months after the end of the reporting period, profit sharing, bonuses and deferred compensation.

Answer 70

Since the accounting for such items under IAS 19 is on a similar basis to that for post-employment benefits similar issues to those discussed at Post-employment benefits above are applicable.

Question 71

Termination benefits These should not cause difficulty, since an entity generally recognises such items, particularly for key management personnel, in line with the recognition criteria included in IAS 19.

Answer 71

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Question 72

Share-based payment transactions This category includes share options, share awards or cash-settled awards granted in return for service by the members of key management. Such compensation is accounted for under IFRS 2. For equity-settled share based payment transactions, such as share options or share awards, IFRS 2 broadly requires measurement of their fair value at grant date, and that expense is recognised over the period that employees render services. For cash-settled share-based payment transactions, IFRS 2 requires measurement and recognition based on the cash ultimately paid.

Answer 72

``` IAS 24 does not specify a basis on which the compensation disclosed should be determined. One basis would be to disclose an amount based on the expense under IFRS 2. Another basis would be to disclose amounts based on the fair value that the individual received (based on the value of the shares at date of vesting, or at date of exercise of share options or the cash that is ultimately payable) rather than over the period of the service. An entity should adopt a consistent accounting policy for determining the amounts disclosed. In determining an appropriate accounting policy, the entity should also consider consistency with other disclosures related to key management personnel compensation made outside the financial statements. ```

Question 73

Reporting entity part of a group One additional practical difficulty for an entity in a group is that the disclosure of its key management personnel compensation is for the services rendered to the reporting entity. Accordingly, where key management personnel of the reporting entity also provide services to other entities within the group, an apportionment of the compensation is necessary.

Answer 73

Likewise, where the reporting entity receives services from key management personnel that are also key management personnel of other entities within the group, the reporting entity may have to impute the compensation received. Such apportionments and allocations required judgement and an assessment of the time commitment involved.

Question 74

Key management personnel compensated by other entities A reporting entity also applies the principles set out at Reporting entity part of a group above to situations in which the other entity is a third party, outside of the group, but is a related party.

Answer 74

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Question 75

DISCLOSURE OF OTHER RELATED PARTY TRANSACTION, INCLUDING COMMITMENTS

Answer 75

DISCLOSURE OF OTHER RELATED PARTY TRANSACTION, INCLUDING COMMITMENTS

Question 76

IAS 24 requires an entity that has had related party transactions during the periods covered by its financial statements to disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. [IAS 24.18].

Answer 76

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Question 77

Related party transactions requiring disclosure 1 IAS 24 gives the following as examples of transactions to be disclosed, if they are with a related party. The list is not intended to be exhaustive: * purchases or sales of goods (finished or unfinished); * purchases or sales of property and other assets; * rendering or receiving of services; * leases; * transfers of research and development;

Answer 77

* transfers under licence agreements; * transfers under finance arrangements (including loans and equity contributions in cash or in kind); * provisions of guarantees or collateral; * commitments to do something if a particular event occurs or does not occur in the future, including executory contracts (recognised and unrecognised); and * settlement of liabilities on behalf of the entity or by the entity on behalf of that related party. [IAS 24.21].

Question 78

Related party transactions requiring disclosure 2 The standard does not contain any exemptions based on the nature of the transaction. Consequently, related party transactions include transactions such as dividend payments and the issue of shares under rights issues to major shareholders or key management personnel (i.e. those that fall within the definition of related parties), even where they participate on the same basis as other shareholders.

Answer 78

However, for dividend payments, a preparer might conclude that no additional disclosures are necessary beyond those required by IAS 1, to explain the potential effect of the relationship on the financial statements. [IAS 1.137]. Further, as discussed at Government-related entities above, not all transactions may need to be disclosed. Transactions with significant amounts may be immaterial from an IAS 1 perspective.

Question 79

Related party transactions requiring disclosure 3 The standard also includes transactions with those individuals identified as related parties where their dealings with the entity are in a private capacity, rather than in a business capacity.

Answer 79

Participation by a parent or subsidiary in a defined benefit plan that shares risks between group entities is a transaction between related parties (see Chapter 31 at 3.3.2). [IAS 24.22].

Question 80

Related party transactions requiring disclosure 4 As indicated at Disclosable transactions above, disclosure is required irrespective of whether or not consideration is received, which means that the standard applies to gifts of assets or services and to asset swaps. Common examples of such transactions which may occur within a group include: • administration by an entity of another entity within a group (or of its post employment benefit plan) free of charge;

Answer 80

* transfer of tax assets from one member of a group to another without payment; * rent-free accommodation or the loan of assets at no charge; or * guarantees by directors of bank loans to the entity.

Question 81

Related party transactions requiring disclosure - Aggregation of items of a similar nature Presumably in order to minimise the volume of disclosures, IAS 24 permits aggregation of items of a similar nature, except when separate disclosure is necessary for an understanding of the effects of the related party transactions on the financial statements of the entity. [IAS 24.24].

Answer 81

The standard does not expand on this requirement, but it seems appropriate that, for example, purchases or sales of goods with other subsidiaries within a group can be aggregated, but any purchases or sales of property, plant, and equipment or of intangible assets with such entities are shown as a separate category. However, the level of aggregation is limited by the separate disclosure of transactions with particular categories of related parties (see Disclosures required for related party transactions, including commitments below).

Question 82

Related party transactions requiring disclosure - Commitments 1 ‘Commitments’ are not defined in IFRS. However, IFRS 12 states that the commitments relating to joint ventures are those that may give rise to a future outflow of cash or other resources. [IFRS 12.B18]. IAS 24 specifically mentions executory contracts (recognised and unrecognised) as commitments requiring disclosure. Executory contracts are excluded from the scope of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – unless they are onerous to the reporting entity.

Answer 82

An executory contract is a contract under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. [IAS 37.3]. An example of an executory contract would be a contract to buy an asset at a future date where neither the transfer of the asset nor the payment of consideration has occurred

Question 83

Related party transactions requiring disclosure - Commitments 2 The words ‘commitments to do something if a particular event occurs or does not occur in the future’ can potentially have a wide application. One obvious type of arrangement to which this applies would be some form of commitment by a subsidiary to its parent to undertake certain trading or research and development activities.

Answer 83

With respect to the type of transaction that the IASB is expecting to be disclosed, IFRS 12 provides a list of illustrative but not exhaustive examples of the type of unrecognised commitments that could relate to joint ventures. Some of these examples could apply equally to other related party arrangements. IFRS 12 clarifies that the commitments required to be disclosed under IAS 24 in respect of joint ventures include an entity’s share of commitments made jointly with other investors with joint control of a joint venture. [IFRS 12.B18].

Question 84

Related party transactions requiring disclosure - Commitments 3 IFRS 12 provides the following illustrations of commitments relating to joint ventures that would typically be disclosable under paragraph 18 of IAS 24 and could apply equally to other related party arrangements: • unrecognised commitments to acquire another party’s ownership interest (or a portion of that ownership interest) in a joint venture if a particular event occurs or does not occur in the future. [IFRS 12.B19-20].

Answer 84

• unrecognised commitments to contribute funding or resources as a result of, for example: - the constitution or acquisition agreements of a joint venture (that, for example, require an entity to contribute funds over a specific period); - capital intensive projects undertaken by a joint venture; - unconditional purchase obligations, comprising procurement of equipment, inventory or services that an entity is committed to purchasing from, or on behalf of, a joint venture; - unrecognised commitments to provide loans or other financial support to a joint venture; • unrecognised commitments to contribute resources to a joint venture, such as assets or services; and - other non-cancellable unrecognised commitments relating to a joint venture.

Question 85

Related party transactions requiring disclosure - Commitments 4 Provisions of guarantees, which are a form of commitment, require separate disclosure. Disclosure of commitments to purchase property, plant and equipment and intangible assets in aggregate is required separately by IAS 16 – Property, Plant and Equipment – and IAS 38 – Intangible Assets – respectively. [IAS 16.74(c), IAS 38.122(e)].

Answer 85

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Question 86

Disclosures required for related party transactions, including commitments 1 The standard states that, at a minimum, the disclosures must include: (a) the amount of the transactions; (b) the amount of outstanding balances, including commitments, and: (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and (ii) details of any guarantees given or received;

Answer 86

(c) provisions for doubtful debts related to the amount of outstanding balances; and (d) the expense recognised during the period in respect of bad or doubtful debts due from related parties. [IAS 24.18].

Question 87

Disclosures required for related party transactions, including commitments 2 The standard gives no exemption from disclosure on the grounds of sensitivity or confidentiality. However, since there is no requirement to disclose the name of a related party, this lack of exemption is likely to be less of a concern. The requirement in (b) above could be read literally as requiring outstanding balances and commitments to be amalgamated into a single balance.

Answer 87

However, commitments such as executory contracts do not give rise to outstanding balances. In practice, narrative disclosure of the terms and conditions of material commitments will be necessary. There is no requirement to disclose individually significant transactions. However, as discussed at Disclosures with government-related entities below, there is such a requirement for transactions with government related entities where a reporting entity has decided to apply the disclosure exemption.

Question 88

Disclosures required for related party transactions, including commitments 3 The disclosures are made separately for each of the following categories: (a) the parent; (b) entities with joint control of, or significant influence over, the entity; (c) subsidiaries; (d) associates; (e) joint ventures in which the entity is a joint venturer; (f) key management personnel of the entity or its parent; and (g) other related parties. [IAS 24.19].

Answer 88

In our view the references in (a) and (f) above to ‘the parent’ should be read as including all parents of the entity, i.e. its immediate parent, any intermediate parent, and the ultimate parent. In the context of the financial statements of an entity within a group, it is insufficient to disclose related party transactions for a single category of ‘group companies’. Separate categories are required for parent(s), subsidiaries and ‘other related parties’.

Question 89

Disclosures required for related party transactions, including commitments 4 IAS 24 does not identify the following relationships as a separate category of related party, and therefore we would normally expect to include information related to the following relationships within the category other related parties: (a) fellow subsidiaries; (b) subsidiaries of an investor with significant influence; and (c) associates of the entity’s controlling investor.

Answer 89

However, a preparer should consider separate disclosure of transactions with the above related parties if this would provide useful information to users of the entity’s financial statements.

Question 90

Disclosures required for related party transactions, including commitments 5 The classification of amounts payable to, and receivable from, related parties in the different categories is an extension of the disclosure requirement in IAS 1 for an entity to present information either in the statement of financial position or in the notes. [IAS 1.78(b)].

Answer 90

The categories are extended to provide a more comprehensive analysis of related party balances and apply to related party transactions. [IAS 24.20]

Question 91

Disclosures required for related party transactions, including commitments 6 IAS 24 discourages an entity from disclosing that transactions are on normal commercial terms or on an arm’s length basis, by stating that such disclosures ‘are made only if such terms can be substantiated.’ [IAS 24.23].

Answer 91

Accordingly, IAS 24 emphasises that an entity should not state that related party transactions are on an arm’s length basis unless the reporting entity can demonstrate such terms and conditions. To substantiate that related party transactions are on an arm’s length basis an entity would need to be satisfied that a transaction with similar terms and conditions could be obtained from an independent third party.

Question 92

DISCLOSURE OF EXPENSE INCURRED WITH MANAGEMENT ENTITY As discussed at Entities, or any member of the group of which they are a part, that provide key management personnel services above disclosure of amounts incurred by the entity for the provision of key management personnel services by a separate management entity is required. [IAS 24.18A].

Answer 92

NO NOTE

Question 93

DISCLOSURE WITH GOVERNMENT RELATED | ENTITIES

Answer 93

DISCLOSURE WITH GOVERNMENT RELATED | ENTITIES

Question 94

IAS 24 provides an exemption from the disclosure requirements of paragraph 18, discussed at Disclosures required for related party transactions, including commitments above, in relation to related party transactions and outstanding balances, including commitments, with: (a) a government that has control or joint control of, or significant influence over, the reporting entity; and (b) another entity that is a related party because the same government has control or joint control of, or significant influence over, both the reporting entity and the other entity. [IAS 24.25].

Answer 94

This wording implies that a reporting entity is related to an entity that is significantly influenced by a government that also has significant influence over the reporting entity. However, the definition of a related party does not include entities that are subject to significant influence from the same entity, but are not otherwise related parties as defined in IAS 24 (see Entities that are associates or joint ventures above). The application of the disclosure exemption is illustrated in the example below, which is based on an illustrative example accompanying IAS 24. Example 35.10: Application of the disclosure exemption for government-related entities

Question 95

The use of the disclosure exemption is conditional on the reporting entity making the following disclosures about the transactions and related outstanding balances with the government-related entities: (a) the name of the government and the nature of its relationship with the reporting entity (i.e. control, joint control or significant influence);

Answer 95

(b) the following information in sufficient detail to enable users of the entity’s financial statements to understand the effect of related party transactions on its financial statements: (i) the nature and amount of each individually significant transaction; and (ii) for other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent. Types of transactions include those discussed at Related party transactions requiring disclosure above. [IAS 24.26].

Question 96

The wording above does not explicitly mention ‘commitments’ when referring to transactions. However, given that IAS 24 describes a commitment as a form of transaction (see Related party transactions requiring disclosure above), disclosure of individually and collectively significant commitments with government-related entities is required.

Answer 96

NO NOTE

Question 97

In using its judgement to determine the level of detail to be disclosed in accordance with the requirements in (b) above, a reporting entity considers the closeness of the related party relationship and other factors, including materiality, relevant in establishing the level of significance of the transaction such as whether it is: (a) significant in terms of size; (b) carried out on non-market terms;

Answer 97

(c) outside normal day-to-day business operations, such as the purchase and sale of businesses; (d) disclosed to regulatory or supervisory authorities; (e) reported to senior management; and (f) subject to shareholder approval. [IAS 24.27].

Question 98

Disclosure of the nature and amount of each individually significant transaction is not a requirement for other related party transactions (see Disclosures required for related party transactions, including commitments above). The Board considered that this requirement should not be too onerous for a reporting entity because: (a) individually significant transactions should be a small subset, by number, of total related party transactions;

Answer 98

(b) the reporting entity should know what these transactions are; and (c) reporting such items on an exceptional basis takes into account cost-benefit considerations. [IAS 24.BC45].

Question 99

The Board also considered that more disclosure of individually significant transactions would better meet the objective of IAS 24 because this approach focuses on transactions that, through their nature or size, are of more interest to users and are more likely to be affected by the related party relationship. [IAS 24.BC46]

Answer 99

In response to concerns about whether a reporting entity would be able to identify whether the counterparty to such transactions was a government-related entity, the Board concluded that ‘management will know, or will apply more effort in establishing, who the counterparty to an individually significant transaction is and will have, or be able to obtain, background information on the counterparty’. [IAS 24.BC47-48].

Question 100

The following are other illustrations of the type of disclosures required for transactions with government-related entities based on examples in the standard:

Answer 100

Example 35.11: Individually significant transaction carried out on non-market terms Example 35.12: Individually significant transaction because of size of transaction Example 35.13: Collectively significant transactions In Example 35.13 above, either a qualitative or a quantitative disclosure is permitted for transactions that are collectively but not individually significant.