IAS 24 Related parties by definition

IAS 24 Related parties by definition starts with two classes of related parties:Third party services

  • person(s)
  • entity(ies)

in relation to the central entity in this standards the REPORTING ENTITY.

The reporting entity in IAS 24 is referred to (so it strictly is spoken not an IFRS Definition) as the entity that is preparing its financial statements (consolidated and/or unconsolidated).

PERSONS

For persons it includes close members of that person’s family – where family is sometimes broader than a domestic (legal) definition of a married couple, as follows:

Starting point is a person and its relation with the reporting entity, the (related party) person has one of the following relations with a reporting entity:

  1. the (related party) person has control, joint control or significant influence (sometimes also referred to as ‘soft control’) over the reporting entity (see Control Joint control Significant influence), or
  2. the (related party) person is a member of key management personnel of the reporting entity or the parent of the reporting entity

Close members of a person:

  • his children and the spouse (husband or wife (the person) in relation to their partner with whom he/she share these children) or domestic partner (a person who is living with another person in a close personal and sexual relationship),
  • children of that person’s spouse (husband or wife (the person) in relation to their partner with whom he/she share these children) or domestic partner (a person who is living with another person in a close personal and sexual relationship), and
  • dependents (i.e. someone depending financially) of that person or that person’s spouse (husband or wife (the person) in relation to their partner with whom he/she share these children) or domestic partner (a person who is living with another person in a close personal and sexual relationship).

Here is a related parties diagram displaying such relations:

IAS 24 Related parties by definition

Conclusion:

A, B, C are persons identified as a related party to the reporting entity, IAS 24 Related parties by definition

Start-entity is a related party to the reporting entity, and IAS 24 Related parties by definition

A, B, C and the reporting entity are also related parties to the start-up entity IAS 24 Related parties by definition

Key management personnel IAS 24 Related parties by definition

Those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including all directors (executive and non-executive).

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Here is a related parties diagram for key management personnel displaying such relations: IAS 24 Related parties by definition

Key management personnel

Mrs. A, Mr. B and Mr. C are the three members of the management committee. This committee decides on all important financial and operational decisions within the group. All other managers in the group are following these decisions based on the group’s hierarchy of management.

Conclusion: IAS 24 Related parties by definition

Mr. A is a related party person in control of the reporting entity and its subsidiaries.

Mrs. A, Mr. B and Mr. C are key management personnel because they plan, direct and control the activities of the group through the management committee.

In practice it has to be judged whether Mr. A is only in control and not (informally) part of the management committee.

Entity A, B, and C are related party entities with the specific label subsidiaries and need specific disclosures in the unconsolidated accounts of the reporting entity. Entity D is a related party entity with the specific label associate (see Significant influence) and need specific disclosures in the unconsolidated and consolidated accounts of the reporting entity.

ENTITIES

Related party entities are entities that have strictly defined relations with a reporting entity, as follows:

Here is a related parties diagram displaying such relations: IAS 24 Related parties by definition

Disclosures related parties

Key to disclosures related parties is the disclosure of the nature and amounts of financial transactions between the reporting entity and the identified related parties. These disclosures are classified into three distinctive components:

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1. General relationships:

2. Key management personnel:

3. Transactions:

  • Entities should disclose information about transactions with related parties necessary for users to understand the potential effect of the relationship on the financial statements.
  • This includes the nature of the related party relationship, the amount of the transaction, outstanding balances (including off-balance sheet commitments), guarantees, allowances and expenses for doubtful debts (IAS 24 18).
  • A related party transaction is defined as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged (IAS 24 9). These disclosures should be made separately for categories of related parties as specified in IAS 24 19.
  • Aggregating items of similar nature is allowed by the paragraph IAS 24 24.
  • Separate disclosure of each individually significant transaction is not required (other than for government controlled entities in IAS 24 26b(i)).
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Materiality

Keeping in mind the nature of related party transactions (key management compensation and transactions above or below market terms (think of transfer pricing policies/tax implications)) materiality considerations need to be used applying stricter quantification. In other words, a transaction may be material, even if its amount is low.

See also: IAS 24 Related party dislosures

IAS 24 Related parties by definition

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