Disclosing related party transactions - Who is a related party?
Which standard applies?
IAS 24 Related Party Disclosures is the Accounting Standard that identifies related party relationships, and requires various disclosures about related party relationships and related party transactions and balances.
Why is disclosure of related party information important?
Related party relationships can affect the profit or loss and the financial position of an entity because related parties may enter into transactions that unrelated parties would not. For example, related parties may sell goods to one another or provide services that are not on ‘arm’s length’ or normal commercial terms. Profit or loss may be affected even if transactions do not occur. For example, a parent entity may instruct its subsidiary not to deal with a trading partner if it acquires a business that is in direct competition with the former trading partner.
Who is a related party?
A related party is a person or entity that is related to the entity preparing the financial statements (i.e. the reporting entity).
A person is related to a reporting entity if any of the following apply.
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.
Source: Definition of ‘key management personnel’ in IAS 24.
A close member of the person’s family is also related to the reporting entity if they have one of the relationships mentioned above. Close members of the person’s family include, but are not limited to:
- The person’s children
- The person’s spouse or domestic partner
- Children of the person’s spouse or domestic partner (i.e. stepchildren)
- Dependants of the person (for example, dependant parents)
- Dependants of the person’s spouse or domestic partner (for example, in-laws).
Sometimes judgement may be required to assess whether a person is a dependant.
It is more complicated to identify related entities under IAS 24 than related persons. An entity is related to another entity if any of the following apply.
The required disclosures for related party relationships and related party transactions are outlined in IAS 24 . Please refer to the standard for specific requirements.
The above diagrams shows that many persons or entities could be related to your reporting entity and identifying related parties can therefore be a complex process.
For a more in-depth, high-level overview of the requirements of IAS 24, please refer to our Summary on a Page on the standard.
If you require further assistance with identifying your related party relationships, you can contact BDO’s IFRS Advisory team.
For more on the above, please contact your local BDO representative.
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