for Accounting Professionals
IAS 24 Related Party Disclosures
2011
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2
2011 Updated
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IAS 24 Related Party Disclosures
CONTENTS
1. Introduction ............................................................. 4
2. IAS 24 for Banks ..................................................... 6
3. Definitions ............................................................... 7
4. Disclosure ............................................................. 16
5. MULTIPLE CHOICE QUESTIONS ......................... 21
6. Case Studies ......................................................... 23
7. ANSWERS ............................................................. 24
8. ANSWERS TO CASE STUDIES ............................ 25
9. Annex – Examples of Disclosure Notes ........... 26
Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook:
-Applying IFRS
-IFRS News
-Accounting Solutions
-Illustrative consolidated financial statements 2006 – Banks
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IAS 24 Related Parties Disclosures
1. Introduction
Aim
The aim of this workbook is to assist the individual in
understanding Related Party Disclosures according to IFRS.
Objective
Scope
The standard will be applied in:
1. Identifying related party relationships and transactions;
2. Identifying outstanding balances between an undertaking
and related parties;
3. Identifying when the disclosures should be made; and
4. Determining what disclosures should be made.
Related Party Disclosures are the subject of International
Accounting Standard 24. The standard is short, but has a major
The standard relates to separate financial statements of
impact on the level of disclosure in financial statements.
undertakings, parent companies, venturers, investors and
Financial statements must contain the disclosures necessary to
consolidated groups.
highlight the possibility that an undertaking’s financial position
Groups of companies
and its profit, or loss, may have been affected by the existence of
related parties, and by transactions and outstanding balances,
including commitments, with such parties.
Related party disclosure must be made even though there have
Members of the same group are considered to be related parties.
Their intra-group transactions and balances are disclosed in the
financial statements of the individual undertakings, but eliminated
on consolidation.
been no transactions.
State Controlled Entities
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IAS 24 Related Parties Disclosures
State Controlled Entities are within the scope of IFRS. For
The related party relationships can have an impact on the profit,
example state companies may trade with one another on
or loss, of an undertaking. Transactions may be made that would
conditions that are influenced by government.
not be made with unrelated parties, or on different terms or
Municipalities may trade with enterprises owned by related
prices, than would have been made with unrelated parties.
parties.
The profits and financial position of an undertaking may be
The key determinant is the ability of one related party to influence
affected, even if no transactions occur between the related
the other.
parties. A parent company can give instructions to other
members of a group that could limit the commercial actions of
Purpose of related party disclosures
those other group members.
Related party relationships are a normal feature of business
throughout the world. Trading often takes place through
Example
subsidiaries, associates and joint ventures. The parent can
Parent companies may limit the trade of a subsidiary to one
control, or influence, the financial and operating policies of the
country, limit its product range, or insist that no local research
investee, especially in terms of pricing and credit terms.
and development is carried out.
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IAS 24 Related Parties Disclosures
Some car manufacturers in Western Europe make different parts
A bank may give a loan to an independent firm, knowing that the
of cars in different countries, so that no one country makes all the
loan will be used for the firm’s business. A similar loan to a
parts. This provides flexibility when negotiating with unions and
subsidiary company of a third party may be used to finance its
governments, as the companies can threaten to move production
parent’s business, or the business of other group companies,
to another country to wring concessions from the unions and
thus increasing the bank’s risk in making the loan.
governments.
Due to the central control of their parents, these local subsidiaries
Example
cannot operate like independent firms.
A bank finances a company constructing apartment blocks. The
Knowledge of the related parties, their transactions and balances
extent of the bank’s involvement may indicate that it effectively
may impact the assessments of the undertakings by the users of
controls the construction company. The construction company
financial statements, especially assessments of risks and
cannot therefore be treated as a normal part of the bank’s credit
opportunities facing the undertaking.
portfolio and related party disclosures should be made.
2.
IAS 24 for Banks
Example
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IAS 24 Related Parties Disclosures
Related parties is a major issue for banks, as the potential
access to banks’ funds attracts undesirable parties.
The major risks of related parties is they can secure credit at
either below-market rates, or circumvent the normal credit
appraisal procedures that would either have vetoed the loan, or
demanded stricter conditions.
Example
In some countries, a group may include a bank which finances
group activities on special terms (a pocket bank). The rationale is
that the bank is exists primarily to finance group activities, so the
normal risk evaluation procedures may be waived for group
members. In extreme circumstances, bank funds may be used to
keep the group solvent, even if the bank itself is liquidated.
The existence of such a relationship and the extent and nature of
Where shareholders attempt to persuade a bank to lend to
businesses in which those shareholders have an interest, the
bank’s normal lending procedures may be compromised.
Where such loans are made, this may not be illegal, but the
bank’s management and readers of the financial statements
should be made aware of them.
If a bank is seen to be adversely influenced by related parties,
other banks will perceive a higher risk in that bank, which will
increase their cost of funds.
3.
Definitions
Related party
In summary, a related party is a major shareholder, group
company, key manager or pension fund. Close relatives of
people in this list, are also deemed to be related parties.
Private pension funds are often managed by key management
personnel of a company. Funds may become shareholders in a
company. These and other financial transactions may have a
material impact on a firm’s financial situation, and may be open to
manipulation.
the transactions should be disclosed.
In most countries, banks provide loans to directors and other staff
at favourable rates. Loans to shareholders may also be allowed,
though are illegal in some countries.
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Example
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IAS 24 Related Parties Disclosures
A major shareholder insists that his wife’s firm has a monopoly of
the undertaking’s export sales. His wife is a related party by
virtue of being a close relative of a major shareholder, who has
demonstrated his ability to significantly influence the commercial
policy of the undertaking.
The detailed definition of a related party is as follows:
The party may be an individual, or a firm. It may be a
shareholder, parent or group company.
(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).
A party is related to an undertaking if:
(iii) Both entities are joint ventures of the same
third party.
A related party is a person, or entity, that is related to the
entity that is preparing its financial statements
(iv) One entity is a joint venture of a third entity
and the other entity is an associate of the third
entity.
(1) A person, or a close member of that person's family, is
related to a reporting entity if that person:
(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.
(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.
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 (1).
(2) An entity is related to a reporting entity if any of the
following conditions applies:
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IAS 24 Related Parties Disclosures
(vii)
A person identified in (1)(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).
Related party transaction
A related party transaction is a transfer of resources, services, or
obligations between related parties, regardless of whether a price
is charged.
Example
A parent company may provide some of its key staff to a
subsidiary without cost. The subsidiary is being subsidised at the
expense of the parent.
Close members of the family of an individual
Close members of the family of an individual are those family
members who may be expected to influence, or be influenced by,
that individual in their dealings with the undertaking. They
include:
(1)
the individual’s domestic partner and children;
(2)
children of the individual’s domestic partner; and
(3)
dependants of the individual, or the individual’s domestic
partner.
It is interesting to note that different cultures may have different
definitions for what constitutes a related party. For example, in
cultures where the blood tie is very strong, it would be reasonable
to class distant cousins as a close family member.
In countries where the culture did not have a strong blood tie, the
distant cousin may not be classified as a related party.
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Example
Adopted children would be included as close family members.
Companies and investment vehicles owned by family members
would also be considered as related parties, if they had any
interaction with the undertaking.
Close family members are included to avoid related parties
disguising their activities by using family members.
Compensation
Compensation includes all employee benefits, including
payments in kind, such as the provision of a company car, or
share options. Employee benefits are all forms of consideration
paid, payable or provided by the undertaking, or on behalf of the
undertaking, in exchange for services rendered to the
undertaking. It also includes such consideration paid on behalf of
a parent of the undertaking in respect of the undertaking.
The following classifications of compensation are important, as
disclosure of compensation has to be shown under these 5
headings (based on those listed in IAS 19 Staff Benefits), and in
total.
Compensation includes:
(1)
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;
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IAS 24 Related Parties Disclosures
(2)
post-employment benefits such as pensions, other
retirement benefits, post-employment life insurance and postemployment medical care;
(3)
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
period, profit-sharing, bonuses and deferred compensation;
(4)
(5)
termination benefits; and
equity compensation benefits (share-based payments –
IFRS 2).
Examples
Your chief executive is fired. To settle his contractual claims, your
firm pays him $200.000, plus provides a car for the next 3 years,
valued at $10.000 per year. This information will be detailed as
termination benefits.
Compensation to your management team includes both the right
to buy a specific number of shares at a discount price to that of
the market, and a share option scheme, which allows participants
to fix the price today of future share purchases. Both will be
detailed under equity compensation benefits.
Compensation may not be paid to the individual directly.
It may be paid to another firm, but must be shown in the same
manner, with a note detailing to whom it is paid.
Example
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Among your directors are 2 people who are not paid directly by
the undertaking. Their directors’ fees are paid to their employers.
Ivan is an architect, and his firm receives $30.000 for his
services. Elena works for the government, and you pay the
government $35.000 for her services. No other compensation is
paid in respect of them by your undertaking.
Both amounts will be disclosed, next to the names of Ivan and
Elena, together with the fact that the money is paid to the
architect’s firm and the government respectively.
There is no difference in presentation whether Ivan and Elena
receive the money from their employers, or not. Nor is there any
difference in presentation if it is not known whether they receive
the money.
Example
Disclosure of key management remuneration from associate
Entity A has an associate, entity B, over which it has significant
influence. Mr Jones is key management of both A and B and
shares his time 60% with entity A and 40% with entity B.
He is paid a salary by each company to reflect the services he
provides and he has a separate contract of employment with
each one.
Should entity A include the remuneration Mr Jones receives from
entity B in its disclosure of key management compensation?
Entity A should not include the remuneration Mr Jones receives
from entity B in its disclosure of key management compensation.
The disclosure requirement of IAS 24 is of remuneration paid by
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IAS 24 Related Parties Disclosures
the entity or on behalf of the entity for services rendered to the
entity.
An associate is not part of the reporting entity in so far as an
associate is not part of the .group. (the group is defined as the
parent and its subsidiaries
(IFRS 10)).
Entity A will therefore only include in its disclosure of key
management compensation under IFRS the amount paid to Mr
Jones by entity A.
Additional disclosures using different bases may be required by
national laws or listing rules.
Example
of individual privacy.
Should entity A disclose the compensation of Mr Big in its IFRS
financial statements and, if so, should it be just the compensation
from entity A or
include the compensation from all three entities?
Mr Big is a member of key management for entity A’s
consolidated group. Disclosure of his compensation is therefore
required in A’s consolidated financial statements in accordance
IAS 24.
Disclosures.
The amount disclosed should be the total compensation received
from the consolidated A group because that is the reporting entity
for which the consolidated financial statements are prepared.
Disclosure of key management compensation
Entity A is a holding company. It has two subsidiaries, B and C.
Entity A owns 100% of B and 70% of C. Mr Big is a director of
entity A
and also a director of entities B and C. Mr Big receives
compensation
from each of entities A, B and C relating to his services to each
one
Entity A should disclose the names of key management but it
does not
need to associate amounts with individual names. It may disclose
the
compensation paid to key management in total.
.
The laws of the country in which entities A, B and C are located
do not
require the disclosure of directors’ compensation on the grounds
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IAS 24 Related Parties Disclosures
Example
Key management compensation
E plc is a holding company with several 100%-owned
subsidiaries, including F Ltd and G Ltd. F Ltd trades and holds
approximately half the group’s business, while G Ltd is nontrading. E plc has equity listed on the London Stock
Exchange.
Table 1
Year ended 31 December 2004
Dr: Employee benefits expense 50
Cr: Equity 50
Year ended 31 December 2005
Dr: Employee benefits expense 50
Cr: Equity 50
Mr W is a director of E plc. Mrs X is not a director of E plc but sits
on the supervisory board, which advises the board of directors on
the management of the business.
Mr Y is a director of F Ltd and Ms Z is a director of G Ltd.
Whose emoluments need to be disclosed in the financial
statements of E plc, which are prepared in accordance with
IFRS?
The IAS 24 disclosure is required for key management of the
group, and not the directors of the company. Key management is
defined in IAS 24 and includes all those with responsibility for
.planning, directing and controlling the activities of the entity,
directly or indirectly, including any director (whether executive or
otherwise) of that entity.
The IAS 24 key management compensation disclosure will
therefore (in aggregate) include the emoluments of Mr W and Mrs
X; it will also include the emoluments of Mr Y: although not a
director of the parent company, he is key management within the
reporting entity (the group).
Ms Z is a director of a company within the group but she is not
key management.of the group.
Would it make a difference if F Ltd were incorporated in a territory
where, on the basis of individual privacy, Mr Y.s emoluments are
not required to be disclosed?
No, this would not make any difference. There are no
requirements for Mr Y’s individual emoluments to be disclosed in
the consolidated financial statements; he is simply included in the
aggregate number.
There are no exemptions to the requirements of IAS 24 on the
basis of individual privacy.
IAS 24 requires disclosure of the aggregate emoluments of key
management, both in total and split into five categories (shortterm employee benefits, post-employment benefits,other longterm benefits, termination benefits and share-based payment).
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IAS 24 Related Parties Disclosures
Control
Control is the power to govern the financial and operating policies
of an undertaking so as to obtain benefits from its activities.
Joint control
Joint control is the contractually-agreed sharing of control over an
economic activity.
Example
The government has a small shareholding in your defence
company, but has the right to appoint, and dismiss all directors.
The government has control, even if it decides not to exercise it.
It may let the company appoint its own directors, but retains the
right to dismiss any directors it chooses.
Example
You have a joint-venture agreement with a foreign sales agent.
You provide the goods, which your agent sells in a foreign
territory.
The benefits the government derives from this structure may be
political, rather than economic. The control may be needed to
avoid the company being controlled by a foreign power.
Example
Related-party disclosure between associates and
subsidiaries
Entity C is the parent of a partially-owned subsidiary, entity D. C
is also an investor in entity E, which is an associate of C.
Does D need to disclose any related party transactions with E?
These entities are not related parties with each other as defined
in IAS 24.
The agreement identifies the product range, promotional material,
management support, limit of the sales area, and transfer price.
You share the profits, with 40% coming you, 60% to the agent.
This is an example of joint control.
Key management personnel
This includes all directors and their equivalents.
It also includes persons having authority and responsibility for
planning, directing and controlling the activities of the
undertaking, directly or indirectly.
Example
Executives from your parent company may give instructions to
your staff in important matters, such as strategic planning and
treasury functions. For your company, these are key
management personnel.
E is neither controlled nor significantly influenced by D and
similarly D is neither controlled nor significantly influenced by E.
Related-party transactions can only occur between related
parties. Therefore D would not be required to disclose
transactions with E in terms of IAS 24.
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IAS 24 Related Parties Disclosures
Example
Disclosure of the purchase of land from a director
Issue
Materiality depends on the size and nature of the item judged in
the particular circumstances of its omission [IAS1].
Should management disclose the purchase of land from a
director in the financial statements?
Background
An entity operating in the pulp and paper industry has
implemented a strategy to expand its forests by buying land.
The land surrounds land that the entity already owns. One of the
entity’s directors owned a small portion of the land that the entity
purchased. The terms of the sale were determined on an armslength basis.
Solution
Yes, the director is a related party and the transaction should be
disclosed separately, even though the amounts involved are
relatively immaterial. The entity should disclose:
a) the nature of the related party relationship (director);
b) the type of transaction (the purchase of land); and
c) the conditions of the transaction (at arms-length).
Significant influence
Significant influence is the power to participate in the financial
and operating policy decisions of an undertaking, but is not
control over those policies. Significant influence may be gained
by share ownership, statute or agreement.
Example
Significant influence may be reflected in board membership,
and/or a substantial shareholding of between 20% and 50%. A
majority shareholding is more than a significant influence, as at
would yield control, in most circumstances.
In considering each possible related party relationship, attention
is directed to the substance of the relationship and not merely the
legal form.
The following are not necessarily related parties:
(1) a client, supplier, franchisor, distributor, or general agent with
whom an undertaking transacts a significant volume of business,
merely by virtue of the resulting economic dependence.
(2)
 providers of finance, such as banks,
 trade unions,
 public utilities, and
 government departments and agencies,
simply by virtue of their normal dealings with an undertaking
(even though they may affect the freedom of action of an
undertaking, or participate in its decision making process); and
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IAS 24 Related Parties Disclosures
(3)
two venturers simply because they share joint control
over a joint venture.
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 each other.
Example
You set up a foreign representative office with a firm from an
unrelated business. The joint venture is structured in order to
share the costs of the office. The other firm is unlikely to be a
related party.
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 each other.
(4)
two undertakings simply because they have a director or
other member
of key management personnel in common,
notwithstanding (4) and (6) in the definition of ‘related party’.
Example
2 of your directors are also directors of a government –sponsored
export insurance firm. Your firm does not export any goods or
services. The directors are in a minority on the insurance firm’s
board, and their role is advisory. The insurance firm is unlikely to
be a related party.
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 significantly influenced by a
government.
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 each other.
In the definition of a related party, an associate includes
subsidiaries of the associate and a joint venture includes
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IAS 24 Related Parties Disclosures
4. Disclosure
Relationships between parents and subsidiaries shall be
disclosed, whether or not there have been transactions between
those related parties. An undertaking shall disclose the name of
the undertaking’s parent and, if different, the ultimate controlling
party.
When neither the undertaking’s parent nor the ultimate controlling
party produces financial statements available for public use, the
undertaking discloses the name of the next most senior parent
that does so. 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.
Inna- who are Inna's related parties?
Example
If the undertaking’s parent is itself a subsidiary of another
company, the parent is not the controlling party. It is necessary to
establish which company is at the top of the group structure to
identify the controlling party.
Controlled
by
Produces financial
statements
No
Elena
Tamara
No
No
If neither the undertaking’s parent nor the ultimate controlling
party produces financial statements available for public use, the
name of the next most senior parent that does so shall also be
disclosed.
Anna
Elena
No
No
To enable users of financial statements to form a view about the
impacts of related party relationships on an undertaking, it is
appropriate to disclose the related party relationship when control
exists, whether or not there have been transactions between the
related parties.
Olga
Anna
Yes
Yes, highest
level that
produces
financial
statements
Galina
Olga
Yes
No
Svetlana
Galina
Yes
Yes, parent
company
Inna
Svetlana
Yes
Alexandra
Inna
Yes
This is especially true of groups of companies, where a parent
can decide the operating and financial strategies of other group
members.
The identification of related party relationships between parents
and subsidiaries is in addition to the disclosure requirements in
IFRS 12, which require an appropriate listing and description of
significant investments in subsidiaries, associates and jointly
controlled undertakings.
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Company
Tamara
Related
Parties?
Yes, owner
Yes,
subsidiary
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IAS 24 Related Parties Disclosures
An undertaking shall disclose key management personnel
compensation in total and for each of the following categories,
which are detailed in the definition of ‘Compensation’ above:
(1)
short-term employee benefits;
(2)
post-employment benefits;
(3)
other long-term benefits;
(4)
termination benefits; and
(5)
equity compensation benefits (share-based
payments).
(5)
the expense recognised during the period in
respect of bad or doubtful debts due from related
parties.
Points (3) and (4) provide information where a bonus is paid in
the form of a loan instead of salary. To avoid personal income tax
and social security payments, the recipient of the bonus has a
loan on which the interest and principle are never repaid.
If there have been transactions between related parties, an
undertaking shall disclose the nature of the related party
relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the
potential effect of the relationship on the financial statements.
Example
In addition to the standard compensation recorded for the key
management personnel, 3 executives have subsidised loans for
$50.000, $65.000 and $95.000. These will be disclosed, with the
detailed terms of the loans. Any overdue repayment of any loan
will also be noted.
The loans would also be detailed, even if the rates were not
subsidised.
(These disclosure requirements are in addition to the
requirements to disclose key management personnel
compensation.)
The disclosures shall be made separately for each of the
following categories:
(1)
the parent;
At a minimum, disclosures shall include:
(1)
the amount of the transactions;
(2)
undertakings with joint control
influence over the undertaking;
or
significant
(3)
subsidiaries;
(2)
the amount of outstanding balances 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;
(4)
associates;
(5)
joint ventures in which the undertaking is a venturer;
(6)
key management personnel of the undertaking or its
parent; and
(4)
(7) other related parties, including major shareholders.
provisions for doubtful debts related to the amount
of outstanding balances; and
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IAS 24 Related Parties Disclosures
The classification of amounts payable to, and receivable from,
related parties in the different categories as required in this
paragraph is an extension of the disclosure requirement in IAS 1
Presentation of Financial Statements for information to be
presented either on the balance sheet (SFP) or in the notes.
The categories are extended to provide a more comprehensive
analysis of related party balances and apply to related party
transactions.
The following are examples of transactions that are disclosed if
they are with a related party:
(1) purchases or sales of goods (finished or unfinished);
(2)
purchases or sales of property and other assets;
(3)
rendering or receiving of services;
(4)
leases;
(5)
transfers of research and development;
(6)
transfers under license agreements;
(7)
transfers under finance arrangements (including loans and
equity contributions in cash or in kind);
(8)
provision of guarantees or collateral;
(9)
settlement of liabilities on behalf of the undertaking or by the
undertaking on behalf of another party:
(10) commitments to do something if a particular event occurs or
does not occur in the future, including executory
contracts* (recognised and unrecognised).
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IAS 37 defines executory contracts as contracts under which
neither party has performed any of its obligations or both parties
have partially performed their obligations to an equal extent.
Disclosures that related party transactions were made on terms
equivalent to those that prevail in arm’s length transactions are
made only if such terms can be substantiated.
Items of a similar nature may be disclosed in aggregate, except
when separate disclosure is necessary for an understanding of
the effects of related party transactions on the financial
statements of the undertaking.
Government-related entities
A reporting entity is exempt from the disclosure
requirements in relation to related party transactions and
outstanding balances, including commitments, with:
(1) a government that has control, joint control or
significant influence over the reporting entity; and
(2) another entity that is a related party because the same
government has control, joint control or significant influence
over both the reporting entity and the other entity.
If a reporting entity applies this exemption, it shall disclose
the following about the transactions and related outstanding
balances:
(1)
the name of the government and the nature of its
relationship with the reporting entity (ie control, joint
control or significant influence);
(2)
the following information in sufficient detail to enable
users of the entity's financial statements to understand
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IAS 24 Related Parties Disclosures
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.
In using its judgement to determine the level of detail to be
disclosed, the reporting entity shall consider the closeness of the
related party relationship and other factors relevant in
establishing the level of significance of the transaction such as
whether it is:
(1)
significant in terms of size;
(2)
carried out on non-market terms;
(3)
outside normal day-to-day business operations, such as the
purchase and sale of businesses;
(4)
disclosed to regulatory or supervisory authorities;
(5)
reported to senior management;
(6)
subject to shareholder approval.
002
Sample Accounting Note –
Taken from Illustrated Corporate Financial Statements 2002
– PWC
Related party transactions
The Company is controlled by Parent Ltd (incorporated in [name
of country]) which owns 51% of the Company’s shares. The
remaining 49% of the shares are widely held. The ultimate parent
of the Group is Ultimate Parent Ltd (incorporated in [name of
country]).
The following transactions were carried out with related parties:
i) Sales of goods and services
Sales of goods:
[Name(s) of joint venture(s)}
[Name(s) of associate(s)}
Household Paints Ltd
Sales of services:
Parent Ltd (legal services)
Ultimate Parent Ltd (consultation services)
[Name(s) of associate(s)]
2002
2001
618
168
337
1,123
557
93
279
929
67
84
16
167
127
69
35
231
Sales to the joint ventures were carried out on commercial terms
and conditions and at market prices.
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IAS 24 Related Parties Disclosures
Sales to Household Paints Ltd are based on a long-term
agreement, which enables Household Paints Ltd to purchase
certain goods slightly under the normal sales price. Household
Paints Ltd is a firm belonging to the wife of E Choo, a director of
the Company.
As an average the goods were sold at 5% under the normal sales
price in 2002 (4% under the normal sales price in 2001). Sales to
the associated undertakings and to Parent Ltd and Ultimate
Parent Ltd were carried out at cost.
2002
2001
26
54
14
14
108
23
46
11
17
97
2,202
1,195
2002
2001
2,300
(2,300)
-
2.495
(195)
2,300
Receivables from related parties:
[Name(s) of joint venture(s)
[Name(s) of associate(s)]
Household Paints Ltd
Parent Ltd
Payables to related parties:
[Name(s) of associate(s)]
ii) Purchases of goods and services
Purchases of goods
Sister Ltd
[Name(s) of associate(s)]
Purchases of services
Parent Ltd (management services)
Haven Ltd (consultation services)
2002
2001
83
54
137
70
58
128
89
206
295
94
174
268
Sister Ltd is a fellow subsidiary of Parent Ltd. Haven Ltd is owned
by P Wallace, the Managing Director of Ultimate Parent Ltd.
The above transactions were carried out on commercial terms
and conditions, except for the goods and services purchased
from the associated undertaking and from Parent Ltd, which were
at cost. There were no purchases from the joint ventures.
iii) Year-end balances arising from sales/purchases of
goods/services
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iv) Loans from related parties
Loan from Ultimate Parent Ltd:
At the beginning of year
Repaid during the year
At the end of the year
The loan from Ultimate Parent Ltd was provided interest free, and
there was no specified repayment date.
v) Loans to directors
2002
2001
Loans to the directors of the Company (and
their families)
At the beginning of year
196
168
Loans advanced during the year
343
62
Loan repayments received
(49)
(34)
At the end of the year
490
196
In 2002, loans were advanced to B van der Hoek
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IAS 24 Related Parties Disclosures
of Local Currency 173; repayable monthly over two years;
interest rate 7.7% and to J Kelly of Local Currency 170;
repayable monthly over two years; interest rate 7.7%.
Loans advanced during the year
Loan repayments received
At the end of the year
In 2001 loans were advanced to T Ferreira of Local Currency 42;
repayable in 2003; interest rate 7.5% and to Y Sovgyra of Local
Currency 20; repayable in 2002; interest rate 7.6%). The loans
were given on commercial terms and conditions.
The loans to associates were given on commercial terms and
conditions. The related interest income was
Local Currency 36 (2001: Local Currency 38).
The related interest income in 2002 was Local Currency 30
(2001: Local Currency 16). No provision has been required in
2002 and 2001 for the loans made to directors.
The loans are due on 1 January 2004 and carry interest at 7.0%.
No provision has been required in 2002 and 2001 for the loans
made to associated undertakings.
Certain loans advanced to directors during the year amounting to
Local Currency 50 (2001: Local Currency 30) are secured by
shares in listed companies, which are held as collateral for these
loans, and are repayable in monthly instalments over four year
terms.
The fair value of these shares was Local Currency 65
at the balance sheet date (2001: Local Currency 39).
viii) Share options granted to directors
(70)
590
The aggregate number of share options granted to the directors
of the Company during 2002 was 125 (2001: 175). The share
options were given on the same terms and conditions as those
offered to other employees of the Company.
The outstanding number of share options granted to the directors
of the Company at the end of the year was 480 (450 at the end of
2001).
vi) Directors’ remuneration
In 2002 the total remuneration of the directors was Local
Currency 2.2 million (2001: Local Currency 1.3 million).
ix) Commitments and contingencies
The amount for 2002 included termination benefits of
Local Currency 0.4 million and Local Currency 0.2 million paid,
respectively, to two directors, A Tardos and J Laakso, who left
the Group during the year (2001: Local Currency Nil).
The Company has guaranteed a loan made by a bank to V
Ribollet, a director of the Company, in a total amount of Local
Currency 17 (2001: Local Currency 17). The loan is
repayable in 2003.
vii) Loans to associates
5. MULTIPLE CHOICE QUESTIONS
At the beginning of year
50
(64)
660
2002
660
2001
674
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IAS 24 Related Parties Disclosures
1.
Groups of companies are considered to be related
parties:
1. Sometimes.
2. Never.
3. Always.
2.
Intragroup transactions and balances appear in:
1. Consolidated financial statements.
2. Financial statements of individual statements.
3. Neither.
3.
A parent company can control, or influence its
subsidiary’s:
1. Financial policies.
2. Operating policies.
3. Both.
4.
If no transactions occur between the related parties, can the
profits and financial position of either party be affected by
the other?
1. Yes.
2. No.
5.
What is the likely response of users of financial statements
to the knowledge of related parties, their transactions and
balances?
1. Ignore them.
2. Adjust their assessments of the risks and opportunities
facing the undertaking.
3. Refuse to deal with the undertaking on principle.
6.
Which of the following are related parties?
1. major shareholders.
2. group companies.
3. key managers.
4. pension funds.
5. all suppliers.
6. all government departments.
7. relatives of any member of staff.
7.
A major shareholder can avoid the consequences of
related party transactions, by transacting other
business through his wife, or her husband, when the
undertaking in which he, or she, has invested is
involved.
1.True.
2.False.
3.Sometimes.
8.
If services are provided, without charge, between
group companies, does this qualify as a related party
transaction?
1. Yes.
2. No.
9.
Close family members of a related party. Does a
brother of the related party qualify as a related party in
his own right?
1. Never.
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IAS 24 Related Parties Disclosures
2. Always.
3. Only if he is expected to influence, or be influenced by
the first related party, in dealings with the undertaking.
10.
to:
12.
Compensation relating to a director that is paid to the
director’s firm, rather than to the director directly:
1. Can be ignored.
2. Should be reported without mentioning the director’s
firm.
3. Should be reported with a note detailing to whom it is
paid.
13.
Significant influence in an undertaking is:
1. Control of an undertaking.
2. Power to participate in the financial and operating policy
decisions.
3. Holding 10% of the shares, without board
representation.
14.
In considering any related party relationship, attention
should be directed primarily to the:
1. Legal form of the relationship.
2. Substance of the relationship.
3. Neither of these.
15.
Two venturers who share a joint venture are:
1. Always related parties.
2. Never related parties.
3. Not necessarily related parties.
16.
Related party relationships need not be disclosed, if
no transactions have taken place.
1. True.
2. False.
Close family members are included as related parties
1. Avoid related parties disguising their activities.
2. Help related parties disguise their activities.
11.
Classify each of the following transactions as either:
1. Short-term employment benefits.
2. Post-employment benefits.
3. Long-term employment benefits.
4. Equity compensation benefits.
Transactions
Share option schemes
Pensions
Paid sick leave
Sabbatical leave
Subsidised goods or
employees
services
provided
to
6. Case Studies
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IAS 24 Related Parties Disclosures
1. A bank is financing a construction company with a loan that
provides 90% of the construction company’s capital
requirements. The construction company is owned by a friend of
the Chief Executive Officer of the bank. The loan is secured on
the assets of the construction company.
1. Yes.
5. What is the likely response of users of financial
statements to the knowledge of related parties, their
transactions and balances?
2. Adjust their assessments of the risks and opportunities
facing the undertaking.
Is the construction company a related party?
2. Company T trades with company K. They are not in the same
group of companies, but both of their parent companies have the
same person as majority shareholder.
6. Which of the following are related parties?
YES
1. major shareholders.
2. group companies.
3. key managers.
4. pension funds.
NO
5. all suppliers.
6. all government departments.
7. relatives of any member of staff.
Are they related parties?
3. Company M buys a franchise to run a Russian food restaurant
in Tula. Is it a related party to the company that sold it the
franchise.
7. ANSWERS
7. A major shareholder can avoid the consequences of
related party transactions, by transacting other
business through his wife, or her husband, when the
undertaking in which he, or she, has invested is
involved.
2. False.
1. Groups of companies are considered to be related
parties:
3. Always.
2. Intragroup transactions and balances appear in:
2. Financial statements of individual statements.
8.
If services are provided, without charge, between
group companies, does this qualify as a related party
transaction?
1. Yes.
9.
Close family members of a related party. Does a
brother of the related party qualify as a related party in
his own right?
3. A parent company can control, or influence its
subsidiary’s:
3. Both.
4. If no transactions occur between the related parties,
can the profits and financial position of either party be
affected by the other?
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IAS 24 Related Parties Disclosures
3. Only if he is expected to influence, or be influenced by
the first related party, in dealings with the undertaking.
10.
to:
Close family members are included as related parties
2.Power to participate in the financial and operating policy
decisions.
14.
In considering any related party relationship, attention
should be directed primarily to the:
2. Substance of the relationship.
15.
Two venturers who share a joint venture are:
3. Not necessarily related parties.
16.
Related party relationships need not be disclosed, if
no transactions have taken place.
3. False.
1. Avoid related parties disguising their activities.
11.
Classify each of the following transactions as either:
1. Short-term employment benefits.
2. Post-employment benefits.
3. Long-term employment benefits.
4. Equity compensation benefits.
Transactions
Share option schemes
Pensions
Paid sick leave
Sabbatical leave
Subsidised goods or
services provided to
employees
8. ANSWERS TO CASE STUDIES
4.
Equity
compensation
benefits.
2. Post-employment benefits.
1. Short-term employment
benefits.
3. Long-term employment
benefits.
1. Short-term employment
benefits.
12.
Compensation relating to a director that is paid to the
director’s firm, rather than to the director directly:
3. Should be reported with a note detailing to whom it is
paid.
13.
Significant influence in an undertaking is:
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1. The construction company will not be a related party, if the
bank provides the loan on standard commercial terms, having
carried out its normal risk analysis on the construction company.
However, if favourable loan terms have been offered, the
construction company may be a related company.
2. They are related parties, as they are under common control of
the major shareholder, even if the major shareholder does not
exercise that control.
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IAS 24 Related Parties Disclosures
3. They are related parties, as the franchise agreement relates only to Tula. Company cannot expand its business without the agreement of
the company that sold it the franchise. The company’s operating policies are also governed by the franchise agreements.
9. Annex – Examples of Disclosure Notes
Typical Disclosure Note:
RELATED PARTY TRANSACTIONS
The holding company and ultimate holding company of the Group are Markov Holdings Limited (incorporated in the Russian Federation Land,
1991) and Limmasol Holdings Limited (incorporated in Cyprus, 1995).
Trading Transactions
During the year, group companies entered into the following transactions with related parties who are not members of the Group:
Sales of goods
Purchases of goods
Amounts owed to
Amounts owed by
31/12/03
31/12/02
31/12/03
31/12/02
31/12/03
31/12/02
31/12/03
31/12/02
Markov Holdings Limited
$700
$650
675
876
1868
1500
0
0
Subsidiaries of Limmasol
1500
1200
456
235
1003
900
0
0
Holdings Limited
Associates and a jointly
0
0
0
0
0
0
512
323
Controlled entities
Other
$800
$0
Sales of goods to related parties were made at the Group’s usual list prices, less average discounts of 20 per cent. Purchases were made at
market price discounted to reflect the quantity of goods purchased and the relationships between the parties.
Other: A property was sold to a major shareholder for $800,000. This represents a discount of 30% on the fair value as established by the real
estate agents Vintor International Limited.
Extract from Illustrative consolidated financial statements 2006 – Banks
48. Related-party transactions
The Group is controlled by Parent Inc. (incorporated in [name of country]), which owns 60% of the ordinary shares. The remaining 40% of
the shares are widely held.
The ultimate parent of the Group is Ultimate Parent Inc. (incorporated in [name of country]).
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IAS 24 Related Parties Disclosures
A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and
foreign currency transactions. There were no related- party transactions with the ultimate parent company or with the parent company,
Parent Inc., other than the payment of dividends on ordinary shares.
The volumes of related-party transactions, outstanding balances at the year-end, and relating expense and income for the year are as
follows:
(a) Loans and advances to related parties
(All amounts in euro millions unless otherwise stated)
Directors and other key
management personnel
(and close family
members)
2006
2005
Loans and advances to
customers
Loans outstanding at 1
January
Loans issued during the
year
Loan repayments during
the year
Loans outstanding at 31
December
Interest income earned
Associated
companies
2006 2005
135
117
450
381
14
33
25
116
-18
-15
-58
-47
131
135
417
450
11
10
35
33
No provisions have been recognised in respect of loans given to related parties (2005: nil).
The loans issued to directors and other key management personnel (and close family members) during the year of õ14 (2005: õ33)
are repayable monthly over two years and have interest rates of 6.5%
(2005: 6.3%). The loans advanced to the directors during the year are collateralised by shares in listed companies. The fair value of
those shares was õ20 (2005: õ36).
The loans and advances to associated companies are unsecured, carry variable interest rates and repayable on demand.
(b)
Deposits from related parties
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IAS 24 Related Parties Disclosures
Directors and other key
management personnel (and Associated
close family members)
companies
2006
2005
2006 2005
Due to customers
Deposits at 1 January
Deposits received during the
year
Deposits repaid during the
year
Deposits at 31 December
Interest expense on deposits
25
18
110
98
18
21
115
107
-22
21
-14
25
-102
123
-95
110
2
2
8
7
The above deposits are unsecured, carry variable interest rates and are repayable on demand.
(c)
Other transactions with related parties
Directors and other key
management personnel
(and close family
members)
2006
2005
Fee and commission
income
Guarantees issued by
the Group
Associated
companies
2006
2005
0
0
14
7
0
0
25
12
The above guarantees are issued by the Bank for associated company’s short-term bank borrowings in the normal course of
business.
(d)
Key management compensation
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IAS 24 Related Parties Disclosures
Salaries and other short-term benefits
Post-employment benefits
Share-based payments
2006
2005
252
25
15
292
246
18
20
284
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