What is a related party?
In simple terms, IAS 24 defines a ‘related party’ as a person or entity related to the entity preparing its financial statements (referred to as the ‘reporting entity’). In addition, the standard provides an in-depth overview of which parties would meet the related party definition in the same paragraph.
Meanwhile, ISA 550 defines a related party as a party that is either:
- A related party as defined in the applicable financial reporting framework; or
- Where the applicable financial reporting framework establishes minimal or no related party requirements:
- A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity;
- Another entity over which the reporting entity has control or significant influence, directly or indirectly, through one or more intermediaries; or
- Another entity under common control with the reporting entity through having: (i). Common controlling ownership; (ii). Owners who are close family members; or (iii). Common key management.
However, entities under common control by a state (that is, a national, regional or local government) are only considered related if they engage in significant transactions or share resources to a considerable extent with one another.
What constitutes a related party transaction?
A related party transaction is characterised by a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.
Paragraph 11 of the standard discusses a list of relationships which are not considered as related parties, for instance, two entities, simply because they have a director or other member of key management personnel in common.
Why is the identification of such related party relationships and transactions considered necessary?
The standard advises enabling users of financial statements to form a view about the effects of related party relationships on an entity; it is appropriate to disclose the connected party relationship when control exists, irrespective of whether there have been transactions between the associated parties.
What disclosures are required to the notes of the financial statements in terms of related party relationships and transactions?
Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been transactions between them. In addition, an entity shall disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity’s parent nor the ultimate controlling party produces consolidated financial statements available for public use, the name of the following most senior parent that does so shall also be disclosed.
An entity must also disclose critical management personnel compensation in total and for each of several categories the standard outlines, such as short-term employee or post-employment benefits.
The following are examples of transactions that are disclosed if they are with a related party:
(a) purchases or sales of goods (finished or unfinished);
(b) purchases or sales of property and other assets;
(c) rendering or receiving of services; and
(d) leases.
In addition to those stated above, the standard goes into additional detail to describe an extensive list of disclosure requirements.
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Article written by Shannon Muscat
