FAC3764: TOPIC 9.

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IAS 24, RELATED PARTY
DISCLOSURE – STUDY NOTES

1. Related parties

1.1. Introduction

A related party relationship could affect the profit or loss and financial position of an entity.
Related parties may enter into transactions unrelated parties would not enter into. For example, an
entity that sells goods to its parent at cost may not sell on the same terms to another customer.

For financial statements to meet fair presentation, the reporting entity must disclose the
transactions involving the related parties to the users to be aware of the interrelationships
between related parties, including the level of support provided by related parties to assist users of
the financial statements in making their economic decisions.

1.2. Definitions (IAS 24.9)

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.

A related party is a person or an entity that is related to the entity that is preparing its financial
statements. In considering each possible related-party relationship, attention is directed to the
substance of the relationship, not merely the legal form (IAS 24.10).

(a) A person, or a 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 key management personnel of the reporting entity, or a parent of
the reporting entity.
(b) An entity is related to a reporting entity if any of the following conditions apply:
(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 each other).
(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).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other is an associate of the third
entity.
(v) The entity is a post-employment benefit plan for the benefit of the employees of either
the reporting entity or an entity related to the reporting entity. If the reporting entity is
itself a plan, the sponsoring employers are also related to the entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(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.

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Close members of the family of a person are 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) dependents of that person or that person's spouse or domestic partner.

Compensation includes all employee benefits in all forms of consideration paid, payable or
provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity. It
also includes such consideration paid on behalf of a parent of the entity in respect of the entity.
Compensation includes the following:
(a) Short-term employee benefits such as wages, salaries, social security contributions, paid
annual leave, paid sick leave, profit-sharing and bonuses (if payable within 12 months of the
end of the period), medical care, housing, cars and free or subsidised goods or services.
(b) Postemployment benefits (pensions, other retirement benefits, post-employment life
insurance and medical care).
(c) Other long-term employee benefits (long-service leave, sabbatical leave, jubilee benefits or
other long-service benefits, long-term disability benefits and profit-sharing bonuses and
deferred compensation payable after 12 months of the end of the reporting period);
(d) Termination benefits and
(e) share-based payments.

Key management personnel are those persons having authority and responsibility of planning,
directing and controlling the activities of the entity, directly or indirectly, including any director
(whether executive or otherwise) of that entity ,

Significant influence is the power to participate in the financial and operating policy decisions of
an entity, but not the power to control those policies. Significant influence may be gained by share
ownership, statute or agreement.

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.

The following are not related parties:

(a) 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 entity.
(b) Two joint ventures simply because they share joint control over a joint venture.
(c) (i) Providers of finance,
(ii) trade unions,
(iii) public utilities; or
(iv) departments and agencies of a government that does not control, jointly control or
significantly influence the reporting entity simply because of their normal dealings with
an entity (even though they may affect freedom of action of an entity or participate in its
decision-making process).
(d) A customer, supplier, franchisor, distributor or general agent with whom an entity transacts a
significant volume of business, simply because of the resulting economic dependence.

In the definition of a related party, an associate includes subsidiaries of the associate, and a joint
venture includes subsidiaries of the joint venture. For example, an associate's subsidiary and the
investor that influences the associate are related to each other.

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1.3. Disclosure (IAS 24.13-24)

Disclosure of related-party relationships

The standard requires that all relationships between a parent and subsidiary be disclosed,
irrespective whether or not a transaction occurred. Regarding parents and subsidiaries, an entity
must disclose the name of its parent and, if different, the ultimate controlling company. If neither
the parent nor the ultimate controlling company produces consolidated financial statements for
public use, the name of the next most senior parent who does so, should also be disclosed. The
disclosure requirement is in addition to the requirements of IAS 27 and IFRS 12 Disclosure of
Interests in Other Entities.

Disclosure of key management personnel compensation

Total key management compensation must be disclosed for each of the following categories.

- short-term employee benefits

- postemployment benefits
- other long-term benefits
- termination benefits
- share-based payments

Disclosure of related-party transactions

Any information about the related-party transaction and any outstanding balances must be
disclosed for an understanding of the potential effect of the relationship.

At a minimum, the disclosures must include the following:

- the nature of the relationships between the related parties
- the amount of the transactions
- the amount of any outstanding balances (payables and receivables including commitments
must be distinguished):
 the terms and conditions, any security provided and method of settlement and
 details of guarantees given or received
- provision for doubtful debts relating to the outstanding balances
- the expense recognised during the period in respect of bad or doubtful debts due from related
parties.

The disclosure of related-party transactions shall be made for the following categories:
- parent
- entities that are jointly controlled or exercise significant influence
- subsidiaries
- associates
- joint ventures in which the entity is a venture
- key management personnel of the entity or its parent
- other related parties

Examples of the different types of disclosures of related-party transactions are:

- purchases or sales of goods, property and other assets
- leases, and
- rendering or receiving services.

Participation by a parent or subsidiary in a defined benefit plan that shares risks among the group
entities is a transaction between related parties.

Items of a similar nature must be disclosed in total, except when separate disclosure is necessary
for an understanding of the related-party transaction that has occurred.

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Government-related entities

A reporting entity is exempted from the disclosure requirements of IAS 24 if:

- a government has control, joint control or significant influence over the reporting entity, or
- transactions with another entity that is a related party due to a common government having
control, joint control or significant influence over both the other entity and reporting entity.

If the exemption stated above is applied, the entity must, however, disclose the following:
- The name of the government and the nature of the relationship of the reporting entity with the
government.

- The following information detailed enough to help users of the entity's financial statements to
understand the effect of related-party transactions on the entity:
 the nature and amount of each individually significant transaction; and
 for all transactions that are collectively, but not individually significant, a quantitative or
qualitative indication of their extent. (Refer to IAS 24.21 for a list of such transactions.)

1.4. Identifying related parties

IAS 24 contains a detailed definition of a related party. When considering each possible related-
party relationship, attention is directed to the substance of the relationship and not merely its legal
form. Each element of the definition of a related party will now be considered in more detail.

1.4.1 The entity and the reporting entity are members of the same group (IAS 24.9(b)(i))

EXAMPLE 1

X Limited

100% 70%

Y Limited Z Limited

In the separate financial statements of parent company X Limited, both subsidiaries, Y Limited and
Z Limited, will be disclosed as related parties as they are controlled by X Limited.

In the separate financial statements of Y Limited, parent company X Limited will be a related party
as X Limited controls Y Limited. Fellow subsidiary Z Limited will also be disclosed as a related
party in the separate financial statements of Y Limited as it is under common control, namely X
Limited. On similar grounds, X Limited and Y Limited will be related parties in the separate financial
statements of Z Limited.

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1.4.2 The reporting entity is an associate of the other entity (IAS 24.9(b)(ii))

EXAMPLE 2

X Limited

30%

Y Limited

The 30% interest of X Limited in Y Limited, constitutes significant influence. In Y Limited's financial
statements, X Limited will be a related party.

1.4.3 The reporting entity is a joint venture of the other entity (IAS 24.9(b)(ii))

EXAMPLE 3

X Limited

45%

Y Limited
(joint venture)

X Limited has a 45% interest in Y Limited and exercises joint control over Y Limited in terms of a
contractual arrangement with another party. In Y Limited's financial statements, X Limited will be a
related party.

1.4.4 One entity is an associate of the reporting entity (IAS 24.9(b)(ii))

EXAMPLE 4

X Limited

30%

Y Limited
(associate)

The 30% interest of X Limited in Y Limited constitutes significant influence. Y Limited will be a
related party in X Limited's financial statements..
This part of the definition may appear the same as the part of the definition in 1.4.2. It should,
however, be noted that it does not always lead to reciprocal disclosures in the financial statements
of the relevant reporting entities.

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1.4.5 One entity is an associate, and the other entity is a subsidiary of the reporting
entity (IAS 24.9(b)(i) and (ii))

EXAMPLE 5

X Limited

80% 35%

Y Limited Z Limited
(subsidiary) (associate)

The following related parties will have to be disclosed in the financial statements of X Limited:
 Y Limited is a related party as it is controlled by X Limited.
 Z Limited is a related party as it is an associate of X Limited.

X Limited must therefore disclose all the transactions between X Limited and Y Limited and
between X Limited and Z Limited in the financial statements.
The transactions of the following related parties will have to be disclosed in the financial statements
of Z Limited:
 X Limited is a related party as it exercises significant influence over Z Limited. Z Limited must
therefore disclose all the transactions between X Limited and Z Limited.
 Y Limited is a related party of Z Limited, as Y Limited is a member of the group of which Z
Limited is also a member.

1.4.6 One entity is a joint venture of the reporting entity (IAS 24.9(b)(ii))

EXAMPLE 6

X Limited

45%

Y Limited

X Limited has a 45% interest in Y Limited and exercises joint control over Y Limited in terms of a
contractual arrangement with another party. In Y Limited's financial statements, X Limited will be a
related party.

Y Limited will be a related party in X Limited's financial statements.

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1.4.7 Both entities are joint ventures of the same third party (IAS 24.9(b)(iii)

EXAMPLE 7

X Limited

45% 35%

Y Limited Z Limited

 Y Limited is a related party of Z Limited.

 Z Limited is a related party of Y Limited.

1.4.8 A person or a close member of the person's family is a member of the key
management personnel of the reporting entity (IAS 24.9(b)(iii))

EXAMPLE 8

Mr A
(Executive
director)

X Limited

Mr C (planning
and controlling Mr B (non-
the daily executive
activities) director)

Mr A and Mr B are related parties of X Limited, as they are executive and non-executive directors
of X Limited.
Mr C is a related party of X Limited, as he is responsible for planning and controlling the daily
activities of X Limited.

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1.4.9 A person or a close member of the person's family who has significant influence
over a reporting entity (IAS 24.9(b)(ii))

EXAMPLE 9

Mr Jones Mrs Jones

25% 80%

X Limited
controlled by Mrs
Reporting entity Jones

Mrs Jones is a related party of the reporting entity, as she is a close family member of Mr Jones,
who has significant influence over the reporting entity

1.4.10 Entities controlled, jointly controlled or significantly influenced by certain related

parties (IAS 24.9(b)(vi) and (vii))

EXAMPLE 10

Mr Jones Mrs Jones

45% 80%

Reporting entity
X Limited
controlled by
Mrs Jones

X Limited is a related party of the reporting entity as it is an entity that is controlled by Mrs Jones, a
close family member of Mr Jones; an individual who has significant influence over the reporting entity.

Mrs Jones is a related party of the reporting entity, as she is a close family member of Mr Jones who
has significant influence over the reporting entity.

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1.4.11 The entity is a postemployment benefit plan to the benefit of employees of either
the reporting entity or an entity related to the reporting entity (IAS 24.9(b)(v))

EXAMPLE 11

X Limited 80% Y Limited

(subsidiary
of X Limited)

Fund X Fund Y
(For the benefit of (For the benefit of
employees of X employees of Y Limited)
Limited)

Both Fund X and Fund Y are related parties of X Limited; and both Fund X and Fund Y are related
parties of Y Limited

1.5. Comprehensive example

Asgard Ltd is a diversified mining group. The group structure is as follows:

Asgard Limited

60% 30% 100%

Wraith Limited Genii Limited Nox Limited

10% 30% 45

Orion Limited Athosian Limited

(1) Mr Deadalus is the Chief Financial Officer of Asgard Limited. Mrs Deadalus, the wife of Mr
Deadalus, is a partner in Orion Inc, the accounting firm responsible for compiling the financial
records of the Asgard group. The accounting fee for the reporting period ended 31 December
20x22 was R500 000.
(2) Nox Ltd is responsible for transporting the inventory of Asgard Ltd. Nox Ltd charged Asgard Ltd
R2 500 000 for the safe transport of all the gold and gemstones that were mined. On
31 December 20x22, R1 200 000 was still outstanding.
(3) Wraith Ltd is an engineering company responsible for maintaining all the mining equipment.
Wraith Ltd invoiced Asgard Ltd for the maintenance amounting to R10 000 000 for the reporting
period ended 31 December 20x22. Asgard Ltd invoiced Athosian Ltd for their portion of the
maintenance provided by Wraith Ltd to the amount of R2 500 000. The accounts receivable of
Wraith Ltd were R1 300 000, of which R350 000 was owed by Asgard Ltd on behalf of Athosian
Ltd.
(4) Genii Ltd prepared a contract for a lease agreement for Athosian Ltd at no cost.

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Except for the transaction with Genii Ltd, all the above transactions were entered into at market-related
prices and at arm's length terms and conditions.

REQUIRED
Disclose all relevant information required by IAS 24, Related Party Disclosures, in
the notes to Asgard Ltd's financial statements for the year ended
31 December 20x22.

SOLUTION

ASGARD LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20x22
2. Related-party transactions
2.1 Related parties
Asgard Ltd is related to Wraith Ltd, Nox Ltd and Athosian Ltd because they are subsidiaries of Asgard Ltd.
Asgard Ltd is related to Genii Ltd because Genii Ltd is an associate of Asgard Ltd.
Mr Deadalus is a related party of Asgard Ltd as he is part of the key management personnel of
Asgard Ltd.
Orion lnc is a related party of Asgard Ltd as Mrs Deadalus (the wife of Mr Deadalus, a key
management personnel member of Asgard Ltd) has significant influence over Orion Inc.

2.2 Transactions
The following transactions occurred between related parties of the company during the
past financial year:
20x22
R
Accounting fees paid to Orion Inc 500 000
Transport paid to Nox Ltd 2 500 000
Maintenance cost incurred: Wraith Ltd 10 000 000
Maintenance cost recovered from Athosian Ltd 2 500 000
Genii Ltd prepared a contract for a lease agreement for Athosian Ltd at no cost.

2.3 Outstanding balances

 Included in accounts payable in R1 200 000 owed to Nox Ltd.
 Included in accounts receivable is R350 000 receivable from Athosian Ltd.

Except for the transaction with Genii Ltd, all the above transactions were entered into at market-related
prices and at arm's length terms and conditions.

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