IAS 24

Related Parties Disclosure

 Overview
 Objective
 Scope
 Definition
 Disclosures
 Objective
.

The objective of this Standard is to ensure that an

entity’s financial statements contain the disclosures
necessary to draw attention to the possibility that
its financial position and profit or loss may have
been affected by the existence of related parties and
by transactions and outstanding balances, including
commitments, with such parties.
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Scope
IAS 24 is primarily a disclosure standard

This (a) identifying related party relationships and

Standard
shall be transactions;
applied in:
(b) identifying outstanding balances between an
entity and its related parties;

(c) identifying the circumstances disclosed

 Definition 5

 Related Party:
 A related party is a person or entity that is related to the entity that is
preparing its financial statements (in this Standard referred to as the
‘reporting entity’).
Related-party transactions:
 Related party transactions are transfer of resources whether a price is
charged for the transactions.
Government related entity
 Is an entity that is controlled, jointly controlled or significantly influenced
by government
What is the rationale for compelling these disclosures?
 Because related-party transactions are different from armed –length
transactions
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Continued

Control
• the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities

Joint control
• the contractually agreed sharing of control over an economic
activity

Significant influence
• the power to participate in the financial and operating policy decisions of
an entity, but is not control over those policies may be gained by share
ownership, statute or agreement
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Difference between Related parties transactions & others

●
Related parties may enter into certain transactions with each other which unrelated parties may not
normally want to enter into.
●
Amounts charged for transactions may not be comparable to amounts charged for similar
transactions with unrelated parties (May be transacted at amounts other than fair value )
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●
Users may assume that the transaction reflects fair value
●
Would be entered into during the normal course of business or with valid
business reason from the entity’s perspective
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Continued

 Parties are related if:

(a) directly, or indirectly :

(i) controls, is controlled by, or is under common control with, the entity

(ii) has significant influence over the entity; or

(iii) has joint control over the entity;

(b) (c) the party is a joint venture in which the entity is a venturer

(d) the party is a member of the key management personnel of the entity or its
parent;

(e) the party is a close member of the family

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Continued
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 The relationship between parent and a subsidiary is a related
party relationship & it offers opportunities for manipulating the
parent's F/S & include:

1. The subsidiary sells goods to the parent company at a low

price.

2. The parent sells goods to the subsidiary at an artificially

high price.
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Continued
3. The parent can sell an asset to the subsidiary at an amount in excess of its
carrying amount.
 All increase parent company profit while reducing profit in the
subsidiary, thus increasing profit available for distribution to parent
company shareholders at the expense of the Non Controlling
Interest.
4. The subsidiary makes a loan to the parent at low rate of interest or the
parent makes a loan to the subsidiary at high rate of interest.
 The loans will be cancelled on consolidation but the interest
payments will transfer cash from the subsidiary to the parent.
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Continued
 IAS 24 lists some of transactions that are disclosed if they are with a
related party:
1. Purchases or sales of goods
2. Purchases or sales of property and other assets
3. Rendering or receiving of services
4. Leases
5. Transfer of research and development
6. Transfers under license agreements
7. Provision of finance (including loans and equity contribution)
8. Provision of guarantees and collateral security
9. Settlement of liabilities on behalf of the entity or by the entity on behalf of
another party.
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Disclosure
Disclosure:
The following disclosures are needed:
(1) Parent–Subsidiary Relationships
 Disclosures
• The name of the parent
• The name of the ultimate controlling party
• If neither of the above produce financial statements that are available, the name of
the next most senior parent
(2) Management Compensation
 Disclosures
• Short-term employee benefits (wages, salaries, bonuses, etc.)
• Post-employment benefits (pensions, life insurance, etc.)
• Other long-term benefits (sabbatical, disability, etc.)
• Terminations
• Share-based payments
 Total compensation benefits and subtotals for each of these categories should be disclosed
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.....Disclosure:
(3) Related-Party Transactions
 Disclosures
 Amount
 Amount of balances still outstanding
 Provisions for doubtful debt and any related expense recognized during the
period

 Who should make separate disclosures?

 Parent
 Entities with joint control/significant influence over the entity
 Subsidiaries
 Associates
 Joint ventures
 Key management personnel
 Other related parties
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.....Disclosure:

 Arm’s-length transactions/terms
• May only disclose if this claim can be substantiated
• Substantiation might be made by benchmarking against other similar
transactions

 Examples of related-party transactions

• Purchase or sales of goods or property
• Leases
• Loans
• Guarantees
• Others
 IFRS 12 -Disclosure of Interests in Other
Entities
main principles
IFRS 12 Disclosure of Interests in Other Entities requires
disclosure of:
• overall objective: information that enables primary users to
evaluate:
• the nature of, and risks associated with, its interests in other entities;
and
• the effects of those interests on its financial position, financial
performance and cash flows.
• specific information about interests in:
• subsidiaries (IFRS 10)
• joint arrangements (IFRS 11)
• associates (IAS 28)
• structured entities that have not been consolidated
 Disclosure of Interests in Other Entities
selected judgments
IFRS 12 Disclosure of Interests in Other Entities includes
disclosures about:
• judgments and assumptions in determining the degree of
influence exerted over other entities (ie control, joint
control, significant influence) in accordance with IFRS 10,
IFRS 11 and IAS 28
• judgments in applying IFRS 12 include:
• identifying unconsolidated structured entities
• measuring maximum exposure to loss
• determining the appropriate level of aggregation
• judging the extent of disclosure needed to satisfy the
overall objective
Thank You
Questions and Discussion
 Case Study 1
Facts (the example below is meant to clarify the concept of IAS 24 and it in no way is
meant to mirror or show actual events)
ethio telecom transacts business through a business model that has worked for several years and
has made the entity a successful enterprise that is rated in the top 10 telecoms in Africa. ethio
telecom believes in working with reliable and dependable vendors
 ethio telecom purchases a specialized network products from Excellent Plc which was
incorporated in London but has a local office. Excellent Plc is a well-known supplier. Due to the
high quality of the material that Excellent Plc. has provided over the last 10 years, ethio telecom.
has never purchased the specialized item from any other supplier. Thus it may be considered
economically dependent on Excellent Plc.
 ethio telecom sells 30% of its output to government owned/funded entities
 ethio telecom stores inventory in a warehouse that is leased from the wife of its director. The lease
rentals are at arm’s length.
 ethio telecom has provided an interest-free loan to the chief executive officer (CEO)
 Required
Based on the requirements of IAS 24, identify which transactions would need to be disclosed as related party
transactions under IAS 24.