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Related party transactions (Disclosures must be made separately for each…
Related party transactions
Users of accounts will normally base their reading of the accounts and analysis of them on the expectation that all the transactions undertaken by the entity have been at arms length, where both the entity and counterparty to each transaction are trying to obtain the best deal they and through market prices or negotiation
IAS 24 'Related Party Transactions' deals with disclosures when transactions are not at arms length and so users may need to take a different view of such transactions
Entities are not required to disclose whether transactions are actually at a fair price or not they must simply disclose whether transactions are related party transactions
This standard also deals with remuneration of directors, called key management personnel
There are substantial restrictions and safeguards in UK company law regarding other transactions between companies and directors, including restrictions on loans to directors
A related party can be either individuals or other entities. In a group context, all group companies will be related parties
A related party is a person that is related to the entity that is preparing its financial statements
(A) a person or close member of that person's family is related to a reporting entity if that person
has control or joint control of the reporting entity
has significant influence over the reporting entity
is a member of the key management personnel of the reporting entity or of a parent of the reporting entity
(B) an entity is related to a reporting entity if any of the following conditions applies
the entity and reporting entity are members of the same group
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)
both entities are joint ventures of the same third party
the entry is a post employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity itself is such a plan, the sponsoring employers are also related to the reporting entity
the entity is controlled or jointly controlled by a person identified in (A)
a person identified in (A) has significant influence over the entity of is a member of the key management personnel (or of a parent)
the entity or any member of a group of which it is a part provides key management personnel services to the reporting entity or to the parent of the reporting entity
Once related parties have been identified, the standard requires various disclosures to be made about them and any related party transactions
Relationships between a parent and its subsidiaries must be disclosed irrespective of whether there have been transactions between them. An entity must disclose the name of its parent and 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 next most senior parent that does so much be disclosed
If an entity has had related party transactions during the period, it must disclose the nature of the related party transaction as well as information about those transactions and outstanding balances , including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. At a minimum disclosures will include
The amount of transactions
The amount of outstanding balances, including commitments, their terms and conditions, whether they are secured, and the nature of consideration to be provided, deals of any guarantees given or received
Provisions for doubtful debts related to the amount of outstanding balances
The expense recognised during the period in respect of bad or doubtful debts due from related parties
Disclosures must be made separately for each of the following categories
The parent
Entities with joint control of, or significant influence over, the entity
Subsidiaries
Associates
Joint ventures in which the entity is a joint venturer
Key management personnel of the entity or its parents
Other related parties
Related party transactions include
Short and long term borrowings
Buying and selling of goods
Guarantees
Provision of management services
There are exemptions from disclosure of related parties and related party transactions where the entities are government related. The issue of materialty is problematic for related party transactions. Director remuneration may be small but the standard assumes that it will always be material to users (and indeed UK law takes the view that it must be disclosed precisely). For other transactions, there may be no or a very low transaction price. In effect, however, the standard assumes that the knowledge of the related party connection will always be material to users of accounts, and although similar transactions can be bundled together, disclosure will always be required.