CPA AFR: ADVANCED FINANCIAL REPORTING
IAS 24 – Related Party Disclosures
Objective of IAS 24
The objective of IAS 24 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 with such parties.
Who Are Related Parties?
Parties are considered to be related if one party has the ability to control the other party or to exercise significant influence or joint control over the other party in making financial and operating decisions.
A party is related to an entity if: [IAS 24.9]
- (a) directly, or indirectly through one or more intermediaries, the party:
- (i) controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries);
- (ii) has an interest in the entity that gives it significant influence over the entity; or
- (iii) has joint control over the entity;
- (b) the party is an associate (as defined in IAS 28 Investments in Associates) of the entity;
- (c) the party is a joint venture in which the entity is a venturer (see IAS 31 Interests in Joint Ventures);
- (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 of any individual referred to in (a) or (d);
- (f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
- (g) the party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity.
Prior to the 2003 revision of IAS 24, state-controlled entities were exempted from the related party disclosures. That exemption has been removed in the 2003 revision. Therefore, profit-oriented state-controlled entities that use IFRS are no longer exempted from disclosing transactions with other state-controlled entities.
The following are deemed not to be related: [IAS 24.11]
- two enterprises simply because they have a director or key manager in common;
- two venturers who share joint control over a joint venture;
- providers of finance, trade unions, public utilities, government departments and agencies in the course of their normal dealings with an enterprise; and
- a single customer, supplier, franchiser, distributor, or general agent with whom an enterprise transacts a significant volume of business merely by virtue of the resulting economic dependence.
What Are Related Party Transactions?
A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of whether a price is charged. [IAS 24.9]
Relationships between parents and subsidiaries. Regardless of whether there have been transactions between a parent and a subsidiary, an entity must 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 financial statements available for public use, the name of the next most senior parent that does so must also be disclosed. [IAS 24.12]
Management compensation. Disclose key management personnel compensation in total and for each of the following categories: [IAS 24.16]
- short-term employee benefits;
- post-employment benefits;
- other long-term benefits;
- termination benefits; and
- equity compensation benefits.
Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including all directors (whether executive or otherwise). [IAS 24.9]
Related party transactions. If there have been transactions between related parties, 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. These disclosure would be made separately for each category of related parties and would include: [IAS 24.17-18]
- The amount of the transactions.
- The amount of outstanding balances, including terms and conditions and guarantees.
- Provisions for doubtful debts related to the amount of outstanding balances.
- Expense recognized during the period in respect of bad or doubtful debts due from related parties.
|Examples of the Kinds of Transactions that Are Disclosed If They Are with a Related Party|
A statement that related party transactions were made on terms equivalent to those that prevail in arm’s length transactions should be made only if such terms can be substantiated. [IAS 24.21]
Tourists Paradise Limited, TPL is a company quoted on the Nairobi Stock exchange. Its managing directors, Mr. Tamiba, owns 52% of the share capital of the company. Mr. Tamiba is a director of Tourists Travels Limited (TTL), an 80% subsidiary of Tourists Paradise Limited, of Mombasa Deep-sea Fishing Limited (MDFL), a 40% associate of Tourists Paradise Limited, and of Mombasa Hotel Supplies Limited (MHSL). TPL owns and runs 6 tourist hotels along the coast, both north and South of Mombasa. TTL is a travel and transport company. All TPL’s travel and transport needs are outsourced to TTL, MDFL, markets a wide variety of fish products parts of its output is exported and the rest is sold to a large number of hotels and restaurants both in the coastal region and inland. MHSL supplies many hotels in the coast region with an assortment of different products. Mr. Tamiba owns 40% of the share capital of MHSL, his wife owns 20%, the owners of the 4 other hotels in the coastal region each own 10% of the ordinary share capital. In addition to being a director of these companies, Mr. Tamiba is a director of Bamburi Cement Limited (BCL) from which company all the other companies named above buy cement at the normal market price. All 5 companies prepare their annual financial statements to 30 November each year.
Transactions between the companies in the year ended 30 November 2000 are as follows
|Purchaser||Seller||Amount||Basis of price charged||Outstanding at 30 November 2000|
|TPL||TTL||Sh.38 million||Comparable uncontrolled price||Sh.4 million|
|TPL||MDFL||Sh.32 million||Cost plus 100% other consumers|
|are charged cost plus 80%||Sh.3 million|
|TPL||MHSL||Sh.49 million||Comparable uncontrolled price|
|Plus 10%||Sh.5 million|
|TPL||BCL||Sh.2 million||Normal market price||Sh.2 million|
|MDFL||BCL||Sh.1 million||Normal market price||Nil|
|MHSL||MDFL||Sh.66 million||Comparable uncontrolled price plus 10%||Sh.6 million|
(a) Define the terms “related party” and “related party transaction” as laid down in IAS 24: Related party Disclosures (2 marks)
(b) IAS 24 deals only with certain related party relationships. State the 5 related party relationships dealt with. (5 marks)
(c) Disclose the information required by IAS 24 in the consolidated financial statements of TPL, and in the individual financial statements of TTL, MDFL and MHSL. (10 marks)
(Total: 17 marks)
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