Related parties and events after the reporting period - Rela...

Learning Outcomes

After studying this article, you will be able to identify related parties according to IAS 24, explain the main disclosure requirements for related party transactions, describe typical examples of related parties, and spot common exam traps involving the scope and exclusions of IAS 24. This will support your ability to answer ACCA exam questions requiring the recognition, disclosure, and implications of related party relationships.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand both the identification of related parties and correct disclosure requirements under IAS 24. In particular, your revision should focus on:

• Defining a related party and recognising when relationships exist under IAS 24
• Explaining why disclosure of related party relationships and transactions is necessary
• Listing the required disclosures for related party transactions and balances
• Identifying common examples of related parties and transactions that must be reported
• Stating which relationships and transactions are not considered related parties under IAS 24

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of these would always be treated as a related party under IAS 24?
   1. A key manager’s spouse’s business
   2. Main customer who purchases 40% of the entity’s goods
   3. Trade supplier with a 5-year contract
   4. Government entity in the same country

2. According to IAS 24, what minimum information must be disclosed for material related party transactions in the financial statements?

3. True or false? Two companies that have a director in common are always related parties.

4. Briefly outline one example of a transaction that must be disclosed under IAS 24, and one example that is not required to be disclosed.

Introduction

The recognition, measurement, and disclosure of transactions depend not only on their commercial substance but also on the parties involved. Certain relationships can affect an entity’s results. IAS 24 Related Party Disclosures requires transparent reporting to help users of financial statements understand their potential impact.

Failure to disclose related party transactions can lead to misleading financial reporting and exam errors, especially regarding who qualifies as a related party and what must be disclosed.

Key Term: related party
A related party is a person or entity with the ability to control or exercise significant influence over the reporting entity, or vice versa, or where both are subject to common control or influence. This includes subsidiaries, associates, joint ventures, key management personnel, and their close family members.

Key Term: related party transaction
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.

Identifying Related Parties

Entities must identify all related parties for both recognition and disclosure purposes. Only those relationships specified in IAS 24 are treated as related parties.

Key categories include:

• Parent, subsidiary, and fellow subsidiaries (under common control)
• Associates and joint ventures, and their parents, subsidiaries and fellow ventures
• Individuals with control or significant influence over the entity (e.g. key management personnel)
• Close family members of such individuals, and any entities they control or significantly influence (such as those owned by immediate family)
• Key management personnel of the entity and their close family or businesses

Two entities are not necessarily related if they only share a director or two entities with significant business dealings unless there is control, joint control, or significant influence.

Key Term: key management personnel
Those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (executive or otherwise) of that entity.

Common Related Party Examples

• Parent-subsidiary relationships, even if the parent owns less than 100%
• Fellow subsidiaries under the same parent company
• Directors’ immediate families and companies they control
• Post-employment benefit plans for employees of the entity or related entities

However, standard trade relationships, customer-supplier contracts, or transactions with government entities are generally not sufficient for "related party" status under IAS 24.

Worked Example 1.1

Scenario: An entity, London Ltd, purchases supplies from a company owned 100% by its Chief Executive’s sibling. Should this be disclosed as a related party relationship?

Answer:
Yes. The company owner is the sibling (a close family member) of key management personnel (the Chief Executive), and under IAS 24, businesses controlled by close family members of key management personnel are related parties. The supplies transaction should be disclosed.

Disclosure Requirements for Related Party Transactions

All relationships between a reporting entity and its related parties must be disclosed if a transaction or outstanding balance exists, or even if none exist but a relationship does.

Disclosures must include:

• The nature of the relationship
• The amount of transactions and outstanding balances, including terms, amounts written off, or incurred during the period
• Any guarantees given or received
• Provisions for doubtful debts related to these balances

Disclosure is required even if transactions occur at market rates or are immaterial individually, but aggregate materiality applies.

Key Term: disclosure
The process of making information available in the financial statements or notes, required to allow users to understand the impact of related party relationships and transactions.

Exclusions from Related Party Status

IAS 24 specifically states that the following are not related parties purely by these factors:

• Two entities with a director or other key management person in common, unless otherwise connected by control or significant influence
• Providers of finance, unions, public utilities, or departments and agencies of government in the course of their normal dealings
• Customers, suppliers, franchisors, or licensees with significant business with the entity, unless they otherwise qualify as related parties

Key Term: close family members
Family members who may be expected to influence, or be influenced by, that person in their dealings with the entity. Includes spouse or domestic partner, children and dependants, and possibly others.

Worked Example 1.2

Scenario: Beta plc shares one non-executive director with Omega Ltd, but there is no other connection. Is this a related party relationship?

Answer:
No. Sharing a director does not in itself make two entities related. There must be control, joint control, or significant influence by one entity or person over the other.

Events After the Reporting Period: Impact on Related Party Disclosures

Events after the reporting period (IAS 10) can involve transactions or relationships that affect related party identification or disclosure. Adjusting events (e.g. control is lost before approval of the accounts) must be reflected in the financial statements at the reporting date. Non-adjusting events only require disclosure if material but do not change the related party list as at the reporting date.

Exam Warning

Omitting related party disclosures, especially those involving family-held companies or off-balance sheet entities, is a common exam error. Read scenario facts carefully.

Summary

IAS 24 requires entities to identify related parties, recognize related party transactions, and disclose them fully—even if transactions are at normal market rates. Proper identification is limited to relationships specified in the standard, not just by association or business size alone. Events after the reporting period may affect disclosures if they provide evidence about conditions at the reporting date.

Key Point Checklist

This article has covered the following key knowledge points:

• Define a related party, close family member, and key management personnel under IAS 24
• Identify when a related party relationship exists for disclosure
• Explain which transactions and balances require disclosure
• List key items excluded from related party status
• State the disclosure requirements when reporting related party transactions
• Recognise how events after the reporting period may affect related party disclosures

Key Terms and Concepts

• related party
• related party transaction
• key management personnel
• disclosure
• close family members