Related Parties: How to Identify and Disclose Them According to IAS 24
Related Party Disclosures (IAS 24): Governance, Transparency, and Compliance
Buying from your sister company or selling to the CEO’s son is not necessarily fraud, but it is certainly a transaction that requires special attention. IAS 24 makes it mandatory to disclose Related Party Transactions to ensure that financial statements are not misleading. In this guide, we explain: Who exactly is a related party? Why do auditors focus on them? And how do you draft the disclosure note professionally to satisfy investors and regulators?
- Definition of Related Party under IAS 24 (Entities and Individuals).
- The concept of Control, Joint Control, and Significant Influence.
- Who are Key Management Personnel (KMP)?
- Visual model (SVG) mapping the network of relationships.
- What is the Arm’s Length principle?
- Required disclosures: Nature of relationship, transaction amount, and outstanding balances.
- A “Copy-Paste” template for the Related Party Disclosure note.
1) Who is a Related Party?
A Related Party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the “reporting entity”). The relationship exists if one party has the ability to control or exercise significant influence over the other in making financial and operating decisions.
2) Related Individuals (KMP & Family)
A person is related to the reporting entity if that person:
- Has control or joint control over the reporting entity.
- Has significant influence over the reporting entity.
- Is a member of the Key Management Personnel (KMP) of the entity or its parent (e.g., CEO, CFO, Directors).
3) Related Entities (Group Structure)
An entity is related to the reporting entity if:
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- They are members of the same group (Parent, Subsidiary, Fellow Subsidiary).
- One entity is an Associate or Joint Venture of the other.
- The entity is controlled or significantly influenced by a related person (e.g., a company owned by the CEO).
4) Visual Map: Who is Connected?
5) The Arm’s Length Principle
Transactions with related parties are often suspected of being preferential (e.g., selling below market price). An Arm’s Length Transaction is one conducted as if the parties were unrelated, each acting in their own best interest. Disclosing that a transaction was at arm’s length is only allowed if it can be substantiated.
6) What Must be Disclosed?
According to IAS 24, if there have been transactions, you must disclose:
- The nature of the related party relationship.
- The amount of the transactions.
- The amount of outstanding balances (Receivables/Payables) and their terms.
- Provisions for doubtful debts related to the amount of outstanding balances.
- Key Management Personnel Compensation (Total benefits).
7) Template: Disclosure Note
Use this text to draft your Related Party note in the financial statements:
8) Frequently Asked Questions
Are two companies related just because they have a common director?
Not necessarily. Having a common director does not automatically create a related party relationship unless that director has control or significant influence over both entities.
Do I disclose transactions that were eliminated in consolidation?
In Consolidated Financial Statements, intragroup transactions (Parent-Subsidiary) are eliminated and not disclosed. However, transactions with Associates and KMP must still be disclosed.
9) Conclusion
The summary is simple: IAS 24 exists to protect stakeholders. It doesn’t forbid related party transactions, but it shines a bright light on them. By identifying your KMP and related entities and disclosing balances transparently, you build trust and ensure your Financial Statements provide a complete and fair picture.