IFRS provides guidance on the disclosure requirements for related-party transactions, but does not provide specific guidance on how to value the transactions.
There are three steps in accounting for a related-party transaction:
Determine whether the transaction falls under the definition of “related-party”.
Determine how to record the transaction in the books.
Determine what disclosure requirements are associated with the related-party transaction.
Is the transaction a related-party transaction?
IAS 24, Paragraph 9 provides a definition for related-party transactions.
First we establish if there is a related-party relationship.
An entity or a person is related to the company if one of the following is true:
“has control or joint control of the reporting entity; OR
has significant influence over the reporting entity; OR
is a member of the key management personnel of the reporting entity or of a parent of the reporting entity”
To review the concept of control, click here.
Additionally, an entity would be considered a related-party if any one of the following conditions are met:
“The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). OR
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). OR
Both entities are joint ventures of the same third party. OR
One entity is a joint venture of a third entity and the other entity is an associate of the third entity. OR
The entity 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 is itself 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). OR
A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). OR
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.”
We then establish if the transaction is considered a related-party transaction. IAS 24, Paragraph 9 provides further guidance. It states that a related-party transaction occurs when there is a transfer of “resources, services or obligations between a reporting entity and a related party.” It does not matter whether or not cash or other assets were exchanged, or whether a price was charged. If the definition above is met, it will be considered a related-party transaction.
How to record the item received in the transaction?
Related-party transactions are typically recorded at the amounts exchanged.
What should be disclosed?
IAS 24, Paragraph 13 and onward outlines what entities should disclose. Entities should disclose all subsidiaries, parent companies, key management personnel, etc..
Additionally, entities will need to disclose the following, with respect to any related-party transactions:
The nature of the relationship,
Any commitments between the parties, that could have a potential effect on the financial statements,
The nature of the transaction,
The amount of the transaction,
The amount of outstanding balances and commitments,
The terms and conditions of any outstanding balances, along with any guarantees given/received,
Any provisions for doubtful debts for the balances outstanding,
The amount of expense recognized due to any bad or doubtful debts.
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