CMA Ramesh Krishnan
Current business scenario, the related party relationship are normal feature of any business, It may be through subsidiaries, joint ventures and associates, these kind of business arrangements generally affect the business transactions, financial & operating policies of the investee or investor entity through the presence of control, join venture or significant influence. Ultimately this will affect the profit & loss a/c and financial position of an entity. Due to this reason the disclosure of related party relationship, transactions, balances and commitments are required to understand the financials statement by the stake holders.
Indian Accounting standard -18 deals with the related party transactions, however this article tries to unfold the related party transactions aspects under IFRS
Under IFRS, IAS-24 deals with the related party disclosure, this standard guide us to identify the following
1. Related party relationships & transactions
2. Related party outstanding balance and commitments between the related party and reporting entity
3. Identify the circumstances in which disclosures required
4. Determining the disclosures to be made about transactions, balance and commitments
This standard applies for financial statements prepared as separate or consolidated whatever the form.
Who is the related party: This standard guides us to decide who is/are the related party/ies and their relationships.
Individual – as Related party
|a person or close member of that person`s family is related to a reporting entity if that person
a. Has control or joint control of the reporting entity
b. Has significant influence over the reporting entity or
c. Is a member of the key management personnel of the reporting entity or the parent of the reporting entity
“Key management personnel” are those having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.
As related party
|Entity will be treated as related party of the reporting entity if any of the following conditions are applies
a. The entity and the reporting entity are the members of the same group, which means that each parent, subsidiary and fellow subsidiary is related party to others.
b. One entity is an associate or joint venture of the other entity or an associate or joint venture of the member of a group of which the entity is a member
c. The entity and reporting entry are the joint ventures of the same third party.
d. One entity is the joint venture of the third party and other entity is an associate of the third party.
e. The entity is post-employment benefit plan for the benefit f the employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity itself such a plan, the sponsoring employers are also related to the reporting entity.
f. The entity controlled or jointly controlled by a person identified as Individual as related party as above
g. The entity identified or controlled over the significant influence by the person or the key management personnel referred in Individual as related party as above.
h. The entity providing key management personnel service to the reporting entity.
What are all the related party transactions: The transactions are transfer of resources, services or obligations between a reporting entity and related party, regardless of whether a price is charged.
Disclosure requirement: Under this standard the reporting entity required to disclose the following
a. Relationship between a parent and its subsidiaries shall be disclosed irrespective of whether there have been transactions between them. An entity shall disclose the name of its parents and if different, 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 shall also be disclosed .
b. An entity shall disclose key management personnel compensation in total and for each of the following
1. Short term employee benefits
2. Post employment benefits
3. Other long term benefits
4. Termination benefits
5. Share based payments
If an entity obtains key management personnel services from a management entity , the entity is not required to disclose the compensation details paid/payable to the management entity`s employees and director, however it can be disclosed as the provision of key management personnel services that are provided by the separate management entity.
c. Transactions: If there have been transactions between related parties, then the reporting entity has to disclose the following
i. Relationship of related party
ii. The amount of the transactions
iii. The amount of outstanding balances, including terms and conditions and guarantees
iv. Provision for doubtful debts related to the amount of outstanding balances
v. Expenses recognised during the period in respect of bad or doubtful debts due from related parties
These above disclosures have to be made separately for each of the different categories like , parent, joint control or significant influence, subsidiaries, associates, joint ventures ,key management personnel and other related parties. In case the transactions are similar nature it can be disclosed in aggregate except when separate disclosure is necessary for understanding the effects on financials.
Exemption in disclosure: The below categories of entity are exempted from the disclosure
a. A government that has control or joint control of , or significant influence over , the reporting entity and
b. Another entity that is a related party because of the same government has control or joint control of, or significant influence over both the reporting entity and the other entity.
If the entity is exempted from the disclosure due to above circumstances then they need to disclose the following details
a. The name of the Government
b. The nature of its relationship like control, joint control or significant influence.