Disclosure of related party Transactions

10/09/2022 0 By indiafreenotes

Related Party Transactions are an integral part of businesses in today’s world. The transactions between the related parties are generally conducted at negotiated terms and hence they must be disclosed. Additionally, for an investor, knowledge of related parties facilitates a more informed decision to invest in an entity. Also, for every reader of the financial statements accurate disclosure of all the related party relationships, transactions, and outstanding balances presents a correct picture of the risk and opportunities for an entity.

Related party transactions are the transfer of services or obligations, resources between a reporting entity, and related party irrespective of the fact that a price is charged.

The Government refers to government, government agencies, and similar bodies whether local, national, or international.

A government-related entity is an entity that is controlled, jointly controlled, or significantly influenced by the government.

Compensation includes all employment benefits such as short-term employment benefits, post-employment benefits, other long-term employer benefits, termination benefits, and share-based payments.

Related party is a person or entity that is related to the reporting entity that is an entity that prepares financial statements. A person or close family member is related to reporting entity if that individual:

  • Has control or joint control over the reporting entity.
  • Has significant influence over the reporting entity.

Is a member of the key personnel of the reporting entity or of the parent of the reporting entity.

A Close member of the family includes person’s children, spouse or domestic partner, brother, sister, father and mother, children of that person’s spouse or domestic partner and dependants of that person’s or person’s spouse or domestic partner. An entity is related to a reporting entity if the following conditions are met:

  • Both the reporting entity and the entity belonging to the same group.
  • An associate or joint venture of the other entity or of the same third party.
  • The entity is a post-employment benefit plan for the reporting entity or any entity related to the reporting entity.
  • The entity is controlled or jointly controlled by the person mentioned above or the person mentioned has significant influence over the entity.
  • The entity or any member of the group provides key management personnel service to the reporting entity or parent of reporting entity.

The following information should be disclosed where control exists between the parties.

  • Name of its parent and ultimate controlling party (if it is other than its parent); and
  • Nature of the related party relationship.
  • If neither the entity’s parent nor the ultimate controlling party prepares consolidated financial statements available for public use, the name of the next most senior parent (first parent in the group above the immediate parent that produces consolidated financial statements available for public) that does so shall also be disclosed.
  • These two should be disclosed irrespective of whether or not there have been transactions between the related parties. Observe that this requirement is only when control exist between the parties. If there is NO Control, entity needs to disclose the information only when there is a transaction.

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 24.18-19]

  • 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 recognised 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

  • Purchases or Sales of Goods
  • Purchases or Sales of Property and Other Assets
  • Rendering or Receiving of Services
  • Leases
  • Transfers of Research and Development
  • Transfers Under Licence Agreements
  • Transfers Under Finance Arrangements (Including Loans and Equity Contributions in Cash or In Kind)
  • Provision Of Guarantees or Collateral
  • Commitments to do Something If a Particular Event Occurs or Does Not Occur in The Future, Including Executory Contracts (Recognised and Unrecognised)
  • Settlement Of Liabilities on Behalf of The Entity or By the Entity on Behalf of Another Party