Related party disclosures (Ind AS 24), Scope, Definitions, Understanding Relationship between Reporting entity and a Person/Other entity

Ind AS 24, “Related Party Disclosures,” mandates the disclosure of related party relationships, transactions, and outstanding balances, including commitments, in the financial statements of entities to provide a clearer understanding of the financial position and performance of the entity. This standard is crucial as transactions with related parties might not be conducted under the same terms and conditions as transactions with unrelated parties, potentially leading to financial positions or performances that differ from those involving independent parties.

The primary objective of Ind AS 24 is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties.

Related parties under Ind AS 24 include, but are not limited to, directors, key management personnel, shareholders with significant influence over the entity, and family members of these individuals. It also covers entities that control, are controlled by, or are under common control with the reporting entity (this includes subsidiaries, associates, joint ventures, and post-employment benefit plans).

Disclosures required by Ind AS 24 encompass the amount of the transactions, outstanding balances and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and details of any guarantees given or received. The reporting of related party transactions must be made separately for each category of related parties.

Ind AS 24 helps stakeholders assess the impact of related party relationships and transactions on the financial statements, enhancing transparency and comparability. By requiring detailed disclosures, the standard aims to mitigate the risks of entities engaging in unfair practices or not conducting transactions at arm’s length, thereby safeguarding the interests of all stakeholders.

Related party disclosures (Ind AS 24) Scope:

Scope Inclusions

1. All Entities:

Ind AS 24 applies to all entities that prepare financial statements in accordance with Indian Accounting Standards (Ind AS), regardless of the type of entity (e.g., public, private, governmental, non-profit).

2. Related Party Relationships:

Includes relationships between the entity and its subsidiaries, associates, joint ventures, key management personnel, significant shareholders, and family members of these individuals or groups.

3. Transactions and Balances:

Covers all transactions and outstanding balances with related parties, including sales, purchases, leases, transfers of resources, services, obligations, and loans.

Scope Exclusions

While Ind AS 24 has a broad application, certain exclusions are noted within the standard:

• Dealing with Government:

Disclosures relating to transactions with a government that controls, jointly controls, or significantly influences the reporting entity are not required beyond what is stipulated in specific situations outlined by the standard.

• Benefit Plans:

The standard exempts certain disclosures in the financial statements of state plans or government-related defined benefit plans.

Key Points

• Comprehensive Coverage:

The standard aims to capture a wide array of relationships and transactions to prevent entities from omitting significant related party transactions that could influence the financial statements.

• Focus on Disclosure:

The primary focus is on disclosing information that could impact users’ understanding of the financial statements, rather than dictating the terms or conditions under which related party transactions should occur.

• Exemption Criteria:

While the scope is broad, Ind AS 24 also specifies situations where certain disclosures are not required or are simplified to avoid excessive burden without compromising the quality of information provided to users.

Understanding Relationship between Reporting entity and a Person/other entity:

The relationship between a reporting entity and a person or another entity, as outlined in Ind AS 24, “Related Party Disclosures,” is crucial for understanding the dynamics that influence financial transactions and the presentation of financial statements. These relationships are significant because they might lead to transactions that would not have occurred with unrelated parties or might have been conducted under different terms and conditions. Identifying and disclosing these relationships helps users of financial statements assess the financial position, performance, and cash flows of an entity.

Types of Related Party Relationships

1. Control Relationships:

These involve entities over which the reporting entity has control, joint control, or significant influence, and vice versa. This includes parent companies, subsidiaries, joint ventures, and associates.

2. Key Management Personnel (KMP):

Individuals who have the authority and responsibility for planning, directing, and controlling the activities of the reporting entity, directly or indirectly. This includes both executive and non-executive directors, as well as other persons holding similar positions.

3. Close Family Members of Individuals:

Family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. This typically includes children, spouses, or domestic partners and might extend to other relatives who are financially dependent on the individual.

4. Entities with Common KMP or Significant Shareholders:

Entities that are significantly influenced by or have the power to significantly influence the same person or entity. This can also include entities that share key management personnel or significant shareholders.

5. Post-Employment Benefit Plans:

For the benefit of employees or the key management personnel of the reporting entity or an entity related to the reporting entity.

Understanding the Relationships

• Control and Influence:

The essence of many related party relationships is the ability to control or significantly influence financial and operating policies of another entity. This control can be direct or indirect and may not necessarily involve a majority ownership.

• Financial Interdependency:

Related parties might be involved in financial interdependencies, including providing guarantees, loans, or capital support, which may not reflect arm’s length transactions.

• Key Management Personnel:

The influence of KMP extends beyond the activities directly within their job descriptions to include broader financial relationships and transactions in which they might be involved, directly or indirectly.

• Transparency and Disclosure:

Understanding these relationships is critical for the transparency of financial reporting. Ind AS 24 requires disclosures that help users understand the potential impact of related party transactions and outstanding balances on the financial health and performance of the entity.

The framework set by Ind AS 24 for identifying and disclosing related party relationships and transactions is designed to ensure that financial statements reflect the true economic substance of an entity’s dealings, thereby enhancing the reliability and comparability of financial information across entities.