Tag: Ind AS 24

Ind AS 24 requires disclosure of related party relationships, transactions, and outstanding balances, including commitments, necessary for users to understand the potential effect of related party relationships on an entity’s financial position and profit or loss. Related party relationships are a normal feature of commerce and business, but they can influence the terms and conditions of transactions in ways that would not occur between unrelated parties, potentially distorting an entity’s reported results. Even in the absence of actual transactions, the mere existence of a related party relationship may affect an entity’s dealings with other parties. The standard identifies who qualifies as a related party, defines related party transactions, and prescribes disclosures needed to ensure financial statements draw attention to such influences.

Objectives of Related Party Disclosures (Ind AS 24):

1. Ensuring Financial Statements Draw Attention to Related Party Influence

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, including commitments, with such parties. Since related party relationships can influence pricing, credit terms, and other conditions in ways that differ from arm’s-length dealings, this objective ensures users are alerted to potential distortions in reported results that would not be apparent from examining transactions with unrelated parties alone.

2. Identifying Related Party Relationships Comprehensively

Ind AS 24 aims to establish clear, comprehensive criteria for identifying related party relationships, covering parties with control, joint control, or significant influence over the entity, key management personnel, close family members of such individuals, and entities under common control or significant influence. This objective ensures a consistent and complete identification framework is applied across all entities, preventing related parties from being inadvertently or deliberately excluded from disclosure merely because the relationship does not fit narrow or informal notions of “related party,” thereby ensuring the full scope of potentially influential relationships is captured in financial reporting.

3. Requiring Disclosure Regardless of Whether Transactions Occurred

A key objective of the standard is to require disclosure of related party relationships between a parent and its subsidiaries, irrespective of whether there have been transactions between them, since the mere existence of the relationship may affect an entity’s dealings with other parties. This objective recognises that related party influence extends beyond documented transactions—the existence of a controlling or significantly influential relationship alone can affect market perception, negotiating dynamics, and business decisions—ensuring users are informed of such relationships even when no specific transaction has occurred during the reporting period under review.

4. Prescribing Disclosure of Related Party Transactions and Terms

Ind AS 24 seeks to ensure that if there have been transactions between related parties during the periods covered by the financial statements, the nature of the related party relationship, along with information about the transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements, is disclosed. This objective ensures comprehensive transparency regarding the substance and terms of related party dealings, enabling users to assess whether such transactions were conducted on terms comparable to arm’s-length arrangements or reflect preferential treatment arising from the underlying relationship.

5. Requiring Disclosure of Key Management Personnel Compensation

The standard aims to require disclosure of key management personnel compensation in total and for each specified category, recognising that compensation arrangements for those with authority and responsibility for planning, directing, and controlling the entity’s activities represent a particularly sensitive category of related party transaction. This objective ensures transparency regarding remuneration paid to individuals who may have significant influence over the entity’s financial reporting and business decisions, allowing shareholders and other stakeholders to assess whether compensation levels and structures are reasonable and appropriately aligned with the entity’s overall performance and governance standards.

6. Enhancing Comparability and Consistency Across Entities

Ind AS 24 seeks to promote consistency and comparability in related party disclosures across different entities by establishing standardised definitions, identification criteria, and minimum disclosure requirements. This objective prevents entities from adopting narrow or self-serving interpretations of related party relationships that might minimise required disclosures, ensuring that users comparing financial statements of different entities can rely on a consistent baseline of related party transparency. Standardisation also facilitates regulatory oversight and audit verification, as auditors and regulators can apply consistent criteria in assessing whether an entity has appropriately identified and disclosed all relevant related party relationships and transactions.

Scope of Related Party Disclosures (Ind AS 24):

1. General Applicability

Ind AS 24 applies in identifying related party relationships and transactions, identifying outstanding balances, including commitments, between an entity and its related parties, identifying the circumstances in which disclosure of the items above is required, and determining the disclosures to be made about those items. It applies to the separate financial statements of an entity, as well as to consolidated and individual financial statements presented in accordance with Ind AS 110. This broad applicability ensures related party transparency is achieved consistently across all levels at which an entity’s financial statements are prepared and presented.

2. Application at Both Individual and Consolidated Levels

The standard requires related party disclosures to be made in the consolidated financial statements of a group, as well as in the separate financial statements of a parent, venturer, or investor, if such statements are prepared and presented. This ensures related party relationships and transactions are transparently disclosed regardless of whether users are examining the group’s overall consolidated position or the standalone financial position of an individual entity within the group, preventing related party influence from being disclosed at only one reporting level while remaining hidden or diluted at another level of the corporate structure.

3. Elimination of Intra-Group Transactions in Consolidated Statements

Related party transactions and outstanding balances with other entities within a group are disclosed in an entity’s financial statements; however, intra-group related party transactions and outstanding balances are eliminated in the preparation of consolidated financial statements of the group, since they represent transactions with the group itself rather than external parties. This scope clarification ensures related party disclosure requirements are applied meaningfully—full disclosure at the individual entity level captures related party influence within that entity’s own financial statements, while consolidation naturally eliminates transactions that lose economic significance once viewed from the group’s overall perspective.

4. Exemption for Government-Related Entities

Ind AS 24 provides a partial exemption for entities that are related to the government (Central, State, or Local Government) that has control, joint control, or significant influence over the reporting entity, and another entity that is a related party because the same government has control, joint control, or significant influence over both. Such government-related entities are exempt from the general disclosure requirements in respect of related party transactions and outstanding balances with the government and other government-related entities, subject to specified reduced disclosures instead, recognising the impracticality of exhaustively disclosing every transaction with numerous government-controlled entities.

5. Reduced Disclosures for Exempt Government-Related Entities

Where the exemption for government-related entities applies, an entity is still required to disclose the name of the government and the nature of its relationship with the reporting entity, together with information about the nature and amount of each individually significant transaction, and a qualitative or quantitative indication of the extent of other transactions that are collectively significant but not individually significant. This scope limitation balances practical disclosure burden concerns against the need for meaningful transparency, ensuring materially significant government-related dealings are still disclosed even though blanket disclosure of every minor government-related transaction is not mandated.

Recognition of Related Party Disclosures (Ind AS 24):

1. Identification of a Related Party – General Definition

A related party is a person or entity that is related to the entity preparing its financial statements (the “reporting entity”). This identification is not based on legal form alone but on the substance of the relationship, encompassing situations involving control, joint control, significant influence, or key management personnel relationships. Correctly identifying related parties is the foundational step under Ind AS 24, since all subsequent disclosure obligations flow from accurate identification of these relationships. Entities must look beyond mere legal structuring to the actual substance of influence or control exercised between parties to ensure comprehensive identification.

2. Identification of Related Parties – Persons

A person or a close member of that person’s family is related to a reporting entity if that person has control or joint control over the reporting entity, 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. Close family members include those who may be expected to influence, or be influenced by, that person in their dealings with the entity, such as the person’s children, spouse or domestic partner, siblings, and dependents of that person or their spouse/domestic partner.

3. Identification of Related Parties – Entities

An entity is related to a reporting entity if, among other criteria, the entity and the reporting entity are members of the same group, one entity is an associate or joint venture of the other, both entities are joint ventures of the same third party, one entity is a joint venture and the other an associate of the same third entity, the entity is a post-employment benefit plan for employees of either entity, or the entity is controlled or jointly controlled by a person identified as a related party under the “persons” criteria described above.

4. Identification of Key Management Personnel

Key management personnel are those persons 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. This identification extends beyond individuals with formal executive titles to encompass anyone who genuinely exercises such authority and responsibility, including non-executive directors who participate in governance decisions. Recognising key management personnel accurately is essential since transactions with and compensation paid to this group represent a particularly significant category of related party disclosure requiring careful identification.

5. Identification of Related Party Transactions

A related party transaction is a transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged. This broad definition ensures that even non-monetary transactions, or transactions conducted without any consideration changing hands, are captured within the scope of related party transaction identification, since the absence of a price does not diminish the potential influence or economic significance of the transaction between related parties. Identifying such transactions accurately, including their substance beyond mere legal form, is essential for meeting the standard’s disclosure objectives.

6. Identification Exclusions – Parties Not Considered Related

Ind AS 24 clarifies certain relationships that, in the absence of control, joint control, or significant influence, are not necessarily related parties merely because of shared characteristics: two entities simply because they have a director or key management personnel in common, two venturers simply because they share joint control over a joint venture, providers of finance, trade unions, public utilities, and government departments/agencies in the course of normal dealings, and a single customer, supplier, or distributor with whom an entity transacts a significant volume of business merely by virtue of resulting economic dependence.

Measurement of Related Party Disclosures (Ind AS 24):

1. No Prescribed Pricing Basis for Related Party Transactions

Ind AS 24 does not prescribe or require related party transactions to be conducted at arm’s length, nor does it mandate any specific measurement or pricing basis for such transactions. The standard is fundamentally a disclosure standard rather than a recognition or measurement standard; it does not affect how related party transactions themselves are recognised or measured in the financial statements, since those aspects are governed by other applicable Ind AS (such as Ind AS 115 for revenue or Ind AS 109 for financial instruments). Instead, Ind AS 24 focuses solely on ensuring adequate disclosure of the terms and amounts involved.

2. Disclosure of Amount of Transactions

For each category of related party, the amount of transactions during the period must be disclosed, quantified based on the actual transaction value recorded in the entity’s books, regardless of whether that value reflects arm’s-length pricing. This means the “measurement” relevant to Ind AS 24 disclosures is simply the recorded transaction amount as determined under the applicable recognition and measurement standard governing that particular transaction type, with Ind AS 24 requiring transparent disclosure of this figure rather than independently assessing or adjusting whether the price charged was fair or comparable to market terms.

3. Disclosure of Outstanding Balances and Terms

The amount of outstanding balances, including commitments, must be disclosed along with their terms and conditions, including whether they are secured, and the nature of consideration to be provided in settlement, together with details of any guarantees given or received. This disclosure captures the measured carrying amount of receivables, payables, loans, or other balances outstanding with related parties as at the reporting date, providing users with quantified insight into the entity’s financial exposure to related parties beyond mere transaction flow during the period, extending to point-in-time balance sheet positions.

4. Disclosure of Provisions for Doubtful Debts

Entities must disclose the amount of any provision for doubtful debts related to outstanding balances with related parties, and the expense recognised during the period in respect of bad or doubtful debts due from such related parties. This ensures that the measurement of expected credit losses or impairment relating specifically to related party balances, determined under Ind AS 109’s expected credit loss model, is separately visible to users, rather than being embedded anonymously within aggregate provisioning figures that do not distinguish between related and unrelated party credit risk exposures.

5. Disclosure of Key Management Personnel Compensation by Category

Key management personnel compensation must be disclosed in total and separately for each of the specified categories: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payment. This categorised measurement disclosure, based on amounts determined under Ind AS 19 (Employee Benefits) and Ind AS 102 (Share-based Payment), ensures users can assess not merely the aggregate compensation figure but its composition, distinguishing between immediate cash-based remuneration and deferred or contingent compensation elements that may carry different implications for governance and incentive alignment.

Disclosures of Related Party Disclosures (Ind AS 24):

1. Disclosure of Parent-Subsidiary Relationships

Relationships between a parent and its subsidiaries must be disclosed irrespective of whether there have been transactions between them, and an entity must disclose the name of its parent 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 must also be disclosed. This disclosure ensures users understand the entity’s position within a broader corporate group structure, even in the complete absence of any actual transactions between the entity and its parent.

2. Disclosure of Key Management Personnel Compensation

An entity must disclose key management personnel compensation in total and for each of the following categories: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payment. This disclosure is required regardless of whether the compensation was paid directly by the entity or was borne by a parent on the entity’s behalf, ensuring transparency regarding remuneration paid to individuals with significant authority and influence over the entity’s operations and financial reporting, supporting stakeholder assessment of governance quality and alignment between compensation and organisational performance.

3. Disclosure of Related Party Transactions

If there have been transactions between related parties, an entity must disclose the nature of the related party relationship, along with information about the transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. Disclosures are made separately for each category of related party, including the parent, entities with joint control or significant influence, subsidiaries, associates, joint ventures, key management personnel, and other related parties, ensuring users can distinguish the nature and magnitude of dealings with each distinct category of related party.

4. Minimum Disclosure Items for Related Party Transactions

At a minimum, disclosures must include the amount of transactions, the amount of outstanding balances including commitments and their terms and conditions (including whether secured and the nature of consideration to be provided in settlement, and details of guarantees given or received), provisions for doubtful debts related to outstanding balances, and the expense recognised during the period in respect of bad or doubtful debts due from related parties. This comprehensive minimum disclosure list ensures a consistent, comparable baseline of information across entities regarding the financial magnitude and terms of related party dealings.

5. Disclosure that Terms Are Equivalent to Arm’s Length Transactions

Disclosures that transactions with related parties were made on terms equivalent to those that prevail in arm’s length transactions are made only if such terms can be substantiated, since merely asserting arm’s-length pricing without adequate supporting evidence would be misleading to users. This disclosure requirement imposes a discipline on entities, preventing unsubstantiated claims of fair dealing designed to reassure users without genuine evidentiary support, and ensures that any representation regarding the fairness of related party transaction terms carries actual credibility and can withstand scrutiny by auditors, regulators, and other users of the financial statements.

6. Disclosure of Items of a Similar Nature in Aggregate

Items of a similar nature may be disclosed in aggregate, except when separate disclosure is necessary for understanding the effects of related party transactions on the entity’s financial statements. This disclosure flexibility balances practicality against transparency, allowing entities to avoid excessive granularity for numerous minor, similar transactions with the same category of related party, while still preserving the requirement for separate disclosure whenever aggregation would obscure a transaction’s individual significance or distort users’ understanding of the entity’s exposure to a particular related party relationship.

Example of Related Party Disclosures (Ind AS 24):

ABC Ltd. has a director, Mr. A, who controls XYZ Ltd. During the year, ABC Ltd. purchases goods worth ₹5,00,000 from XYZ Ltd. Since Mr. A controls XYZ Ltd. and is a key management person of ABC Ltd., the transaction is a related party transaction under Ind AS 24, subject to the standard’s definitions.

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