SESSION 34 IAS 24 RELATED PARTY DISCLOSURE

Accountancy Tuition Centre (International Holdings) Ltd 2008 3401

Overview
Objective
To evaluate related party involvement and explain the disclosure of related
parties and transactions between them.





SCOPE


Included in the standard
Parties deemed not to be related

DEFINITIONS


Related party
Related party transactions
Control
Significant influence
Joint control

THE RELATED
PARTY ISSUE


Effect on reporting entity

DISCLOSURE


Situations
Disclosure required
Aggregation




SESSION 34 IAS 24 RELATED PARTY DISCLOSURE
Accountancy Tuition Centre (International Holdings) Ltd 2008 3402
1 Scope of IAS 24
1.1 Scope
(a) IAS 24 will be applied in identifying:
Related party relationships and transactions;
Outstanding balances between an entity and its related parties;
When disclosure of the above items is required;
The disclosures to be made.
(b) IAS 24 requires disclosure in the separate financial statements of an investor
in a subsidiary, associate or joint venture.
1.2 Parties deemed not to be related
Two entities simply because they have a director or other member of key
management personnel in common, unless they:
are a member of the key management personnel; or
can control, jointly control or exert significant influence; or
have significant voting power,
over both entities
Two venturers simply because they share joint control over a joint venture.
Providers of finance, trade unions, public utilities, government departments
and agencies, in the course of their normal dealings with an entity (even
though they may restrict business activities).
A customer, supplier, franchisor, distributor, etc with whom a significant
volume of business is transacted as a result of economic dependence.
2 Definitions
2.1 Related party
(a) Parties that directly or indirectly:
control;
are controlled by;
are under common control;
have significant influence over; or
have joint control over,

the entity.

SESSION 34 IAS 24 RELATED PARTY DISCLOSURE
Accountancy Tuition Centre (International Holdings) Ltd 2008 3403
(b) Associates of the entity (according to IAS 28).
(c) Joint ventures in which the entity is a venturer (according to IAS 31)
(d) Key management personnel (i.e. persons having authority and responsibility
for planning, directing and controlling activities of the reporting entity)
including directors.

Commentary
Non-executive directors are included within key management personnel.
(e) Close family members of (a) or (d).

Commentary
That is those that may be expected to influence, or be influenced by that
person this includes the individuals domestic partner and any children or
dependents of the individual or their domestic partner.
(f) Entities that are controlled by, jointly controlled by, or under significant
influence of, or in which a significant voting power is held by any person
described in (d) or (e).
(g) the party is a post-employment benefit plan for the benefit of the employees
or related parties of the entity.

Commentary
Substance of relationship, not merely legal form, should be considered. One
party has the ability to control the other party or exercise significant
influence over the other party in making financial and operating decisions.

Illustration 1

33. Related party transactions

Nokia Pension Foundation is a separate legal entity that manages and holds in
trust the assets for the Groups Finnish employee benefit plans; these assets do not
include Nokia shares. The Group recorded net rental expense of EUR 2 million in
2006 (EUR 2 million in 2005 and EUR 2 million in 2004) pertaining to a sale-leaseback
transaction with the Nokia Pension Foundation involving certain buildings and a
lease of the underlying land.
At December 31, 2006, the Group had borrowings amounting to EUR 88 million
(EUR 62 million in 2005) from Nokia Untersttzungskasse GmbH, the Groups German
Pension fund, which is a separate legal entity.
There were no loans granted to the members of the Group Executive Board and
Board of Directors at December 31, 2006 or 2005.
Nokia in 2006



SESSION 34 IAS 24 RELATED PARTY DISCLOSURE
Accountancy Tuition Centre (International Holdings) Ltd 2008 3404
2.2 Related party transaction
A transfer of resources, services or obligations between related parties,
regardless of whether a price is charged.
2.3 Control
Power to govern the financial and operating policies of the entity so as to
gain benefits from its activities.
Joint control is the contractually agreed sharing of control.
2.4 Significant influence
Power to participate in, but not control of, the entitys financial and operating
policy decisions.
May be gained by share ownership, statute or agreement.
2.5 Joint control
The contractually agreed sharing of control over an economic activity.

Commentary
These definitions are now consistent with the definitions in IAS 27, 28 and 31.
3 The related party issue
3.1 Effect on reporting entity
Related party relationships are a normal feature of commerce and business.
A related party relationship could have an effect on financial position and
operating results:
Entering into transactions which unrelated parties would not.
Transactions not at the same amounts as for unrelated parties.
Even if related party transactions do not occur, mere existence of
the relationship may affect transactions with other parties.

Commentary
In the light of current interest in governance and transparency, IASB is
particularly anxious that accounting standards seek to provide full disclosure of
any relationships that may affect the way in which the business is conducted.
Hence more extensive disclosures are now included in IAS 24.
SESSION 34 IAS 24 RELATED PARTY DISCLOSURE
Accountancy Tuition Centre (International Holdings) Ltd 2008 3405
4 Disclosure
4.1 Examples of situations
Examples of situations where related party transactions will lead to disclosure
include:
Purchases or sales of goods, property and other assets;
Rendering or receiving of services;
Leasing arrangements;
Transfer of research and development;
Licence agreements;
Finance (including loans and equity contributions);
Guarantees and collaterals.
4.2 Disclosure required
Related party relationships where control exists (irrespective of whether there
have been related party transactions), for example, between a parent and
subsidiaries.

Commentary
This disclosure is in addition to the disclosure requirements in IAS 27, IAS 28
and IAS 31 in these standards only significant investments are required to
be disclosed
Name of the entitys parent or the ultimate controlling party.

Commentary
So that the reader can form a view about the effects of related party relationships.
Key management compensation must be disclosed in total and for each of the
following headings:
Short term employee benefits;
Post employment benefits;
Other long term benefits;
Termination benefits; and
Share-based payment.


Commentary
This was not included in the exposure draft but the IASB decided that users
thought key management personnel are related parties and therefore should
be included in the disclosures.

SESSION 34 IAS 24 RELATED PARTY DISCLOSURE
Accountancy Tuition Centre (International Holdings) Ltd 2008 3406
If there have been transactions between related parties, the entity must
disclose the nature of the relationships and information about the balances
and transactions. The minimum disclosures are as follows:
amount of the transactions;
amount of outstanding items along with their terms and
conditions, and any guarantees;
doubtful debt provisions and expense relating to bad and doubtful debts.

Commentary
Note that the use of the term provision in IAS 24 should more correctly be
described as an allowance (against receivables) as there is no liability as
defined under IFRS.
Sufficient disclosure must be made to ensure that the nature of the transaction
is understood. These disclosures shall be made separately for each of the
following classifications of related parties:
parent;
subsidiaries;
associates;
joint ventures;
key management personnel;
parties with joint control or significant influence over the entity;
other.

Commentary
This is an extension of the requirements in IAS 1 where amounts payable to
and receivable from related parties are required to be disclosed. For
example, fees received by a group director from another group company.

Illustration 2

33. Transactions with related parties
The Group has not entered into any material transactions with related parties. Furthermore, throughout 2006,
no director had a personal interest in any transaction of significance for the business of the Group.
Nestl Consolidated accounts 2006



4.3 Aggregation
Similar items may be aggregated so long as users can understand the effects of the
transactions of the financial statements.
SESSION 34 IAS 24 RELATED PARTY DISCLOSURE
Accountancy Tuition Centre (International Holdings) Ltd 2008 3407
Focus
You should now be able to:
define and apply the definition of related parties in accordance with IAS 24;
describe the potential to mislead users when related party transactions are
accounted for;
adjust financial statements (for comparative purposes) for the effects of non-
commercial related party transactions;

Commentary
For example, the results of a subsidiary which sells goods to a fellow
subsidiary at favourable prices or on favourable credit terms would be
distorted as compared with those of another company that has traded on
normal commercial terms. The financial statements would need to be
adjusted to make meaningful comparisons.
describe the disclosure requirements for related party transactions.
SESSION 34 IAS 24 RELATED PARTY DISCLOSURE
Accountancy Tuition Centre (International Holdings) Ltd 2008 3408