Indian Accounting Standard 24 – Related Party Disclosures

Indian Accounting Standard 24 requires disclosures to be made by a parent entity regarding its transactions with associates, joint ventures or subsidiaries, collectively referred to as Related party. Hence related party refers to an entity or person that is related to the reporting entity.

Objective of the standard

The objective of this standard is to bring to notice the fact that an entity’s financial statements and profit or loss can be affected by transactions with the related party transactions and disclose outstanding balances including commitments to such parties.

Scope of the standard

This standard shall be applied to:

• Identifying related parties and transactions with them.
• Identifying outstanding balance and commitments between the reporting entity and related parties.
• Recognising the circumstances in which disclosures will be required in the above-stated situations
• Determine the disclosures to be made.

The standard also requires disclosure of related party relationships transactions, outstanding balances including commitments in the consolidated financial statements, separate financial statements, and individual financial statements. In case a statute or regulatory body or similar competent authority governing an entity prohibits the entity from disclosing certain information that is required by this standard, then the disclosure of such information is not warranted. For instance banks, stock broking entities are not permitted to disclose customer related information, hence such information need not be disclosed.

Why should related party transactions be disclosed?

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.

Disclosures to be made

Let’s have a look at the disclosures that need to be made:

• Relationships between parent and subsidiaries should be disclosed irrespective of whether there have been any transactions or not. If the entity’s parent or the ultimate controlling party does not produce consolidated financial statements, then the next senior parent must be named in the consolidated financial statements for public use.
• An entity must report the compensation to the key management personnel in total and each of the categories such as short term employee benefits, post-employment benefits, termination benefits, share-based payment, and other long-term benefits.
• If key management services are obtained from another entity, then only the amounts incurred for the provision of such services shall be disclosed.
• If the entity has transactions with the related party during the financial year, then it shall disclose the nature of such transactions, and also all the details such as amount, outstanding balances including commitments, provision for doubtful debts, and the expense recognised in respect of bad and doubtful debts.
• The above disclosures will be made separately in respect of a parent, subsidiaries, associate, entities with joint control or significant influence over the other entity, joint ventures in which the entity is the venturer, and key management personnel of the entity or parent and other related parties.

The disclosures for similar items can be made in aggregate except when separate disclosure is necessary to understand the effects of related party transactions on the financial statements. Examples of related party transactions are purchase and sale of goods, assets, rendering, or receiving of services, leases, transfers, and so on.

Transaction with the government-related entity

The Reporting entity is exempt from the disclosures requirement with the government who has control or joint control or significant influence over the reporting entity and another entity that is a related party because the same government has control or joint control of or significant influence over both the reporting and other entity. As a result of such exemption, the entity need not disclose related party transactions and outstanding balances including commitments. If the above exemption applies, an entity must disclose the following:

• Name of the government and nature of its relationship.
• The nature and amount of each individually significant transaction and for other transactions that are collected, but not individually significant a qualitative or quantitative indication of their extent.

Definitions

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.

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.