IAS 24 Related Party Disclosures:…

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

IAS 24 is a disclosure standard with no recognition or measurement consequences whatsoever. It changes no number in the financial statements. That makes it easy to treat as a compliance afterthought, and it is treated that way in a great many annual reports.

The objective explains why that is a mistake. IAS 24 exists to ensure that financial statements contain the disclosures necessary to draw attention to the possibility that the entity's financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with them.

The word doing the work is possibility. IAS 24 does not assert that related party transactions are improper. It requires disclosure sufficient for a user to reach their own conclusion, on the basis that a transaction between parties who are not independent may not have occurred on the terms that independent parties would have agreed, or may not have occurred at all.

Post 82 covers what NFRA and Big 4 auditors look for in Indian practice. This post covers the definition, the exemptions, and the omissions that recur.

The Definition: 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.

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

The definitions of control, joint control, and significant influence are those in IFRS 10, IFRS 11, and IAS 28 respectively, as covered in Posts 49, 51, and 52. IAS 24 does not create its own thresholds.

Close Members of the Family

Close family members are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

The category includes that person's children and spouse or domestic partner, the children of that person's spouse or domestic partner, and dependants of that person or that person's spouse or domestic partner.

The list is not a closed one in practice. The test is expected influence, and in the Indian context, where extended family involvement in business is common and promoter groups frequently span multiple generations and branches, applying the list mechanically without considering who may be expected to influence dealings produces incomplete identification.

The Definition: Entities

An entity is related to a reporting entity if any of the following applies:

The entity and the reporting entity are members of the same group, meaning each parent, subsidiary, and fellow subsidiary is related to the others.

One entity is an associate or joint venture of the other, or an associate or joint venture of a member of a group of which the other is a member.

Both entities are joint ventures of the same third party.

One entity is a joint venture of a third entity and the other is an associate of that third entity.

The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. Where the reporting entity is itself such a plan, the sponsoring employers are also related.

The entity is controlled or jointly controlled by a person identified as a related party under the persons limb.

A person who controls or jointly controls the reporting entity has significant influence over the entity, or is a member of the key management personnel of that entity or of its parent.

The entity, or any member of a group of which it is part, provides key management personnel services to the reporting entity or to its parent.

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 of the entity, whether executive or otherwise.

Two points about the practical application.

All directors are key management personnel, executive and non-executive alike. There is no carve-out for independent or nominee directors.

The category can extend beyond directors. The application depends on local law and the entity's organisational structure. An individual with genuine authority over planning, directing, and controlling activities qualifies even where they hold no board seat, and does not necessarily need to be a legal employee of the reporting entity. The chief executive of a significant subsidiary may qualify where the criteria are met.

The practical test is authority and responsibility, not job title.

IAS 24 lists specific circumstances that do not, by themselves, create a related party relationship, and these exclusions are the source of a great deal of confusion.

Two entities are not related simply because they have a director or other key management personnel in common, or because a member of key management personnel of one entity has significant influence over the other. A shared director is a fact requiring assessment, not an automatic conclusion.

Two joint venturers are not related simply because they share joint control over a joint venture. Each is related to the joint venture; they are not thereby related to each other.

Providers of finance, trade unions, public utilities, and government departments and agencies that do not control, jointly control, or significantly influence the reporting entity are not related parties simply by virtue of their normal dealings with the entity. A bank lending on commercial terms is not a related party by reason of the lending relationship.

A customer, supplier, franchisor, distributor, or general agent with whom an entity transacts a significant volume of business is not a related party merely by virtue of the resulting economic dependence.

That final exclusion deserves emphasis because it is frequently misapplied in both directions. An Indian auto component manufacturer deriving eighty per cent of its revenue from a single original equipment manufacturer has substantial economic dependence and a concentration risk requiring disclosure under IFRS 7, but the customer is not thereby a related party under IAS 24. Conversely, entities sometimes assume that because dependence alone does not create the relationship, no assessment is required, when the relationship may exist for an entirely separate reason such as common control.

Substance Over Form

IAS 24 requires attention to the substance of the relationship, not merely its legal form.

Two consequences follow.

A relationship existing during the period requires disclosure even if it ended before the reporting date. An entity disposed of mid-year remains a related party for the portion of the period during which the relationship existed, and transactions occurring in that period are disclosed.

The absence of transactions does not remove the disclosure requirement for certain relationships. Parent and subsidiary relationships must be disclosed regardless of whether any transactions have occurred between them.

The Disclosure Requirements

Relationships

Regardless of whether transactions have occurred, an entity discloses the name of its parent and, if different, the ultimate controlling party. Where neither the 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 is disclosed.

The ultimate controlling party disclosure is not limited to entities. Where an individual or a family group ultimately controls the reporting entity, that is what must be disclosed, which is directly relevant to promoter-controlled Indian companies.

Key Management Personnel Compensation

Compensation is disclosed in total and separately for each of the following categories: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payment.

The amounts are calculated in accordance with IAS 19 and IFRS 2, as covered in Posts 56, 57, 59, and 60, and include compensation paid by or on behalf of the entity.

Transactions and Outstanding Balances

Where related party transactions have occurred, an entity discloses the nature of the relationship and information about the transactions and outstanding balances, including commitments, necessary for users to understand the potential effect on the financial statements.

At a minimum, this includes the amount of the transactions, the amount of outstanding balances including commitments, their terms and conditions, whether they are secured, the nature of the consideration to be provided in settlement, details of any guarantees given or received, provisions for doubtful debts related to those balances, and the expense recognised during the period for bad or doubtful debts due from related parties.

Disclosures are presented separately for each category of related party: the parent, entities with joint control or significant influence over the entity, subsidiaries, associates, joint ventures in which the entity is a venturer, key management personnel, and other related parties.

A transaction is disclosed regardless of whether a price is charged. A transfer of resources, services, or obligations between related parties is a related party transaction irrespective of consideration. Free provision of services, interest-free loans, and rent-free use of property are all related party transactions.

The Arm's Length Assertion

Disclosure that related party transactions were made on terms equivalent to those that prevail in arm's length transactions is permitted only if such terms can be substantiated.

This is a genuine constraint. An entity cannot include a general statement that all related party transactions were at arm's length as a matter of drafting convention. Where the assertion is made, evidence supporting it must exist, and auditors test for it.

This exemption, introduced in the 2009 revision to IAS 24, matters enormously in India and is worth understanding precisely.

A government-related entity is one controlled, jointly controlled, or significantly influenced by a government.

Such an entity is exempt from the detailed disclosure requirements in respect of related party transactions and outstanding balances with:

The government that has control, joint control, or significant influence over it, and

Another entity that is a related party because the same government has control, joint control, or significant influence over both.

Why This Exists

Without the exemption, every state-controlled entity would be a related party of every other entity controlled by the same government. An Indian public sector undertaking would need to disclose, in full detail, every transaction with every other central government-controlled entity: every fuel purchase from a state oil company, every banking transaction with a public sector bank, every power purchase from a state generator, every insurance policy with a state insurer.

The volume would be enormous and the informational value close to nil, because such transactions are typically at market terms and are not the kind of relationship the standard was designed to surface.

What Must Still Be Disclosed

The exemption is from the detailed requirements, not from disclosure altogether. A government-related entity applying the exemption must disclose:

The name of the government and the nature of its relationship with the reporting entity, meaning control, joint control, or significant influence.

The nature and amount of each individually significant transaction.

For other transactions that are collectively but not individually significant, a qualitative or quantitative indication of their extent.

The individually significant transaction requirement is where judgment sits, and it is where the exemption is most frequently over-applied. A public sector entity entering a single large contract with another government-controlled entity cannot shelter it within a collective indication; it must be disclosed on its own terms.

The Indian Application

India's public sector is extensive, spanning oil and gas, coal, power generation and transmission, banking, insurance, defence manufacturing, railways, shipping, and mining, at both central and state level.

For a central government-controlled entity, every other central government-controlled entity is technically a related party, and the exemption is what makes the disclosure tractable. The exemption applies at the level of the controlling government, so a central government entity's transactions with a state government entity are not covered by the exemption in respect of that state government unless the same government controls both.

Groups with a mix of government and private ownership need to identify precisely which government exercises control, joint control, or significant influence, since that determines the boundary of the exemption.

The Key Management Personnel Services Exemption

Where an entity obtains key management personnel services from a separate management entity, the reporting entity is not required to disclose the compensation paid by that management entity to its own employees or directors.

What the reporting entity discloses instead is the amount incurred for the provision of key management personnel services provided by the management entity.

The management entity is itself a related party of the reporting entity, because it provides key management personnel services. The exemption simply prevents the reporting entity from having to disclose compensation information it does not possess and over which it has no visibility.

Common Omissions

Six omissions recur with enough frequency to be worth listing explicitly.

Relationships that ended during the period. An entity disposed of, or a director who resigned, mid-year remains a related party for the portion of the period during which the relationship existed. Transactions in that portion require disclosure, and identification systems keyed to the year-end position miss them entirely.

Transactions with no consideration. Interest-free loans, guarantees provided without charge, free use of premises, and services provided without invoice are related party transactions. Systems that identify related party transactions from the accounts payable and receivable ledgers miss every one of them.

Commitments. The disclosure requirement extends to outstanding commitments, not only to recognised balances. A commitment to fund a related party, or to purchase from one in future periods, requires disclosure even though no amount appears on the balance sheet.

Close family members beyond the immediate list. Where a promoter's sibling, parent, or extended family member may be expected to influence or be influenced by that person in dealings with the entity, the relationship falls within the definition. Applying only the enumerated categories under-identifies.

Key management personnel below board level. Individuals with genuine authority over planning, directing, and controlling activities are key management personnel whether or not they sit on the board. Restricting the population to directors is a common and material under-identification.

The unsubstantiated arm's length assertion. Including a general statement that transactions were at arm's length, without evidence capable of substantiating it, is not permitted. Auditors test this specifically.

Ind AS 24 vs IAS 24

Area	IAS 24	Ind AS 24
Definition of related party	Same	Same
Close family members	Same	Same
Key management personnel	Same	Same
Exclusions, including economic dependence	Same	Same
Disclosure of parent and ultimate controlling party regardless of transactions	Same	Same
KMP compensation by category	Same	Same
Arm's length assertion only where substantiable	Same	Same
Government-related entity exemption	Same	Same; extensively relied upon by Indian public sector undertakings
Regulatory overlay	Not applicable	Companies Act 2013 Section 188 and SEBI LODR Regulation 23 impose separate approval, materiality, and disclosure requirements that operate alongside and independently of Ind AS 24

The Indian regulatory overlay is substantial and is not a substitute for Ind AS 24 compliance. The Companies Act and SEBI frameworks address approval thresholds, audit committee oversight, and shareholder consent, using their own definitions and materiality thresholds. An entity can be fully compliant with Section 188 and SEBI LODR and still have deficient Ind AS 24 disclosure, because the frameworks are asking different questions. Post 82 examines this interaction and what regulators have found.

What Big 4 Auditors Focus On

Completeness of the related party population. Auditors test whether the entity's identification process captures relationships arising through key management personnel, close family members, and entities controlled by those individuals, rather than only group entities visible from the structure chart.

Relationships existing during the period but not at the reporting date. Auditors specifically test for entities disposed of and individuals who ceased to hold positions during the year, since these are systematically missed by year-end-focused processes.

Transactions without consideration. Auditors probe for interest-free funding, guarantees, shared services, and use of assets provided without charge, none of which appear in transaction ledgers.

The arm's length assertion. Where the entity has asserted that transactions were on arm's length terms, auditors test whether evidence substantiating that assertion exists, and challenge the assertion where it does not.

Application of the government-related entity exemption. For public sector entities, auditors test whether individually significant transactions have been separately disclosed rather than aggregated into a collective indication, and whether the boundary of the exemption has been correctly drawn by reference to the controlling government.

Key management personnel population. Auditors assess whether the population extends appropriately below board level to individuals with genuine planning, directing, and controlling authority.

Dip IFRS Exam Angle

IAS 24 is examined as a definition and disclosure question, typically requiring identification of related parties from a described group structure.

Most tested areas:

Identifying which parties in a scenario are related and which are not, applying both the persons and entities limbs.

Applying the specific exclusions, particularly that a common director does not by itself create a relationship between two entities, and that economic dependence does not create a relationship.

Recognising that parent and subsidiary relationships require disclosure regardless of whether transactions occurred.

Identifying the categories of key management personnel compensation requiring separate disclosure.

Applying the government-related entity exemption and identifying what must still be disclosed.

Common traps:

Treating two entities with a common director as related to each other. They are not, by that fact alone.

Treating a major customer or supplier as a related party because of economic dependence. Dependence alone does not create the relationship.

Treating two joint venturers as related to each other. Each is related to the joint venture, not to the other venturer.

Omitting disclosure where no transactions occurred. Parent and subsidiary relationships are disclosed regardless.

Omitting transactions where no price was charged. A transfer of resources is a related party transaction whether or not consideration passes.

Assuming the government-related entity exemption removes all disclosure. The name of the government, the nature of the relationship, individually significant transactions, and an indication of the extent of other transactions must still be disclosed.

Restricting key management personnel to executive directors. All directors qualify, and the population may extend further.

FAQ

Does IAS 24 require related party transactions to be at arm's length?

No. IAS 24 imposes no requirement about the terms of transactions. It requires disclosure sufficient for users to understand the relationships and transactions and to assess their potential effect. Whether a transaction should have been at arm's length is a matter for company law, listing rules, and governance, not for IAS 24.

Are two companies with the same director automatically related parties?

No. IAS 24 states expressly that entities are not related simply because they have a director or other key management personnel in common. The relationship may exist for another reason, such as common control, but the shared director alone does not create it.

Is a company's largest customer a related party?

Not by virtue of the economic dependence, however substantial. IAS 24 specifically excludes customers, suppliers, franchisors, distributors, and general agents from being related parties merely by reason of the resulting economic dependence. Concentration risk is disclosed under IFRS 7 instead.

Must a parent-subsidiary relationship be disclosed if there were no transactions?

Yes. The relationship disclosure requirement applies regardless of whether transactions occurred, and the entity discloses the name of its parent and the ultimate controlling party.

Can an entity state that all related party transactions were on arm's length terms?

Only if such terms can be substantiated. The assertion is permitted, not automatic, and where evidence supporting it does not exist, the statement should not be made.

What does the government-related entity exemption actually remove?

It removes the detailed transaction and balance disclosure requirements for transactions with the controlling government and with other entities under common government control. It does not remove the requirement to name the government, describe the relationship, disclose individually significant transactions, and indicate the extent of other collectively significant transactions.

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This is Post 80 of the Global Fin X IFRS Series. Previous: IAS 29 Financial Reporting in Hyperinflationary Economies. Next: Post 81: IFRS 8 Operating Segments: CODM Test, Aggregation and Reconciliation.

IAS 24 Related Party Disclosures: Definition, Exemptions and Common Omissions

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