International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 593
2.7.1
Related party transactions requiring disclosure
IAS 24 gives the following as examples of transactions to be disclosed, if they are with
a related party. The list is not intended to be exhaustive:
• purchases or sales of goods (finished or unfinished);
• purchases or sales of property and other assets;
• rendering or receiving of services;
• leases;
Related party disclosures 2987
• transfers of research and development;
• transfers under licence agreements;
• transfers under finance arrangements (including loans and equity contributions in
cash or in kind);
• provisions of guarantees or collateral;
• commitments to do something if a particular event occurs or does not occur in the
future, including executory contracts (recognised and unrecognised); and
• settlement of liabilities on behalf of the entity or by the entity on behalf of that
related party. [IAS 24.21].
The standard does not contain any exemptions based on the nature of the transaction.
Consequently, related party transactions include transactions such as dividend payments
and the issue of shares under rights issues to major shareholders or key management
personnel (i.e. those that fall within the definition of related parties), even where they
participate on the same basis as other shareholders. However, for dividend payments, a
preparer might conclude that no additional disclosures are necessary beyond those required
by IAS 1, to explain the potential effect of the relationship on the financial statements.
[IAS 1.137]. Further, as discussed at 2.2.10 above, not all transactions may need to be disclosed.
Transactions with significant amounts may be immaterial from an IAS 1 perspective.
The standard also includes transactions with those individuals identified as related
parties where their dealings with the entity are in a private capacity, rather than in a
business capacity.
Participation by a parent or subsidiary in a defined benefit plan that shares risks between
group entities is a transaction between related parties (see Chapter 31 at 3.3.2). [IAS 24.22].
As indicated at 2.5 above, disclosure is required irrespective of whether or not consideration
is received, which means that the standard applies to gifts of assets or services and to asset
swaps. Common examples of such transactions which may occur within a group include:
• administration by an entity of another entity within a group (or of its post-
employment benefit plan) free of charge;
• transfer of tax assets from one member of a group to another without payment;
• rent-free accommodation or the loan of assets at no charge; or
• guarantees by directors of bank loans to the entity.
2.7.1.A
Aggregation of items of a similar nature
Presumably in order to minimise the volume of disclosures, IAS 24 permits aggregation
of items of a similar nature, except when separate disclosure is necessary for an
understanding of the effects of the related party transactions on the financial statements
of the entity. [IAS 24.24]. The standard does not expand on this requirement, but it seems
appropriate that, for example, purchases or sales of goods with other subsidiaries within
a group can be aggregated, but any purchases or sales of property, plant, and equipment
or of intangible assets with such entities are shown as a separate category. However, the
level of aggregation is limited by the separate disclosure of transactions with particular
categories of related parties (see 2.7.2 below).
2988 Chapter 35
2.7.1.B Commitments
‘Commitments’ are not defined in IFRS. However, IFRS 12 states that the commitments
relating to joint ventures are those that may give rise to a future outflow of cash or other
resources. [IFRS 12.B18].
IAS 24 specifically mentions executory contracts (recognised and unrecognised) as
commitments requiring disclosure. Executory contracts are excluded from the scope of
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – unless they are
onerous to the reporting entity. An executory contract is a contract under which neither
party has performed any of its obligations or both parties have partially performed their
obligations to an equal extent. [IAS 37.3]. An example of an executory contract would be
a contract to buy an asset at a future date where neither the transfer of the asset nor the
payment of consideration has occurred.
The words ‘commitments to do something if a particular event occurs or does not occur
in the future’ can potentially have a wide application. One obvious type of arrangement
to which this applies would be some form of commitment by a subsidiary to its parent
to undertake certain trading or research and development activities.
With respect to the type of transaction that the IASB is expecting to be disclosed,
IFRS 12 provides a list of illustrative but not exhaustive examples of the type of
unrecognised commitments that could relate to joint ventures. Some of these examples
could apply equally to other related party arrangements. IFRS 12 clarifies that the
commitments required to be disclosed under IAS 24 in respect of joint ventures include
an entity’s share of commitments made jointly with other investors with joint control of
a joint venture. [IFRS 12.B18].
IFRS 12 provides the following illustrations of commitments relating to joint ventures
that would typically be disclosable under paragraph 18 of IAS 24 and could apply equally
to other related party arrangements:
• unrecognised commitments to contribute funding or resources as a result of,
for example:
• the constitution or acquisition agreements of a joint venture (that, for
example, require an entity to contribute funds over a specific period);
• capital intensive projects undertaken by a joint venture;
• unconditional purchase obligations, comprising procurement of equipment,
inventory or services that an entity is committed to purchasing from, or on
behalf of, a joint venture;
• unrecognised commitments to provide loans or other financial support to a
joint venture;
• unrecognised commitments to contribute resources to a joint venture, such
as assets or services; and
• other non-cancellable unrecognised commitments relating to a joint venture.
• unrecognised commitments to acquire another party’s ownership interest (or a
portion of that ownership interest) in a joint venture if a particular event occurs or
does not occur in the future. [IFRS 12.B19-20].
Related party disclosures 2989
Provisions of guarantees, which are a form of commitment, require separate disclosure.
Disclosure of commitments to purchase property, plant and equipment and intangible
assets in aggregate is required separately by IAS 16 – Property, Plant and Equipment –
and IAS 38 – Intangible Assets – respectively. [IAS 16.74(c), IAS 38.122(e)].
2.7.2
Disclosures required for related party transactions, including
commitments
The standard states that, at a minimum, the disclosures must include:
(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and:
(i) their terms and conditions, including whether they are secured, and the
nature of the consideration to be provided in settlement; and
(ii) details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding balances; and
(d) the expense recognised during the period in respect of bad or doubtful debts due
from related parties. [IAS 24.18].
The standard gives no exemption from disclosure on the grounds of sensitivity or
confidentiality. However, since there is no requirement to disclose the name of a related
party, this lack of exemption is likely to be less of a concern.
The requirement in (b) above could be read literally as requiring outstanding balances and
commitments to be amalgamated into a single balance. However, commitments such as
executory contracts do not give rise to outstanding balances. In practice, narrative
disclosure of the terms and conditions of material commitments will be necessary.
There is no requirement to disclose individually significant transactions. However, as
discussed at 2.9 below, there is such a requirement for transactions with government-
related entities where a reporting entity has decided to apply the disclosure exemption.
The disclosures are made separately for each of the following categories:
(a) the
parent;
(b) entities with joint control of, or significant influence over, the entity;
(c) subsidiaries;
(d) associates;
(e) joint ventures in which the entity is a joint venturer;
(f) key management personnel of the entity or its parent; and
(g) other
related
parties.
[IAS 24.19].
In our view the references in (a) and (f) above to ‘the parent’ should be read as including all
parents of the entity, i.e. its immediate parent, any intermediate parent, and the ultimate
parent. In the context of the financial statements of an entity within a group, it is insufficient
to disclose related party transactions for a single category of ‘group companies’. Separate
categories are required for parent(s), subsidiaries and ‘other related parties’.
2990 Chapter 35
IAS 24 does not identify the following relationships as a separate category of related
party, and therefore we would normally expect to include information related to the
following relationships within the category other related parties:
(a) fellow
subsidiaries;
(b) subsidiaries of an investor with significant influence; and
(c) associates of the entity’s controlling investor.
However, a preparer should consider separate disclosure of transactions with the
above related parties if this would provide useful information to users of the entity’s
financial statements.
The classification of amounts payable to, and receivable from, related parties in the
different categories is an extension of the disclosure requirement in IAS 1 for an entity
to present information either in the statement of financial position or in the notes.
[IAS 1.78(b)]. The categories are extended to provide a more comprehensive analysis of
related party balances and apply to related party transactions. [IAS 24.20].
IAS 24 discourages an entity from disclosing that transactions are on normal commercial
terms or on an arm’s length basis, by stating that such disclosures ‘are made only if such terms
can be substantiated.’ [IAS 24.23]. Accordingly, IAS 24 emphasises that an entity should not state
that related party transactions are on an arm’s length basis unless the reporting entity can
demonstrate such terms and conditions. To substantiate that related party transactions are
on an arm’s length basis an entity would need to be satisfied that a transaction with similar
terms and conditions could be obtained from an independent third party.
The company financial statements of Schroders plc provide the following disclosures of
related party relationships with subsidiaries.
Extract 35.2: Schroders plc (2017)
Notes to the accounts [extract]
37.
Related party transactions [extract]
The Company is not deemed to be controlled or jointly controlled by a party directly or through intermediaries under
IFRS. As a result the related parties of the Company comprise principally subsidiaries, joint ventures and associates, key management personnel, close family members of key management personnel and any entity controlled by those parties.
The Company has determined that key management personnel comprises only the Board of Directors.
Transactions between related parties
Details of transactions between the Company and its subsidiaries, which are related parties of the Company, and
transactions between the Company and other related parties, excluding compensation (which is set out in note 31),
are disclosed below:
2017
Amounts
owed by
Amounts owed
Interest
Interest
related
to related
Revenue
Expenses
receivable
payable
parties
parties
£m
£m
£m
£m
£m
£m
Subsidiaries of the Company
479.3
11.3
2.1
0.3
1,357.2
(26.6)
Key management personnel
0.2
–
–
–
–
(54.1)
Related party disclosures 2991
2016
Amounts
owed by
Amounts owed
Interest
Interest
related
to related
Revenue
Expenses
receivable
payable
parties
parties
£m
£m
£m
£m
£m
£m
Subsidiaries of the Company
467.2
9.3
2.9
0.3
1,176.0
(23.3)
Key management personnel
0.2
–
–
–
–
(12.8)
Transactions with related parties were made at market rates. The amounts outstanding are unsecured and will be
settled in cash. No expense for bad or doubtful debts has been recognized during the year (2016: nil) in respect of the
amounts owed by related parties.
The consolidated financial statements of J Sainsbury plc provide the following
disclosures of related party relationships with joint ventures and associates.
Extract 35.3: J Sainsbury plc (2018)
Notes to the consolidated financial statements [extract]
36 Related party transactions [extract]
b).
Joint ventures and associates [extract]
Transactions with joint ventures and associates
For the 52 weeks to 10 March 2018, the Group entered into various transactions with joint ventures and associates as
set out below:
2018
2017
£m
£m
Management services provided
1
8
Income share received from joint ventures and associates
26
29
Dividends and distributions received
37
65
Proceeds from repayment of loan to joint venture and associates
–
2
Investment in joint ventures
(9)
(18)
Disposals of joint ventures
2
–
Rental expenses paid
(46)
(57)
Year-end balances arising from transactions with joint ventures and associates
2018 2017
£m £m
Receivables
Other receivables
6
12
Loans due from joint ventures
–
3
Payables
Loans due to joint ventures
(5)
(5)
Insight 2 Communication LLP became a wholly owned subsidiary as at 1 February 2018; up until this point it was a
joint venture. All transactions up to the acquisition date have been included above. Outstanding balances as at
10 March 2018 have been excluded as they have now been fully consolidated.
Loans with joint ventures are interest bearing and repayable on demand.
2992 Chapter 35
The financial statements of British Sky Broadcasting Group plc illustrate the disclosure
of transactions with a party controlled by a close family member of key management.
Extract 35.4: British Sky Broadcasting Group plc (2014)
Notes to the consolidated financial statements [extract]
28. Transactions with related parties and major shareholders [extract]
c) Other transactions with related parties [extract]
A close family member of one Director of the Company runs Freud Communications Limited (“Freud”), which has
provided external support to the press and publicity activities of the Group. During the year the Group incurred
expenditure amounting to £1 million (2013: £1 million) with Freud. At 30 June 2014 there was £1 million (2013: less