IAS 24 is a disclosure standard. It requires a company to disclose its relationships with related parties, any transactions and outstanding balances with them, and the compensation paid to key management personnel, so that readers know when results may have been shaped by dealings that were not at arm's length. It does not change how any transaction is measured.
Most accounting standards tell you how to measure something. IAS 24 has no recognition or measurement rules at all, and that one fact explains most of what students get wrong about it. This guide covers why the standard exists, who counts as a related party (and who does not), what must be disclosed, and a worked scenario with four transactions.
Why the standard exists
Financial statements carry an unstated assumption: that transactions happened on commercial terms between independent parties. Related party transactions break that assumption.
A company might sell inventory to a business owned by its chief executive at half the market price. It might buy consultancy from a director's spouse at three times the going rate, or borrow from its parent interest-free. Each of those can be legal and properly recorded, and each distorts the picture a reader would otherwise form.
The effect can exist even when no transaction takes place. A subsidiary may be profitable only because its parent chooses not to charge it for services. That is why IAS 24 requires some relationships to be disclosed whether or not anything was bought or sold.
Disclosure, not remeasurement
If a company sells goods to a related party below market value, IAS 24 does not require the sale to be restated at market price. The revenue stays at the amount actually charged, measured under the normal standards. IAS 24 adds an obligation to tell the reader that the transaction happened, who it was with and on what terms, so they can judge for themselves.
In exams, the answer to "how does this related party sale affect the financial statements?" is usually: the entries do not change, but the sale must be disclosed. Restating the transaction is the wrong answer.
Who counts as a related party
The definition splits into people and entities. Working through it in order is more reliable than trying to remember a list.
People
A person, or a close member of that person's family, is related to the reporting entity if the person:
- has control or joint control over it;
- has significant influence over it; or
- is a member of the key management personnel of the entity or of its parent.
Close members of the family are those who may be expected to influence, or be influenced by, that person: children, a spouse or domestic partner, the partner's children, and dependants of either.
Entities
An entity is related to the reporting entity if any of these apply:
- both are members of the same group, so a parent, its subsidiaries and fellow subsidiaries are all related to each other;
- one is an associate or joint venture of the other, or of a member of its group;
- both are joint ventures of the same third party;
- one is a joint venture of a third entity and the other is an associate of that same entity;
- it is a post-employment benefit plan for employees of either;
- it is controlled or jointly controlled by a person identified above;
- a person with control or joint control of the reporting entity has significant influence over it, or is one of its key management personnel; or
- it, or a member of its group, provides key management personnel services to the reporting entity.
Who is not a related party
The exclusions are tested as often as the inclusions, because they are counter-intuitive. These are not related parties simply because of the relationship described:
- Two entities that only share a director or other key manager. A common directorship alone is not enough; there must be control, joint control or significant influence.
- Lenders, trade unions, public utilities and government departments that do not control the entity, in their normal dealings with it.
- A single customer, supplier, franchisor or distributor with whom the entity does a large volume of business, just because of the economic dependence that creates.
Your bank is not a related party because you owe it a lot of money. Your largest customer is not a related party because losing it would sink you.
Key management personnel
Key management personnel (KMP) are the people with authority and responsibility for planning, directing and controlling the entity's activities, directly or indirectly. That includes every director, executive or non-executive. The test is about authority, not job title: someone who directs the business without an executive title can still be KMP.
KMP compensation is disclosed in total and broken down into five categories:
| Category | Examples |
|---|---|
| Short-term employee benefits | Salaries, bonuses, paid leave, medical benefits, cars |
| Post-employment benefits | Pension contributions |
| Other long-term benefits | Long-service leave, sabbaticals |
| Termination benefits | Severance payments |
| Share-based payment | Share options and share awards |
What must be disclosed
There are two separate obligations, and keeping them apart is the key to a clean answer.
1. Parent and subsidiary relationships, always. The name of the parent and, if different, the ultimate controlling party must be disclosed, whether or not any transactions took place. If neither publishes financial statements, the next most senior parent that does is named.
2. Where transactions have taken place, the nature of the relationship and enough information to understand its potential effect, including:
- the amount of the transactions;
- outstanding balances and commitments, with their terms and conditions, whether they are secured, and how they will be settled;
- any guarantees given or received;
- allowances for doubtful debts on those balances; and
- the expense recognized in the period for bad or doubtful debts due from related parties.
These are given separately for each category of related party (parent, subsidiaries, associates, joint ventures, KMP and others), not as one combined total.
A related party transaction is a transfer of resources, services or obligations whether or not a price is charged. A free transfer still counts, which is why interest-free group loans and uncharged head-office services fall inside the standard.
The government-related entity exemption
Applied literally, the definition would bury a state-owned company in disclosure, because every other entity controlled by the same government would be a related party. IAS 24 therefore gives a partial exemption. A government-related entity can instead disclose the name of the government and the nature of the relationship, the nature and amount of each individually significant transaction, and an indication of the extent of transactions that are significant collectively. It is a reduction in detail, not a removal of the obligation.
A worked scenario
Meridian Ltd is a wholly owned subsidiary of Kestrel Holdings. During the year:
- Meridian sold goods worth $400,000 to Harlow Trading, a company owned by Meridian's finance director. $90,000 was outstanding at the year end, unsecured and interest-free.
- Kestrel provided management services to Meridian and charged nothing.
- Meridian paid its directors $650,000 in salaries and $70,000 in pension contributions.
- Meridian bought $2.1 million of raw materials from Ashfield Supplies, its largest supplier, which represents 60% of Ashfield's revenue.
| Item | Disclose? | Why |
|---|---|---|
| Parent relationship with Kestrel | Yes | Required whether or not there are transactions |
| 1. Sales to Harlow | Yes: $400,000 of sales and the $90,000 unsecured, interest-free balance | The finance director is KMP, so a company they own is a related party |
| 2. Free management services | Yes | A transfer of services is a transaction even with no charge |
| 3. Directors' pay | Yes: $720,000, split $650,000 short-term and $70,000 post-employment | KMP compensation by category |
| 4. Purchases from Ashfield | No | Economic dependence alone does not create a related party |
Common related party mistakes
- Restating a related party transaction at market value. IAS 24 is disclosure-only.
- Leaving out the parent relationship when there were no transactions. It is always required.
- Ignoring transactions with no price. Free services and interest-free loans count.
- Treating a shared director as enough. It is not, without control or significant influence.
- Treating a dominant customer or supplier as related. Economic dependence is explicitly excluded.
- Giving one combined KMP figure. The five-category breakdown is part of the requirement.
- Stating that transactions were at arm's length without support. That statement may be made only if it can be substantiated.
Practice it
Related party questions are usually a scenario with several transactions, only some of which qualify. The marks are in classifying each one correctly and stating the disclosure precisely, not in arithmetic. Work through the definition in order every time: is this a person or an entity, and which part of the test does it meet? Accountely's financial statement presentation challenges cover disclosure questions like these, and you can browse every topic on the challenge list. It's free to start.
Frequently Asked Questions
What is a related party under IAS 24?
A person or entity related to the reporting entity: someone with control, joint control or significant influence over it, a member of its key management personnel or their close family, or an entity in the same group, an associate or joint venture, or an entity controlled by one of those people.
Does IAS 24 change how related party transactions are measured?
No. IAS 24 only requires disclosure. Transactions are recorded at the amounts actually charged under the normal standards, even if those amounts are not at market value.
Is a major customer a related party?
Not just because of the volume of business. IAS 24 specifically excludes customers, suppliers, franchisors and distributors with whom an entity has significant business purely because of economic dependence.
What KMP compensation must be disclosed?
The total, broken down into short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payment.