Workbook on IAS 24 Related Party

IAS 24 Related Party Disclosures - Complete Student Guide with Examples 📚

What is IAS 24? 🤔

IAS 24 requires companies to disclose information about their related parties and any transactions with them. Think of it as "telling the world about your business family and friends."

Real-World Examples:

🏢 Example 1 - Tech Startup:

• TechCorp's CEO sells software licenses to his wife's consulting firm
• Even if price is fair, investors need to know about this relationship
• Without disclosure, investors can't assess if profits are genuine

🏦 Example 2 - Banking Sector:

• MegaBank lends $10M to a company where the bank's chairman is a director
• Risk profile is different - chairman might influence repayment decisions
• Disclosure helps investors understand true credit risk

Why Do We Need Related Party Disclosures? 🎯

The Problem:

• Companies might do business with "family and friends" on special terms
• These deals might not be fair or normal
• Investors need to know if the company's results are influenced by these relationships

Multi-Perspective Examples:

📊 Investor Perspective - ABC Company:

• Situation: ABC reports 25% profit growth
• Hidden Truth: 80% of new sales are to CEO's brother's company at 30% above market rates
• Investor Impact: Without disclosure, investors think growth is from competitive strength
• Reality: Growth is artificial and unsustainable

👔 Management Perspective - DEF Corporation:

• Situation: CFO's son provides IT services worth $500k annually
• Management View: "It's only 2% of our IT budget, why disclose?"
• IAS 24 Requirement: Must disclose regardless of size - nature matters, not amount
• Stakeholder Benefit: Shareholders can assess if IT costs are inflated

🔍 Auditor Perspective - GHI Limited:

• Situation: Company purchases raw materials from director's private company
• Audit Risk: Need to verify pricing is reasonable
• Disclosure Requirement: Must show relationship + transaction amounts + terms
• Quality Control: Helps auditors focus on high-risk related party transactions

Who Are Related Parties? 👥

Think of related parties as your "business family tree":

1. People (Individuals)

• Key Management (CEO, CFO, directors)
• Close Family Members of key management

📝 Detailed Examples:

Example A - Family Relationships:

• CEO John Smith is key management
• Related parties include:

1. 1. Wife Sarah Smith ✅
   2. Son Mike Smith (age 25, lives independently) ✅
   3. Daughter Emma Smith (age 16, lives at home) ✅
   4. Father Robert Smith (financially dependent) ✅
   5. Brother Tom Smith (independent, different city) ❌
   6. Cousin Lisa Johnson ❌

Example B - Business Context:

1. Sarah Smith (CEO's wife) owns a catering company
2. Mike Smith (CEO's son) owns a digital marketing agency
3. Both companies are automatically related parties to John's company
4. All transactions with these companies need disclosure

2. Companies (Entities)

🏢 Group Structure Examples:

Example C - Complex Group:

Ultimate Parent: Global Holdings Ltd (UK)

    ↓

Regional Parent: Asia Holdings Pte Ltd (Singapore)

    ↓

Operating Companies:

1. - Manufacturing Ltd (Malaysia) ← Reporting entity
2. - Trading Ltd (Malaysia) ← Sister company
3. - Service Pte Ltd (Singapore) ← Sister company

All relationships between these companies must be disclosed

Example D - Associate Relationships:

1. TechStart Ltd owns 30% of InnovateCorp
2. InnovateCorp is an associate of TechStart
3. Any transactions between them need disclosure
4. Example transactions: License fees, management services, loans

3. Other Related Parties

💼 Complex Examples:

Example E - Pension Fund:

1. Company: Manufacturing Corp
2. Pension Fund: Manufacturing Corp Employee Pension Scheme
3. Relationship: Company contributes to fund for employee benefits
4. Transactions to disclose: Contributions, fund management fees, any loans

Example F - Major Shareholder:

1. BigInvestor Fund owns 35% of SmallTech Company
2. Significant influence through board representation
3. Related party transactions: Any business deals between the two
4. Real scenario: BigInvestor provides consulting services to SmallTech

Key Definitions Made Simple 📖

Control 🎛️

= Power to make all the important decisions

📊 Control Examples:

Example G - Voting Control:

1. Parent Corp owns 60% of Subsidiary Ltd
2. Parent can: Fire CEO, change strategy, approve budgets
3. Control exists even if Parent doesn't exercise it daily

Example H - Management Control:

1. Government owns only 25% of DefenseCorp
2. But government can: Appoint all directors, veto major decisions
3. Control exists through legal rights, not ownership percentage

Example I - De Facto Control:

1. Founder owns 35% of StartupCorp (largest single shareholding)
2. Other shareholders are dispersed (thousands of small investors)
3. Founder controls all major decisions despite <50% ownership

Significant Influence 📈

= Power to participate in decisions (but not control)

📈 Significant Influence Examples:

Example J - Board Representation:

1. InvestorCorp owns 25% of TargetCorp
2. InvestorCorp has 2 out of 8 board seats
3. Can influence: Strategy discussions, major transactions
4. Cannot control: Final decisions require board majority

Example K - Technical Dependence:

1. SoftwareCorp owns 15% of ClientCorp
2. ClientCorp depends on SoftwareCorp's technology
3. Significant influence exists through business dependence
4. Example impact: SoftwareCorp influences ClientCorp's technology strategy

Key Management Personnel 👔

= People who plan, direct, and control the company

👔 Key Management Examples:

Example L - Clear Cases:

1. CEO, CFO, COO ✅ (Executive directors)
2. Chairman, Board members ✅ (Non-executive directors)
3. Company Secretary ✅ (If involved in strategic decisions)

Example M - Borderline Cases:

1. Head of Sales (reports to CEO, manages 200 people) ✅
2. Regional Manager (autonomous region, $50M revenue) ✅
3. Plant Manager (operational role, no strategic input) ❌
4. Senior Accountant (technical role, follows instructions) ❌

Example N - Parent Company Influence:

1. LocalCorp (subsidiary) has its own CEO and CFO
2. GlobalCorp (parent) executives regularly give strategic direction
3. Parent company executives are key management of LocalCorp
4. Must disclose: Their compensation and any direct transactions

What Must Be Disclosed? 📋

Always Disclose:

1. Relationship exists (even if no transactions occurred)
2. Parent company name and ultimate controlling party
3. Key management compensation (total and by category)

📋 Disclosure Examples:

Example O - Relationship Without Transactions:

"XYZ Corp is a subsidiary of ABC Holdings Ltd (60% ownership). The ultimate controlling party is Global Investments Inc.

During the year, no transactions occurred between XYZ Corp  and other group companies."

Example P - Complex Ownership Structure:

"Company A is 70% owned by Holding B Ltd. Holding B Ltd is 100% owned by Investment C Corp.

Investment C Corp is 45% owned by Mr. John Doe (CEO of Company A).

Ultimate controlling party: Mr. John Doe through Investment C Corp."

If Transactions Occurred, Also Disclose:

1. Nature of relationship
2. Amount of transactions
3. Outstanding balances
4. Terms and conditions
5. Guarantees given/received

💰 Transaction Disclosure Examples:

Example Q - Sales to Related Party:

"Sales to Associate Company XYZ:

1. - Nature: Sale of finished goods
2. - Amount: $2.5 million
3. - Terms: 60-day payment terms (normal terms: 30 days)
4. - Outstanding balance: $800,000
5. - Security: Unsecured"

Example R - Management Services:

"Services from Parent Company:

1. - Nature: IT support and management services
2. - Amount: $150,000
3. - Terms: Monthly payments in advance
4. - Outstanding balance: $25,000
5. - Guarantee: Parent guarantees subsidiary's bank loans ($5M)"

Types of Compensation to Disclose 💰

Key management compensation must be shown in 5 categories:

💰 Comprehensive Compensation Examples:

Example S - CEO Total Package:

CEO Annual Compensation:

1. Short-term benefits: $450,000

   - Base salary: $300,000

   - Annual bonus: $100,000

   - Company car benefit: $25,000

   - Health insurance: $15,000

   - Other allowances: $10,000

2. Post-employment benefits: $45,000

   - Pension contributions: $45,000

3. Other long-term benefits: $20,000

   - Long-service bonus accrual: $20,000

4. Termination benefits: $0

5. Share-based payments: $80,000

   - Stock options granted: $50,000

   - Restricted shares: $30,000

Total CEO Compensation: $595,000

Example T - Multiple Key Management:

Total Key Management Compensation (5 individuals):

1. Short-term benefits: $1,200,000

2. Post-employment benefits: $180,000

3. Other long-term benefits: $50,000

4. Termination benefits: $150,000 (retiring CFO)

5. Share-based payments: $300,000

Total: $1,880,000

Example U - Indirect Compensation:

"The company pays management fees of $200,000 annually

to Management Services Ltd for the services of Mr. X

(CEO) and Ms. Y (CFO). This amount is included in

key management compensation."

Common Related Party Transactions 🔄

🔄 Comprehensive Transaction Examples:

Example V - Manufacturing Company:

Related Party Transactions:

1. Raw material purchases from Parent: $5.2M
2. Finished goods sales to Sister company: $3.8M
3. Loan from Parent company: $10M at 3% interest
4. Rent paid to CEO's property company: $240k annually
5. IT services from Associate: $180k
6. Guarantee given for Subsidiary's bank loan: $25M

Example W - Service Company:

Related Party Transactions:

1. Consulting services to Associate: $890k
2. Office lease from Chairman's company: $150k
3. Professional fees to Partner's law firm: $85k
4. Loan to Joint Venture: $2M interest-free
5. Management fees from Subsidiary: $320k

Example X - Technology Company:

Related Party Transactions:

1. Software licensing to Parent: $1.5M
2. R&D services from Sister company: $2.1M
3. Equipment purchase from CEO's supplier: $450k
4. Marketing services to Associate: $680k
5. Patent licensing from Joint Venture: $220k

Important Rules to Remember ⚠️

1. Size Doesn't Matter

⚠️ Size Examples:

Example Y - Small but Significant:

1. Transaction: CEO purchases office furniture worth $5,000 from company
2. Company revenue: $500 million (0.001% of revenue)
3. IAS 24 requirement: Must disclose despite tiny size
4. Reason: Investors need to know about all related party benefits

Example Z - Large but Disclosed:

1. Transaction: $50M sale to Parent company
2. Company revenue: $100M (50% of revenue)
3. Investor concern: Is company viable without Parent support?
4. Disclosure benefit: Investors can assess true business sustainability

2. Arm's Length Claims

🤝 Arm's Length Examples:

Example AA - Provable Arm's Length:

"Property rental from Director: $120,000 annually. Market evidence: Independent valuations show similar properties rent for $115,000-$125,000

Conclusion: Transaction on arm's length terms"

Example BB - Cannot Prove Arm's Length:

"Consulting services from CEO's company: $200,000. No comparable market data available for similar services

Disclosure: Terms and conditions disclosed,no claim of arm's length terms made"

3. Disclosure Categories

📊 Category Examples:

Example CC - Complete Categorization:

Related Party Transactions by Category:

Parent Company:

- Sales: $15M

- Purchases: $8M

- Outstanding receivables: $2.5M

Subsidiaries:

- Management fees received: $500k

- Loans advanced: $3M

- Outstanding loans: $2.8M

Associates:

- Joint marketing costs: $200k

- Shared facility costs: $150k

Key Management:

- Compensation: $1.2M

- Loans to executives: $180k

Other Related Parties:

- Services from Chairman's firm: $75k

Practical Examples by Industry 💡

🏭 Manufacturing Industry:

Example DD - Auto Parts Manufacturer:

1. Parent company provides raw steel at cost + 5%
2. Sister company in Mexico provides assembly services
3. CEO's brother owns logistics company handling 30% of shipments
4. Joint venture in China handles Asian sales
5. Key disclosures: All pricing terms, volume commitments, exclusivity agreements

🏦 Financial Services:

Example EE - Regional Bank:

1. Parent bank provides IT systems and compliance support
2. Subsidiary insurance company offers products to bank customers
3. Chairman is also director of major customer (property developer)
4. Key management receive subsidized loans at staff rates
5. Key disclosures: Service agreements, cross-selling arrangements, loan terms

🛒 Retail Industry:

Example FF - Fashion Retailer:

1. Franchise agreements with stores owned by major shareholders
2. Sister company manufactures private label products
3. CEO's family trust owns distribution centers
4. Associate company provides online marketing services
5. Key disclosures: Franchise terms, transfer pricing, service agreements

Government-Related Entities 🏛️

🏛️ Government Examples:

Example GG - State-Owned Enterprise:

1. PowerCorp is 51% owned by government
2. WaterCorp is 100% owned by same government
3. Both companies trade with each other regularly
4. Exemption: Don't need to disclose routine transactions
5. Still disclose: Government relationship and significant transactions

Example HH - University:

1. State University receives government funding
2. Government has significant influence through funding
3. Related entity: Government-owned technology park
4. Disclosure requirement: Government relationship and major grants

Quick Study Tips 📝

🎯 Perspective-Based Learning:

From Investor Viewpoint:

1. "What hidden relationships might affect my investment?"
2. "Are profits real or from favorable related party deals?"
3. "Can this company survive without related party support?"

From Management Viewpoint:

1. "Which relationships must we disclose?"
2. "How do we prove transactions are fair?"
3. "What level of detail is required?"

From Auditor Viewpoint:

1. "Are all related parties identified?"
2. "Do transaction terms seem reasonable?"
3. "Is disclosure complete and accurate?"

📚 Memory Techniques:

The "FAMILY" Method:

1. Find all related parties first
2. Assess all transactions during the year
3. Measure significance (nature, not size)
4. Include all required disclosures
5. List by proper categories
6. Yearly review for completeness

Common Exam Scenarios 📝

📝 Typical Exam Questions:

Scenario A - Identification: "John is CEO of TechCorp. His wife owns DesignCorp. His son works as marketingmanager at TechCorp. Identify all related parties."

Answer approach:

1. John: Key management ✅
2. Wife's company (DesignCorp): Related party ✅
3. Son: Close family member ✅
4. Son as employee: Also key management if senior enough

Scenario B - Disclosure Requirements: "TechCorp bought $500k consulting services from CEO's wife's company. Explain disclosure requirements."

Answer approach:

1. Nature of relationship (CEO's spouse)
2. Transaction amount ($500k)
3. Terms and conditions
4. Outstanding balances
5. Cannot claim arm's length without proof

Scenario C - Materiality: "The transaction is only 0.1% of company revenue. Does it need disclosure?"

Answer approach:

1. Related party transactions are material by nature
2. Size is irrelevant
3. Must disclose regardless of percentage
4. Explain investor protection rationale

Summary Checklist ✅

🔍 Comprehensive Review Process:

Step 1: Identify Related Parties

1. [ ] All key management personnel
2. [ ] Close family members of key management
3. [ ] All group companies (parent, subsidiaries, associates)
4. [ ] Joint ventures and their subsidiaries
5. [ ] Companies controlled by key management/family
6. [ ] Pension funds and major shareholders

Step 2: Identify All Transactions

1. [ ] Sales and purchases of goods/services
2. [ ] Property transactions
3. [ ] Loans and financial arrangements
4. [ ] Guarantees and commitments
5. [ ] Management and technical services
6. [ ] Lease agreements

Step 3: Gather Required Information

1. [ ] Transaction amounts
2. [ ] Terms and conditions
3. [ ] Outstanding balances
4. [ ] Security arrangements
5. [ ] Guarantees given/received
6. [ ] Provisions for doubtful debts

Step 4: Prepare Disclosures

1. [ ] Key management compensation (5 categories)
2. [ ] Transactions by related party category
3. [ ] Relationship descriptions
4. [ ] Terms and conditions
5. [ ] Outstanding balances
6. [ ] Only claim arm's length if provable

Step 5: Final Review

1. [ ] All relationships disclosed (even without transactions)
2. [ ] Materiality based on nature, not size
3. [ ] Separate disclosure by category
4. [ ] Consistency with prior year
5. [ ] Consider user needs and transparency

💡 Remember: IAS 24 is ultimately about transparency and protecting stakeholders. Every disclosure should help users understand whether the company's performance and position are influenced by special relationships rather than normal market forces.