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Related Party, Transactions and Disclosure in FS

Writer's picture: Sharon ChooSharon Choo

Definition of a related party


A related party is a person or entity with control or significant influence over the reporting entity.


Another entity over which the reporting entity has control or significant influence.


Another entity under common control with the reporting entity through common ownership, close family members, or common key management.


Related party transaction


A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.



Common related party transactions include:

  1. Sales and Purchases: Transactions between a company and its subsidiaries, affiliates, or major shareholders involving goods or services.


  2. Loans and Guarantees: Loans provided by or to related parties, or guarantees given by one party on behalf of another.


  3. Management Services: Agreements where one party provides management, administrative, or consulting services to another.


  1. Lease Agreements: Leasing of property or equipment between related parties.


  1. Compensation: Payment of salaries, bonuses, or other compensation to key management personnel or their family members.


  2. Asset Transfers: Sale or transfer of assets between related parties, often at non-market rates.


  3. Joint Ventures: Collaborations or partnerships where related parties invest together in a new venture.



Should related party transaction be disclosed?


Yes, related party transactions should be disclosed in financial statements. Related party transactions refer to transactions or arrangements between a reporting entity and its related parties, which could include:

 

  • Key Management Personnel (KMP): Such as directors or executives of the company.


  • Close family members of key personnel or owners of the company.


  • Entities controlled or significantly influenced by key personnel or their family members.


Disclosure of related party transactions is important for transparency and to prevent conflicts of interest. It helps stakeholders understand the potential impact of these transactions on the financial position, performance, and cash flows of the reporting entity. Disclosures typically include the nature of the relationship, a description of the transactions, and any outstanding balances related to these transactions.



How should related party transactions be disclosed in financial statements?


  1. Nature of the Relationship: Clearly describe the nature of the related party relationship.


  2. Details of Transactions: Provide details of the transactions, including the type and purpose of the transactions, the terms and conditions, including whether they are equivalent to those prevailing in arm’s length transactions.


  3. Amounts Involved: Disclose the amounts involved in the transactions.


  4. Outstanding Balances: Include information on any outstanding balances, including terms and conditions, and whether they are secured or unsecured.


  5. Compliance with Accounting Standards

    Entities must ensure that disclosures comply with relevant accounting standards, such as IFRS (International Financial Reporting Standards): Specifically, IAS 24 (Related Party Disclosures).


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