Why do Related party transactions need to be disclosed?

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The objective of IAS 24 is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties.

A related party is a person or an entity that is related to the reporting entity: 

• A person or a close member of that person’s family is related to a reporting entity if that person has control, joint control, or significant influence over the entity or is a member of its key management personnel.
• An entity is related to a reporting entity if, among other circumstances, it is a parent, subsidiary, fellow subsidiary, associate, or joint venture of the reporting entity, or it is controlled, jointly controlled, or significantly influenced or managed by a person who is a related party. 

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. If an entity has had related party transactions during the periods covered by the financial statements, IAS 24 requires it to disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements.

IAS 24 requires an entity to disclose key management personnel compensation in total and by category as defined in the Standard.

Standard history

In April 2001 the International Accounting Standards Board (Board) adopted IAS 24 Related Party Disclosures, which had originally been issued by the International Accounting Standards Committee in July 1984.

In December 2003 the Board issued a revised IAS 24 as part of its initial agenda of technical projects that included amending disclosures on management compensation and related party disclosures in separate financial statements. The Board revised IAS 24 again to address the disclosures in government‑related entities.

In November 2009 the Board issued a revised IAS 24 to simplify the definition of ‘related party’ and to provide an exemption from the disclosure requirements for some government‑related entities.

Other Standards have made minor consequential amendments to IAS 24. They include IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 12 Disclosure of Interests in Other Entities (issued May 2011), IAS 19 Employee Benefits (issued June 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012) and Annual Improvements to IFRSs 2010–2012 Cycle (issued December 2013).

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Publication date: 28 Feb 2022   

us Financial statement presentation guide 26.4

The disclosure provisions of ASC 850 are intended to enable users of financial statements to evaluate the nature and financial effects of related party relationships and transactions. In general, the disclosures outlined below are required when the financial statements include material related party transactions. However, related party transactions are subject to these disclosure requirements even if they are not given accounting recognition in the financial statements.

Related party transactions that occur in the ordinary course of business may not require the same extent of disclosure. In some situations, the relationship's effect on the financial statements may be pervasive enough that disclosing the relationship alone is sufficient. Regardless, SEC registrants need to include sufficient disclosure to address SEC requirements, including S-X 4-08(k).

It may be appropriate to aggregate similar transactions by type of related party. Before aggregating, the reporting entity should consider whether disclosure of the name of a related party is necessary for a user to understand the relationship.

Related party transactions eliminated in the preparation of consolidated or combined financial statements are not required to be disclosed in those statements.

ASC 850 provides guidance on related party disclosures.

Excerpt from ASC 850-10-50-1

The disclosures shall include:

1. The nature of the relationship(s) involved
2. A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements
3. The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period
4. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement
5. The information required by paragraph 740-10-50-17

ASC 740-10-50-17

An entity that is a member of a group that files a consolidated tax return shall disclose in its separately issued financial statements:

1. The aggregate amount of current and deferred tax expense for each statement of earnings presented and the amount of any tax-related balances due to or from affiliates as of the date of each statement of financial position presented
2. The principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to members of the group and the nature and effect of any changes in that method (and in determining related balances to or from affiliates) during the years for which the above disclosures are presented

The above disclosures are incremental to the identification of related party transactions on the face of the financial statements.

26.4.1 Disclosures about common control relationships

A reporting entity may also need to consider whether to disclose common control ownership or common management with other entities, even if there have not been any transactions with those entities.

ASC 850-10-50-6

If the reporting entity and one or more other entities are under common ownership or management control and the existence of that control could result in operating results or financial position of the reporting entity significantly different from those that would have been obtained if the entities were autonomous, the nature of the control relationship shall be disclosed even though there are no transactions between the entities.

26.4.2 Disclosures about arm’s-length basis of transactions

Transactions involving related parties cannot be presumed to be at arm’s length. As discussed in ASC 850-10-50-5, a reporting entity should only disclose that a transaction was at arm’s length when it can substantiate such a representation.

For example, a reporting entity may want to disclose that a loan arrangement between the reporting entity and a related party is at arm’s length. Such disclosure would only be appropriate if the reporting entity is able to substantiate that the terms of the loan are equivalent to terms it would have obtained with an unrelated lender. Similarly, a reporting entity may sell services to third parties and related parties at the same rate. In this situation, the reporting entity may be able to substantiate that the transactions occur at arm’s length.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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