• Agenda decision discussed at May 2006 Board Meeting
• Agenda decision at July 2006 Board Meeting
• Discussed at September 2006 Board Meeting
• Discussed at October 2006 Board Meeting
• Discussed at January 2007 Board Meeting
• February 2007: Exposure Draft of proposed amendments to IAS 24 issued
  Click for Press Release (PDF 63k)
• Discussed at September 2007 IASB Meeting
• Discussed at October 2007 IASB Meeting
• Discussed at November 2007 IASB Meeting
• Discussed at January 2008 IASB Meeting
• Discussed at September 2008 IASB Meeting
• Discussed at November 2008 IASB Meeting
• December 2008: Revised Exposure Draft of proposed amendments to IAS 24 issued
  Click for Press Release (PDF 63k)
  Comment deadline is 13 March 2009
• Discussed at July 2009 IASB Meeting
• Discussed at September 2009 IASB Meeting
• Revised IAS 24 issued 4 November 2009

Timetable

• Click for IASB Project Timetable

Discussion at May 2006 IASB Meeting

The Board considered a staff proposal to consult the SAC and the IASC Foundation Trustees on adding a project to its agenda to update and clarify the requirements in IAS 24 Related Party Disclosures. The draft proposal was not available to observers.

Staff explained that the main objectives of such a project would be to address:

• a. The requirements in IAS 24 for entities with significant state ownership when they transact with similar entities; and
• b. Whether, when an associate of an entity is preparing its own financial statements, the requirements of IAS 24 should include, as related party transactions, transactions between the associate and a subsidiary of the associate's significant investor.

The Board discussed the issues set out in the agenda paper. Board members said that disclosure of transactions between entities with significant common ownership is both useful and important information.

The Board approved the staff proposal to consult with the SAC and the IASC Foundation in June regarding adding this project to the IASB's agenda.

Discussion at the July 2006 IASB Meeting

The Board considered a formal proposal to add a project to the Board's technical agenda to amend IAS 24 with respect to certain transactions between state-controlled entities and among entities when one entity is a subsidiary and the other is an associate of the same parent/ investor. The staff noted that the proposal had already been discussed with the SAC and the Trustees, as required by the Board's Due Process Handbook.

Transactions between state-controlled entities

Board members asked for clarification of the scope of the possible amendments. It was noted that there was no proposal to limit or exempt disclosures of transactions between the State and any State-owned business entities (that is, parent-subsidiary or investor-investee transactions). The project would explore whether and to what extent disclosure accommodations could be made with respect to transactions among entities which are owned by the State, or in which the State has significant influence.

The Board agreed to add this aspect of the project to its technical agenda. It was noted that a blanket exemption was unlikely to command the support of the Board, but that restricting disclosure to 'off-market' transactions might be a possibility. However, it was too early to conclude how the Board might approach the issue.

Transactions between two related parties of an entity

This issue relates to what the requirements of IAS 24 are when:

• (a) an entity has both subsidiaries and associates that transact with each other; and
• (b) the associate is the reporting entity.

Board members expressed various views about this issue. One noted that transactions between the subsidiary and the associate should be within the scope of IAS 24, but saw difficulty with enforcing this. Other Board members disagreed, noting that if the associate's procedures for identifying related parties were adequate, the associate should be able to identify the parent's subsidiaries. At the margins, there will be situations in which the associate would not know it is transacting with a related party, but it must still make its best efforts to identify them.

It was suggested that, as part of the plan for addressing this part of the project, the staff should contact those SAC members that are professional users of financial statements and who had expressed concerns about the current definition of related parties.

The Board agreed to add this aspect of the project to its technical agenda.

Discussion at the September 2006 IASB Meeting

Costs and benefits: disclosing related party transactions

The Board agreed that only related party relationships which arise through common control from the State should be considered for relief from the disclosure requirements of IAS 24. Other related party relationships, for example between entities controlled by the State and the State itself, are presumed to be material related party relationships that warrant disclosure (and are therefore not the type of relationship from which the amendments are designed to provide relief).

The State

The Board agreed that 'State' referred to all levels of government, such as central, national, federal, provincial, state, regional, local, town, or municipality.

Relief for State-controlled entities

The Board agreed that any relief provided by amendments to IAS 24 should be strictly limited to those entities that meet the definition of a related party simply because of common control from the State and that this relief should not include entities that are significantly influenced by the State.

The Board noted that any relief considered would be granted 'horizontally' but not 'vertically.' That is, for transactions between State-controlled entities but not for transactions between the State entities controlled by it.

What would the relief be?

The Board agreed that to distinguish between those transactions that should and should not be disclosed, IAS 24 should include indicators similar to the following.

IAS 24 would start from a presumption that State-controlled entities would make the assertion that common control from the State does not give rise to transactions that need to be disclosed by the reporting entity with respect to transactions with other State-controlled entities. However, certain indicators that might lead the entity to identify that related party relationships exist and that the entity should be disclosing the relationship and transactions. Those indicators could include the following situations:

• The existence of direction or compulsion from the State for entities to act in a certain way
• The existence of transactions at non-market rates between the two entities (other than by way of regulation)
• The use of shared resources
• Economically significant transactions between the common controlled entities
• Common board members between the two entities controlled by the State.

Board members noted that in the majority of situations, the nature of the transaction would trigger the assessment above: essentially, "if it looks odd, it's probably a related party transaction."

The Board agreed that, in the situation in which any of the indicators of a related party transaction exist, the full requirements of IAS 24 paragraph 17 should be complied with.

Definition of related party transaction-clarification

The Board agreed that the definition of a related party transaction, together with a consequential amendment to IAS 24 paragraph 17 were necessary, as follows:

Discussion at the October 2006 IASB Meeting

The Board discussed proposals for clarification of the requirements in IAS 24 to disclose relationship and transactions between an associate and a subsidiary of that associate's significant investor. The Board considered four issues:

Issue 1: A relationship between a Subsidiary (C) in a group and an Associate (B) where the parent (A) of entity C also has significant influence over entity B. What are the disclosure requirements in entity B's separate financial statements?

The Board agreed that the opportunity should be taken to amend IAS 24 to clarify that transactions between entity C and entity B should be disclosed in entity B's separate financial statements.

Issue 2: A relationship between entity B and entity C. Does the current IAS 24 require these transactions to be disclosed in Entity A's consolidated financial statements?

The Board agreed that these transactions should be disclosed in entity A's consolidated financial statements and that this requirement should be clarified.

Issue 3: A relationship between entity B and entity C. Does the current IAS 24 require disclosure of these transactions in entity C's individual financial statements?

The Board confirmed that the separate financial statement of C does not include the operations of the group of which it is a part. Therefore, current IAS 24 does not require disclosure of the relationship between B and C in this situation, because C is the reporting entity. The Board agreed that control could be exercised through the parent and that A could compel C to transact with B in a way that did not benefit C the most (rather A or the group). It would therefore be inconsistent with the objective of IAS 24 not to require disclosure.

The Board decided that IAS 24 should be amended to reflect that a transaction as described in issue 3 should be disclosed in entity C's individual financial statement.

Issue 4: A relationship between entity B and entity D (another associate of A). Does the current IAS 24 require disclosure in either entity B, entity D or group AC's financial statements?

The Board confirmed that this is a situation where it is a relationship between two entities not controlled by any entity in the group (absence of control). It also confirmed that this is a situation that is not within the definition of a related party and should be scoped out of IAS 24.

As a result to this the Board confirmed that the relief should include associates of a fellow subsidiary.

Discussion at the January 2007 IASB Meeting

The Board discussed several 'sweep issues' arising from the pre-ballot draft of Amendments to IAS 24.

Key management personnel

The Board considered the following illustrative example:

A person, X, holds a 100 per cent investment in Entity A and is a member of the key management personnel of Entity C. Entity B holds a 100 per cent investment in Entity C.

In Entity C's financial statements, Entity A is a related party of Entity C because X controls Entity A and is a member of the key management personnel of Entity C.

Entity A is also a related party of Entity C if X is a member of the key management personnel of Entity B.

Further, Entity A is a related party of Entity C if X holds only joint control, significant influence or significant voting power over Entity A.

Under the current version of IAS 24, in Entity A's separate financial statements, Entity C is not a related party of Entity A. The Board agreed that IAS 24 should be amended such that, in Entity A's separate financial statements, Entity C should be included as a related party.

Disclosure

The Board agreed that a new sub-paragraph 17A(b) should be reworded to state something along the lines of: A reporting entity is exempt from the disclosure requirements of paragraph 17 in relation to an entity that: (a) is a related party only because the reporting entity is controlled or significantly influenced by a state and the other entity is controlled or significantly influenced by that state; and (b) there are no indicators that the reporting entity influenced or was influenced by the entity.

Definition of a related party transaction

The Board agreed that transactions or commitments, which have a future settlement date, should be included in the definition of a related party transaction and that an example should be added to IAS 24 paragraph 20 to clarify this.

Comment period

The Board agreed that the comment period should be 90 days rather than 120 days. This was in response to strong representations from jurisdictions most affected by the proposed amendment. Those jurisdictions wanted the amendment to be in place in time for 2007 financial year ends. In addition, the Board noted that every effort should be made to accommodate this request, even at the expense of obligations under the Memorandum of Understanding with respect to Discussion Papers (Standards-level documents have priority).

February 2007: Exposure Draft of amendments to IAS 24

On 22 February 2007, the IASB published an exposure draft of proposed amendments to IAS 24 Related Party Disclosures. The amendments would:

• Exempt some state-controlled entities from related party disclosures
• Change the definition of a 'related party'.

Comment deadline is 25 May 2007. Click for Press Release (PDF 63k).

March 2007: Special edition of our IAS Plus newsletter

We have published a Special Edition of the IAS Plus Newsletter (PDF 122k) explaining the proposal.

Discussion at the September 2007 IASB Meeting

The staff presented their analysis of comments received on the IASB's Exposure Draft of Proposed Amendments to IAS 24 Related Party Disclosures – State-controlled Entities and the Definition of a Related Party (ED). The analysis is available in the Observer Notes section of the IASB's website (Agenda Paper 11).

No initial views were expressed by Board members and no decisions were made at this meeting.

State-controlled entities

Most respondents supported the Board's proposal to provide relief from the disclosure requirements in paragraph 17 of IAS 24 for entities that are related simply because of control or significant influence by a common state. The main comments related to this proposal were:

• To extend the exemption to other type of entities, that is, non-state-controlled entities.
• To provide the exemption additionally to entities that are jointly controlled by a state.

Most respondents also supported the indicator approach proposed in the ED. The comments mainly related to suggestions for clarifying how and when to apply the indicators; for example:

• Amending paragraph 17A(b) to include the influence exercised directly by a common state.
• Clarifying whether the indicators suggested in paragraph 17B of the ED are rebuttable presumptions.

Definition of a related party

In principle most respondents agreed with the Board's proposal to amend the definition of a related party. However, several raised practical and cost-benefit concerns.

Most respondents agreed that. However, a large number of respondents believe that the proposed wording improves the definition but that it is still complex and difficult to apply. Main comments were:

• Defining the term 'significant voting power'.
• Reinstating the word 'may' in the proposed definition of 'close members of the family of a person'.
• Removing inconsistency related to key management personnel in paragraph 9(b)(vii ).

Definition of a related party transaction

Most respondents agreed with the proposal to clarify the definition of related party transaction. However, many were concerned by the new example of a related party transaction proposed in paragraph 20(j) of the ED.

Project plan

The Board agreed to discuss the issues in detail at the October and November meeting. It was noted that because of the large number of issues raised an additional session may be required.

Discussion at the October 2007 IASB Meeting

Objective and Scope

The Board agreed that:

• The exemption proposed in the Exposure Draft (ED) should not be extended to entities controlled by an entity that is not a State.
• The exemption from disclosure proposed in the ED should not be extended to other related party relationships.
• It would not reconsider fundamentally the definition of a related party. Such a re-consideration was beyond the scope of this project.
• It would not permit an entity to avoid disclosure on the basis that, notwithstanding its 'best endeavours', it had been unable to obtain the necessary information on related party relationships.
• It would not provide any materiality guidance in IAS 24.
• It would not provide any exemption from IAS 24 disclosure for subsidiaries whose parents prepare consolidated financial statements that are available for public use.

State-controlled entities

The Board redeliberated the fundamental issue raised in the ED, in particular, how to determine whether an entity related to the State should be exempted from IAS 24's disclosure requirement. The staff had proposed an approach that was different in certain respects from that proposed in the ED. However, it was apparent very quickly that Board members were not in favour of the staff recommendations and were in favour of an approach very similar to that proposed in the ED.

The Board concentrated on the following paragraphs from the ED:

The staff noted that comment letters had identified a confusion in paragraph 17A as to whether 'influence' was 'significant influence' as used in IAS 28 Investments in Associates or something else (presumably a lesser degree).

Board members noted that, read in context, ED paragraphs 17A-17E demonstrate that 'influence' in IAS 24 need not be 'significant influence' as that term is used in IAS 28.

After an extended discussion, the Board agreed (one opposed) that:

• If the State controls or exercises significant influence over the reporting entity (that is, the State actively participates in the policies and affairs of the associate) and the counterparty [17A(a)], the exemption would not apply;
• If there are indications that there are 'influenced transactions' [17A(b)], the exemption would not apply.
• When related parties transact business at non-market rates (otherwise than by way of regulation) [17B(a)], the trigger in 17A(b) is deemed to be met by definition and the exemption would not apply.

The Board agreed to clarify in paragraph 17E that once it is determined that the exemption does not apply, all disclosures required by IAS 24 are required (that is, the disclosures are not limited to 'influenced transactions').

The Board agreed that, with respect to paragraph 17A(a), if the State does not exercise significant influence (that is, it could but does not participate in determining the operating and investing policies of the associate) and there are no 'influenced transactions', the proposed exemption would apply and no IAS 24 disclosures would be required.

The Board acknowledged that its approach would create disclosure 'penalties' for off-market transactions. However, it also noted that it did not intend by its vote to scope in government incentives, including low-interest loans and regional development programmes, offered by a State acting as the State.

The Board agreed that the indicators in 17B(b) and (c) were equal in weight and that the staff should investigate combining those indicators with those in 17C. The staff will bring this issue to a subsequent meeting.

The Board will continue redeliberations at a subsequent meeting.

Discussion at the November 2007 IASB Meeting

At the October 2007 IASB meeting, the Board began its redeliberation of amendments to IAS 24 Related Party Disclosures as proposed in the Exposure Draft State-Controlled Entities and the Definition of a Related Party (the ED; published in February 2007) in the light of the comments received. Staff pointed out that some of the comments received recommended rewording or clarifications and will be considered when drafting the final standard.

The staff presented issues relating to the definition of a 'related party' that were raised by constituents subsequent to the publication of the ED. Firstly, commentators identified a perceived inconsistency in the proposal not to include the relationship between associates in the definition, but to include this relationship when the influencing party is part of key management personnel. The complete analysis can be found in Agenda Paper 5A, which is available on the IASB's website. During the discussion it was noted that other bodies are also currently deliberating related party transaction and it might be useful to consider the outcomes of those projects. As the Board could not agree on the staff proposal, staff were requested to come back after considering the issues raised in this session.

The second decision the Board was asked to make dealt with the definition of state and state-controlled entities. In their responses to the ED constituents asked if different parts or levels of a state should be viewed as one composite and if entities which are controlled or significantly influenced by different levels of government should be considered to be related. The staff analysed its definition concluded that the definition of state set out is principle-based and provides sufficient guidance. Consequently, the Board agreed keeping the definition in the ED.

Another concern raised in the comments on the ED was how to determine state-controlled entities under common control. Respondents seek for a definition of 'common state' (which is, the state controlling both transacting entities) or application guidance. The Board agreed with the staff recommendation not to provide a definition or application guidance.

The staff brought to the attention of the Board another possible source of confusion as many respondents see paragraph 17A(b) of the ED as defining entities that are both significantly influenced by the same state as being related parties. Therefore, staff recommended to amend the wording to make clear this was not the case. The Board agreed.

The staff also highlighted that constituents requested clarification in paragraph 17A(b) of the ED to make clear, that it only refers to influence between state-controlled entities. The Board agreed to amend the paragraph with the words 'influence exercised by a common state'.

The Board was then asked to possibly revise a former decision in connection with the definition of 'close members of the family', that the constituents raising this issue considered burdensome. By majority vote the Board decided that the reporting entity should have no discretion whether close family members are related parties or not, i.e. if transactions with close family members (as defined in the ED) occurred they need to be disclosed. Consequently, no changes should be made to the ED.

The next issue raised by commentators was the request for a definition of 'significant voting power' and other wanted the term to be deleted in total. The staff recommended deletion. Some Board members noted that significant voting power is different from significant influence and in some circumstances can exist in absence of significant influence. The Board did not reach a conclusion on how to exactly distinguish the two terms. However, there seemed to be a consensus that the existence of significant voting power should trigger the disclosure requirements in IAS 24. Accordingly, the Board decided not to delete the term significant voting power. The Board also agreed to the staff proposal for minor changes with regard to specific joint control situations and post-employment benefit plans.

The Board then discussed the definition of a related party transaction and other issues.

The Board was presented a perceived burdensome requirement with respect to commitments to future performance in a related party transaction (paragraph 20(j) in the ED). This issue was raised as those commitments might be difficult to be recorded in the financial reporting systems of entities. The Board agreed that it wanted to have those commitments and executory contracts within the scope and that the example should be kept.

The next point the Board dealt with was the request by commentators to define the term 'individual financial statements' as it is not defined in IFRSs. The staff considered such financial statements as neither separate financial statements nor consolidated financial statements, but recommended to include a definition for clarification purposes in IAS 27 Consolidated and Separate Financial Statements. The Board agreed.

Constituents were concerned over the proposed deletion of paragraph 14 in IAS 24. Users would consider such information as useful. The staff therefore recommended that the paragraph should be kept and amended to reflect that it is additional to other disclosure requirements. The Board agreed.

Some constituents asked whether key management compensation to be disclosed should be the amounts paid or payable or the amounts recognised as an expense and what should be disclosed for post-employment benefits (for example, how to treat the 'corridor approach', interest costs and the share of actuarial gains and losses) and share-based payments.

The staff expressed concerns about the consumption of resources such research and analysis would require and recommended to the Board that it should not deal with this issue in this project. It might look at other standard-setting institutions to gain some insight and put that information on the record for the next project on related party transactions. The Board agreed.

The next request for change proposed to change the categories for disclosure in paragraph 18 of IAS 24 for reasons of usefulness. The staff recommended not changing the categories. The Board agreed.

Another area of concern was if, within the definition of related party, an associate and a joint venture include subsidiaries of the associate and joint venture. The staff believed the paragraph is not clear on this point and recommended an amendment to add clarification. The majority of the Board members agreed.

The staff then asked the Board on the effective date of the final standard. The Board agreed to postpone this decision until it is clear when the standard is finalised.

The Board also agreed that full retrospective application would be required.

The last point was a proposed consequential amendment to IFRS 8 with regard to state-controlled entities. The amendment recommended by the staff would grant the same relief in paragraph 34 of IFRS 8 Operating Segments as the proposed IAS 24 would. The Board agreed.

Discussion at the January 2008 IASB Meeting

Review of redeliberations to date

The IASB reviewed a summary of the results of their redeliberations to date. One Board member expressed concern that he was not in a position, neither was it clear from the agenda paper, to determine (i) whether re-exposure would be necessary; and (ii) whether the redeliberations has resulted in divergence between the IASB and the FASB with respect to related party disclosures. Although the IAS 24 project was not a convergence project, the IASB should, as a matter of courtesy, alert their US colleagues if amendments to IAS 24, which currently is largely consistent with the equivalent US standards, would result in that no longer being the situation. Other Board members noted that this would also be an issue with other jurisdictions.

Follow-up issues: State-controlled entities

The Board spent a considerable amount of time re-deliberating the exemption from disclosure under the Standard for State-controlled entities.

The Board appeared to agree that the presence of transactions not on arm's-length terms would be an indicator of influence. 'Arm's-length terms' are those terms, including price, that would apply if the transaction occurred between unrelated parties. Negotiated volume discounts similar to those that would be offered to other parties purchasing similar amounts would be arm's-length sales.

The Board also appeared to agree that the exemption being proposed would not be available if State influence was identified at either the transaction or entity level (see IASPlus.com's reports for October 2007 and November 2007).

However, the status of these decisions was thrown in to doubt when the Board determined that, in some jurisdictions including China, the State often nominates one or more Board members. This fact alone seemed to indicate that the State would normally 'participate in the operating and financial decisions' of State-controlled entities and thus would always fail the exemption criteria developed.

The session ended in a degree of confusion and the staff will consult with interested parties and return to a subsequent meeting with revised proposals.

Discussion at the September 2008 IASB Meeting

The staff introduced the session by stating that its purpose would be

• To review the proposed exemption for state-controlled entities;
• To clarify follow-up issues on the definition of a related party; and
• To reach a consensus on the interaction of the proposals with other IFRSs.

Review of the proposed exemption for state-controlled entities

In February 2007, the Board had issued an Exposure Draft of amendments to IAS 24 with regard to state-controlled entities and the definition of a related party. Under that proposal entities which are controlled or significantly influenced by a common state would have been exempt from the disclosure requirements of IAS 24, unless influence – evidenced by an indicator approach – existed between those entities.

The majority of those who commented on the proposed amendments agreed with the Board in general, but had questions as to how the approach would have to be applied in certain situations and, hence, asked for clarifications. During the redeliberations the Board made changes to its proposal which were summarised by the staff in tabular format. The application of the revised proposal was depicted in a flowchart. Both the table and the flowchart were included in observer note 13B paras. 14 et seq. (available from the IASB's website).

The staff did a thorough review of the decision taken so far and came to the conclusion that the revised proposal was both complex and not cost-beneficial. Therefore, the staff proposed not to finalise the current ED, but to pursue an alternative approach. The staff presented three alternative approaches to the Board:

• Approach 1 would require all state-controlled entities in a certain country to disclose a statement that a significant proportion of the entities' business transactions were related party transactions with other state-controlled entities, if state ownership was pervasive.
• Approach 2 would require the same as approach 1, but would be based on pervasive transactions with other state-controlled entities rather than on pervasive ownership.
• Approach 3 would drop any pervasiveness notion and would foresee a simple disclosure that a certain percentage of the entity's transactions were with state-owned entities. This approach was recommended by the staff should the Board decide not to continue with the revised proposal.

The Board had a lively debate on the issue. One Board member said that a state-controlled entity could not possibly know whether or not the entity it is dealing with was also under state control. The only fact such an entity would be aware of was who its owner was and that any transactions entered into with the owner were with a related party. He illustrated his view by pointing at two entities that are both state-owned and are doing business with each other. Both entities would individually know whether or not they were influenced by the state; however, they could not reasonably be required to explore whether or not the counterparty was as well. The Board member, therefore, suggested disclosing only those transactions entered into with its immediate parent.

Another Board member questioned the usefulness of such an approach. On the one hand, the state could decide to pool its shares in the entity in a holding company that was wholly-owned by the state and had no other assets but the shares in the entity. Under such a scenario, it was likely that there would not be many transactions between the entity and its owner underlying the control of the latter, so that the disclosure requirement would be meaningless. On the other hand, depending how broad one defined 'the state', the requirement could become overly burdensome.

To illustrate the Board member cited the example of an airline that was owned by the government. He asked the other Board members whether that suggested that the airline needed to disclose each and every ticket sale with an employee of the Ministry of Defense, the Navy, the Army, etc.

In the end, the Board voted 10:3 in favour of the staff's proposal, that is, not require any disclosures for related party transactions of state-controlled entities, but instead to require an explicit statement of the entity ('a health warning') that its financial statements were influenced by the fact the entity was owned by the state and that the entity was unable to decide which transactions would have been influenced by its owner. Where possible, the degree of influence should be disclosed as well by some qualitative remark ('heavily', 'the majority', etc.).

The staff pointed out that the Board's tentative conclusion above would be a significant deviation from the proposal contained in the ED and would, thus, require re-exposure.

Follow-up issues on the definition of a related party

With regard to the definition of a related party the Board agreed unanimously with the staff

• Not to treat entities as related parties merely because one entity's member of key management personnel has significant influence over the other entity;
• To maintain the position in IAS 24 under which a person has joint control over one entity and significant influence or joint control of the other, but to resolve internal inconsistencies identified during the comment letter process;
• To amend the ED to include close members of key management personnel's family when determining whether related parties exist;
• Not to explore whether or not an entity can be a member of key management personnel (given the limited scope of the project); and
• To maintain the requirement that a multi-employer plan remain a related party of its sponsoring entities.

Interaction of the proposals with other IFRSs

Finally, the staff presented two issues where the proposals regarding related parties interacted with requirements in other standards, namely IFRS 8 (Operating Segments) and IAS 19 (Employee Benefits). With regard to IFRS 8 the issue was whether to treat entities that are state-controlled as a single customer under IFRS 8.34. So far, the Board has tentatively concluded that state ownership alone does not warrant treating all state-controlled entities as a single customer. The staff recommended leaving the decision to the entity's judgment on the principle that an entity shall provide information about the extent of its reliance on major customers.

The Board believed that the segment disclosures ought to be consistent with the reasoning envisaged for the revised IAS 24. Hence, it would not be conceivable to state, on one hand, that the entity was not aware of the fact whether or not a third party it is transacting with was state-controlled while on the other hand treating that party together with others as a single customer. The Board asked the staff for more guidance on this issue.

The second issue related to the fact that changing the definition of a related party would implicitly change the definition of a qualifying insurance policy - something constituents might not be aware of. Therefore, the staff proposed adding a footnote to the Basis for Conclusions of IAS 19 stating that the definition of a qualifying insurance policy referred to a related party as defined by IAS 24 as amended in 2008.

The Board agreed.

Discussion at the November 2008 IASB Meeting

Issues arising from re-exposure ballot draft

The Board discussed two sweep issues related to the forthcoming re-exposure draft of proposed amendments to IAS 24 Related Party Transactions:

• disclosure of the extent of transactions with a state or state-controlled entities
• the length of the comment period

Disclosure of the extent of transactions with a state or state-controlled/ influenced entities

The staff presented proposed wording intended to capture concerns expressed by Board members about the disclosures that would be required about the extent of transactions with a state or state-controlled/ influenced entities. The revised wording would require the entity to disclose 'the extent of transactions with [the entities defined in the ED]'. Related explanatory guidance suggests that such disclosure would state whether transactions with the state or other entities controlled, jointly-controlled or significantly influenced by the state were 'significant or insignificant'. In addition, the reporting entity would 'not [be] required to analyse those transactions by counterparty or by nature and need not provide detailed quantitative information about their extent'.

Several Board members stated that they did not like the proposed wording, which they thought did not communicate strongly enough the 'health warning' desired by the Board. These Board members were anxious to avoid boilerplate disclosure; they wanted meaningful disclosure that there might be significant related party transactions and where in the financial statements those transactions might be reported. They supported the intent of a suggestion from one Board member that disclosure be required of the 'nature and extent of these transactions in total for the state and all such entities, either qualitatively (for example, a significant portion of the revenues is transacted with state controlled entities) or quantitatively (for example, about one quarter of the sales)'.

The staff expressed concerns about the implied information accumulation obligation of this proposal and that to disclose information about the nature of the transactions (that is, where in the financial statements the effects might be recognised) implied a data obligation that the ED was designed to avoid.

The Chairman intervened to suggest that the staff redraft the requirement such that:

• A reporting entity could quantify the transactions with the state or other entities referred to in the ED.
• If it did not, the entity would be required to disclose whether transactions with the state or other entities referred to in the ED were significant, insignificant, or significance could not be determined by the reporting entity.
• If transactions were significant, the reporting entity would be required to disclose the nature of such transactions.

This suggestion was accepted by the Board.

Additional Disclosure Discussion

The Board agreed revised wording for the forthcoming ED of proposed changes to IAS 24. The ED will include the following paragraph:

17B However, a reporting entity shall disclose the following information about transactions with the state or other entities referred to in paragraph 17A:

(a) the name of the state and the nature of its relationship with the reporting entity (ie control, joint control or significant influence);

(b) the types of individually or collectively significant transactions with the state or such entities and a qualitative or quantitative indication of their extent. Types of transactions include those listed in paragraph 20; and

(c) the fact that the state or such entities are related parties as defined in IAS 24 but, as permitted by paragraph 17A, disclosures about related party transactions do not include transactions with that state or those entities.

There was no discussion.

The length of the comment period

The Board agreed that the comment period for the re-exposure draft should be 90 days rather than the more usual 120 days.

December 2008: IASB re-exposes proposed related party standard

On 11 December 2008, the IASB published a revised exposure draft (2008 ED) proposing to amend IAS 24 with respect to 'relationships with the state'. The purpose of the 2008 ED is to simplify the disclosure requirements that apply to state-controlled entities under the existing IAS 24. Prior to a revision of IAS 24 in 2003, state-controlled entities were exempted from the related party disclosures. That exemption was removed in the 2003 revision, which took effect in 2005 and continues in force today. Therefore, currently, profit-oriented state-controlled entities that use IFRSs must disclose transactions with other state-controlled entities. In those jurisdictions, such as China, where state-controlled entities are a major segment of the economy, the volume of disclosures under the requirements of the current IAS 24 has become burdensome and unwieldy, impairing understandability and usefulness of the financial statements.

In February 2007 the IASB published an exposure draft (2007 ED) of proposals to simplify the 2003 requirements by providing exemptions for transactions that met specified conditions. However, many respondents to the 2007 ED said that the proposed exemptions are insufficient and the revised standard would still be too complex.

Under the 2008 (revised) ED, the revised exemption would not require state-controlled entities to assess the extent of state influence. It would exempt such entities from providing full details about transactions with other state-controlled entities and the state. Instead, (unlike the 2007 ED) the 2008 ED would require general disclosures about the types and extent of significant transactions.

Comments are requested by by 13 March 2009. Click for Press Release (PDF 47k). The ED is available on the IASB's Website until the end of the comment period.

The 2007 ED also proposed to amend the definition of a related party to clarify the intended meaning and remove inconsistencies. Respondents were largely in agreement with the revised definition of a related party. The IASB intends to finalise the definitions of a related party and of a related party transaction without further exposure (apart from one minor matter raised in the 2008 ED) and will issue them when it issues the amendments resulting from the 2008 ED.

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter (PDF 124k) explaining the proposals in the ED.

Discussion at the July 2009 IASB Meeting

The Board considered an analysis of the comment letters on the 2008 exposure draft (ED) Relationships with the State, which proposed amendments to IAS 24 Related Party Disclosures. The Board reiterated that it did not want to overhaul the basis of related party disclosures but, rather, address some specific issues that have arisen in applying it.

Exemption from disclosure for state-controlled entities

The Board first addressed the issue of the scope of the proposed exemption. The staff recommended retaining the exemption as proposed by the 2008 ED. The staff noted that most of the respondents to the ED supported the proposed exemption, as it overcomes the obstacles to identify all related parties and provide a balance between required disclosures and costs to compile it. A minority of constituents (mainly from China) commented that state-controlled entities should be exempted from IAS 24 altogether. On the other hand, some constituents were concerned that the proposed exemption is too broad and would lead to loss of information in the financial statements. The concerns of constituents seemed to be fuelled by the financial crisis and the absence of a level playfield for private FSI institutions in comparison with those bailed out by the governments.

The main issue of discussion was whether the exemption is applied for vertical groups (for example, in separate financial statements of a subgroup containing state controlled parent and its subsidiaries). Several Board members felt uncomfortable to grant such an exemption to state controlled parent because comparable private companies would have to comply with full requirements of IAS 24. They did not see any difference whether the group was state-controlled or private controlled. The staff responded that as state influenced directly the decisions of the parent and subsidiaries, the exemption is appropriate. Moreover, the staff was concerned about the potential level of randomness in the disclosures as the exemption would be based on the legal structure (if the entity is state controlled or is part of the state itself). One Board member responded that he would rather see tension on the level of definition of state rather than see on the level of companies having different requirements. Several Board members noted that the exception was proposed mainly for the jurisdictions where the level of state ownership is rather pervasive, to avoid excessive disclosures of routine transactions that have no user benefit.

After substantial discussion in which many Board members expressed their concerns that the Board would create two different regimes for operations for comparable entities (a 'non-level playing field'), most of the Board members said that the wider exemption was appropriate as long as it is supplemented by additional disclosures. Finally, the Board voted for the wider exemption being applied.

The Board continued its discussion with the proposed disclosure requirements when exemption applies. Most Board members noted that some additional disclosures are needed to provide a summary of significant transactions. The Board supported the staff in not requiring additional disclosures of direct related party relationships (vertical groups) as those disclosures are provided by other IFRSs requirements.

The staff proposed to add disclosures about individually significant transactions (for example, disclosures to regulators). Some Board members proposed that disclosure about collectively significant transactions should be added. The Board agreed.

Several Board members were concerned by the usage of the word 'significant' and proposed to replace it with 'material'. Nonetheless, the Board decided to retain the significant and define it both qualitative and quantitative sense. Several Board members seemed to be concerned that similar requirements are not placed on private companies as well, as those could improve the quality of disclosures as private companies may face similar difficulties in providing the disclosures as the state controlled entities.

Definition of state

The staff proposed to change the proposed definition of state by the definition of the government already established in IFRSs (such as in IAS 20) as this definition is more comprehensive. One Board member was concerned that this definition would not capture all types of rulers who do not see themselves necessarily as the government. Another Board member was concerned about whether the proposed definition of government from IAS 20 would capture, for example, the US Federal Reserve Board. The Board concluded that capturing all the different notions of state involvement would be very difficult whichever definition is adopted. The Board approved the change of the definition to that used in IAS 20 encompassing statutory power and governing jurisdiction. The Board deliberately did not include regulatory power in explanation of the definition.

Revised definition of related party

The Board then discussed the revised definition of related party. The Board agreed with the staff proposal to remove anomalies in the definition of a related party by agreeing that two entities are related to each other whenever a person or a third party has joint control over one entity and that person (or a close member of that person's family) or a third party has joint control or significant influence over the other entity.

The staff also discussed the apparent inconsistency with the use of significant voting power concept as there was no definition of significant voting power in IAS 24. The staff proposed to delete the reference to significant voting power from the proposed standard as it increases its complexity and generate anomalies. Moreover, the undefined notion is hard to distinguish from significant influence and leads to counterintuitive conclusions. The Board agreed.

Other issues

The Board briefly touched two other issues: consequential amendments to IFRS 8 and the question whether an entity can be 'key management personnel'. The Board stated that it has already discussed these issues and reaffirmed its conclusions.

Timetable and transition

The Board approved the proposed timetable which expects the publication of the final standard in November 2009 and directed the staff to proceed to drafting the amendments.

The Board diligently examined the proposed retrospective application of the government controlled entities exemption with immediate effect. Most Board members felt that retrospective application would lead to undue complexity as now the disclosures are more extensive and this requirement would lead to re-examining them. The Board decided to apply the requirements prospectively.

Most of the Board members agreed that amendments to the definition of related party shall be applied retrospectively, with the effective date on 1 January 2011.

The Board examined also the need for re-exposure of the draft. Two Board members felt that re-exposure would be welcome due to several changes made, but majority of the Board thought that changes made to the ED were insignificant.

Overall, the Board approved the Amendment to the Standard with one dissenting opinion. One Board member dissented on issuing of the standard as he felt that the amendment does not create a levelled playing field for private and government-controlled entities.

Discussion at the September 2009 IASB Meeting

The Board reconsidered its tentative decisions with respect to the transitional requirements for the amendments to IAS 24.

In July 2009, the Board had agreed that the amendments would be applied prospectively from the effective date, 1 January 2011.

The Board noted that the main changes to IAS 24 were:

• A partial exemption from the disclosure requirements for transactions between a government-controlled reporting entity and that government or other entities controlled by that government; and
• Amendments to the definition of a related party.

The Board agreed that the partial exemption from the disclosure requirements should be required to be made retrospectively, because this should result in a reduction of 'clutter' in the footnotes and an identification of better information about the nature and extent of significant transactions with the government.

In addition, the Board agreed that the definition of a related party should also be applied retrospectively from the effective date.

In addition, the Board agreed that an entity should be permitted to adopt the partial exemption for government-controlled entities before the effective date even if it does not adopt the amended definition of related party until a later date.