• 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

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.