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Related Party Disclosures (Amendments to IAS 24)

Date recorded:

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.