Related Party Disclosures - Amendments to IAS 24

Date recorded:

At the October 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.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.