IAS 24 Related Party Disclosures

Date recorded:

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.

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