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com/IFRS
Background
Identifying related party relationships can be a challenging and costly exercise particularly
for large multinational organisations. It requires the ability to identify and evaluate all types
of relationships up and down the organisational chart including those among and between
subsidiaries, associates, investees and any other entities that might be influenced by a
common set of owners or key management (or close family members thereof).
Reporting entities in some jurisdictions, such as China, face particular challenges where
transactions between entities that are controlled, jointly-controlled, or significantly
influenced by the same government (hereinafter referred to as “government-related
entities”) are common and represent related party transactions that are subject to
disclosure under IFRS. In addition, as a result of the increase in the number of government
‘bail-outs’ of businesses that has taken place during the past several years, the number of
related party relationships that are to be identified, quantified and disclosed will have
substantially increased for some entities.
In some respects, the definition of what a related party relationship represents, as set out
in the current IAS 24 Related Party Disclosures, has not helped matters due the complex
and cumbersome structure of the definition itself. In response to these issues, the IASB has
amended IAS 24 in an effort to simplify the identification of such relationships and
re-balance the extent of disclosures of transactions between related parties based on the
costs to preparers and the benefits to users in having this information available in financial
statements.
• When an entity assesses whether two parties are related, it will treat significant
influence as equivalent to the relationship that exists between an entity and a member
of its key management personnel. However, those relationships are not as close as a
relationship of control or joint control.
• If two entities are both subject to control (or joint control) by the same entity or person,
the two entities are related to each other.
• If one entity (or person) controls (or • However, the amended standard
jointly controls) a second entity and the changed the definition to address the
first entity (or person) has significant scenario where a person (or a close
influence over a third entity, the second member of that person’s family)
and third entities are related to each significantly influences two entities,
other. the entities are not related due to
• Conversely, if two entities are both insufficient influence.
subject to significant influence by the • Investments of members of key
same entity (or person), the two entities management personnel:
are not related to each other. • Currently in IAS 24, where the key
• If the revised definition treats one party management personnel of an entity
as related to a second party, the held an investment which resulted in
definition should also treat the second control or joint control, the investee
party as related to the first party, by was treated as a related party of the
symmetry. entity. The amendment provides that
The following related party relationships the reciprocal of this is also treated as
were affected by the change in the a related party (i.e., from the
definition: standpoint of the investee, the entity
is a related party of the investee).
• An associate of a subsidiary’s controlling
• Joint control:
investor:
• T
► he current definition states that
• Clarified that where an investor
when a person has joint control over a
controls a subsidiary and has
reporting entity and a close member
significant influence over an
of that person’s family has joint
associate, both the investor and the
control or significant influence over
subsidiary are related parties to the
another entity, the other entity is
associate.
related to the reporting entity.
• Changed the definition to include a
• This definition, however, does not
similar scenario where an investor
include the reciprocal of this
controls a subsidiary and has
relationship (i.e., from the standpoint
significant influence over an
of the other entity, the reporting
associate, both the investor and
entity is treated as a related party),
associate are related parties to the
nor does it deal with cases when a
subsidiary.
person or a third entity has joint
• Two associates of a person: control or significant influence over
• The definition has always stated that the two entities. The amended
where an entity invests in two definition includes these cases, to
associates, the associates are not treat similar relationships in a
regarded as related parties as there is consistent manner.
insufficient influence.
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