From the IFRS Institute – June 4, 2021
Related party disclosures are a critical component of a company’s financial statements. They provide transparency on how its financial position and financial performance may be affected by transactions with related parties, which may or not be conducted on an arm’s length basis. Despite similar objectives, IAS 241 has incremental requirements to US GAAP2, such as the disclosure of key management compensation and transactions with government related entities. Here we summarize our selection of the Top 10 GAAP identification and disclosure differences.
What’s a related party?
IAS 24 requires companies to identify related party relationships and transactions. Determining who is a related party sometimes requires significant judgment. Related party relationships may result from direct or indirect control (including common control), joint control or significant influence. The definition of a related party is not limited only to entities within the same group. It may include individuals such as controlling investors and key management personnel, as well as their close family members, or even a post-employment benefit plan.
A company’s related party relationships and transactions can also take a variety of forms. These transactions may occur in the normal course of business, such as the purchase and sale of goods, cash pooling or central treasury functions, management services, and loans and guarantees. They may or may not be conducted on an arm's length basis.
What are the IAS 24 requirements?
IAS 24 has no special recognition or measurement requirements for related party transactions. However, it requires companies to disclose transactions and outstanding balances, including any commitments, with related parties. Only intragroup transactions eliminated in consolidation are exempt from disclosure in the consolidated financial statements.
The disclosures are both quantitative and qualitative, such as terms and conditions. The requirements apply regardless of whether the price is charged. A company should state that transactions are made on an arm’s length basis only if that statement can be substantiated.
Additionally, key management personnel compensation must be disclosed in total, and analyzed by component – i.e. short term, post-employment, other long-term and termination benefits, and share-based payments. The information is provided on a no-name basis (unless otherwise required by local regulation); however this disclosure often turns out to be highly sensitive, particularly for US private companies, because US GAAP does not require anything similar.
How is IAS 24 different from US GAAP and SEC Regulations?
While both US GAAP and IFRS Standards share similar objectives, certain differences exist in the identification and disclosure requirements. Certain measurement differences may also exist that may impair comparability – e.g. unlike under IFRS Standards, in a sale-leaseback between related parties, neither party makes an adjustment for off-market lease terms under US GAAP. Further, SEC regulations require certain additional disclosures in this area. Here we summarize our selection of Top 10 differences in identifying and disclosing related party transactions under IFRS Standards and US GAAP.