I have often been asked about the purpose of IAS 24, or recently, I was asked specifically about the role of IAS 24 in “regulating an entity’s transactions with ‘friends’”. Specifically, the question related to the [incorrect] presumption that IAS 24 required a company to disclose the “fair value” of transactions with related parties, or at least state whether the transactions have been undertaken at “arm’s length prices”.
Let’s get this straight… IAS 24 is not a measurement standard! It neither requires transactions with related parties to be restated to a “fair value”, nor does it require a commentary by the entity as to whether the transactions undertaken have been conducted at “arm’s length”. IAS 24 simply requires the identification of all related parties (a simple list of “who”, some of which is then disclosed), disclosures in all cases about parent-subsidiary relationships, disclosure in all cases about aspects of key management personnel remuneration (actual amounts paid, so no question of the “value” of such remuneration), and then certain details where there have been actual transactions with related parties. The disclosure of related party transactions includes the amount, and year end balances if any. So nowhere does the standard require the entity to tell us about the “value” of any transactions.
However, an entity may wish to voluntarily add to the disclosure of amount (terms, y/e balance etc) of related party transactions a commentary such as “These transactions were all conducted on normal commercial, arm’s length, terms”. Why not? It is trying to allay the reader’s concern that there might be something “special” about the price and terms of the transaction. IAS 24 allows such a disclosure to be made, but paragraph 23 requires that such an assertion can only be made “if the terms can be substantiated”. Thus evidence will have to be presented by the preparer that the transactions were on arm’s length terms.
So in conclusion, the purpose of IAS 24 is to bring to the reader’s attention the possibility that the statement of financial position and/or statement(s) of financial performance may have been affected by the existence of related parties and transactions with them.
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