Related party disclosure under IFRS refers to the information companies must provide in their financial statements about transactions and relationships they have with related parties. This disclosure is essential for users of financial statements to understand the potential impact of these relationships on the company's financial performance and position.
Who are Related Parties?
IFRS defines related parties as entities that have the ability to control or significantly influence the other party's decisions or that are subject to common control. Some common examples of related parties include:
- Parent and subsidiary companies
- Subsidiaries of the same parent company
- Joint ventures
- Associates
- Key management personnel
- Close family members of key management personnel
- Entities that have significant influence over the reporting entity
What Information Must be Disclosed?
Companies are required to disclose the following information about related party transactions and relationships:
- Nature of the relationship
- The nature of the transaction
- The amount of the transaction
- The terms of the transaction
- Any outstanding balances
- Any guarantees or indemnities provided
Why is Related Party Disclosure Important?
Related party disclosures are crucial for various reasons:
- Transparency: They provide transparency into the company's relationships with related parties, allowing users to assess potential conflicts of interest or undue influence.
- Fairness: They ensure fair and accurate reporting of the company's financial performance, as transactions with related parties may not be conducted at arm's length.
- Decision-making: They help users make informed decisions about investing in or lending to the company.
Examples of Related Party Disclosures
Here are some examples of related party disclosures that companies might provide in their financial statements:
- A company may disclose a loan it received from its parent company, including the interest rate, maturity date, and any guarantees provided.
- A company may disclose the sale of goods to a subsidiary at a specific price, highlighting any differences from the market price.
- A company may disclose the compensation paid to its key management personnel, including any bonuses or stock options.
Conclusion
Related party disclosure is a vital aspect of financial reporting under IFRS. By providing transparent information about transactions and relationships with related parties, companies help users understand the potential impact of these relationships on their financial performance and position.
