ACT504 Chap.2 Related Party Identification and Disclosure
Related Party Identification and Disclosure
A standard that prohibits nothing and remeasures nothing
The objective of the related party standard is to make sure a reader is alerted wherever material dealings with related parties could have shaped what the statements say about position and performance. It forbids no transaction and changes no measurement.
Its whole function is to put a reader in a position to ask a question they would otherwise not know to ask, which is why every examinable issue in it is a boundary decision about who counts.
Two doors, and testing at the wrong one loses the case
An individual, or someone close to them within their family, is related to a reporting entity where that person controls it, jointly controls it, holds influence short of control over it, or sits among the managers of the entity or of its parent.
An entity is related on an entirely separate set of conditions: membership of the same group, standing as one another's associate or joint venture, being two joint ventures of one third party, one joint venture and one associate of the same third party, a post-employment benefit plan for the employees of either, control or joint control by a person in the first list, and significant influence or key management status held by such a person.
Candidates who try to test an entity against the person conditions lose the group and joint venture cases entirely.
Four approaches that close the avoidance routes
Substance over form directs attention to the substance of a relationship rather than its legal form. Relationships are symmetrical, so where one entity is related to another, the reverse holds too.
Every direct control, joint control or significant influence relationship counts. And the grouping rules treat a person and close family as one party, and a parent with all its subsidiaries as one party. Applying the grouping rules before anything else usually collapses a question that looked like six relationships into two.
A fifth point sits beside them: influence short of control ranks alongside being one of the managers, and both rank below control or joint control, which is what decides whether a link can be chained through a common party.
The exclusions are where the questions live
Five situations do not by themselves create a related party relationship: two entities sharing a key manager, two venturers in the same joint venture, providers of finance, trade unions, public utilities and government departments engaged in normal dealings, and a customer, a supplier, a franchisor, a distributor or an agent trading in large volume with the entity.
Each carries the same qualifier, that they are not necessarily related parties, so an answer that names the excluded feature and then says what additional fact would change the result earns the mark that a bare negative does not.
Two disclosure sets, only one of which depends on anything happening
The immediate parent, the ultimate parent and the ultimate controlling party are named whether or not there were any transactions, and key management personnel compensation is disclosed in total and split into payments settled in shares, termination benefits, other long-term benefits, benefits arising once employment has ended, and benefits payable in the short term.
Where transactions exist, the nature of the relationship, the amounts, outstanding balances with their terms and any guarantees, provisions for doubtful debts on those balances and bad debt expense are added, separately for each category of related party.
A statement that transactions were on terms equivalent to arm's length ones may be published only where the entity can support it with evidence.
A transaction is wider than it sounds
A related party transaction is Any movement of resources, of services or of obligations between the entity and a related party, priced or not.
The final clause is the examinable part: an interest-free loan, a guarantee given, the free use of an asset and the settlement of another party's liability are all transactions. Sustainability-related transactions and commitments sit here too, so a multi-year funding commitment to a group member is disclosable before any money moves.
What this chapter covers
- 01
What the standard is actually for, and what it deliberately does not do
- 02
The person route into related-party status, and close family
- 03
The entity route, and the seven conditions it contains
- 04
Substance, symmetry, direct routes and grouping
- 05
Why significant influence ranks with the management relationship
- 06
Five situations that are not necessarily related-party relationships
- 07
How to write an exclusion so that it earns the mark
- 08
The disclosures that apply even in a year with no transactions
- 09
Transfers with no price, and sustainability commitments
Sort four relationships, and name the rule that settled each
- 4Classify each of the four, naming the condition or exclusion relied on.
- 4State what must be disclosed for each one you classified as related.
Key terms
- Related Party
- An individual, or a company, linked to the reporting entity by control, by joint control, by influence short of control, by management position or one of the enumerated entity conditions such as common group membership.
- Related Party Transaction
- Any movement of resources, of services or of obligations between the entity and a related party, priced or not. The absence of a price does not remove the disclosure.
- Key Management Personnel
- Those with authority and responsibility for planning, directing and controlling the activities of an entity. Their compensation is disclosed in total and split into five categories.
- Close Members of the Family
- Family members who may be expected to influence, or be influenced by, a person in dealings with the entity. They are treated as one party with that person for identification purposes.
- Post-employment Benefit Plan
- A plan providing benefits to employees after employment ends. A plan for the reporting entity's employees, or for those of a related entity, is itself a related party.
- Ultimate Controlling Party
- The person or entity at the top of the ownership chain. It is named in the disclosures whether or not the entity transacted with it during the period.
- Economic Dependence
- Reliance on a customer, supplier, franchisor or distributor for a significant volume of business. It is expressly outside the definition of a related party relationship on its own.
Related Party Identification and Disclosure FAQ
Is a major customer a related party if it takes most of our output?
Not on that fact alone. The standard expressly excludes a customer, a supplier, a franchisor, a distributor or an agent, where the only link between them is the dependence a large flow of business creates. The reason is that the standard targets parties whose interest could distort a price or a term, and a buyer with bargaining power has no stake in the seller's reported result.
Add a shareholding large enough to give significant influence and the answer changes, which is the sentence worth writing.
Do we disclose anything if there were no related party transactions this year?
Yes. The naming requirements are independent of transactions: the immediate parent, the ultimate parent and the ultimate controlling party are disclosed regardless. Key management personnel compensation is also disclosed, in total and split into payments settled in shares, termination benefits, other long-term benefits, benefits arising once employment has ended, and benefits payable in the short term.
What can be omitted in a quiet year is the transaction-level detail, because there is none.
Are two companies with the same investor related to each other?
It depends on the strength of the link. Where the common investor controls or jointly controls both, they are members of the same group or are otherwise caught, and they are related. Where the investor only has significant influence over both, they are not, because significant influence ranks with the key management relationship and the entity conditions do not chain through it. Each of them is still related to the investor.
Exam move
Open the related party note of any annual report and try to reconstruct, for each name in it, which condition put it there. Then look for the categories that are missing and ask whether the entity genuinely has none or whether you would have expected one. Working from a real note is far more useful than re-reading the conditions, because the note forces you to apply the grouping rules the way an examiner will.
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