Chapter 23: Related-Party Disclosures
Perspective and Issues
Transactions between enterprises that are considered "related parties" (as defined by IAS) must be adequately disclosed in financial statements of the reporting entity. Such disclosures are commonly required, and most accounting standard-setting bodies around the world have created similar mandates. The rationale for compelling these disclosures is based upon the concern that enterprises which are related to each other, either by virtue of their ability to "control" or exercise "significant influence" (both as defined) usually have leverage in the setting of prices to be charged. If these were simply mingled with transactions with normal arm's-length customers or vendors, the users of the financial statements would be impeded in their ability to project future earnings and cash flow for the entity. Thus, in order to ensure transparency a reporting enterprise is required to disclose the nature, type, and components of its transactions with related parties.
IAS 24 addresses the related-party issue and prescribes extensive disclosures. This standard became effective in 1986, and apart from a reformatting in 1994, no substantive changes or revisions have been made to it. However, the IASB has, as part of its Improvements Project, proposed a number of changes to the standard, which if adopted will be published as amended IAS 24 in 2003. (The proposed changes are set forth at the conclusion of this chapter.)
Although IAS 24 recognizes states "related-party relationships are a normal feature of commerce and business," it nevertheless recognizes that a related-party relationship could have an effect on the financial position and operating results of the reporting entity, due to the possibility that transactions with related parties may not be effected at the same amounts as are those between unrelated parties. For that reason, extensive disclosure of such transactions is deemed necessary to convey a full picture of the entity's position and results of operations.
While IAS 24 has been operative for well over a decade now, one notices that related-party transactions are still not being disclosed properly in all instances. This is probably due to the perceived sensitive nature of such disclosures. As a consequence, even when footnotes to financial statements that are captioned "related-party transactions," are presented, it is often fairly evident that the full gamut of disclosures as required by IAS 24 are not included. There seems to be a particular resistance to reporting certain types of related-party transactions, such as loans to directors, key management personnel, or close members of the executives' families.
IAS 1 demands that there be full compliance with all IAS as a prerequisite to making a claim that financial statements have been prepared in conformity with IAS. This requirement extends to the disclosures to be made as well. As a practical matter, it becomes incumbent upon the auditors to ascertain whether disclosures, including related-party disclosures, comply with IAS when the financial statements represent such.
Related-party disclosures are prescribed by most accounting standards around the globe, including US GAAP and UK GAAP. The US GAAP counterpart of IAS 24 is SFAS 57, which was issued in 1982. On the other hand, the UK standard, FRS 8, is a comparatively recent offering on the subject, having been issued in 1995. There are some significant differences between both the US and UK standards and IAS 24; however, in general, these three standards could be considered similar to each other.
IAS 1, 5, 8, 24, 27, 28, 30