It's time to continue with Part 2 of IAS 24! (If you have not read Part 1, this is the link: https://tysonspeaks.blogspot.com/2019/08/ias-24-related-party-disclosures-part-1.html)
As a recap, under Paragraph 9 of IAS 24, part (a) of the definition deals with a person (i.e. when a person / real human being is related to an entity) and part (b) deals with an entity (i.e. when an entity is related to another entity). This post will focus on part (b) of the definition.
Let's look into Part (b)(i).
An entity is related to a reporting entity if the entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
The diagram above shows a group of company (parent with two subsidiaries and one sub-subsidiaries). All the four companies above are related to each other as they are in the same group.
Note: Subsidiary is a company that is controlled by the parent.
Part (b)(i) is quite simple. Let's look at Part (b)(ii) now.
An entity is related to a reporting entity one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
According to IAS 28,
An associate is an entity over which the investor has significant influence.According to IFRS 11,
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Those parties are called joint venturers.There are a few possible scenarios under part (b)(ii):
Scenario 1 - Associate or Joint Venture of the Other Entity
Generally, if a company is having an associate or joint venture, they are considered related (as shown below).
However, take note that the parent and Co A are not necessarily related party. More information are needed to assess whether they are related party.
Note: The associate and the joint venture are also related based on paragraph 9(b)(iv), which will be covered later.
Scenario 2 - A Group with Subsidiary, Sub-subsidiary, Associate and Joint Ventures
Let's now make some changes to the group structure in Scenario 1. Assuming that the parent is also having a subsidiary and sub-subsidiary as shown in the diagram below:
1. The parent, subsidiary and sub-subsidiary are in the same group. As such, they are related to each other.
2. As the parent also owns the associate and joint venture and the parent is in the same group with subsidiary and sub-subsidiary, the associate and the joint venture are also related to the subsidiary and sub-subsidiary.
Scenario 3 - Associate or Joint Venture of Subsidiary
1. The parent, subsidiary A and subsidiary B are in the same group. As such, the three companies are related to each other.
2. The associate or joint venture is related to Subsidiary A due to associate or joint venture relationship.
3. As subsidiary A is part of the group with Parent and Subsidiary B, the associate or joint venture is also related to parent and subsidiary B.
Scenario 4 - Associate's Subsidiary or Joint Venture's Subsidiary
IAS 24 also mentions that:
An associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. Therefore, for example, an associate’s subsidiary and the investor that has significant influence over the associate are related to each other.
That's all for Part (b)(ii). We can now look into Part (b)(iii).
An entity is related to a reporting entity if both entities are joint ventures of the same third party.
Consider the following scenario:
Joint Venture 1 and Joint Venture 2 are both jointly owned by Co A and Co B. As such, Joint Venture 1 and Joint Venture 2 are related.
However, take note that the Co A and Co B are not necessarily related party. More information are needed to assess whether they are related party.
Let's now look into Part (b)(iv).
An entity is related to a reporting entity if one entity is a joint venture of a third entity and the other entity is an associate of the third entity
For this part, we will refer back to Scenario 1 in part (b)(ii) above.
Refer to the purple arrow above, the associate and joint venture are related because they relate to the same company (i.e. the parent).
However, two associates of the parent are not related party (as shown below):
This is because common significant influence is not sufficiently strong to create a related party relationship. In other words, if you can only somehow influence the associates, you can't really have a strong power to force the two associates to be involved in certain transactions.
We can now look into Part (b)(v).
An entity is related to a reporting entity if the entity is a post‑employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
This paragraph deals with a post-employment benefit plan under IAS 19. Basically, the defined benefit plans are related to the company or related entities of the company.
Next, let's look at Part (b)(vi) and Part (b)(vii) together.
An entity is related to a reporting entity if the entity is controlled or jointly controlled by a person identified in (a).
An entity is related to a reporting entity if a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
As a recap, part (a) of the definition talks about:
A person or a close member of that person’s family is related to a reporting entity if that person:
(i) has control or joint control of the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.As such, there are a few possible scenario under part (b)(vi) and part (b)(vii).
Scenario 1
Scenario 2
Let's change scenario 1 a bit by bringing in the close member of that person's family (i.e. the wife now appears!).
In this case, the two entities are also related to each other.
Scenario 3
Now let's look at the case where a person and his close family member jointly controls two entities.
In this case, the two entities are also related to each other.
Scenario 4
Let's look into the scenarios where a person has control or joint control over one entity and that person (or his close family member) has significant influence or is a key management personnel of the another entity.
or
Scenario 5
For this scenario, we have one person who is having control or joint control over one entity (Co A) and that person (or his close family member) is the key management personnel of the parent (Co B) of the other entity (Co C).
or
In these cases, Co A and Co B are related. As Co B can also controls Co C, we can therefore say that Co A is also related to Co C.
Scenario 6
However, do take note that if one person is having significant influence over one entity and he (or his close family member) is also having significant influence over another entity, the two entities are not related, as shown below.
or
As mentioned previously, this is because common significant influence is not sufficiently strong to create a related party relationship.
Scenario 7
You should also take note that if two entities are having common director or common key management personnel, the two entities are not necessarily related party, as shown below:
Whether or not Co A and Co B are related would depend on whether the person has the power to control both companies or not.
Scenario 8
Same goes to the case where a person is a key management personnel of a entity and that person have significant influence over another entity, the two entities are also not related party, as shown below:
An entity is related to a reporting entity if the entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.
Sometimes, an entity might be outsourcing their management services to a management company. This management company provides key management service to the entity. Such management company is considered related to the entity (as shown below, the management company is related to the parent).
If the management company provides key management personnel service to the parent of the subsidiary, the subsidiary is also considered as related to the management company.
Phew! Finally we come to an end of the definition! What a longgggggg post.
As a final note, I think I should highlight you on the scenarios where two entities are not related party according to paragraph 11 of IAS 24:
(a)
two entities simply because they have a director or other member of key management personnel in common or because a member of key management personnel of one entity has significant influence over the other entity. (highlighted in Scenario 7 and 8 of Part (b)(vi) and Part (b)(vii) above)
(b)
two joint venturers simply because they share joint control of a joint venture. (highlighted in Part (b)(iii) above)
(c)
(i) providers of finance,
(ii) trade unions,
(iii) public utilities, and
(iv) departments and agencies of a government that does not control, jointly control or significant influence the reporting entity, simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision‑making process).
(d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence.
Wishing you have a nice day ahead of you and hope that you learnt something from these posts!
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