Understanding IND AS 24: Related Party Disclosures

Overview of IND AS 24

IND AS 24 is a standard issued by the Institute of Chartered Accountants of India (ICAI) that outlines the disclosure requirements for related party transactions in financial reporting. The objective of this standard is to enhance transparency and accountability by ensuring that entities disclose all transactions, outstanding balances, and relationships with related parties in their financial statements.

Related parties are individuals or entities that have the ability to control or significantly influence the management or operating policies of an entity, or have a significant interest in the entity's financial performance. Examples of related parties include a company's directors, key management personnel, shareholders, and their close family members.

The scope of IND AS 24 covers disclosure requirements for all transactions and outstanding balances between an entity and its related parties. It also includes disclosures related to the nature of relationships between related parties and the impact of related party transactions on the financial performance of the entity.

Entities must comply with IND AS 24 in their financial reporting. Failure to comply with this standard may lead to adverse consequences, such as penalties and legal action, which could have a detrimental impact on an entity's reputation and financial performance.

Definition of Related Party

As per IND AS 24, a related party is defined as a person or entity that has the ability to control, jointly control, or significantly influence the management or operating policies of an entity, or has a close family member that has such an ability. Examples of related parties include:

• Key management personnel of the reporting entity or its parent company
• The reporting entity's parent, subsidiaries, or fellow subsidiaries
• Associates of the reporting entity
• Joint ventures in which the reporting entity is a participant
• Individuals owning or controlling a significant portion of the voting power in the reporting entity
• Close family members of any of the above individuals or entities

The term "control" refers to the power to govern the financial and operating policies of an entity. "Significant influence" refers to the ability to participate in the financial and operating policy decisions of an entity, but not to govern those policies. "Joint control" refers to the contractually agreed sharing of control over an entity's financial and operating policies.

Disclosures Required

IND AS 24 requires entities to disclose certain information about their related party relationships and transactions. The disclosures required under this standard include:

• Identification of Related Parties: Entities must identify their related parties and provide details of the nature of their relationships. This includes identifying any parent entities, subsidiaries, fellow subsidiaries, associates, and joint ventures in which the entity is a participant.
• Related Party Transactions: Entities must disclose any material transactions that they have entered into with their related parties. This includes transactions for the sale or purchase of goods, services, and intangible assets, as well as any loans, guarantees, and other financial arrangements.
• Outstanding Balances: Entities must disclose any outstanding balances related to transactions with related parties at the end of the reporting period, including the terms and conditions of those balances.
• Nature of Relationships: Entities must disclose the nature of their relationships with related parties, including any contractual arrangements, such as management or service agreements, and any other significant factors that influence the terms of the transactions.
• Impact on Financial Statements: Entities must disclose the impact of any related party transactions on their financial statements, including the effect on the entity's financial position, results of operations, and cash flows.

The disclosures required under IND AS 24 should be made in the notes to the financial statements, and they should be specific, clear, and understandable. Entities should ensure that they disclose all related party transactions and relationships, even if those transactions are not material, to ensure transparency and accountability in their financial reporting.

Exemptions and Exceptions

While IND AS 24 requires entities to disclose all related party transactions and relationships, there are some exemptions and exceptions to the disclosure requirements. These include:

• Impracticality: If it is impractical to obtain the necessary information about related party transactions, the entity may be exempted from disclosure. However, this exemption is very narrow and should be used sparingly.
• Confidentiality: If the disclosure of related party transactions would breach confidentiality, the entity may be exempted from disclosure. However, this exemption is also narrow and should only be used in exceptional circumstances.
• Parent-subsidiary relationships: If the entity is a wholly-owned subsidiary of a parent company, it may be exempted from disclosing transactions with the parent company.
• Government-related entities: Government-related entities may be exempted from disclosing related party transactions with other government-related entities.

It is important to note that these exemptions and exceptions are limited and that entities should carefully consider whether they meet the criteria for exemption before deciding not to disclose related party transactions. Even if an exemption applies, entities should disclose the nature of the relationship with the related party and the reason for the exemption in the notes to the financial statements.

Entities should also be aware that the presence of an exemption does not relieve them of the responsibility to ensure that they are complying with the underlying principles of transparency and accountability in financial reporting.

Impact on Financial Reporting

The disclosure requirements of IND AS 24 can have a significant impact on financial reporting for entities with related party transactions. Here are some ways that the standard can impact financial reporting:

• Increased Transparency: The disclosure requirements of IND AS 24 increase transparency around related party transactions and relationships. This provides stakeholders with a more complete picture of an entity's financial position, performance, and risk exposure.
• Improved Accountability: The increased transparency can improve accountability by making it more difficult for entities to engage in transactions that are not in the best interests of the entity or its stakeholders. This can also help to prevent conflicts of interest and other unethical behavior.
• Changes in Financial Ratios: Related party transactions can have a significant impact on an entity's financial ratios. For example, a loan from a related party may result in a higher debt-to-equity ratio. The disclosure of related party transactions can help stakeholders to better understand the impact of these transactions on an entity's financial performance.
• Legal and Regulatory Compliance: Failure to comply with the disclosure requirements of IND AS 24 can result in legal and regulatory penalties. This can include fines, legal action, and damage to an entity's reputation.

Overall, the disclosure requirements of IND AS 24 can have a positive impact on financial reporting by promoting transparency, accountability, and ethical behavior. While complying with the standard may require additional resources and effort from entities, the benefits of increased transparency and accountability are likely to outweigh the costs.

Practical Examples

 Here are a few practical examples to illustrate how the disclosure requirements of IND AS 24 can impact financial reporting:

• Example 1 - Loans from Related Parties: A company borrows money from a related party, such as a director or a subsidiary. The company must disclose the loan in its financial statements, including the terms of the loan, the interest rate, and any collateral provided. Failure to disclose this transaction could result in legal and regulatory penalties.
• Example 2 - Sales to Related Parties: A company sells goods or services to a related party, such as a parent company or a subsidiary. The company must disclose the sale in its financial statements, including the value of the sale, the terms of the sale, and any adjustments made to the price. Failure to disclose this transaction could result in legal and regulatory penalties.
• Example 3 - Lease Arrangements with Related Parties: A company enters into a lease arrangement with a related party, such as a director or a subsidiary. The company must disclose the lease in its financial statements, including the terms of the lease, the rental payments, and any adjustments made to the lease terms. Failure to disclose this transaction could result in legal and regulatory penalties.
• Example 4 - Compensation of Key Management Personnel: A company pays compensation to its key management personnel, who are related parties. The company must disclose the compensation in its financial statements, including the nature of the compensation, the amount paid, and any adjustments made to the compensation. Failure to disclose this transaction could result in legal and regulatory penalties.

In each of these examples, the disclosure requirements of IND AS 24 require the company to provide information about the related party transaction. This information is important for stakeholders to understand the financial position and performance of the company, as well as any potential conflicts of interest or other risks associated with related party transactions.

Case studies

 Here are a few case studies related to IND AS 24 that illustrate how the standard can impact financial reporting:

• Case Study 1 - ABC Ltd. is a company that has entered into a lease arrangement with a related party, XYZ Ltd. The lease is for a property that is owned by XYZ Ltd. and is used by ABC Ltd. for its business operations. ABC Ltd. must disclose the lease arrangement in its financial statements, including the terms of the lease, the rental payments, and any adjustments made to the lease terms. Failure to disclose this transaction could result in legal and regulatory penalties.
• Case Study 2 - DEF Ltd. is a company that has borrowed money from a related party, GHI Ltd. GHI Ltd. is a subsidiary of DEF Ltd. The loan is for a significant amount and is being used by DEF Ltd. for its business operations. DEF Ltd. must disclose the loan in its financial statements, including the terms of the loan, the interest rate, and any collateral provided. Failure to disclose this transaction could result in legal and regulatory penalties.
• Case Study 3 - JKL Ltd. is a company that has sold goods to a related party, MNO Ltd. MNO Ltd. is a subsidiary of JKL Ltd. The sale is for a significant amount and is being used by MNO Ltd. for its business operations. JKL Ltd. must disclose the sale in its financial statements, including the value of the sale, the terms of the sale, and any adjustments made to the price. Failure to disclose this transaction could result in legal and regulatory penalties.

In each of these case studies, the disclosure requirements of IND AS 24 require the company to provide information about the related party transaction. This information is important for stakeholders to understand the financial position and performance of the company, as well as any potential conflicts of interest or other risks associated with related party transactions. The case studies illustrate the importance of complying with the disclosure requirements of IND AS 24 to avoid legal and regulatory penalties and maintain transparency and accountability in financial reporting.

Comparison with Other Reporting Standards

IND AS 24 is similar to other international accounting standards related to related party disclosures, such as International Financial Reporting Standard (IFRS) 15 and 16. However, there are some differences between IND AS 24 and other reporting standards.

One of the main differences is the scope of the standard. IND AS 24 applies to all types of related party transactions, including those involving key management personnel, whereas IFRS 15 and 16 only apply to revenue recognition and lease accounting, respectively.

Another difference is in the definition of related parties. IND AS 24 has a broader definition of related parties compared to IFRS 15 and 16, which may result in more related party transactions being subject to disclosure requirements.

In terms of disclosure requirements, IND AS 24 is similar to IFRS 15 and 16 in that it requires disclosure of the nature of the related party relationship, the transactions between related parties, and the terms and conditions of those transactions. However, IND AS 24 also requires disclosure of the names of the related parties, which is not required under IFRS 15 and 16.

Overall, while there are some differences between IND AS 24 and other reporting standards, the general principles and objectives of related party disclosures are consistent across these standards. The main goal is to provide transparency and accountability in financial reporting by disclosing related party transactions that may create conflicts of interest or other risks for stakeholders.

Conclusion

IND AS 24 plays a crucial role in financial reporting by requiring companies to disclose related party transactions. The standard aims to promote transparency and accountability in financial reporting, as related party transactions can create conflicts of interest or other risks for stakeholders. By providing information about related party transactions, companies can help stakeholders understand the financial position and performance of the company and identify any potential risks or opportunities associated with related party transactions.

The standard requires companies to disclose the nature of the related party relationship, the transactions between related parties, and the terms and conditions of those transactions. It also requires disclosure of the names of the related parties in some cases. Failure to comply with the disclosure requirements can result in legal and regulatory penalties.

While there are some differences between IND AS 24 and other reporting standards, the general principles and objectives of related party disclosures are consistent across these standards. Overall, compliance with IND AS 24 is essential for companies to maintain transparency and accountability in financial reporting and to avoid legal and regulatory penalties.

Disclaimer: This article provides general information existing at the time of preparation and author takes no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and author neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.