IAS 24 Question 1
QUESTION 1 – IAS 24 Related Party Disclosures (ICAP C6 S07)
Following transactions were carried out by Yellow Limited during the year ended June 30, 2006.
(i) Mr. Sharp, a well-known management consultant was hired, to conduct a three weeks
workshop on time management for the staff of the company at a fee of Rs. 0.5 million. Mr.
Sharp is the son of the Chief Executive Officer.
(ii) A loan of Rs. 30 million was obtained from Blue Bank Limited. The loan was negotiated by
Mr. Slim, General Manager Finance of Yellow Limited, who was formerly a senior executive
of the Bank.
(iii) Three used delivery trucks of the company were sold to Red Supplies Limited, which
supplies approximately 60% of the total raw material used by the company.
(iv) Granted interest bearing loan to its Chief Executive Officer for construction of house in
accordance with the company’s policy relating to employees’ benefit.
(v) Paid mobilization advance of Rs. 9 million against a construction contract to Orange Limited
which is owned by Mr. Clear, a member of a reputed business family. Two influential
directors of the company are nephews of Mr. Clear.
(vi) The company awarded a contract for plant maintenance services to its subsidiary Brown
(Pvt.) Limited effective August 01, 2007.
(vii) The company has nominated a director in Purple Limited who participates actively in its
operational decisions. However, no business relations exist between the two companies.
Required:
For each case, discuss the requirement of IAS 24 (Related Party Disclosures) as regards the
following disclosures in the financial statements for the year ended June 30, 2006:
(a) Related party relationship; and
(b) Related party transactions. (14)
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IAS 24 Question 1
ANSWER 1 – IAS 24 Related Party Disclosures (ICAP C6 S07)
(i) Mr. Sharp is a related party as he is son (close family member) of the CEO (member of key
management personnel) of the company. [IAS 24.9(a)(iii)]
The fee for training Rs. 0.5 million paid to Mr. Sharp shall be disclosed alongwith nature of
related party relationship.
(ii) Blue Bank Limited is not a related party as former employee does not create any such
relation. [IAS 24.11(c)(i)]
No disclosure is required under IAS 24.
(iii) Red Supplies Limited is not a related party as significant volume of business does not
create related party relationship unless significant influence can be exerted. [IAS 24.11(d)]
No disclosure is required under IAS 24.
(iv) CEO is related party being member of key management personnel. [IAS 24.9(a)(iii)]
The amount of loan granted alongwith terms and condtions including rate of interest and
outstanding balance shall be disclosed.
(v) Generally nephews are not considered close family members of a person. However, if Mr.
Clear is able to influence his nephews, he shall be considered a related party. [IAS
24.9(a)(iii)]
If considered related party, the mobilization advance of Rs. 9 million shall be disclosed.
(vi) Brown (Pvt) Limited is a related party being a subsidiary. [IAS 24.9(b)(i)]
Nature of related party relationship shall be disclosed. Awarding a contract itself is not a
transaction but the contractual commitment needs to be disclosed.
(vii) The active participation of director nominated by Yellow Limited indicates the significant
influence over Purple Limited. [IAS 24.9(b)(ii)]
No disclosure is required under IAS 24.
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IAS 24 Question 1
Examiner Comments
This question consisted of seven parts. The students were required to discuss each case as
regards the disclosure of related party relationship and related party transactions, in the financial
statements. The mistakes which many students repeated were as follows:
They gave their decisions without discussing the basis of their decision.
In part (ii) many students were of the view that since Mr. Slim was formerly a senior
executive of the bank, the bank is a related party of Yellow Limited. However, there is no
such condition in IAS 24.
A major supplier as was the case in part (iii) could be a related party only if it can influence
the decision of its customer. Most students reached their conclusions, both in the
affirmative and otherwise, without giving any reasons thereof.
In part (iv) many examinees incorrectly stated that any benefit given to the CEO in
accordance with the Company’s policy for all employees, need not be disclosed in the
financial statements.
In part (v) it was clear that a related party relation shall be deemed to exist if Mr. Clear is in
a position to influence his nephews. Most of the students were not able to answer correctly.
In part (vi) and (vii), related party relationship existed but no transactions were carried out.
Most of the students ignored this fact and declared that the relationship as well as the
transaction was required to be disclosed in the financial statements.
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