In plain words
A company owned by the government deals with many other state-owned bodies. Listing every one of these dealings would be long and unhelpful. The rules let it give a shorter disclosure: who the government is, the big individual deals, and a general picture of the routine ones. Dealings with its own associates and joint ventures, and with its senior managers, must still be disclosed in full.
Why it matters
A DFI wholly owned by the government deals constantly with other government-related entities: it places deposits with state-owned banks, borrows from government funds, co-invests with the sovereign wealth fund, receives guarantees from the ministry of finance, and lends to or invests in state-owned enterprises in partner countries. Without relief, every one of these would require full related party disclosure. IAS 24 allows a government-related entity to drop the detailed paragraph 18 disclosures for transactions with the controlling government and entities related only through that government, but only if it gives substitute disclosures of the government's identity and of individually and collectively significant transactions. DFIs often either over-disclose long lists of routine items, or apply the exemption without the substitute disclosures, or wrongly extend it to their own associates, subsidiaries and key management personnel.
Diagnostic questions
Is the DFI controlled, jointly controlled or significantly influenced by a government, and which counterparties are related to it only because the same government controls, jointly controls or significantly influences them? Which counterparties are related for other reasons (the DFI's own subsidiaries, associates and joint ventures, key management personnel and their close family, entities they control) and therefore outside the exemption? Which transactions with government-related entities are individually significant because of their size, non-market terms, nature outside the normal course of business, disclosure to regulators or approval by the shareholder? What is the collective extent of routine transactions, such as deposits with state-owned banks? If the DFI is an investment entity, have transactions with fair-valued subsidiaries, which are not eliminated, been disclosed?
Recognition
- Build a related party register covering the government, government-related entities, the DFI's own subsidiaries, associates and joint ventures, and key management personnel and their related entities.
- Disclose the relationship with the government as parent and ultimate controlling party regardless of whether transactions occurred.
- Decide whether to apply the partial exemption for balances and transactions with the controlling government and entities related only through it; it is optional.
- If applied, give the substitute disclosures: the name of the government and the nature of the relationship; the nature and amount of each individually significant transaction; and a qualitative or quantitative indication of the extent of transactions that are collectively significant.
- Judge individual significance using the closeness of the relationship and the size, terms, nature and approval of the transaction.
- Give full paragraph 18 disclosures for all related parties outside the exemption, including associates, joint ventures, unconsolidated subsidiaries of an investment entity and key management personnel.
- Disclose key management personnel compensation in total and by category in all cases.
Measurement
IAS 24 prescribes no measurement; transactions with the government and its related entities are measured under the applicable Standards (for example a concessional loan from a government fund at fair value under IFRS 9, with any benefit treated as a grant or capital contribution). A statement that related party transactions were on arm's-length terms may be made only if it can be substantiated.
Presentation & disclosure
Disclose: (1) the government as parent and ultimate controlling party; (2) if the exemption is applied, the name of the government and the nature of its relationship with the DFI; (3) the nature and amount of each individually significant transaction with the government or government-related entities, such as capital injections, concessional borrowings, sovereign guarantees on the DFI's debt and large co-investments; (4) an indication of the extent of collectively significant transactions, such as the proportion of deposits placed with state-owned banks; (5) full details of transactions and balances with associates, joint ventures, unconsolidated subsidiaries and key management personnel; (6) key management personnel compensation by category.
Common mistakes
- Applying the exemption and disclosing nothing about government-related transactions
- listing every routine deposit and payment with state-owned entities, which obscures the significant items
- extending the exemption to the DFI's own associates, joint ventures and investment entity subsidiaries, which are related for reasons other than common government control
- omitting key management compensation on the basis that the DFI is government-owned
- treating every entity in which any ministry holds a share as related without assessing control, joint control or significant influence
- omitting the sovereign guarantee of the DFI's bonds as a significant transaction
- asserting arm's-length terms for concessional arrangements
Simple example
Al Waha Development Finance Company is wholly owned by the government and applies the IAS 24 exemption. During the year it holds a SAR 500,000,000 term deposit with a state-owned bank at 5% per annum, part of SAR 2,000,000,000 of deposits placed with state-owned banks (80% of its total deposits of SAR 2,500,000,000). It also borrows SAR 1,500,000,000 for ten years from a government development fund at 1% per annum, approved by the shareholder. Interest accrued on the term deposit: 500,000,000 x 5% = SAR 25,000,000. Journal entry at year end: Dr Accrued interest receivable 25,000,000 Cr Interest income 25,000,000 Disclosure under the exemption: the name of the government and that it controls Al Waha; the SAR 1,500,000,000 concessional borrowing from the government development fund, its terms and its accounting, as an individually significant transaction; and that SAR 2,000,000,000, or 80% of deposits, is placed with state-owned banks on commercial terms, as an indication of collectively significant transactions. Loans to Al Waha's own associates and the compensation of its key management personnel are disclosed in full.
Professional judgment
The main judgments are the boundary of the exemption and the threshold of significance. The exemption covers only parties related through the government; a state-owned enterprise in which the DFI itself holds 30% is related as the DFI's associate and needs full disclosure. Individual significance is judged on the closeness of the relationship and factors such as size, non-market terms, transactions outside the ordinary course, regulatory reporting and shareholder approval; for a DFI, capital injections, portfolio transfers, concessional funding and sovereign guarantees are almost always individually significant. Identifying which entities a government controls or significantly influences across ministries and funds can itself require judgment and good information from the shareholder.
Source basis
IAS 24 · Related Party Disclosures
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
Related issues
Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.