In plain words
A hospital may buy laboratory or pharmacy services from businesses partly owned by its own doctors or directors. The question is how this affects the accounts. The transaction is measured normally under the relevant standard; related party status does not change the numbers. However, the hospital must identify these relationships, disclose the transactions, balances and key management pay, and document whether prices match arm's length terms.
Why it matters
Undisclosed physician-ownership and referral relationships are both a financial reporting risk and a regulatory/governance red flag; investors, auditors and health regulators specifically look for related-party referral patterns that could indicate self-dealing, so incomplete identification undermines trust in governance even when pricing is technically at arm's length.
Diagnostic questions
Do any physicians, directors or senior managers hold ownership interests in referring clinics, labs, pharmacies or suppliers the entity transacts with? Are referral, supply or service arrangements with those parties priced on terms consistent with arm's-length transactions, and is that comparison documented? Is key management compensation, including any physician profit-sharing or incentive arrangement, identified and disclosed separately from ordinary payroll?
Recognition
1) Build and maintain a related-party register covering physicians, directors and senior management with ownership interests in referring clinics, labs, pharmacies or suppliers the entity transacts with, including indirect ownership through holding structures or close family members. 2) For each identified related party, capture the nature of the relationship, the type of transaction (referral fees, service arrangements, supply contracts) and whether terms differ from unrelated-party arrangements. 3) Apply the applicable measurement/recognition standard to the transaction itself (revenue, leases, purchases), IAS 24 does not change measurement, only triggers disclosure. 4) Separately identify and disaggregate key management personnel compensation by component (short-term, post-employment, share-based, termination, other long-term). 5) Refresh the related-party register periodically (at least annually, and on new physician recruitment/departure or ownership changes) as a governance process, not a one-off exercise. 6) Assess whether pricing is consistent with arm's length terms and document the basis, since disclosure applies regardless of the outcome.
Measurement
Assess and disclose the terms and conditions of related party transactions, including whether pricing is consistent with arm's length terms, using observable market comparables where available; identify all entities and individuals meeting the related party definition, including close family members of key management who could influence or be influenced by that person in dealings with the entity; measurement of the underlying transaction follows the relevant standard (IFRS 15, IFRS 16, etc.) unaffected by the related-party status itself.
Presentation & disclosure
Disclose the nature of relationships (control, significant influence, key management, close family); disclose transaction amounts and outstanding balances by category of related party; disclose key management personnel compensation by component (short-term, post-employment, other long-term, termination, share-based); disclose any guarantees or commitments with related parties; disclose whether terms are equivalent to arm's length and, if disclosed as such, the basis for that conclusion.
Common mistakes
- Failing to identify physician-owned entities or key management'
- s family-controlled suppliers as related parties, especially where ownership is indirect
- assuming market-rate pricing removes the disclosure requirement (it does not, IAS 24 requires disclosure regardless of pricing)
- omitting key management compensation disaggregation by benefit type, disclosing only a lump sum
- not refreshing the related-party register as physicians join or leave, or as ownership structures change
- disclosing transaction amounts without the required outstanding balance information.
Simple example
A hospital pays SAR 4,000,000 annually to a diagnostic laboratory partly owned by two of its senior consultants; pricing matches published market rates, but the relationship is disclosed as related party. Recognizing the expense as normal operations (measurement unaffected by the related-party status): Dr Laboratory services expense 4,000,000 / Cr Trade payable - diagnostic laboratory 4,000,000; and on payment: Dr Trade payable - diagnostic laboratory 4,000,000 / Cr Cash 4,000,000. No separate journal entry arises from the IAS 24 conclusion itself, the SAR 4,000,000 transaction amount and any outstanding balance are disclosed in the related-party note as a required disclosure item, not a distinct accounting entry.
Professional judgment
Identifying the full population of related parties, particularly indirect physician ownership through holding structures or family members, requires ongoing governance processes rather than a one-time exercise; a genuine grey area is where to draw the line on 'close family members' whose influence should trigger disclosure, and how to treat a physician who refers patients but has no ownership interest (generally not a related party under IAS 24 unless significant influence exists).
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.