Related party transactions and disclosures · IAS 24

In plain words

Contracting groups often buy steel, rent equipment or subcontract work from companies owned by the same family or shareholders. The question is whether these deals need special accounting. They are recognised and measured exactly as if with an outside party. What changes is disclosure: the company identifies all related parties, discloses the transactions, balances and key management pay, and documents whether pricing matches arm's length terms.

Why it matters

Related party transactions with affiliated subcontractors, equipment rental companies or material suppliers under common ownership are pervasive in contracting groups and are a frequent area of regulator and auditor scrutiny because they can be used (intentionally or not) to shift margin between entities, obscure whether pricing is at arm's length, or hide key management compensation, omitting them from disclosure undermines the reliability of the financial statements even when the underlying transaction accounting is otherwise correct.

Diagnostic questions

Does the contractor use subcontractors, material suppliers, or equipment lessors owned or controlled by the same shareholders, parent, or key management personnel? Are pricing terms with these related parties benchmarked against comparable third-party quotations and is that comparison documented? Have all related party balances, including loans, guarantees, and cost allocations between group entities, been identified and disclosed regardless of whether pricing is at arm's length? Does the disclosure cover key management personnel compensation and close family member transactions, not only corporate related parties?

Recognition

Map the group's ownership and control structure to identify all related parties: parent, fellow subsidiaries, entities under common control or significant influence, key management personnel and their close family members, and entities controlled or significantly influenced by them.
Identify all transactions and outstanding balances with those parties (subcontract awards, equipment rentals, material supply, loans, guarantees, key management compensation) regardless of whether the terms are commercial or non-commercial.
Recognize and measure the underlying transaction under the applicable IFRS (e.g. IFRS 15 for the subcontract cost, IFRS 16 for a lease from an affiliated equipment company), related party status itself does not change the recognition/measurement of the transaction.
Separately assess and document whether the terms are equivalent to those that would apply in an arm's length transaction, since this assessment (not the underlying accounting) is often what regulators and auditors focus on.
Maintain a related party register updated for changes in ownership or key management during the period.

Measurement

Measure the underlying transaction (subcontract cost, equipment rental expense, loan receivable/payable) under the applicable standard exactly as for an unrelated party, related party status does not itself create a different measurement basis unless the transaction's terms are so far from market terms that a component should be recharacterized (e.g. an interest-free 'loan' that is in substance a capital contribution or distribution). Where terms are not at arm's length, quantify the difference for disclosure purposes even though no separate accounting adjustment is typically required unless recharacterization is warranted.

Presentation & disclosure

Disclose: (1) the nature of related party relationships (control, significant influence, key management) even where no transactions occurred in the period; (2) the amount of transactions and outstanding balances by category (subcontract costs, rentals, supplies, loans, guarantees) and by related party; (3) terms and conditions, including whether secured and the nature of consideration; (4) key management personnel compensation by category (short-term, post-employment, other long-term, termination); (5) any provision for doubtful debts related to related party balances and expense recognized on such doubtful debts.

Common mistakes

Omitting a related party from the disclosure population because the relationship is indirect (e.g. a subcontractor owned by a close family member of a director, or an entity under common control via a different holding structure) rather than a direct shareholding
disclosing only the net balance with a related party rather than gross transaction volume and terms
failing to identify or disclose key management personnel compensation in full (including non-cash benefits, end-of-service accruals attributable to key management, and amounts paid via a management company)
assuming a transaction is automatically at arm'
s length simply because a written contract exists, without assessing whether the pricing is actually market-consistent
not updating the related party population when ownership or directorships change during the year.

Simple example

A contracting group awards a SAR 12,000,000 steel supply subcontract to a fabrication company owned by the same family shareholders (a related party). The subcontractor is paid according to normal commercial terms, and management benchmarks the pricing against two independent quotations obtained for similar scope, confirming it is materially consistent with arm's length terms.
Journal entry to recognize the subcontract cost as work is performed (matching the main contract's own progress recognition), e.g. SAR 4,000,000 in the period:
Dr Cost of construction - subcontracted steel works 4,000,000
Cr Accounts payable - related party 4,000,000
No special related party accounting adjustment is needed since the transaction is measured identically to a third-party subcontract; the SAR 12,000,000 total contract value, the SAR 4,000,000 recognized in the period, the outstanding related party payable balance, and the benchmarking basis for arm's length pricing are all disclosed in the related party note.

Professional judgment

Identifying the full population of related parties requires judgment about indirect relationships and 'close family members' (a term the standard defines broadly but which requires understanding actual family and business relationships, not just the formal shareholder register) and about entities under common control through complex or opaque ownership structures common in family-owned contracting groups. Assessing whether related party pricing is 'equivalent to arm's length terms' is itself judgmental in the absence of a truly comparable independent transaction, especially for specialized subcontract scopes where few independent benchmarks exist; disclosure of the assessment methodology (not just a bare assertion) is the more defensible practice where the conclusion is finely balanced.

Source basis

IAS 24 · Related Party Disclosures

Paragraph references

IAS 24.9IAS 24.18IAS 24.23

Verified against the official standard texts used in the IFRS Expert skill.

IAS 24 Related Party Disclosures

Issued: November 2009 (revised) · Effective: 1 January 2011

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.