In plain words
Real estate groups often buy land from shareholders, award contracts to affiliated contractors or receive interest-free shareholder loans. The question is how to record and disclose these dealings. IAS 24 requires disclosure of every related party relationship, transaction and balance. Where terms are off-market, such as land bought above fair value or an interest-free loan, the asset or loan is recorded at fair value, and the difference is usually treated as a distribution to or contribution from the shareholder when it arises from the ownership relationship.
Why it matters
Related-party flows - land bought from shareholders, construction awarded to affiliated contractors, and off-market shareholder funding - are structurally common in family-controlled regional real estate groups and are a primary focus for regulators, lenders and IPO due diligence. Undisclosed or mispriced related-party dealings can materially misstate asset values and equity, and incomplete disclosure is one of the most frequent audit and listing-review findings in the sector.
Diagnostic questions
Was land or another asset acquired from a shareholder or a shareholder-controlled entity, and is the price supported by independent valuation evidence of arm's-length terms? Are construction contracts awarded to related-party contractors benchmarked against independent comparable bids? Are interest-free or below-market shareholder loans split into a fair-value debt component and an equity contribution/distribution, rather than recorded at face value? Are all related-party relationships, transactions, balances, terms and guarantees disclosed regardless of the materiality threshold used for unrelated parties?
Recognition
1) Identify all related parties per IAS 24 (shareholders, key management, entities under common control, close family members and their controlled entities). 2) Map every transaction and outstanding balance with each party in the period (land purchases, contracting awards, funding). 3) For each transaction, determine if terms are at arm's length by benchmarking against independent evidence (valuations, comparable contractor bids, market interest rates). 4) Where terms are off-market, assess whether the difference represents a capital contribution/distribution (e.g., interest-free shareholder loan) requiring separate recognition from the loan's fair value. 5) Disclose relationships (even without transactions), transaction amounts, outstanding balances, terms/conditions, guarantees, and any impairment of related-party receivables, regardless of materiality thresholds used for unrelated parties.
Measurement
Measurement base: related-party land and other non-monetary assets are recognized at the transaction price only if independently supported as arm's length; any excess over fair value is not part of asset cost and is treated as a distribution (or, if the entity is the seller, a contribution). Off-market financial instruments (interest-free or below-market shareholder loans) are measured initially at fair value using a market-consistent discount rate, with the difference from proceeds recognized as an equity contribution or distribution depending on direction. Subsequent measurement: the loan component unwinds at amortized cost using the effective interest method (interest accretes to profit or loss over the loan term); the related-party land or PP&E follows the normal cost or revaluation model applicable to its asset class from that point forward.
Presentation & disclosure
Name and nature of relationship with each related party; total transaction amounts by category (purchases of land, construction awards, financing) for the period; outstanding balances, their terms/conditions (secured/unsecured, interest rate, settlement form) and any guarantees given or received; provisions for doubtful related-party balances; key management personnel compensation by category (short-term, post-employment, share-based); parent/ultimate controlling party identity even absent transactions.
Common mistakes
- Booking land from shareholders at the contract price without obtaining independent valuation evidence to support arm'
- s-length terms
- awarding construction to affiliated contractors at above-market margins with no disclosure of the pricing basis
- netting shareholder current accounts (receivable vs payable) against each other without a legal right of set-off
- treating interest-free shareholder loans as ordinary liabilities at face value instead of splitting into fair value debt plus equity contribution
- omitting key management compensation disclosure because it is paid through a management company.
Simple example
Scenario: A developer buys a land plot from a shareholder-controlled entity for SAR 18,000,000. Two independent valuers assess fair value at SAR 17,600,000 and SAR 17,800,000 (average SAR 17,700,000). The SAR 300,000 excess over fair value is judged, based on the family's continuing majority control and lack of commercial justification, to be a distribution to the shareholder rather than part of the land's cost. Journal entries: Dr Land (inventory / investment property) 17,700,000 Dr Retained earnings (distribution to shareholder) 300,000 Cr Cash / Due to related party 18,000,000 Separately, the developer receives an interest-free 3-year shareholder loan of SAR 5,000,000. Using a market rate of 8%, its fair value at inception is SAR 3,969,200 (PV of SAR 5,000,000 in 3 years at 8%): Dr Cash 5,000,000 Cr Loan from shareholder (financial liability at FV) 3,969,200 Cr Equity - contribution from shareholder 1,030,800 Both the land pricing basis and the loan's fair-value split, plus balances and terms, are disclosed in the related-party note.
Professional judgment
The core judgment is establishing arm's-length evidence: independent valuations for land should be current, from qualified valuers, and reconciled to any variance from the transaction price; for construction, comparable third-party bids or benchmarked rates support fair pricing. A second judgment is whether an off-market element (discounted price, interest-free funding) is genuinely a capital transaction with the shareholder (equity) versus a business subsidy that should flow through profit or loss - this depends on the shareholder's motive, continuing control, and whether the benefit is available only because of the ownership relationship. A third judgment is scope: family members' businesses and entities under common (not just direct) control are often missed and require an active related-party identification exercise, not just a review of the legal share register.
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.