IAS 24

Definition

IAS 24, or International Accounting Standard 24, addresses the disclosure of related party transactions and relationships. It aims to ensure that financial statements provide relevant information about these transactions, enabling users to understand the potential impact on the entity's financial position and performance. This standard recognizes that related party transactions may not always be conducted at arm's length, necessitating clear disclosures to avoid misleading financial reporting.

5 Must Know Facts For Your Next Test

1. IAS 24 requires entities to disclose their relationships with related parties and transactions that occurred during the reporting period, including the nature of the relationship.
2. The standard emphasizes that significant transactions with related parties must be disclosed even if they are conducted at market rates.
3. In addition to the nature of the relationship and transactions, IAS 24 also mandates disclosures regarding outstanding balances and terms of these transactions.
4. Entities are encouraged to assess whether the relationships could influence the financial statements, providing transparency for users of the financial reports.
5. Non-disclosure or improper disclosure of related party transactions can lead to misleading financial statements, impacting stakeholders' decisions.

Review Questions

• How does IAS 24 enhance transparency in financial reporting regarding related party transactions?
  • IAS 24 enhances transparency by requiring entities to disclose detailed information about related party relationships and transactions in their financial statements. This ensures that users of the financial reports understand any potential conflicts of interest or non-arm's length dealings that could affect the entity's financial position. By mandating such disclosures, IAS 24 allows stakeholders to make informed decisions based on a clearer understanding of the company's dealings with its related parties.
• What specific information must entities disclose under IAS 24 about related party transactions, and why is this important for users of financial statements?
  • Entities must disclose the nature of their relationships with related parties, details of transactions, outstanding balances, and terms associated with those transactions under IAS 24. This information is crucial for users because it helps them assess the impact of these transactions on the financial position and performance of the entity. By revealing how related parties influence decisions or financial outcomes, stakeholders can better evaluate risks and potential conflicts inherent in the reported figures.
• Evaluate the implications of non-compliance with IAS 24 for both entities and stakeholders, particularly in terms of financial integrity.
  • Non-compliance with IAS 24 can have serious implications for entities and their stakeholders, leading to questions about financial integrity and reliability. If companies fail to disclose related party transactions or do so inadequately, it may result in misleading financial statements that do not accurately reflect true performance or risks. For stakeholders, this can erode trust and lead to poor investment decisions, regulatory scrutiny, or legal consequences for companies. Therefore, adherence to IAS 24 is essential for maintaining transparency and accountability in financial reporting.

Related terms

Related Party: A related party is an individual or entity that has a close relationship with the reporting entity, potentially influencing its decisions and actions.

Arm's Length Transaction: An arm's length transaction is a deal made by two parties in their own self-interest, ensuring that both sides are acting independently and are not influenced by any relationship.

Disclosure Requirements: Disclosure requirements refer to the obligations of an entity to provide detailed information about its financial activities and related party transactions in its financial statements.