IAS 24 Related Party Disclosures |

Related parties transfer pricing

Transfer pricing is one of the most important issues in international tax and as a result also needs disclosure under IAS 24 Related party disclosures.

Transfer pricing is the general term for the pricing of cross‐border, intra‐firm transactions between related parties. These transactions can include transfers of intangible property, tangible goods, or services as well as loans or other financing transactions.

Most countries’ transfer pricing legislation is based on the ‘arm’s length principle’.

Transfer pricing methodologies

There are a number of transfer pricing methodologies for determining the arm’s length basis of a transaction. For example, the OECD recognises Comparable Uncontrolled Price, resale price, cost plus, transactional net margin, and transactional profit split methods as acceptable but other methods can also … Read more

What are related parties?

Related parties are relationships in which one party has the ability to control or significantly influence the economic and operating decisions of another. Transactions with related parties are a common feature of business. Typically related party relationships include the following:

  • Enterprises controlled or controlling one another, such as subsidiaries and joint venturesConstruction contract modifications Construction contract modifications
  • Individuals having an interest in the enterprise that gives them significant influence over the enterprise, such as majority owners
  • Key management personnel responsible for planning, directing and controlling the activities of the reporting enterprise, including close members of families of these individuals

Parties are considered related when one of the parties has control over the other or is able to exert considerable influence over the other party in … Read more

Loans to an employee

See also Loans at below-market interest rates and Inter-company loans for further discussions on related-party loans.

In contrast to the accounting for the below-market element of inter-company loans, the treatment of the below-market element of a loan to an employee is addressed by specific Standards. The effect of a below-market element in loans to an employee is starting with a general discussion on loans to employees, followed by a discussion for the following specific types of loans to employees:

  • loans to an employee linked to the entity’s shares
  • forgivable loans.

General discussion: Loans to employees

Where an entity makes a loan to an employee that is not on normal commercial terms, our view is that the initial difference between the Read more

Inter-company loans

Inter-company loans (in the separate or individual financial statements)

See also Loans at below market interest rates and Loans to an employee for further discussions on related party loans.

The accounting for the below-market element of an inter-company loan in the separate or individual financial statements of the entities is not addressed by a specific Standard. As a result, the accounting for such transactions is conducted by applying the principles set out in the Conceptual Framework, in particular its definitions of assets, liabilities and equity. The effect of this in accounting for the below-market element relating to the following types of inter-company loans is discussed below in more detail:

  • fixed term loan from a parent to a subsidiaryInter-company loans
  • loans between
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Loans at below-market interest rates

Normally the transaction price of a loan (ie the loan amount) will represent its fair value. For loans made to related parties however, this may not always be the case as such loans are often not on commercial terms. Where this is the case, the fair value of the loans must be calculated and the difference between fair value and transaction price accounted for. A framework for analysing both the initial and subsequent accounting for such loans is discussed in here. Common examples of such loans include inter-company loans (in the separate or individual financial statements) and employee loans.

Loans are one type of financial instrument. As such they are governed by IFRS 9 Financial Instruments which requires all financial … Read more