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 ventures
- 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 terms of financial or business decisions.
An enterprise is considered to have the ability to control another enterprise if either of the two conditions is met:
- it owns, directly or indirectly, through subsidiaries, more than one half of the voting power of the other enterprise; or
- it owns a substantial interest in the voting power along with the power to direct, by statute or agreement, the financial and operating policies of the management of that other enterprise.
Significant influence means the opportunity to participate in or influence formulation of financial and business company policy, but at a lower level than the ability to control policy. Considerable influence can be exerted in several ways such as representation on the Board of Directors or participation in formulation of production, financial and personnel policies. Considerable influence can be achieved through ownership of equity shares or in accordance with rights granted by the company bylaws. When shares are owned, it is commonly understood that significant influence is exercised if the ownership percentage is between 20% and 50%.
Transactions between related parties mean a transfer of assets or liabilities, irrespective of whether a price is charged for the transactions
The following is a list of related party relationships:
- Enterprises that directly or indirectly (through intermediaries) control, are controlled or are under joint control with the reporting enterprise. This includes holding companies, subsidiaries, and partner subsidiaries.
- Persons, directly or indirectly owning an equity share of the reporting enterprise that gives them the opportunity to exercise significant influence over that enterprise.
- Close family members of the enterprise’s key management personnel
- Persons with considerable influence on close members of the family. Close members of the family are people that influence that person or can find themselves under an influence of that person in their transactions with the enterprise.
- Senior management, people with authority and people responsible for planning, management and control of the reporting enterprise, including directors, managers of enterprises and close members of their families.
- Enterprises in which a substantial interest, directly or indirectly, belongs to any of the persons mentioned above or enterprises this person can considerably influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises with the same senior management as the reporting enterprise.
Examples of related parties using Company A as the reporting enterprise:
- A member of Company A’s Board of Directors IAS 24 What are related parties?
- Company A’s Chief Accountant IAS 24 What are related parties?
- Company B, a company that is 30% owned by Company A IAS 24 What are related parties?
- Company C, a company that owns 51% of Company A’s stock
- The husband of Company A’s President IAS 24 What are related parties?
- The adult son of one of Company A’s Directors. IAS 24 What are related parties?
In the process of identifying all possible categories of related parties, it is necessary to focus on the content of the relations and not only the legal form. This is commonly known as the principal of substance over form.
The following enterprises are not considered related parties: IAS 24 What are related parties?
- Two enterprises managed by one director, who has no opportunity to influence the policies of both enterprises in their mutual business relations.
- Financing companies and banks that supply funds to an enterprise under normal business terms and have no related ownership or other relationship.
- Trade unions. IAS 24 What are related parties?
- State municipal services and utilities. IAS 24 What are related parties?
- Government departments and agencies in their normal business relations with the enterprise.
- Entities that the enterprise has transactions with only on the basis of normal business terms such as suppliers and customers, and have no related ownership or other relationship.
Examples of non-related parties using Company A as the reporting enterprise:
- The Chairman of the bank that has loaned Company A a significant amount of funds.
- The Director of the Ministry of Finance who owns 2% of Company A’s stock and also occasionally purchases products from Company A.
- A customer who purchases regularly from Company A and is considered a primary customer by Company A.
Here is an example from the Annual Report 2017 of Ahold Delhaize a Dutch exchange-listed food retail group of supermarkets and e-commerce:Related party disclosures