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IND AS 24 provides comprehensive guidelines on the disclosure requirements for related party transactions. It is important to disclose all material information to maintain the integrity of financial statements. One aspect of this transparency is the disclosure of related party transactions, which are transactions between an entity and its related parties. Let’s dive into the details of IND AS 24 and understand its significance in financial reporting.
Scope and Objective:-
IND AS 24 applies to all entities that prepare financial statements in accordance with Indian Accounting Standards (IND AS). The standard’s primary objective is to ensure that related party transactions and relationships are adequately disclosed in financial statements, enabling users to make informed decisions.
Identification of Related Parties:-
IND AS 24 defines related parties and provides guidance on identifying related party relationships. It includes not only direct relationships but also indirect relationships through intermediate entities. Identifying related parties is a crucial step in complying with IND AS 24’s disclosure requirements. Here are some key considerations and methods for identifying related parties:
Key Management Personnel (KMP):-
These individuals may have significant decision-making authority and can influence the entity’s financial transactions. These individuals may have significant decision-making authority and can influence the entity’s financial transactions. Generally, KMPs are directors, executives, and managers who play a crucial role in shaping the entity’s financial position and performance. Some transactions need to be disclosed like- remuneration, loans, guarantees, and other transactions involving KMP.
Close Family Members:-
Ind As 24 includes close family members of KMP in the scope of related parties. Mainly family includes spouses, children, parents, siblings, and any other individuals who are close to or in a financial relationship with the KMP.
Ownership Relationships:-
To identify related parties, it’s important to analyze the ownership structure of the entity. Take a closer look at significant shareholders, such as parent companies, subsidiaries, and associates. These are entities that hold a substantial stake in the reporting entity and may have key management personnel involved.
Control Relationships:-
We also need to Identify entities or individuals who possess the power to exert control or exert significant influence over the reporting entity. This could include entities with substantial voting rights or those with the ability to appoint key management personnel.
Contractual Relationships:-
Review contracts, agreements, and arrangements to identify related parties. Pay attention to transactions involving entities or individuals that have a significant economic interest in the reporting entity or where there is a potential conflict of interest.
Common Control:-
Entities that are under common control or have common ultimate owners should be examined for related party relationships.
Significant Influence:-
Identify entities or individuals that exert significant influence over the reporting entity’s decision-making processes, even if they don’t meet the criteria for control or ownership relationships.
Professional Relationships:-
Consider professional relationships with auditors, legal advisors, consultants, and other service providers that may be considered related parties.
It is important to exercise professional judgment and conduct a thorough analysis to ensure the comprehensive identification of related parties. Regular communication and coordination with management, the board of directors, and other relevant parties within the organization can help in the accurate identification of related party relationships and transactions.
Disclosure Requirements:-
The standard prescribes detailed disclosure requirements for related party transactions. Entities must disclose the nature of the relationship, description of the transactions, outstanding balances, and any other relevant information.
Significant Related Party Transactions:-
IND AS 24 emphasizes the disclosure of significant related party transactions that could have a material impact on the financial statements. Entities should consider the substance of the transaction rather than solely relying on the legal form.
Disclosure Exemptions:-
When it comes to disclosing related party transactions, IND AS 24 takes into consideration the unique circumstances of government-related entities and transactions between these entities and the government itself. It recognizes that while transparency is crucial, government entities often face practical challenges in disclosing all related party transactions.
Significance in Financial Reporting:-
Understanding the significance of disclosing related party transactions under IND AS 24 is essential. By shedding light on potential conflicts of interest and transactions involving related parties, these disclosures promote transparency in an entity’s financial position. They enable stakeholders to assess the reliability and integrity of financial statements, ensuring they have a complete picture of an entity’s operations.
Moreover, these disclosures empower users to make well-informed decisions by providing insights into the influence of related parties on an entity’s performance. It allows them to evaluate the potential impact of these relationships on the entity’s overall financial health.
Conclusion:-
IND AS 24, with its detailed guidelines on the disclosure of related party transactions, plays a vital role in ensuring transparency and accountability in financial reporting. By providing a framework for disclosing transactions with related parties, the standard enables stakeholders to understand an entity’s financial position and performance comprehensively. Compliance with IND AS 24 fosters trust, promotes transparency, and contributes to the overall reliability of financial statements.