Receivables from related parties are among the most sensitive and complex accounting items in the financial statements, given their close association with the risks of conflicts of interest, the transfer of benefits, unfair pricing (pricing not based on the arm’s length principle) and the possibility that certain transactions may be concealed or misstated. This guide aims to set out the accounting and control treatment of this item in accordance with the requirements of IAS 24, IFRS 9, IAS 1 and IFRS 7, in a way that enhances the fair presentation and credibility of the financial statements.
Definition of Receivables and Related Parties
First: Receivables
These are the financial rights arising from transactions with related parties, whether trade or financing in nature.
Second: Related Parties under IAS 24
- Subsidiaries, associates and joint ventures
- Members of the board of directors and key executive management personnel, and their first-degree relatives
- Major shareholders who hold 5% or more
- Entities over which any of the parties mentioned above has control, joint control or significant influence
Relevant Standards
- IAS 24: Related party disclosures
- IFRS 9: Measurement of receivables and assessment of expected credit losses (ECL)
- IAS 1: Presentation of financial statements
- IFRS 7: Disclosure of financial risks
Accounting and Control Risks
- Conflicts of interest and the transfer of benefits
- Unfair pricing – failure to apply the arm’s length principle
- Weak collectability and the recognition of inadequate allowances
- Concealment or misstatement of transactions
Risk Indicators (Red Flags)
- Large and persistent credit/debit balances with no movement
- Sale/purchase transactions at prices that differ from market prices
- The absence of written contracts or prior board approvals
- Interest-free lending to related parties
- Repeated write-offs of debts owed by related parties
Accounting Measurement
Receivables from related parties are measured in accordance with IFRS 9 through:
- Initial recognition at fair value
- Subsequent measurement at amortised cost
- Assessment of expected credit losses (ECL) and recognition of the necessary allowances
Examination Procedures under the International Standards
- Verifying the nature of the relationship and updating the related party register annually
- Ensuring that the statutory approvals and supporting contracts are in place
- Applying the arm’s length principle
- Assessing impairment in accordance with IFRS 9
- Ensuring the adequacy of the qualitative and quantitative disclosures in accordance with IAS 24
Practical Examples
- An interest-free loan: this is regarded as a benefit and must be measured at fair value, with the difference treated as a distribution of profits
- An old balance with no movement: an indicator of weak collectability, which calls for an immediate ECL assessment
- Purchase of an asset at a price above the market: a breach of the arm’s length principle and a transfer of benefit
Responsibilities of the Audit Committee
- Reviewing and approving the policy on dealing with related parties
- Reviewing material transactions and the extent to which they are consistent with the arm’s length principle
- Ensuring the adequacy of the disclosures in the financial statements
Checklist for Reviewers
| Item | Procedure |
|---|---|
| Identification | Has the related party register been updated annually? |
| Approval | Are the transactions approved by the board of directors/audit committee? |
| Contracts | Are there written supporting contracts for the transactions? |
| Pricing | Are there studies confirming that the arm’s length principle has been applied? |
| Impairment | Has ECL been assessed in accordance with IFRS 9 and have the allowances been recognised? |
| Disclosure | Has disclosure been made in accordance with the requirements of IAS 24? |
Conclusion
Compliance with the requirements of IAS 24 and IFRS 9 in dealing with receivables from related parties enhances transparency, governance and the quality of financial reporting. Sound handling of this item depends on having clear and documented internal policies and procedures in place, obtaining the prior statutory approvals, having supporting documents available for the transactions, and carrying out a periodic review of the balances.