Difference Between IAS 24 Under Going Concern and IAS 24 Under Liquidation

Introduction

IAS 24, “Related Party Disclosures,” outlines the disclosure requirements for relationships, transactions, and balances between an entity and its related parties. This report explores the key differences in applying IAS 24 under a going concern assumption and during liquidation.

IAS 24 Under Going Concern

Core Principle

Under IAS 24, the core principle is to ensure that an entity’s financial statements contain the necessary disclosures to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties.

Identification of Related Parties

Related parties include:

• Entities that control, are controlled by, or are under common control with the reporting entity.

• Associates and joint ventures.

• Key management personnel of the entity or its parent.

• Close family members of the key management personnel.

Example: A company identifies its parent company, subsidiaries, and key management personnel as related parties.

Disclosure of Relationships and Transactions

Entities must disclose:

• The nature of the related party relationships.

• The amount of transactions with related parties.

• Outstanding balances with related parties, including commitments.

• Provisions for doubtful debts related to the outstanding balances.

• Expenses recognized during the period in respect of bad or doubtful debts due from related parties.

Example: A company discloses that it has sold goods worth R500,000 to a subsidiary and has an outstanding receivable balance of R200,000 from the subsidiary at the reporting date.

Key Management Personnel Compensation

Entities must disclose key management personnel compensation in total and for each of the following categories:

• Short-term employee benefits.

• Post-employment benefits.

• Other long-term benefits.

• Termination benefits.

• Share-based payments.

Example: A company discloses that its key management personnel received a total compensation of R2,000,000, including R1,500,000 in short-term benefits and R500,000 in share-based payments.

Nature of Related Party Transactions

Entities must provide disclosures about the nature of related party transactions to give users an understanding of their impact on the financial statements.

Example: A company discloses that it purchased raw materials from an associate at market prices, emphasizing the arm’s length nature of the transaction.

IAS 24 Under Liquidation

Core Principle

During liquidation, the focus shifts from ongoing related party relationships and transactions to the immediate realization of assets and settlement of liabilities. The disclosure requirements of IAS 24 must be adjusted to reflect the liquidation context.

Identification of Related Parties

The identification of related parties remains the same. However, the emphasis may shift to identifying related party relationships that could impact the liquidation process, such as transactions for asset sales or liability settlements with related parties.

Example: A company in liquidation identifies all its related parties, including those involved in any recent transactions related to the liquidation process.

Disclosure of Relationships and Transactions

Entities must continue to disclose related party relationships and transactions, but the focus shifts to transactions and balances that impact the liquidation process. This includes:

• Transactions related to the sale of assets to related parties.

• Settlements of liabilities with related parties.

• Any commitments or guarantees provided to or by related parties.

Example: A company in liquidation discloses that it sold a piece of equipment to its parent company for R300,000 and settled a liability of R100,000 with an associate.

Key Management Personnel Compensation

During liquidation, key management personnel compensation may change due to the winding-up process. Disclosures should reflect any changes in compensation arrangements, including termination benefits.

Example: A company in liquidation discloses that key management personnel received termination benefits totaling R500,000 as part of the liquidation process.

Nature of Related Party Transactions

Disclosures about the nature of related party transactions should focus on their impact on the liquidation process. This includes any transactions that may not be at arm’s length and could affect the fair distribution of assets.

Example: A company in liquidation discloses that it sold inventory to a related party at a discount, explaining the rationale behind the transaction.

Immediate Realization and Settlement

The focus during liquidation is on the immediate realization of assets and settlement of liabilities. Related party transactions and balances that affect this process must be disclosed to provide transparency.

Example: A company in liquidation discloses that it has an outstanding receivable of R100,000 from a subsidiary and a payable of R50,000 to a key management personnel member, highlighting the expected settlement terms.

Disclosures of Any Special Arrangements

During liquidation, any special arrangements with related parties, such as preferential treatment or guarantees, should be disclosed to ensure transparency and fairness in the liquidation process.

Example: A company in liquidation discloses that its parent company has guaranteed certain liabilities, ensuring these liabilities will be settled before other creditors.

Loss of Control or Significant Influence

As the liquidation process progresses, the entity may lose control or significant influence over its related parties. Disclosures should include information about the loss of control or significant influence and the financial impact of these changes.

Example: A company in liquidation discloses that it has lost control over a subsidiary due to its sale and provides information about the financial impact of this loss of control.

Conclusion

The application of IAS 24 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on providing comprehensive disclosures about related party relationships, transactions, and balances to ensure transparency and fair presentation. In contrast, during liquidation, the emphasis shifts to the immediate realization of assets and settlement of liabilities, with disclosures reflecting the urgency and conditions of the liquidation process. Entities must carefully reassess their related party disclosures to ensure accurate and transparent financial reporting during liquidation. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during the liquidation process.

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