Hello there! Today, we are diving into HKAS 24 Related Party Disclosures. At first glance, this might seem like a "talking" chapter because it focuses on notes to the financial statements rather than complex journal entries. However, it is one of the most critical areas in the HKICPA QP Financial Reporting module.

Why? Because in the business world, who you know matters! Investors want to know if a company is making money because it is efficient, or simply because the CEO’s brother is selling them raw materials at a massive discount. This chapter helps us ensure transparency so that the financial statements tell the whole truth.

1. What is the Big Idea?

The main goal of HKAS 24 is to make sure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties.

Important Note: HKAS 24 is about disclosure, not about how to value the transactions. It doesn't tell you to change the numbers on the face of the Balance Sheet; it tells you to explain them in the Notes.

Don't worry if this seems like a long list at first. Think of it like a family tree. A party is related to an entity if they fall into one of two buckets: People or Companies (Entities).

A. People who are Related Parties

A person (or a close member of that person’s family) is related to a reporting entity if that person:
1. Has control or joint control over the entity (e.g., the majority shareholder).
2. Has significant influence over the entity (usually owning \( 20\% \) to \( 50\% \) of voting power).
3. Is a member of the Key Management Personnel (KMP) of the entity or its parent.

Who are "Close Family Members"?
These are people who might influence, or be influenced by, that person in their dealings with the entity. This usually includes:
• That person’s children and spouse/domestic partner.
• Children of that person’s spouse/domestic partner.
• Dependants of 그 person or that person’s spouse/domestic partner.

B. Entities (Companies) that are Related Parties

An entity is related to the reporting entity if:
1. They are members of the same group (Parent, Subsidiary, and Fellow Subsidiaries).
2. One entity is an Associate or Joint Venture of the other.
3. Both entities are Joint Ventures of the same third party.
4. One entity is a Joint Venture of a third entity and the other entity is an Associate of that same third entity.
5. The entity is controlled or jointly controlled by a person identified in the "People" section above.

Analogy Time! Think of a "Fellow Subsidiary" like your sibling. You are both "controlled" by the same parents, so you are related parties. An "Associate" is like a cousin—you have a connection, but it's not as strong as a sibling.

Quick Takeaway:

Control = You run the show. Significant Influence = You have a seat at the table but don't run it. KMP = The bosses (Directors/CEOs).

A related party transaction is a transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged.

Common Mistake to Avoid: Many students think if a transaction is done for "free" or at "cost price," it doesn't need to be disclosed. Incorrect! Even if the CEO gives the company a building for free, it must be disclosed because it’s not an "arm’s length" transaction.

4. Disclosure Requirements

There are three main things we need to disclose in the notes:

A. Relationships

Relationships between parents and subsidiaries must be disclosed even if there have been no transactions between them. This is because the mere existence of the relationship can influence how the business operates.

B. Key Management Personnel (KMP) Compensation

You must disclose the total compensation paid to KMP, broken down into:
• Short-term employee benefits (salaries, bonuses).
• Post-employment benefits (pension contributions).
• Other long-term benefits.
• Termination benefits.
• Share-based payments.

C. Transactions and Balances

If there have been transactions during the period, you must disclose:
1. The nature of the relationship.
2. The amount of the transactions.
3. The amount of outstanding balances (what is still owed at year-end).
4. Provisions for doubtful debts related to those balances.

Did you know?

You cannot state that related party transactions were made on terms equivalent to those in "arm’s length transactions" unless you can actually prove it! If you can't justify the price, don't make the claim.

Sometimes the exam will try to trick you by listing parties that look related but aren't. Under HKAS 24, the following are NOT necessarily related parties:
1. Two entities simply because they have a Director in common (unless that director can influence both).
2. Two venturers simply because they share joint control over a joint venture.
3. Providers of finance (banks), trade unions, public utilities, and government departments (unless they actually control or influence the entity).
4. A customer, supplier, franchisor, or distributor with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence.

Example: If Apple is the only company buying chips from a small factory, that factory is "economically dependent" on Apple. But Apple is not a related party unless it owns shares or has board seats in that factory.

There is a partial exemption for entities that are controlled or significantly influenced by a government.
Why? Because if the government owns hundreds of companies, it would be a nightmare to disclose every single transaction between them. Instead, these entities only need to disclose:
1. The name of the government and the nature of the relationship.
2. Qualitative or quantitative information about the significance of the transactions.

7. Summary Checklist for Students

When you see a Related Party question in your HKICPA QP exam, follow these steps:
1. Identify the relationship: Is there control, joint control, or significant influence? Is it a person or an entity?
2. Check the family: If a person is involved, are their close family members involved too?
3. Identify the transaction: Was there a transfer of resources? (Remember: Price doesn't matter!).
4. Apply disclosure rules: Did they disclose the parent/subsidiary relationship? Did they disclose KMP pay? Did they disclose transaction details?
5. Watch for exemptions: Is it a government-related entity? Is it just a major customer?

Key Takeaway: HKAS 24 is all about substance over form. Even if a relationship isn't "official" on paper, if one party controls the other, they are related! Keep this in mind, and you will master this chapter in no time.