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Plain‑English explainer of HKAS 24 / IAS 24 for students, junior accountants and non‑specialists who find official standards too dense to read.
This article is based on Hong Kong Accounting Standards (HKAS / HKFRS), which are fully aligned with IAS / IFRS except for minor local tweaks, so the same principles generally apply under IAS / IFRS unless noted otherwise. The goal is to unpack HKAS 24 Related Party Disclosures (equivalent to IAS 24) using plain English and practical, real‑life examples instead of technical jargon. It is written for students, junior accountants, audit juniors and finance professionals who want to understand not just “what the standard says” but how to actually read and prepare financial statements in line with it.
When you see “the company” or “the entity” below, you can think of any entity that prepares general purpose financial statements under HKFRS / IFRS.
Is the Director’s Friend’s Company a Related Party?
Picture this common situation at work. Your client has a lot of transactions with a company owned by a director’s close friend. Prices do not look like normal market rates, and the director is clearly more flexible in negotiations than with external customers. Legally, there is no shareholding link between the two companies.
You naturally wonder:
- Does this count as a related party relationship?
- Do these transactions need to be disclosed in the financial statements?
HKAS 24 Related Party Disclosures (equivalent to IAS 24) is designed to handle exactly this “relationships affect decisions” type of situation. The standard does not stop at company law shareholding percentages; instead, it looks at control, joint control, significant influence and key management personnel to define who is a related party. If you understand this definition and identification model, it will affect how you prepare financial statements, perform audits and even how you read annual reports – because you will know which relationships need to be visible to users.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Build an overall “map” of who counts as a related party under HKAS 24 / IAS 24, and understand the spirit behind the definition.
- Distinguish how parents, subsidiaries, fellow subsidiaries, associates and joint ventures become related parties to each other.
- Understand how individuals become related parties: through control, joint control, significant influence and close members of the family.
- Grasp the logic around key management personnel and management entities, and what that means for disclosures.
- Recognise the main relationships that the standard explicitly excludes, so you know when something that “feels related” is actually not a related party.
- Apply a simple step-by-step model to convert the text of the standard into a clear “yes/no” related party conclusion in practice.
1. Big Picture of the Related Party Definition: Substance Over Form
At first sight, the related party definition in HKAS 24 / IAS 24 looks long and complicated. Underneath, there is one core idea: substance over form. The standard cares about whether one party can, because of a relationship, influence the financial and operating decisions of another party – not just whether there is a legal shareholding or a shared director on paper.
The revised HKAS 24 removed some confusing older wording (such as vague references to “significant voting power”) and reorganised the definition around a few core concepts:
- Control: one party can direct the relevant financial and operating policies of another entity.
- Joint control: two or more parties share control under a contractual arrangement.
- Significant influence: one party can participate in financial and operating policy decisions of another entity, even without control (for example via board seats or significant shareholdings).
- Key management personnel (KMP): individuals with authority and responsibility for planning, directing and controlling the entity’s key activities.
For beginners, a practical way to remember this is:
If a person or entity “speaks much louder than others” when resources are allocated, contracts are negotiated or strategy is set, the relationship probably falls into the related party zone and needs your attention.
In day-to-day work, you do not need to recite the full definition, but you must train your sensitivity. When you see the same individual on multiple boards, or the same family effectively controlling several groups, your internal “related party alert” should automatically switch on.
2. Relationships Between Entities: Parents, Subsidiaries, Fellow Subsidiaries, Associates and Joint Ventures
Let’s start with the more intuitive side: relationships between entities. In general, the following types of relationships almost always create related parties:
- Parent and subsidiary
- Whenever a parent controls a subsidiary, the two are related parties to each other.
- Even though consolidated financial statements present them as one group, you still need to consider parent–subsidiary transactions for related party disclosure.
- Fellow subsidiaries
- If Entity A and Entity B are both controlled by the same parent, they are fellow subsidiaries.
- Even without direct shareholdings between A and B, the common parent means they are related parties.
- In practice, you often see internal services, loans or guarantees between fellow subsidiaries.
- Associates and joint ventures
- An associate or joint venture of the reporting entity is normally a related party.
- The reporting entity’s parent also needs to consider its relationship with these associates and joint ventures.
A few simple illustrations help fix this in your mind:
- Group P controls Company A and Company B. A and B are fellow subsidiaries and therefore related parties.
- Company X holds 30% of Company Y and has board representation. X has significant influence, so Y is X’s associate; the two are related parties.
- Transactions between a subsidiary A and an associate B of the same parent X will usually also fall within the related party transaction bucket.
In practice, a very common and effective approach is to first draw a group structure chart. Show where control, joint control and significant influence exist; then extend that into a related party list. This reduces the risk of missing entities, and gives auditors a clear basis for understanding and testing your judgments.
3. Individual-Level Related Parties: Control, Joint Control and Significant Influence
Now move from entities to people. An individual becomes a related party in classic situations where he or she:
- Directly or indirectly controls the entity.
- Has joint control over the entity.
- Has significant influence over the entity.
- Is a member of the entity’s key management personnel.
In many real-life cases you will see a pattern like this:
Individual X – controls Entity A (for example, owns more than 50% and acts as managing director) – has significant influence over Entity B (for example, owns 30% and sits on the board) – jointly controls Entity C together with other investors under a contractual arrangement.
In this setup:
- X is a related party to A, B and C.
- A is very likely related to B and C as well, because they are all under X’s control or influence.
- Any other entity controlled by X or by X’s close family members may also be pulled into the related party circle.
This is why identifying the ultimate controlling party is so important in practice. You cannot stop at the company name on the share register; you often need to track ownership and control back to individuals or a controlling family. If you stay only at the legal entity level, you will overlook many potential related parties, especially in family-owned businesses and multi-layered shareholding structures.
4. Close Family Members and Partners: How Family Extends the Related Party Circle
HKAS 24 / IAS 24 uses an “includes but is not limited to” approach when describing close members of the family. It usually refers to:
- A person’s spouse or domestic partner.
- The person’s children and dependants.
- The spouse’s / partner’s children and dependants.
- Other family members who are expected to influence, or be influenced by, the person in their dealings with the entity.
The key idea is not to memorise a closed list, but to focus on substance. If two family members clearly influence each other’s economic decisions, they should be treated as close family members, even if the exact relationship is not spelled out word-for-word in the examples.
A very common real-world example:
- Mr A controls Company A.
- Ms B, Mr A’s spouse, controls Company B.
- Legally, there is no link between A and B, but the couple share their financial life and decisions.
In such a case, transactions between Company A and Company B are very likely not at arm’s length, and A and B are usually treated as related parties.
At work, you are not expected to act like a private investigator into people’s personal lives. But when available information shows that a director or key management person’s close family member owns a significant entity, you should consider whether that entity belongs on the related party list.
5. Key Management Personnel and Management Entities: Where Service and Disclosure Lines Are Drawn
Key management personnel (KMP) are a very important category of related parties in HKAS 24 / IAS 24. Typically, this includes:
- Directors (both executive and non-executive).
- Senior management such as the CEO, CFO and other top executives.
- Anyone with authority and responsibility to plan and direct the entity’s main operating activities.
KMP are related parties not only as individuals; their compensation – salary, bonuses, share-based payments and other benefits – is also subject to disclosure. These disclosures help users understand the incentive structures of management and assess governance risk.
Recent amendments also introduced the concept of a management entity. Some entities outsource their management team to a separate management company, which second staff to act as directors or senior executives. In such cases:
- The management company itself is a related party.
- The financial statements should disclose the total amount paid for “key management personnel services” to the management entity, even if they do not disclose each individual’s personal pay in detail.
This setup is common in certain investment funds and investment property groups. As a preparer or auditor, your tasks are to work out:
- Who actually holds decision-making power.
- Whether they are directly employed by the reporting entity or provided through a management entity.
- Whether disclosure should focus on individual KMP remuneration or on aggregate service fees paid to the management entity (or both).
6. Explicit Exclusions: What Is Not a Related Party
HKAS 24 / IAS 24 also spells out several situations that are deliberately excluded from the related party definition. The aim is to stop the related party list from expanding endlessly to cover every weak connection. Relationships that normally are not related parties include:
- Common directors or key management only
- A director sitting on the boards of Company A and Company B does not, by itself, make A and B related parties.
- Unless there is control, joint control or significant influence between A and B, “same director” alone is not enough.
- Ordinary counterparties
- Typical examples:
- Banks providing normal loans and credit facilities to the entity.
- Trade unions and pension plans in their capacity as service providers or scheme operators.
- Utility providers such as electricity and water companies, as long as they operate on standard market terms and do not exert control or significant influence.
- Typical examples:
- Co-venturers in the same joint arrangement without other links
- If Company A and Company B jointly control Joint Venture C, but A and B do not control or significantly influence each other, then A and B are not automatically related parties just because they share an interest in C.
The logic behind these exclusions is simple: the standard wants relationships with real power to influence decisions, not every distant or casual connection. Otherwise, disclosures would turn into a messy list full of noise, making it harder for users to spot the truly important relationships.
7. Putting It Together: Scenario-Based Judgments from Text to Practice
Let’s combine these ideas into a simple decision model, using typical scenarios. Each time, ask yourself: is this a related party relationship?
Scenario 1: Controlling Shareholder and Spouse-Owned Company
- Individual X owns 60% of Company A and acts as managing director.
- X’s spouse Y controls Company B.
- There are large sales of goods between A and B.
Judgment:
- X is a related party of both A and B (controls A and can influence B via close family links).
- A and B are related parties because they are both within X’s close family “influence circle”.
- Transactions between A and B are related party transactions and need disclosure in A’s financial statements (and probably B’s as well).
Scenario 2: Fellow Subsidiaries Under the Same Parent
- Group P controls Subsidiaries S1 and S2.
- There is no direct shareholding between S1 and S2.
- S1 frequently provides internal services to S2 at below-market prices.
Judgment:
- P is a related party to S1 and S2.
- S1 and S2 are related parties because they are fellow subsidiaries under the same parent.
- Transactions between S1 and S2 are related party transactions, even if they are eliminated on consolidation; depending on materiality and circumstances, the group may still need to explain them in the notes.
Scenario 3: Shared Non-Executive Director, No Other Links
- Director A sits on the boards of Company C and Company D as a non-executive director.
- C and D have no shareholding relationship, no joint control arrangements and no influence over each other.
- There are occasional sales between C and D at market prices.
Judgment:
- The shared director does not, on its own, make C and D related parties.
- If there is no control, joint control or significant influence, C and D are not related parties under HKAS 24 / IAS 24.
- They remain ordinary trading counterparties.
In your own work, you can plug your client or employer into these patterns. Whenever you see keywords like “common controller”, “family member”, “management company”, “associate” or “joint venture”, walk through a simple checklist:
- Is there control or joint control?
- Is there significant influence?
- Is the person a close family member or a KMP of the entity?
- Does the relationship fall into one of the explicit exclusions?
If you follow these steps, most related party questions will lead to a clear, explainable conclusion rather than a vague feeling.
Building Your Own HKAS 24 / IAS 24 “Related Party Radar”
Understanding the related party definition in HKAS 24 / IAS 24 is really about building a personal radar for relationships. Once you are used to scanning a group using the lenses of control, joint control, significant influence, close family members, KMP and management entities, you will find that:
- It becomes much easier to spot transactions in annual reports that deserve extra attention.
- When preparing or auditing financial statements, you can more confidently decide which entities and individuals belong on the related party list.
- In borderline cases, you rely on a structured judgment model instead of gut feeling, which makes your reasoning easier to document and defend.
As a next step, you can:
- Draw a “related party map” for your own company or client, starting from the ultimate shareholder and extending down to associates, joint ventures and entities owned by close family members.
- Add a column in your working papers to summarise the basis for your judgment (for example: “significant influence”, “close family member”, “management entity”), so that your reasoning is clear for future reviews.
- Link this definition article with the disclosure requirements under the same standard, so that “who is a related party” and “what must be disclosed” form one integrated HKAS 24 / IAS 24 toolkit for you.
When you can look at a relationship and naturally ask, “Does this count as a related party under HKAS 24 / IAS 24?” – and then answer with reasons – you are no longer just memorising the standard. You are turning HKAS 24 into your own practical judgment tool.
Key Takeaways for Students and Junior Accountants
- Always start with who controls whom: identify the parent, subsidiaries, fellow subsidiaries, associates and joint ventures, then layer on individuals, families and management entities before drafting disclosures.
- In exams and at work, separate “real power” relationships (control, joint control, significant influence, KMP, close family) from casual links (same bank, same utility provider, same non-executive director) that the standard explicitly excludes.
- When reviewing contracts, ask: “Is the counterparty controlled or significantly influenced by a shareholder, director, KMP or their close family?” If yes, treat it as a related party candidate and document your reasoning.
- Tag related party transactions early in the general ledger and in working papers; this avoids last‑minute scrambles when preparing note disclosures and supports auditors’ testing.
- Use simple scenario checks like those in this article as a quick internal training tool for new team members, so the whole team applies a consistent HKAS 24 / IAS 24 judgment model.
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