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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.
You Have a Related Party List – What Next?
In many real-life jobs, teams get stuck at exactly this point. You have already drawn a detailed group structure chart and compiled a related party list: parents, subsidiaries, associates, joint ventures, key management personnel (KMP) and their close family members are all identified. Then you open the “Related Party Disclosures” note and ask yourself:
- How much detail do we actually need to give?
- Which items must be broken down separately?
- How granular do we go on KMP remuneration?
This article answers the question: “Once I know who the related parties are, what must the financial statements disclose under HKAS 24 Related Party Disclosures (equivalent to IAS 24)?” We will walk from basic parent–subsidiary relationships, through related party transactions, period-end balances and commitments, all the way to KMP compensation and management entity service fees. The goal is to give you a simple disclosure ‘spine’ you can reuse in both exam and work situations.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Clearly list what parent entities, subsidiaries and the ultimate controlling party must disclose, even when there are no transactions with each other during the period.
- Apply the four basic disclosure elements for related party transactions: nature and relationship, amounts, closing balances and terms/guarantees, plus any bad debt information.
- Recognise the most common related party transaction types and commitments, and understand why “executory contracts” (commitments) still matter to users.
- Decide when aggregation is acceptable and when you need to break items out and explain them one by one.
- Understand the five standard categories of KMP compensation, and why under a management entity model you do not have to split individual KMP pay.
- Develop a cautious, defensible approach to “arm’s length” statements in the notes, so you only use them when you have solid support.
1. What Parent, Subsidiaries and the Ultimate Controlling Party Must Disclose
Let’s start with the simplest relationship: parent and subsidiary. Even if there are no transactions between them during the reporting period, HKAS 24 / IAS 24 still requires certain relationship information to be disclosed. Typical items include:
- Who is the parent of the reporting entity.
- Who is the highest-level parent or ultimate controlling party (for example, an individual or a government entity).
- Where relevant, the name of the parent and of the group, so users can trace the ownership chain.
This links closely with other standards:
- HKAS 27 Separate Financial Statements (equivalent to IAS 27) explains how investments in subsidiaries, associates and joint ventures are presented in separate financial statements.
- HKFRS 12 Disclosure of Interests in Other Entities (equivalent to IFRS 12) requires more detailed disclosures about group structure, non‑controlling interests and unconsolidated structured entities.
- HKAS 24 / IAS 24 comes back to the relationships themselves – who controls whom, who is the ultimate controlling party, and what transactions and balances exist with these related parties.
In practice, many entities include a short paragraph near the start of the notes to explain the group background and ultimate controlling party, for example: “The ultimate holding company of the entity is XYZ Holdings Limited, and the ultimate controlling party is Mr Chan.” This simple explanation greatly helps users understand the power structure behind the financial statements.
2. Related Party Transactions: The Four Core Disclosure Elements
Once there are transactions with related parties, HKAS 24 / IAS 24 can be boiled down into four core disclosure elements. When you prepare the note, you can treat them as four questions to check completeness:
- What is the nature of the transaction and relationship?
- Examples of nature: sale of goods, purchase of services, rental payments, loans, provision of guarantees or collateral.
- Which category of related party is involved: parent, subsidiary, associate, joint venture, KMP, close family member or management entity.
- What is the transaction amount?
- Usually disclosed as the total for the reporting period, often with comparative figures for the prior period.
- Where there are multiple transaction types, it is common to show separate lines, such as “Sales of goods to related parties” and “Purchase of services from related parties”.
- What is the closing balance and under what terms?
- Includes receivables, payables, loan balances and similar items at the reporting date.
- You should describe settlement terms: for example, whether collateral or guarantees are provided, whether the interest rate is normal, and whether the terms are comparable to market practice.
- Are there any special provisions for bad and doubtful debts or recognised losses?
- If receivables from related parties carry significant credit risk, related loss allowances should be disclosed.
- Where bad debts or impairment losses relate to related party balances, it is helpful to state that clearly.
In practice, a common mistake is to disclose only “amounts” and ignore “nature/terms/balances”. Users then see a big number but cannot judge whether the transaction is reasonable or risky. A better approach is to write the description as if you are explaining the situation to a colleague who was not involved – so that by reading the note alone, they can picture what the transaction looks like and where the risks might be.
3. Common Types of Related Party Transactions and Commitments
Related party transactions can span many different types, but HKAS 24 / IAS 24 lists examples that already cover the most frequent situations:
- Sale or purchase of goods or products (for example, intra‑group supply chain sales).
- Provision or receipt of services (management services, technical support, shared administrative resources, etc.).
- Lease arrangements (for instance, property owned by a director or close family member rented to the entity as office space).
- Loan and financing arrangements (loans to/from related entities, shareholder loans, amounts due to/due from shareholders).
- Provision of guarantees or collateral (parent guaranteeing subsidiary’s borrowings, or the reverse).
- Transfer or licensing of assets (such as patents, trademarks and licences).
One area that deserves special attention is executory contracts and commitments. In its 2009 amendments, the standard deliberately emphasised commitments in the examples, to remind users not to focus only on past transactions and ignore signed but not yet fully performed obligations. Typical cases include:
- A long-term supply contract with a related party requiring the entity to buy goods at fixed prices over future years.
- A commitment to provide loans or financing up to a certain amount to a related party.
- Long-term, non‑cancellable leases between related parties.
These commitments may not yet appear fully in the statement of financial position or in the statement of profit or loss and other comprehensive income. However, they can significantly affect future cash flows and risk exposure, which is why HKAS 24 / IAS 24 expects them to be visible through related party disclosures.
4. Aggregated vs Separate Disclosures: When to Group and When to Split
If every related party transaction were disclosed line by line, the note would become almost unreadable. HKAS 24 / IAS 24 therefore allows you to aggregate transactions of a similar nature, provided that such aggregation does not obscure important information. Common aggregation examples include:
- The same type of service provided to multiple fellow subsidiaries, disclosed as a single total line.
- Multiple short-term receivables from related parties with similar terms, presented as one combined balance.
However, “can aggregate” does not mean “always aggregate”. Situations where you should split and disclose separately usually include:
- Very large or otherwise significant transactions that could influence user decisions.
- Transactions clearly on non‑market terms, such as interest‑free loans, very low rent or service fees far above market rates.
- Special arrangements involving KMP or their close family members that are likely to be governance hot spots.
- Related party transactions that have attracted attention in the market or from regulators, for example those involving restructurings, asset injections or connected transactions under listing rules.
A practical method is:
- First group transactions by nature and type of related party to define the initial aggregation buckets.
- Then apply materiality and non‑market terms as a second filter to decide which items need extra narrative explanations or separate line‑by‑line disclosure.
This way, you avoid drowning users in detail while still highlighting the items that really matter from a risk and governance perspective.
5. KMP Compensation: The Five Standard Categories and How to Think About Them
Key management personnel compensation is often seen as a “sensitive” area for both preparers and auditors. HKAS 24 / IAS 24 aims to balance transparency with practicality by requiring disclosure by category, not by individual person (unless other laws or listing rules require more). The five usual categories, which align with HKAS 19 Employee Benefits (equivalent to IAS 19), are:
- Short‑term employee benefits
- Salaries, allowances, current‑year bonuses, cash incentives and non‑monetary benefits such as housing or company car.
- Post‑employment benefits
- Contributions to retirement plans (for example, MPF), pension schemes and post‑retirement medical benefits.
- Other long‑term employee benefits
- Long service awards, deferred bonus schemes and long-term compensated absences.
- Termination benefits
- Severance payments, compensations on termination and one‑off payments under special retirement programs.
- Share‑based payment
- Share options, restricted share units and performance‑linked share awards.
You will often see notes that show one line per category with total amounts for KMP as a group, without naming each director or executive and their personal package. To keep classification consistent, a good workflow is:
- First apply the HKAS 19 categories to all employee benefits across the entity.
- Then extract the KMP portion and present it as the KMP compensation note under HKAS 24 / IAS 24.
For share‑based payment, pay attention to the expense recognised in the current period under the relevant share‑based payment standard, not just the number of options or shares granted on a particular date.
6. Management Entity Fees: What You Do and Do Not Need to Disclose
More and more entities use a management entity model to engage their management team. For example, instead of hiring the CEO and CFO directly, the entity signs a contract with a management company, which then sends staff to act as the executives. In such arrangements, the reporting entity may not know each individual manager’s salary and bonus.
HKAS 24 / IAS 24 provides a specific solution for this:
- The reporting entity only needs to disclose the total amount paid to the management entity for providing KMP services.
- It does not need to break down the management entity’s internal staff pay into the five KMP categories for disclosure.
This design reflects two considerations:
- Practicality – the reporting entity may not have access to the management entity’s internal pay structure.
- Information focus – for users, the key question is: “How much is the entity paying for KMP services?”, rather than a detailed breakdown of the management company’s payroll.
Of course, this does not eliminate related party risk. As a preparer or auditor, you still need to assess:
- Whether the management entity itself is a related party.
- Whether the service fees are reasonable or clearly off‑market.
- Whether there are other arrangements (such as success fees or share awards) that require additional disclosure.
7. “Arm’s Length” Statements: When Can You Safely Say It?
Many entities would like to include a statement in the related party note such as: “All related party transactions were conducted on an arm’s length basis.” HKAS 24 / IAS 24 does not ban such statements, but the standard expects them to be supported, not just asserted.
To “support” an arm’s length statement, you do not need perfect proof, but you should have reasonable evidence, such as:
- Comparisons with similar transactions with independent third parties (benchmarking).
- A documented internal pricing policy (for example, a transfer pricing policy) that is consistently followed.
- Market quotations or independent valuations to support pricing.
- Board or audit committee approval records showing that terms were considered against market conditions.
If you lack this kind of evidence and only have a gut feeling that the terms are “roughly fair”, you should avoid using strong, absolute wording like “all transactions are on an arm’s length basis”. A safer approach is:
- Where you do have solid support for particular transactions or categories, you can describe the pricing methods more specifically.
- For transactions that are harder to evidence, focus on disclosing the terms and amounts clearly, and allow users to form their own judgment.
8. Turning Disclosure Rules into Your Own Related Party Checklist
Once you know who the related parties are, what HKAS 24 / IAS 24 wants you to do can be turned into a practical checklist you can apply every year. Ask yourself:
- Have we clearly told users who the parent, highest-level parent and ultimate controlling party are?
- For each type of related party transaction, have we covered nature, amount, closing balance, key terms and any bad debt or loss allowances?
- Have we shown important commitments, such as long-term contracts, guarantees and future financing arrangements between related parties?
- Have we aggregated similar items sensibly, while separately explaining large, unusual or non‑market‑term transactions?
- Is KMP compensation fully captured across all five categories, and is the classification consistent with HKAS 19 / IAS 19?
- If a management entity is involved, have we disclosed the total fees paid for KMP services?
- If we use “arm’s length” language, do we genuinely have enough evidence to defend that statement?
A great next step is to pick a listed company’s annual report and read its related party note with this checklist in hand. See how they handle parent–subsidiary disclosures, related party transactions and KMP compensation, and mentally tick through each item. When you can do that naturally, HKAS 24 / IAS 24 will feel less like a set of rules and more like a practical framework you automatically apply in your work.
Key Takeaways for Students and Junior Accountants
- Start from relationships, then move to disclosures: identify parents, subsidiaries, associates, joint ventures, KMP and management entities first, then layer on the four core disclosure elements for each transaction type.
- Do not stop at transaction amounts – always explain nature, closing balances, terms and any related credit losses, especially where terms look different from market practice.
- Treat long-term contracts, guarantees and financing commitments with related parties as part of your disclosure work, even if they are not yet fully visible in profit or loss or the statement of financial position.
- Use aggregation to keep the note readable, but always break out big, unusual or non‑arm’s‑length items and KMP‑related arrangements for separate explanation.
- For KMP compensation, build from HKAS 19 / IAS 19 categories, then extract the KMP totals; under a management entity model, focus on total fees paid, not individual salaries.
- Be conservative with “arm’s length” statements – only use them when you can point to actual benchmarking, documented pricing policies or board‑level approval evidence in your working papers.
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