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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.
When Real-Life Cases Look Like Exam Questions (And Vice Versa)
Many people feel the same way when facing HKAS 24 / IAS 24:
“I can more or less memorise the definitions, but once there’s a full scenario – several individuals, multiple companies and some government-related entities – my brain freezes.”
In practice, when you receive a group structure chart, a list of related companies and a stack of vouchers, you are asked to do exactly what exam questions ask:
- Identify who the related parties are.
- Decide which transactions are related party transactions.
- Decide what to disclose, and at what level of detail.
This article wants to connect those two worlds. You will see how to turn the wording of HKAS 24 / IAS 24 into a usable framework, and then how to “translate back” from real situations into the language of the standard.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Walk through a simple “flowchart mindset” for HKAS 24 / IAS 24: from identifying related parties to deciding disclosure depth.
- Handle complex ownership and multi‑person control structures systematically, and clearly label which related party category each party falls into.
- Separate HKAS 24 disclosure issues from HKAS 20 government grant issues when government-related entities and subsidies appear in the same case.
- Avoid several very common misjudgements that show up again and again in practice and exams.
- Use a concise “quick‑memory” framework to tackle HKAS 24 / IAS 24 questions without word‑for‑word memorisation.
1. The Overall Workflow: From Identifying Related Parties to Deciding Disclosures
Instead of jumping straight into fine details, anchor yourself with one main workflow. Whenever you see HKAS 24 / IAS 24 issues, you can think in five steps:
- Identify who the related parties are Ask whether any of these relationships appear:
- Control, joint control or significant influence.
- Parent, subsidiary, fellow subsidiary, associate, joint venture.
- Individuals who control, jointly control or have significant influence over the entity.
- Close family members, key management personnel (KMP) and entities they control or influence.
- Government and government-related entities.
- Check for government-related exemption logic If any related parties are government or government-controlled entities, ask:
- Is the reporting entity controlled, jointly controlled or significantly influenced by that government?
- Are the other entities also controlled or influenced by the same government? If yes, the government-related entity exemption may apply, and the disclosure style will differ slightly from “normal” related parties.
- List all related party transactions and balances Group them roughly into:
- Transactions already occurred: sale/purchase of goods, services, leases, loans, guarantees.
- Period‑end balances: receivables, payables, loans, guarantee obligations.
- Commitments and executory contracts: long-term supply or purchase agreements, future financing commitments.
- Decide the disclosure scope and level of detail Ask four key questions:
- Have we clearly explained the nature of the transaction and the relationship?
- Are the amounts individually significant or collectively significant?
- Are the terms clearly different from normal market terms?
- Are there any bad debt allowances or recognised losses that need highlighting?
- Final check: KMP compensation and management entity Ask:
- Do we have KMP? Has their compensation been disclosed in all five standard categories?
- Do we use a management entity model? If yes, have we at least disclosed the total fee for KMP services paid to that management entity?
If you scribble these five steps on a scrap piece of paper and plug in the information you have, the fog around a long HKAS 24 / IAS 24 case usually clears quickly.
2. Integrated Case 1: Complex Ownership and Multi‑Person Control
Try this combined scenario:
- Individual X holds 60% of Company A and is its managing director.
- Company A holds 40% of Company B and sends directors to B’s board; the remaining 60% is widely held.
- X’s spouse Y controls Company C.
- There are大量 sales and purchases between B and C.
- X is also a non‑executive director of Company D but holds no shares and has no special rights.
Questions:
- Who are A’s related parties?
- Are transactions between B and C related party transactions?
- Does D become a related party of A just because X is a non‑executive director there?
Step 1: Put the reporting entity at the centre
Assume A is the reporting entity. Then:
- X controls A → X is a related party of A.
- A has significant influence over B (40% plus board representation) → B is an associate of A and therefore a related party.
- Y is X’s spouse, a close family member → Y is related to A, and any entity controlled by Y, such as C, is also a related party of A.
So far, A’s related parties include:
- Individuals: X (controller), Y (close family member of the controller).
- Entities: B (associate), C (entity controlled by a close family member).
Step 2: Are B–C transactions related party transactions?
From B’s own perspective, C is controlled by the spouse of B’s ultimate influencer (via A and X), and X/Y as a family unit can influence both B and C. In many cases, transactions between B and C would be treated as related party transactions for B. From A’s perspective, these transactions are part of the “related party circle” involving its associate B and the close family entity C.
In practice, you would usually:
- Treat C as a related party of B as well, due to the close family control link.
- Consider whether transactions between B and C are material enough to be disclosed in B’s financial statements, and whether A needs to consider any indirect effects when disclosing its related party information.
Step 3: What about Company D?
X is a non‑executive director of D but has no shareholding, special rights or clear evidence of significant influence in D. HKAS 24 / IAS 24 specifically warns against treating entities as related parties solely because they have a common director. Without evidence of control, joint control or significant influence, A and D are not related parties.
You can summarise the classification as:
- Related individuals: X (controller of A), Y (close family).
- Related entities: B (associate of A), C (controlled by close family).
- Non‑related entity: D (only a common director, no control or significant influence).
In practice, you can use the same thinking as a reusable framework:
When you receive a group / shareholder chart, circle the people first, then the entities, then draw arrows showing control or significant influence. Finally, label each party with its related party category – parent, subsidiary, fellow subsidiary, associate, close family entity, etc.
This “related party map” becomes your working tool for both accounting and audit.
3. Integrated Case 2: Government-Related Transactions and Grants
Now look at a government-heavy scenario, which is very common in practice:
- Government G controls Company P, and P controls Company S (the reporting entity).
- S provides services to multiple government departments and government-related entities; this revenue totals 35% of S’s total income.
- S obtains a low-interest, long-term loan from a bank controlled by G.
- S also receives a cash grant from G to subsidise part of its operating expenses.
Questions:
- Who are the related parties, and does the government-related entity exemption apply?
- What needs to be disclosed under HKAS 24 / IAS 24?
- What needs to be disclosed under HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance (equivalent to IAS 20)?
Step 1: Related parties and government exemption
- G is the ultimate controlling party of S → G is a related party of S.
- Entities controlled by G – government departments, government banks, government-related companies – are also related parties of S.
- Because S and these entities are all under the same government’s control/influence, they fall into the government-related entity environment, so the HKAS 24 / IAS 24 government-related exemption framework is relevant.
That means S does not have to list every government department by name and every small contract, but it must still obey the minimum disclosure requirements.
Step 2: HKAS 24 / IAS 24 disclosure
Under HKAS 24 / IAS 24, S should:
- Disclose the name of government G and describe the nature of its relationship with S (for example, “G is the ultimate controlling party of the entity, acting through its investment holding company P”).
- Separately disclose any individually significant related party transactions – for example, the low-interest long-term loan, with its key terms and amounts.
- Disclose the aggregate amount of government-related revenue that is collectively significant (such as the 35% of total revenue), describing the main types of services and explaining how dependent S is on government-related customers.
The key is to show who is behind the entity and how much of S’s business depends on the government and its related bodies, without drowning readers in an endless list of small contracts.
Step 3: HKAS 20 / IAS 20 disclosure
The cash grant is a government grant. Under HKAS 20 / IAS 20, S should disclose:
- The nature of the grant and main conditions attached.
- When and how the grant is recognised (for example, recognised as other income over the period in which the related costs are incurred).
- How it is presented in the financial statements (for example, as other income or as a reduction of related expenses).
If the low-interest loan includes a grant element (for example, interest significantly below market), HKAS 20 may also require disclosure of how that grant component is measured and recognised.
In short, train yourself to distinguish:
- The relationship / transaction side → HKAS 24 / IAS 24.
- The grant / assistance accounting side → HKAS 20 / IAS 20.
The same government arrangement can trigger both standards, but each one looks at a different angle.
4. Common Errors in Practice and Exams
HKAS 24 / IAS 24 errors rarely come from total ignorance. They often arise because:
- People rush to draft disclosures before their thinking is organised.
- Labels like “government”, “director” or “related company” mislead them into automatic, but incorrect, conclusions.
Here are several high‑frequency mistakes to watch for:
- Assuming every entity controlled by the same government must be named individually
- This ignores the government-related entity exemption, which allows aggregated disclosure for many transactions.
- Correct approach: identify individually significant and collectively significant government-related transactions, decide which to disclose separately and which to combine in totals plus narrative.
- Only looking at entities, ignoring individuals and their close family
- Example: only checking shareholder registers and missing companies controlled by directors’ spouses or close family members.
- In practice, entities controlled or significantly influenced by close family members of key individuals are frequent “blind spots” in the related party circle.
- Thinking management entities must disclose individual staff salaries
- Some assume that under a management entity model, the reporting entity must break down the management company’s internal payroll.
- HKAS 24 / IAS 24 actually allows the reporting entity to disclose only the total fee paid for KMP services to the management entity, without splitting it into each individual manager’s salary.
- Making “arm’s length” statements too casually
- Writing “all related party transactions were on an arm’s length basis” without any supporting evidence: no market comparisons, no documented pricing policies, no approval records.
- A better approach: only use such statements when you can point to real support; otherwise, limit yourself to clear disclosure of terms and amounts and let users decide.
- Disclosing only amounts, not nature and terms
- Some notes show numbers but do not explain whether they are loans, sales, service fees or rentals, nor whether there are special terms.
- Remember: HKAS 24 / IAS 24 aims to help users understand how relationships affect transactions, not just how big the numbers are.
If you deliberately guard against these five traps when drafting notes or answering exam questions, you will be ahead of many candidates and even some practitioners.
5. A Quick-Memory Framework for HKAS 24 / IAS 24
To finish, here is a simple “quick‑memory” framework you can actually use under time pressure.
Definitions and scope: three keywords + three types of parties
- Keywords: control, joint control, significant influence.
- Parties:
- Entities: parent, subsidiary, fellow subsidiary, associate, joint venture.
- Individuals: those with control, joint control or significant influence, plus close family.
- Government and government-related entities.
Disclosure spine: 1 relationship + 4 elements + 1 compensation
- The “1 relationship”:
- Parent, highest-level parent and ultimate controlling party – name and nature of relationship.
- The “4 elements” for related party transactions and balances:
- Nature of transaction and relationship.
- Amounts of transactions during the period.
- Closing balances and key terms, including guarantees or collateral.
- Any bad debt allowances or recognised losses relating to those balances.
- The “1 compensation”:
- KMP compensation broken down into five categories (short‑term, post‑employment, other long-term, termination, share-based payment), or total management‑entity KMP service fees where applicable.
Government exemption: two groups + two levels of disclosure
- Two groups:
- The government that controls / jointly controls / significantly influences the entity.
- Other entities controlled / jointly controlled / significantly influenced by that same government.
- Two levels of disclosure:
- Minimum: name of the government and nature of relationship.
- Further: individually significant transactions + aggregated information on collectively significant transactions (with descriptions of main types and totals).
Simplified thinking steps (for work and exams)
Whenever you see an HKAS 24 / IAS 24 issue, think:
- List related parties and their categories (entity / individual / government).
- If government is involved, decide whether the exemption logic applies.
- List what must be disclosed (relationships, transactions, balances, commitments).
- If KMP / management entities appear, decide how to disclose compensation or service fees.
- If there is room, briefly mention aggregation choices, non‑market terms and any supported “arm’s length” comments.
Key Takeaways for Students and Junior Accountants
- Turn HKAS 24 / IAS 24 into a workflow: identify related parties, check government-related exemption, list transactions/balances/commitments, then layer on disclosure detail and KMP issues.
- When ownership structures are complex, draw a “related party map”: start from the reporting entity, mark individuals and close family, then add entities and arrows for control or significant influence.
- In mixed cases with government and grants, separate the relationship and transactions angle (HKAS 24 / IAS 24) from the grant accounting angle (HKAS 20 / IAS 20).
- Avoid the classic pitfalls: assuming every government-controlled entity must be named, ignoring close family entities, over‑disclosing management entity details, making unsupported arm’s‑length claims, and giving only numbers without context.
- Use the “1 relationship + 4 elements + 1 compensation” spine as your mental checklist when drafting notes or answering exam questions.
- Practise by reverse‑engineering real annual reports: take a related party note and see how it follows (or sometimes fails to follow) the framework in this article.
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