Why Related Party Disclosure Exists

AASB 124 exists because a transaction priced or structured differently from what an unrelated counterparty would agree to is invisible in the primary financial statements. The balance sheet and income statement record what happened at the amounts recorded; they do not flag that a lease was set below market rent because the landlord is the majority shareholder, or that a management fee was paid to a company owned by a director rather than tendered competitively. AASB 124 does not require related party transactions to be priced at arm’s length, and it does not prohibit them. It requires that a reader be told they exist, who the counterparty is, and what the transaction involved, so the reader can form their own judgment about whether the reported numbers reflect normal trading conditions.

Defining a Related Party

AASB 124 defines a related party through control, joint control, or significant influence relationships, and through the concept of key management personnel. A party is related to a reporting entity if, directly or indirectly, it controls, is controlled by, or is under common control with the entity; it has an interest that gives it significant influence; it is a joint venture in which the entity is a venturer; it is a post-employment benefit plan for the entity’s employees; or it is a close family member of an individual falling into any of the categories above.

Two categories cause most of the practical difficulty. The first is common control: two entities are related to each other if a third party controls both, even where neither entity has any direct relationship with the other and neither party may be aware of the connection without deliberately mapping the group’s ownership structure. The second is close family members, which AASB 124 defines broadly enough to include a person’s domestic partner and children, and any dependants of that person or their partner, extending the related party net well past the immediate corporate structure.

The KMP Test

Key management personnel are defined as those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any director, whether executive or otherwise. The test is functional, not titular. A person without a formal director title who nonetheless directs the entity’s activities, such as a de facto general manager reporting informally to an absent board, meets the KMP definition on substance. Conversely, a non-executive director who attends quarterly meetings but has genuine planning and directing authority over strategic decisions is KMP regardless of the limited time commitment, because AASB 124 looks at the nature of the authority held, not the number of hours worked.

Getting the KMP population wrong has a compounding effect: every close family member of every person wrongly included or excluded also enters or exits the related party population, and every entity that person or their family member controls or significantly influences moves with them. A KMP population review is therefore the first step in any AASB 124 engagement, not a formality performed after the transactions have already been identified.

What Gets Disclosed

Two disclosures are mandatory regardless of whether any related party transactions occurred during the period. First, KMP compensation must be disclosed in total and by category: short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payments. Second, where related party transactions did occur, AASB 124 requires disclosure of the nature of the relationship, the amount of the transactions, the amount of outstanding balances including terms and conditions and whether they are secured, and any provision for doubtful debts related to those balances.

A frequently missed nuance is that disclosure of “no related party transactions during the period” is itself a disclosure obligation, not something that can simply be omitted when the note has nothing to say. A blank or absent related party note reads as an omission during audit review, not as confirmation that none exist.

Why Australia Extends Further

AASB 124 substantively mirrors IAS 24, but the Australian application has one significant divergence covered in Part 3 of this series: from 2016, the AASB extended related party disclosure requirements to not-for-profit public sector entities, a scope extension that has no equivalent under IFRS. Government departments, local councils, and public sector entities that would have no related party disclosure obligation under an unmodified IAS 24 framework must apply the full AASB 124 regime in Australia, a deliberate transparency measure aimed at public sector KMP compensation and government-to-government transactions.

Practical Takeaway

Most AASB 124 problems trace back to an incomplete related party population, not to misapplication of the disclosure rules once the population is correctly identified. Building and maintaining a related party register that captures control relationships, significant influence, KMP, and close family members, and refreshing it whenever the ownership structure or KMP roster changes, is the single highest-leverage control an entity can put in place for this standard.