Related party dealings with no price charged
Why services, premises or loans a related party provides free of charge are still related party transactions under IAS 24, and what the note should say.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
The trading company operates from a building owned by the managing director's family trust and pays no rent. Its bookkeeping is done by staff employed by the holding company, which charges nothing. Its delivery bakkie belongs to a director, who never invoices for it. None of these arrangements appears anywhere in the ledger, because no money moved. So none of them appears in the related party note either.
That is the gap this article addresses. Free arrangements are among the most common features of owner-managed groups in South Africa, Nigeria and Kenya, and among the most often missed in their statements. IAS 24 is clear that a missing invoice does not mean a missing transaction.
IAS 24: a transfer counts whether or not a price is charged
IAS 24 defines a related party transaction as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. The final phrase settles the question. Rent-free premises are a transfer of resources. Free bookkeeping is a transfer of services. A director who stands surety for the company's overdraft has taken on an obligation for its benefit. Each is a related party transaction.
The relationship test is set out in the same standard. Under IAS 24, an entity is related to the reporting entity if, among other circumstances, it is a parent, subsidiary, fellow subsidiary, associate or joint venture of the reporting entity, or if it is controlled, jointly controlled, significantly influenced or managed by a person who is a related party. A family trust controlled by a director, a holding company and a sister company run by the same owner all usually fall inside that test.
Common free arrangements in owner-managed groups
When planning the related party work, ask about each of these:
- Premises used rent-free or at a token rent, owned by a director, a trust or a group company.
- Staff and management services provided by another group company without a recharge: accounting, payroll, IT, a shared managing director.
- Assets used without charge, such as vehicles, equipment or a warehouse.
- Interest-free or low-interest loans between group companies or with directors and shareholders.
- Security given by a director or a group company for the reporting company's borrowings.
- Costs borne by one company on behalf of another without recharge: insurance, licences, software subscriptions.
- Goods supplied at cost, or below, between group companies.
The client's directors often do not think of these as transactions at all. Asking specifically, item by item, gets better answers than a general question about related parties.
Why the reader needs to know
The IFRS Foundation states that the objective of IAS 24 is to make sure an entity's statements contain the disclosures needed to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with them, including commitments.
Free arrangements are a clear case. A company that pays no rent and no bookkeeping costs shows a profit it could not earn on its own. A lender assessing whether the business can service a loan, or a buyer considering acquiring it without the building, needs to know that the reported costs are lower than an independent business would bear. Without the disclosure, the statements present a better picture than the company could sustain by itself.
Asking the client through a request
The ledger will not reveal free arrangements, so the evidence has to come from the client. In Achekam, staff can create, send and track requests to clients for documents, answers and confirmations in one RFI console, and the same request form can be raised from a work item, the document console or an assurance review room.
A useful request lists the arrangements above and asks the client to confirm, for each, whether it exists, who the other party is, and what the terms are. Ask for supporting documents where they exist: a lease or occupation letter, a group services agreement, a board minute, a loan agreement, the facility letter showing who provided security. Track the request to a response; an unanswered related party request is a gap a reviewer will notice. Loans in particular are covered in loans from directors and shareholders.
Wording the note
IAS 24 requires that where an entity has had related party transactions during the periods covered by the statements, it discloses the nature of the related party relationship and information about those transactions and outstanding balances, including commitments, needed for users to understand their potential effect on the statements.
For a free arrangement, that means describing what was provided, by whom and on what terms, including that no charge was made. For example:
- "The company occupies premises owned by a trust of which the managing director is a beneficiary and trustee. No rent is charged."
- "Accounting and payroll services are provided by the holding company without charge."
- "A director has provided personal security for the company's bank overdraft. No fee is charged for this."
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write their own notes. Notes take their figures from the mapped trial balance, and facts the trial balance does not hold are left as "[to be completed]" for a person to fill. A free arrangement is exactly that kind of fact, since no amount was ever posted, so the preparer writes its description from the client's confirmed answers and checks the final note against the request responses one by one. The wider note is covered in related party disclosures.
The IFRS Foundation's IAS 24 page explains the disclosures the standard requires so readers can see how related parties may have affected an entity's results and position. Send the free-arrangements request at the start of fieldwork, not at the end, so the answers arrive in time to shape the note.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
