ACCA Strategic Business Reporting (SBR) Practice Exam

According to IAS 24, why is it important to disclose related party transactions?

1. To ensure compliance with legal standards

2. To protect the interests of creditors

3. To assess the impact on financial position and profits

4. To manage investor relations

The correct answer is: To assess the impact on financial position and profits

Disclosing related party transactions is crucial because it allows users of financial statements to assess the impact these transactions can have on a company's financial position and performance. Related party transactions may not represent arm's-length dealings, which can lead to potential biases that affect the financial statements’ reliability. By making these disclosures, the financial statements provide a clearer picture of the company's true financial health, ensuring greater transparency. Understanding the impact of related party transactions helps stakeholders, such as investors and analysts, determine whether the financial performance and financial position of an entity are depicted fairly. This insight can have significant implications for decisions regarding investment, creditworthiness, and corporate governance since these transactions may influence the profitability and resource allocation of the business. The other choices might touch upon important aspects of financial reporting and governance but do not encapsulate the primary reason for disclosing related party transactions as effectively as understanding their impact on financial position and profits.