You may have encountered the term “close family member” in your Accounting & Finance major. This word is used mostly in IAS 24 Related Parties. So, who are close family members? This article explains.
Close Family Member Definition
A close family member in finance refers to an individual who may be expected to influence or be influenced by that family member in their dealings. The term is mostly used in IAS 24 Related Parties to identify whether a person is a related party for disclosure purposes.
In addition, the standard has also explained which family members should be considered as close family members. Close members of family include:
- that person’s children and spouse or domestic partner
- children of that person’s spouse or domestic partner
- dependants of that person
- dependants of that person’s spouse or domestic partner
The above people will be considered close family members and will be identified as related parties as per IAS 24.
Why Close Family Members Are Identified?
Primarily, the concept of close family members is used to identify related parties for disclosure purposes. A close family member is considered as a related party because s/he can influence or be influenced by the party that s/he is close to.
These related parties or the transactions that they have made to each other such as sales, loans, leases, etc… are required to be disclosed as per the standard. The disclosure is necessary because it can distort the performance of the entity if the transaction is unusual. For example, if one related party sells a product to the other at a price higher than the active market price, then the financial statements will reflect higher profit for the year and would misguide the investors about the potential of the entity.
Therefore, it is of keen importance to let the investors know the fair position and performance of the entity so that they have fair data available for decision-making purposes.
