Full explanation
Overview
A company sells raw materials to another business, at a completely normal market price. Nothing wrong with the deal. But if the buyer is run by the CEO's spouse, the rules say you still have to tell investors — because the relationship itself is the risk signal, not the price.
Four standards, one job each — telling investors more about numbers already on the page. IAS twenty-four: related parties. IAS thirty-three: earnings per share. IAS thirty-four: interim reports. IFRS eight: operating segments. None change what you recognise — they change what you reveal.
One disclosure layer
Four modules: who you're really dealing with, what a share is really worth, why a quarter stands on its own, and how a company draws its own map.
Who counts
Related parties: parents, subsidiaries, associates, joint ventures, and key management personnel — sometimes shortened to KMP — plus their close family. If a transaction involves any of these, the relationship must be disclosed, even if the price is completely at arm's length.
Even with zero transactions
One rule catches people out: if a parent controls the company, that relationship is disclosed even with zero transactions between them, and even if the parent never prepares its own public accounts. The relationship itself is the disclosure — not just what passed between them.
Why does the relationship matter more than the price? Because a related party can influence a deal in ways an outsider never could — timing, terms, even whether the deal happens at all. Disclosure isn't an accusation. It's telling investors who's really on both sides of the table.
What must be shown
What must be disclosed: the nature of the relationship, transaction amounts, outstanding balances, and terms. KMP compensation is broken out by category — short-term, post-employment, share-based. One exemption: government-related entities get reduced disclosure, so a state-owned company isn't buried under thousands of routine related-party notes.
In practice
Meridian Ltd's related-party note, in practice: goods sold to an associate, three hundred forty thousand euros, on normal commercial terms. Raw materials bought from the CEO's spouse's company, eighty-five thousand euros. Outstanding balance owed by the associate at year end, forty thousand euros — all three lines, disclosed, whether or not anything about the pricing looks unusual.
Basic EPS
Earnings per share: same net profit, different share count, different EPS. The denominator is where the real judgement lives. Basic EPS: profit attributable to ordinary shareholders, divided by the weighted-average number of shares outstanding.
Diluted EPS asks a harder question: what would EPS be if every option, warrant, and convertible bond actually converted into shares? It's always the same or lower than basic EPS — because it's the worst-case view for existing shareholders, built deliberately to protect them from an overstated per-share number.
€5.00, or €4.42?
Meridian Ltd: profit attributable to ordinary shareholders, five hundred thousand euros. Weighted-average shares outstanding, one hundred thousand. Basic EPS: five euros. Now the convertible bonds: if converted, they add twenty thousand shares, and add back the after-tax interest saved — thirty thousand euros. Diluted EPS: five hundred thirty thousand, divided by one hundred twenty thousand shares — four euros forty-two.
Dilutive or not
That's dilutive, because four forty-two is lower than the five-euro basic figure — so it's included. An instrument that would INCREASE earnings per share if converted is anti-dilutive, and IAS thirty-three requires you to leave it out entirely. And a bonus issue or share split restates every prior period's share count — one of the only retrospective adjustments in this whole standard.
On the face
Presentation: both basic and diluted EPS appear on the face of the income statement, for continuing operations and for total profit or loss, given equal prominence — not buried in a note. If the company makes a loss, the loss per share is still disclosed, and in a loss year potentially-dilutive instruments usually become anti-dilutive, so basic and diluted EPS often end up the same number.
The reconciliation
IAS thirty-three also requires its own reconciliation: the exact profit figure and share count used for both basic and diluted EPS, laid out line by line, plus a description of any instrument that COULD dilute in future but was left out this period because it wasn't yet convertible or exercisable.
Interim reports — a quarter, or a half-year. The single most misunderstood point in IAS thirty-four: an interim period stands as a discrete period in its own right. It's not just a slice of the annual number, waiting to be smoothed out.
Discrete vs integral
Most costs are recognised as incurred — the discrete view. One exception: income tax uses an estimated ANNUAL effective rate applied to the interim period — the integral view. And a retailer's fourth quarter always looks disproportionately strong: IAS thirty-four requires that seasonality be disclosed, not smoothed away to look more even.
The integral view
Meridian Ltd, worked example: full-year effective tax rate is estimated at twenty-eight percent. First-quarter pre-tax profit, two hundred thousand euros. Q1 tax expense: two hundred thousand times twenty-eight percent — fifty-six thousand euros — using the full-year estimated rate, not a rate calculated from Q1 alone.
Two comparison points
Comparatives differ by statement, and this trips people up. The interim balance sheet compares to the END of the prior full year — not the same interim date a year ago. But the income statement and cash flow statement compare to the SAME interim period last year. Two different comparison points, inside one set of interim accounts.
Condensed, not full
IAS thirty-four sets a minimum content: condensed statements — financial position, comprehensive income, changes in equity, cash flows — plus selected explanatory notes. Not the full annual disclosure set. And any event or transaction that's significant to understanding the interim period must be disclosed, even if it wouldn't normally warrant its own note in the annual accounts.
The management approach
Operating segments: defined by how management actually runs the business internally — the management approach — not by geography or product lines imposed from outside. Segments are whatever the CODM, the chief operating decision maker, uses to allocate resources and judge performance.
Three conditions
Formally, an operating segment must meet three conditions: it earns revenue and incurs expenses from its business activities; its results are regularly reviewed by the CODM to assess performance and decide on resources; and discrete financial information is actually available for it. All three, or it isn't a segment at all.
Why hand the definition to management instead of a fixed rule? Because the goal is to show investors the business through the same lens the people running it actually use — not a tidier version invented for the accounts.
Combining segments
Two segments that separately fail the size tests can still be combined — aggregated — if they share similar economic characteristics AND are alike on every one of five fronts: the nature of the products or services, the production process, the type or class of customer, the distribution method, and the regulatory environment. Miss any one of those, and they stay separate, however small each one is.
The 10% test
Meridian Group, five internal segments, total external revenue ten million euros. Manufacturing: four point two million, forty-two percent — passes the ten percent test. Distribution: three point one million, thirty-one percent — passes. Consulting: one point five million, fifteen percent — passes. Leasing: eight hundred thousand, eight percent of revenue — fails on revenue, but its assets are fourteen percent of the total, so it's still reportable. Other: four hundred thousand, four percent — folds into 'all other segments.'
The 75% test
The reportable segments already cover ninety-six percent of external revenue — comfortably past the seventy-five percent coverage test, so no extra segments are forced. Disclosure per segment: revenue, profit or loss, assets, and a reconciliation back to the consolidated totals — often the most closely audited part of the whole note.
Even with one segment
One more layer applies to EVERY company, even one with a single reportable segment: entity-wide disclosures. Revenue by product or service, revenue by geographical area, and — the one that catches people off guard — if a single external customer accounts for ten percent or more of total revenue, that concentration must be disclosed, without naming the customer.
Same threads
These four standards connect to the rest of the channel: KMP compensation ties to IFRS two's share-based payment; convertible options feed straight into diluted EPS; and segment profit measures often differ from IFRS profit — the same management-defined-measure tension IFRS eighteen covers.
IFRS eighteen adds real weight here. Segment profit could always differ from the income statement — but IFRS eighteen's management-performance-measure rules now force that gap to be reconciled, line by line, back to the nearest IFRS subtotal. And interim reports apply that same classification first — before the year end.
Does related-party disclosure mean the transaction was wrong?
Question: does related-party disclosure mean the transaction was wrong? No — disclosure is a transparency requirement, not an accusation. Most related-party transactions are completely legitimate.
Can a company just pick its own segments?
Question: can a company just pick its own segments? No — bounded by the management-approach test and the quantitative thresholds. It's not arbitrary, even though it starts from how management actually sees the business.
Why does diluted EPS matter if conversion hasn't happened?
Question: why does diluted EPS matter if the conversion hasn't happened? Because it shows the worst-case dilution up front, so investors are never surprised later by a per-share number that quietly gets smaller once convertible instruments actually convert.
The real texture
For investors, these four standards are where the real texture of a business shows up — who it really transacts with, what a share is genuinely worth once dilution is priced in, whether a strong quarter is a trend or a seasonal blip, and which parts of the business are actually driving the numbers.
Next up: IAS nineteen, employee benefits — pensions, and why the promise a company makes to its retirees can be one of the biggest, least understood numbers on its balance sheet.