WeekIII - related party slides

WeekIII - related party slides - Related Party Disclosures...

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Unformatted text preview: Related Party Disclosures IAS 24 Overview of session 1. Introduction 2. Definitions & Recognition 3 . Disclosure 2 Related Party Disclosures Introduction Objective of IAS 24 • to ensure that an entity's financial statements contain the disclosures necessary 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 such parties. 4 Scope of IAS 24 a. identifying related transactions; party relationships and b. identifying outstanding balances between an entity and its related parties; c. identifying the circumstances in which disclosure of the items in (a) and (b) is required; and d. determining the disclosures to be made about those items. 5 Related Party Disclosures Definitions & Recognition Definitions a. A person or a close member of that person’s family is related to a reporting entity if that person: i. has control or joint conrol over the reporting entity ii. has significant influence over the reporting entity iii. is a member of the key management personnel of the reporting entity or of a parent of the reporting entity b. An entity is related to a reporting entity if any of the following conditions apply i. the entity and the reporting entity are members of the same group (meaning that each parent , subsidiary and fellow subsidiary is related to the others) ii. One entity is an associate or joint venture of the other entity 7 Definitions b. An entity is related to a reporting entity if any of the following conditions apply ( cont’d) iii. Both entities are joint ventures of the same third party iv. One entity is a joint venture of a third entity and the other entity is an associate of the third entity v. the party is a post-employment benefit plan for the benefit of employees of the reporting entity, or of any entity that is a related party of the entity. vi. The entity is controlled or jointly controlled by a person identified in (a) vii.A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity) 8 Definitions • • A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged. Close members of the family of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. They may include: a. the individual's domestic partner and children; b. children of the individual's domestic partner; and c. dependants of the individual or the individual's domestic partner. 9 Definitions • Compensation includes all employee benefits. Employee benefits are all forms of consideration paid, payable or provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity. It also includes such consideration paid on behalf of a parent of the entity in respect of the entity. • Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. 10 Definitions • Joint control is the contractually agreed sharing of control over an economic activity. • Key management personnel are those persons having authority and responsibility for planning, directing and control ling the activities of the entity, directly or indirectly, including any director of that entity. • Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. Significant influence may be gained by share ownership, statute or agreement. 11 Determining related parties Control Determining Related Parties Parents Subsidiaries Fellow subsidiaries Joint ventures Other entities controlled by owners or key management Significant influence Key management personnel 12 Examples of related party transactions Sales and purchases of good and services Balances arising as a result at the Balance Sheet date Loans, commitments and contingencies Transactions with directors Bank loans and collateral Leases 13 Exclusions Providers of finance Trade Unions Public utilities Government departments and agencies Single suppliers / customers / franchises / distributors unless a specific relationship exists Entities with a director in common unless that director has the ability to direct or significantly influence Two venturers simply because they share joint control over a joint venture 14 Related parties for only part of the year Company A acquires 25% of Company B, regular supplier, on 1/9/20XX for which it equity accounts. During the year ended 31/12/20XX Company B makes sales to A of 2,000. The total sales till 1/9/20XX were 1,100. The companies are related from 1/9/20XX and 900 should be disclosed as a related party transaction. 15 Related Party Disclosures Disclosure Disclosures Nature of the relationships Key management personnel compensation Amount of transactions Amount of outstanding balances 17 Related party disclosures of B? A B C • Company A charges service fee to both Company B & C amounting to 10 • Company B sells product to Company C amounting to 50 • Company C gives loan to Company B amounting to 20 with an interest rate of 10% per year. 18 Related party disclosures of B? Related company transactions as of 31.12.2007: Service expenses: Company A (Parent Company) 10 Product sales: Company C (other related party) 50 Financial expenses: Company C 2 19 Related party disclosures of B? Related company balances as of 31.12.2007: Due from related parties: Company C (other related party) xx Due to related parties: Company A (parent company) xx Financial liabilities: xx Company C Further notes (i.e İ nterest rate, maturity) 20 Related party disclosures of B? AND Renumeration of key management personnel and directors xx 21 Disclosures terms and conditions of outstanding balances details of any guarantees given or received provisions for doubtful debts related to the amount of outstanding balances the expense recognised during the period in respect of bad or doubtful debts due from related parties 22 Disclosures Separately for each of the following categories: • the parent; • entities with joint control or significant influence over the entity; • subsidiaries; • associates; • joint ventures in which the entity is a venturer; • key management personnel of the entity or its parent; and • other related parties. 23 Question The organization chart of A,B,C,D and E is as follows: B A 30% Which companies does A has to disclose in its financials in terms of related party transactions? B 30% 70% C 50% E E!! D C D 24 CASE STUDY#1 Issue Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Key management personnel are classified as related parties. How should management disclose the sale of property by a subsidiary to a director of the subsidiary? - in the group’s financial statements; and - in the subsidiary’s financial statements? Background Entity X owns 70% of the share capital of its subsidiary entity Y. Mr. Choo, who is a director of entity Y, owns the remaining 30% of the shares. Entity Y has sold a property to Mr. Choo for 3,000. Mr. Choo is not a director of entity X. 25 CASE STUDY#2 Issue The related parties of the reporting entity include those entiti es in which a major shareholder of the reporting entity or key management of the reporting entity owns a substantial interest in the voting power, directly or indirectly. Additionally, entities with members of key management in common are also related parties. Should management present an entity as related party because a director of a subsidiary is the majority shareholder of this ent ity? Background A parent has a wholly owned subsidiary. One of the directors of the subsidiary is the majority shareholder of an otherwise independent third party entity that sells goods at arm ’s length to the subsidiary. The director is key management of the subsidiary. 26 CASE STUDY#3 Issue The elements of transactions necessary for an understanding of the financial statements would normally include details of the amoun ts or appropriate proportions of outstanding items. How should management present transactions with entities that ar e related parties for only part of the year? Background An entity, A, is acquired as part of a business combination in February 20X7. Entity A was acquired with the intention of disposal and was sold in November 20X7. Accordingly management have not consolidated the results of entity A into the consolidated financial statements for the year to 31 December 20X7. Consequently, transactions between entity A and the rest of the group are not eliminated on consolidation. Entity A is a regular supplier to the group and during 20X7 the entity continued to supply goods to the group. 27 QUESTIONS? ...
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This note was uploaded on 04/08/2010 for the course FEAS AD 476.01 taught by Professor Müfitbodur during the Spring '10 term at Boğaziçi University.

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