TUTORIAL 2

(MFRS 124 – Related Party Disclosures)

(Answer)

Question 1-answer
Mrs Yap’s acquisition of the equity shares in Bagus Co would be deemed a related party
transaction if the acquisition enabled her to control or have significant influence over Bagus Co.
A 5% ownership would not give Mrs Yap control over the operating decisions of Bagus Co and
it is clear she would not be able to control the entity. Significant influence is the power to
participate in the financial and operating decisions of the entity. It is presumed that a holding of
less than 20% of the voting power is insufficient for significant influence unless this can be
clearly demonstrated. Mrs Yap is unaware of the proposed restructure which would suggest that
she does not have a board position. It can be concluded that she does not have control nor
significant influence.
Mrs Yap would be deemed to be a close family member of Mr Yap. She would therefore be
deemed to be a related party if it was concluded that Mr Yap is a member of key management
personnel of Bagus Co. Mr Yap is the head accountant of Bagus Co but it seems highly unlikely
that he would be deemed to be key management personnel. There is no evidence that he has
authority or responsibility for planning, directing and controlling the activities of Bagus Co. Nor
does he appear to be a director of the entity. It can be concluded that Mrs Yap’s acquisition of
the 5% of the equity in Bagus Co would not be a related party transaction.

ii) A provision for restructuring costs should only be recognised in the financial statements of
Bagus Co where all of the following criteria are met:

– A reliable estimate can be made of the amount of the obligation;

– It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation;
– There is a present obligation as a result of a past event.

IAS® 37 or MFRS 137 Provisions, Contingent Liabilities and Contingent Assets states that it
would be extremely rare that no reliable estimate can be made. A best estimate of the
expenditure required to settle the present obligation should be provided as at 31 December 2020
should all criteria be met. In the case of a restructuring provision, this should only include direct
expenditure arising from the restructuring and not associated with ongoing activities. Hence the
relocation costs would not be included as, although they relate directly to the restructuring, the
costs would be classified as an ongoing activity.

An obligation is regarded as probable where the event is more likely than not to occur. It is not
clear that the restructuring is probable. Mrs David has indicated that alternative strategies are
possible and further clarification would be required to ascertain whether these activities would
constitute a restructuring as per MFRS 137. Only then may it be determined that a restructuring
is indeed probable.

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A constructive obligation for restructuring only arises where a detailed formal plan exists and a
valid expectation to those affected by the restructuring that it will take place has occurred. A plan
is in place but management does not yet appear committed as alternative strategies are possible.
It is unlikely therefore that the plan is detailed and specific enough for these criteria to be
satisfied. For example, the specific expenditure to be incurred, the date of its implementation and
timeframe which should not be unreasonably long must be identified. With alternative strategies
available, this does not appear to be the case. Furthermore, Mr Yap is the only member of staff
who has been notified and no public announcement has been made as at the reporting date.
Consequently, there is no obligation in existence as at 31 December 2020 and no provision can
be recognised. Mrs David has identified that a final decision on the restructuring and
communication is likely to take place before the financial statements are authorised. This would
almost certainly be a material event arising after the reporting date but should be treated as non-
adjusting. Accordingly, Bagus Co should disclose the nature of the restructuring and an estimate
of its financial effect but recognition of a restructuring provision is still prohibited.

Question 2-answer
(a)
For Entity A : Investor J [Para 9 (a) (i)- members of same group]
: Entity B [Para 9 (b) (vi)- controlled or jointly control by a person identified
in (a)], Para 9 (a) (i)members of same group]
For Entity B : Investor J [Para 9 (a) (i)members of same group]
: Entity A [Para 9 (b) (vi), Para 9 (a) (i)]

(b)

For Entity A : Entity X [Para 9 (b) (ii)- associate or joint venture]

: Entity C [Para 9 (b) (i)-control or joint control]
: Entity B [Para 9 (b) (iv)-joint venture of a third party and other entity is an
associate of the entiry)
: Entity D [Para 9 (b) (iv), Para 9 (b) (i)]

For Entity B : Entity X [Para 9 (b) (ii))- associate or joint venture]

: Entity D [Para 9 (b) (i)members of same group]
: Entity A [Para 9 (b) (iv)joint venture]
: Entity C [Para 9 (b) (iv), Para 9 (b) (i)]

For Entity C : Entity A [Para 9 (b) (ii))- associate or joint venture]

: Entity X [Para 9 (b) (i)members of same group]
: Entity B [Para 9 (b) (iv)joint venture]
: Entity D [Para 9 (b) (iv)joint venture, Para 9 (b) (i)]

For Entity D-not related as it under an associate (Entity B)

(c) to ( d)

A related party is a person or entity that is related to the entity that is preparing its financial
statement.

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Based on Para 9(b) an entity is related to a reporting entity if:
(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 a parent of the entity).

Para 9(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 control 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.

Answer-c

In this question, Entity A is influence by investor K which has fulfil the requirement of Para 9(b)
(vi) and Entity B is jointly controlled by investor K which has fulfils the requirement of Para
9(b)(vii). Therefore, they are related.

Answer- (d)

Entity A and Entity B are members of the key management personnel in common. Therefore,
they are NOT related under para 11 (a) of MFRS 124-“ two entity simply because they have a
director or other member of key management personnel in common or because a member of key
management personnel of one entity has significant influence over the other entity”

Answer- (e)

Entity C and Entity D have control or joint control over Joint-venture E. Therefore, they are
related. Assuming reporting entity is JV-E, both entity C and D are related, but not if
reporting entity is C or D.

Question 3

1. Jaya SB must disclose its parent (Cerdik) and ultimate controlling party (the Kaya
family). This is irrespective of whether transactions have occurred with these related
parties during the period.
2. The company in which Pandai has a 23% shareholding is related to Jaya SB as it is
significantly influenced by close family of a controlling party of Jaya SB. Consequently
the sales, any outstanding balances and any bad or doubtful debts must be disclosed even
though they are at market prices: Jaya SB might loss this business if Pandai's husband
was not a shareholder and investors need to be aware of this.

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 3. The interest-free loans, although a benefit, are not a related party transaction in
themselves; they are part of the remuneration package of the employees and would be
accounted for under MFRS 119 Employee Benefits. However, if the employees include
key management personnel the transaction and its cost must be disclosed as a related
party transaction for them.

4. Service fee = transaction between controlling party

Disclose in Jaya SB’s financial statement, x in group a/c – Intra-group transaction

5. Potong is major customer, x member of the same group, x joint venture or other.
= x related party

6. Post-employment benefit plan – MFRS 124, is a related party.

Jaya SB x this transaction –currently overfunded – x contribution - x disclosure
= the plan need recognizes in ‘other income and expenses’

Question 4
(i)
The exclusion of the remuneration of the non-executive directors from key management
personnel disclosures did not comply with the requirements of MFRS 124, which defines key
management personnel as those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly, including any director
(whether executive or otherwise) of that entity. Amanah did not comply with paragraph 16 of
the standard, which also requires key management personnel remuneration to be analysed by
category. The explanation of Amanah is not acceptable. MFRS 124 states that an entity should
disclose key management personnel compensation in total and for each of the following
categories:

(a) short-term employee benefits:

(b) post-employment benefits;
(c) other long-term benefits;
(d) termination benefits; and
(e) share-based payment.

Providing such disclosure will not give information on what individual board members earn as
only totals for each category need be disclosed, hence will not breach any cultural protocol.
However, good corporate governance will require greater disclosure for public entities such as
Amanah.

By not providing an analysis of the total remuneration into the categories prescribed by the
standard, the disclosure of key management personnel did not comply with the requirements of
MFRS 124.

(ii)

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 Note: This is a tricky requirement as few students are likely to be aware of the exemptions in
MFRS124 Related Party Disclosures for government related entities. However, you can still
score solid marks for showing a basic knowledge of the contents and purpose of MFRS 124.

Related party disclosures

Under MFRS 124 Related Party Disclosures, disclosures are required in respect of an entity’s
transactions with related parties. Related parties include parents, subsidiaries, members of key
management personnel of the entity or of a parent of the entity, and post-employment benefit
plans. Where there have been related party transactions during the period, management discloses
the nature of the relationship, as well as information about the transactions and outstanding
balances necessary for users to understand the potential impact of the relationship on the
financial statements. Disclosure is made by category of related party and by major type of
transaction. Management only discloses that related party transactions were made on terms
equivalent to those which prevail in arm’s length transactions if such terms can be substantiated.

Government related entities

Government-related entities are defined as entities which are controlled, jointly controlled or
significantly influenced by the government. The financial crisis widened the range of entities
subject to the related party disclosure requirements. The financial support provided by
governments to financial institutions in many countries meant that the government controls
significantly influenced some of those entities. A government-controlled bank would, in
principle, be required to disclose details of its transactions, deposits and commitments with all
other government-controlled banks and with the central bank.

However, there is an exemption from all of the disclosure requirements of IAS 24 for
transactions between government-related entities and the government, and all other government-
related entities. PutraJaya is exempt from the disclosure requirements in relation to related party
transactions and outstanding balances, including commitments, with:

(a) a government which has control, joint control or significant influence over the reporting
entity; and

(b) another entity which is a related party because the same government has control, joint control
or significant influence over both the reporting entity and the other entity.

Those disclosures are replaced with a requirement to disclose:

(a) the name of the government and the nature of their relationship; and
(b) (i) the nature and amount of any individually significant transactions; and
(ii) the extent of any collectively significant transactions qualitatively or quantitatively.
The disclosures provide more meaningful information about the nature of an entity’s relationship
with the government and material transactions.

Question 5

(1) Lease incentive

The new lease on the head office building is for six years out of the estimated life of the
building of 30 years. The company has no right to direct the use of the head office other than for
office use. It is therefore assumed that the company has no right of control of the asset as per
MFRS 15.

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The lease payments should be charged on a straight-line basis over the lease term. This would
ordinarily be RM1,400 per month. However, here, there is a rent-free period of nine months and
this appears to therefore constitute an incentive and should be accounted for. The aggregate of
the benefit of the incentive should be recognised as a reduction of the rental expense over the
whole of the lease term on a straight-line basis.

The total lease payments payable over the six-year lease term are RM88,200 ((1,400 x 12 x 6) –
(1,400 x 9)). This should then be spread evenly over the six year period, so RM1,225 per month
(88,200 / (12 x 6)) should be recognised.
So for the year ended 30 September 2020 RM12,250 (1,225 x 10 months) should be recognised
as an expense in the statement of profit or loss. HRM plc instead recognised the amounts paid in
the year which was RM4,200 (1,400 x 3 months). Hence an additional charge of RM8,050
(12,250 – 4,200) should be recognised.
A corresponding liability for RM8,050 should be recognised.

(2) Related parties

Fern Danica is a related party to both HRM plc and Acacia Ltd, as she is a director of both
companies and is therefore a member of key management personnel. However, such a
relationship does not automatically mean that HRM plc and Acacia Ltd are related parties and
instead the substance of the relationship should be reviewed. No additional information is
provided to suggest that the two companies are related parties and therefore it would appear that
there is no obligation to report the lease transaction between them.
However, even though there is no legal requirement to disclose the relationship, it may be
appropriate for this information to be provided on a voluntary basis.

(3) Provision for new legislation

IAS 37 or MFRS 137 Provisions, contingent liabilities and contingent assets states that a
provision should be recognised when the following three conditions are satisfied:
 There is a present obligation as a result of a past event;
 an outflow of resources is probable; and
 the amount can be estimated reliably.

To establish whether HRM plc has a present obligation arising from a past event an ‘obligating
event’ needs to have occurred. An obligating event can be legal or constructive in nature.
HRM plc has a legal obligation to put new systems in place for the new filters because new
legislation exists that they should comply with. This is therefore a present obligation, with the
non-compliance with the new filters being the past event. As there is an 80% chance that a fine
will be incurred, there is a probable outflow of resources, in the form of the fine. The fine has a
reliable estimate as there is a standard fine level. Therefore, a provision should be recognised for
the fine.

The actual cost of carrying out the work should not be recognised as a provision as there is no
present obligation as a result of a past event. HRM plc could sell that part of the business and
would therefore not then have an obligation to implement the new legislation
Based on the information given a best estimate for the provision would therefore be RM15,000.
This will reduce profit for the period by RM15,000.

(4) Component depreciation

The machine is an item of property, plant and equipment, the cost of which has been correctly
recognised as such on the date of acquisition. Where an asset has separate components, which

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have different useful lives, these need to be identified separately.
Each separate component is required be depreciated separately.
Hence only RM60,000 should have been depreciated over 12 years, so an adjustment of RM500
(12,000 / 12 x (6/12)) should be made to PPE and an increase in profit for the period. (OR
60,000 / 12 x (6/12) = RM2,500 of depreciation should have been recognised rather than
RM3,000 (72,000 / 12 x (6/12))). However, depreciation should instead have been recognised
on the cutters over three years, being RM2,000 (12,000 / 3 x (6/12)). So overall, there will be a
net reduction in PPE of RM1,500 and profit will decrease by the same amount. At 30 September
2020 the carrying amount of the machine should be RM67,500 (72,000 – 2,500 – 2,000).

(5) Customer list

IAS 38 or MFRS 138 Intangible Assets, defines an intangible asset as a non-monetary asset
without physical substance that is identifiable. An asset is identifiable if it is separable and
arises from legal or contractual rights. The list is separable as it was purchased from a third
party and is therefore identifiable. The customer list should therefore be recognised as a non-
current asset at its cost of RM81,000 at the date of acquisition.

An intangible asset may subsequently be carried at revalued amount where its fair value can be
determined by reference to an active market. For an active market to exists the following
conditions must apply:
 The items traded are homogeneous;
 Willing buyers and sellers can normally be found; and
 Prices are available to the public.

Items are homogeneous if they are all the same, so where an intangible asset is unique in nature
this would not meet this definition. A customer list is unique as it contains different information
to the next customer list and therefore is not homogenous and cannot be revalued. Even if the
intangible asset could be revalued then the revalued amount would not be recognised as part of
profit or loss but instead would be part of equity.
Non-current assets should be reduced by RM39,000 and profit for the period should also be
decreased by this amount.
The intangible asset should be amortised at 30 September 2020 over its useful life. So RM6,750
(81,000 / 3 x (3/12)) should be recognised as an expense in profit or loss for the period and
reduce intangible assets. At 30 September 2020 the intangible asset will be held at its carrying
amount of RM74,250 (81,000 – 6,750).

Question 6-answer
(a)
Any five of the following (list not exhaustive – MFRS 124 has further disclosure
items required):
(1) Purchases or sales of goods (finished or unfinished);
(2) Purchases or sales of property and other assets;
(3) Rendering or receiving of services;
(4) Leases;
(5) Transfers of research and development;
(6) Transfers under licence agreements;
(7) Transfers under finance arrangements (including loans and equity
contributions in cash or in kind);
(8) Provision of guarantees or collateral;

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 (9) Commitments to do something if a particular event occurs or does not occur in
the future, including executory contracts* (recognised and unrecognised); and
(10) Settlement of liabilities on behalf of the entity or by the entity on behalf of
that related party.

Q6 (b)
Accounting Principles:
MFRS 124 Related Party Disclosures requires an entity’s financial statements to 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.
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 control over the reporting entity
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.

Related party transactions are transactions that involves a transfer of resources, services or
obligations between related parties, regardless of whether a price is charged. At the minimum,
the following are to be disclosed:
 The amount of transactions
 The amount of outstanding balances

Accounting Treatments:
The accountant of Ace is correct when he required the finance director to disclose the
information on the goods purchased. This is because the Ventura is a related party of the Ace
where it is jointly owned by the finance director (KMP) and the wife (close family member). The
RP transaction is disclosed regardless of whether the price is charged or arm-length transaction.
Besides, the amount owed by the Ventura should be disclosed as well, as in accordance to the
MFRS 124 where stated that the amount of outstanding balances should be disclosed. The
finance director should not refused to make the disclosure in the account as this is necessary
disclosures are made with regard to related parties to draw attention to the possibility that the
financial statements may have been affected by transactions and outstanding balances with
related parties.

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Important para in MFRS124

Definitions – MFRS para 9 The following terms are used in this Standard with the meanings
specified:
A related party is a person or entity that is related to the entity that is preparing its financial
statements (in this Standard referred to as the ‘reporting entity’).
(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 control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(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 applies:

(i) The entity and the reporting entity are members of the same group (which means 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 (or an associate or joint
venture of a member of a group of which the other entity is a member).

(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 entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a
plan, the sponsoring employers are also related to the reporting 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).

A related party transaction is a transfer of resources, services or obligations between a

reporting entity and a related party, regardless of whether a price is charged. Close members of
the family of a person are those family members who may be expected to influence, or be
influenced by, that person in their dealings with the entity and include:
(a) that person’s children and spouse or domestic partner;
(b) children of that person’s spouse or domestic partner; and
(c) dependants of that person or that person’s spouse or domestic partner.

Compensation includes all employee benefits (as defined in MFRS 119 Employee Benefits)
including employee benefits to which MFRS 2 Share-based Payment applies. 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. Compensation includes:

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(a) short-term employee benefits, such as wages, salaries and social security contributions, paid
annual leave and paid sick leave, profit-sharing and bonuses (if payable within twelve months of
the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or
subsidised goods or services) for current employees;

(b) post-employment benefits such as pensions, other retirement benefits, post-employment life
insurance and post-employment medical care;

(c) other long-term employee benefits, including long-service leave or sabbatical leave, jubilee
or other long-service benefits, long-term disability benefits and, if they are not payable wholly
within twelve months after the end of the period, profit-sharing, bonuses and deferred
compensation;

(d) termination benefits; and

(e) share-based payment

Key management personnel are those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly, including any director
(whether executive or otherwise) 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. Government refers to government, government agencies and
similar bodies whether local, national or international.

A government-related entity is an entity that is controlled, jointly controlled or significantly

influenced by a government.

10 In considering each possible related party relationship, attention is directed to the substance
of the relationship and not merely the legal form.

11 In the context of this Standard, the following are not related parties:
(a) two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one entity has
significant influence over the other entity.

(b) two venturers simply because they share joint control over a joint venture.

(i) providers of finance,

(ii) trade unions,
(iii) public utilities, and
(iv) departments and agencies of a government that does not control, jointly control or
significantly influence the reporting entity, simply by virtue of their normal dealings with an
entity (even though they may affect the freedom of action of an entity or participate in its
decision-making process).

(a) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a
significant volume of business, simply by virtue of the resulting economic dependence.

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An entity shall disclose key management personnel compensation in total and for each of the
following categories:
(a) short-term employee benefits;
(b) post-employment benefits;
(c) other long-term benefits;
(d) termination benefits; and
(e) share-based payment.

18 If an entity has had related party transactions during the periods covered by the financial
statements, it shall disclose the nature of the related party relationship as well as information
about those transactions and outstanding balances, including commitments, necessary for users
to understand the potential effect of the relationship on the financial statements. These disclosure
requirements are in addition to those in paragraph 17.

At a minimum, disclosures shall include:

(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and: (i) their terms and
conditions, including whether they are secured, and the nature of the consideration to be
provided in settlement; and

(ii) details of any guarantees given or received;

(c) provisions for doubtful debts related to the amount of outstanding balances; and
(d) the expense recognised during the period in respect of bad or doubtful debts due from related
parties.

19 The disclosures required by paragraph 18 shall be made separately for each of the following
categories:
(a) the parent;
(b) entities with joint control or significant influence over the entity;
(c) subsidiaries;
(d) associates;
(e) joint ventures in which the entity is a venturer;
(f) key management personnel of the entity or its parent; and
(g) other related parties.

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