INTERMEDIATE ACCOUNTING III (AE 17)

LEARNING MATERIAL

UNIT NUMBER/ HEADING: RELATED PARTIES

LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Discuss the concept of related parties
b. Identify related parties
c. Determine the requirement for disclosure of related party
relationship and transactions
d. Identify the key management personnel compensation
required to be disclosed

Presentation of Content

DEFINITON AND BASIC PRINCIPLES

 Related party – parties are considered to be related if one party
has:
 The ability to control the other party
 The ability to exercise significant influence over the other
party
 Joint control over the entity
 Control is the power over the investee or the power to govern the
financial and operating policies of an entity so as to obtain
benefits
 Control is ownership directly or indirectly through subsidiaries
of more than half of the voting power of an entity
 Significant influence is the power to participate in the financial
and operating policy decision of an entity, but not control of those
policies (20% ownership of shares)
o If an investor holds, directly or indirectly through
subsidiaries, 20% or more of the voting power of the
investee, it is presumed that the investor has significant
influence, unless it can be clearly demonstrated that this
is not the case
o Beyond the mere 20% threshold of ownership, the
existence of significant influence is usually evidenced by
the following factors:
 Representation in the board of directors
 Participation in policy making process
 Material transactions between the investor and the
investee

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  Interchange of managerial personnel
 Provision of essential technical information
 Joint control is the contractually agreed sharing of control over
an economic activity

EXAMPLES OF RELATED PARTIES

1. Entities that directly or indirectly through one or more intermediaries,
control or are controlled by or under common control with the reporting
entity. Such entities pertain squarely to affiliates, meaning the parent,
the subsidiary and fellow subsidiaries.
2. Associates – entities for which the investments are accounted for by
the equity method
If the investment in an ordinary shares is 20% to 50%, the equity
method is used in accounting for investment.
3. Venturer in a joint venture. A joint venture includes the subsidiary or
subsidiaries of the joint venture
4. Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of
the entity, directly or indirectky, including any executive director or
nonexecutive director
5. Close family members 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 which include:
 The individual’s spouse and children
 Children of the individual’s spouse
 Dependents of the individual or the individual’s spouse
6. Individuals owning directly or indirecty an interest in the voting power
of the reporting entity that gives them significant influence over the
entity, and close family members of such individuals
7. Postemployment benefit plans for the benefit of employees of an
entity, or of an entity that is related party to that entity

EXAMPLES OF RELATED PARTY TRANSACTION

 Related party transaction is a transfer of resources or obligations
between related parties, regardless of whether a price is charged
 PAS 24, par. 20, provides the following examples of related party
transaction:
a. Purchase and sale of goods
b. Purchase and sale of property and other asset
c. Rendering or receiving services
d. Leases
e. Transfer of research and development

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 f. Finance arrangements, including loans and equity contributions in
cash or in kind
g. Guarantee and collateral
h. Settlement of liabilities on behalf of the entity or by the entity on
behalf of another party

RELATED PARTY DISCLOSURES

 PAS 24, par. 12, requires disclosure of related party relationships where
control exists irrespective of whether there have been transactions
between the related parties
 Relationships between parents and subsidiaries shall be disclosed
regardless of whether there have been transactions between those
related parties
 An entity shall disclose the name of the entity’s parent and if different,
the ultimate controlling party

DISCLOSURE OF RELATED PARTY TRANSACTION

 PAS 24, par. 17, provides that if there have been transactions between
related parties, an entity shall disclose the nature of the related party
relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the financial
statements
 As minimum, the disclosures of related party transaction shall include:
a. The amount of the transaction
b. The amount of outstanding balance, terms and conditions, whether
secured or unsecured, and nature of consideration to be provided in
settlement
c. The allowance for doubtful accounts related to the outstanding
balance
d. The expense recognized during the period in respect of doubtful
accounts due from related parties
 Disclosures that related party transactions were made on terms
equivalent to those that prevail in arm’s length transactions are made
only if such terms can be substantiated

Key management personnel compensation

 PAS 24, par. 16, provides that an entity shall disclose key management
personnel compensation in total and for each of the following categories;
a. Short-term employee benefits
b. Postemployment benefits, for examples, retirement pensions
c. Other long-term benefits
d. Termination benefits
e. Share based payment transactions, for example, share options

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UNRELATED PARTIES
Unrelated parties include the following:
1. Two entities simply because they have a director or key management
personnel in common
2. Providers of finance, trade unions, public utilities and government
agencies in the course of their normal dealings with an entity by virtue
only of those dealings
3. A single customer, supplier, franchisor or general agent with whom an
entity transacts a significant volume of business merely by virtue of the
resulting economic dependence
4. Two ventures simply because they share joint control over a joint
venture

Transactions with government-related entities

 A reporting entity is exempted from providing the normal disclosures
for transactions with:
a. A government that has control, joint control or significant
influence over the entity
b. Other entities controlled, jointly controlled or significantly
influenced by the same government
 In applying the exemption, the reporting entity is required to disclose
only the following:
a. The name of the government and the nature of the relationship with
the reporting entity
b. The information on the nature and amount of each “individually”
significant transaction with the government

Related party disclosure not required

 PAS 24, par. 3, requires disclosures of related party transactions and
outstanding balances in the separate financial statements of a parent,
subsidiary, associate or venturer
 Par. 4 provides that intragroup related party transactions and
outstanding balances are eliminated in the preparation of consolidated
financial statements of the group

Pricing Policies
 Accounting recognition of a transfer of resources is normally based on
the price agreed upon between the parties. Between unrelated parties,
the price is an arm’s length price
 Methods used to price transactions between related parties:
1. Uncontrolled price method – this sets the price by reference to
comparable goods sold in an economically comparable market to a
buyer unrelated to the seller

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2. Resale price method – this method is often used where goods are
transferred between related parties before a sale to an independent
party is made
3. Cost plus method – this method seeks to add an appropriate
markup to the supplier’s cost
4. No price method – no price is charged, as in the case of free
provision of management services and the extension of free credit on
a debt