Module 11: Reporting Period and Related Parties

Events After the Reporting Period

PAS 10, paragraph 3, defines events after the reporting period as those events, favourable
and unfavourable, that occur between the end of the reporting period and the date when
the financial statements are authorized for issue.
Events after the reporting period are also known as subsequent events. Such events may
require either adjustments or disclosure.
TYPES OF EVENTS AFTER THE REPORTING PERIOD
 Adjusting events after the reporting period are those that provide evidence of
conditions that exist at the end of reporting period.
 Nonadjusting events after reporting period are those that indicative of conditions that
arise after the end of reporting period.
It is appropriate to adjust the financial statements for all events that offer clarity
concerning the conditions that existed at the end of reporting period and that occur prior
to the date the financial statements are authorized for issue.
Accordingly, an entity must adjust the amounts recognized in the financial statements for
adjusting events that provides evidence of conditions that existed at the end of reporting
period.
However, an entity does not recognize events after the reporting period that relate to
conditions that only arose after the reporting period. The entity required only to disclose
significant nonadjusting events.
EXAMPLES OF ADJUSTING EVENTS
1. Settlement after the reporting period of a court case because it confirms that the
entity already had a present obligation at the end of the reporting period.
2. The discovery of fraud that shows that the financial statements are incorrect.
3. The sale of inventories after the reporting period can give evidence about the net
realizable value of the inventory at the end of the reporting period.
4. The determination after the statement of financial position date of the cost of assets
purchased or the proceeds from assets sold before the end of the reporting period is
an adjusting event after the reporting period.
5. The bankruptcy of a customer that occurs after the reporting period usually confirms
that a loss existed at the end of the reporting period on a trade receivable.
EXAMPLES OF NONADJUSTING EVENTS
1. A major combination of entities or disposing of a major subsidiary
2. A plan to discontinue an operation or a major restructuring of an operation;
3. Major purchase of assets or the destruction of a major asset by fire/storm
4. Major share transactions;
5. Abnormally large changes in assets prices or foreign exchange rates;
6. Changes in tax rates or tax laws that have a major impact on an operation from a tax
point of view;
7. Entering into significant commitments or contingent liabilities;
8. Commencing major litigation arising out of events that occurred solely after the
reporting period
 FINANCIAL STATEMENT AUTHORIZED FOR ISSUE
Financial Statements are authorized for issue when the board of directors review the
financial statements and authorizes them issue. In some cases. An entity required to submit
the financial statements of the shareholders for approval after the financial statements
have been issued.
In such cases, the financial statements are authorized for issue on the date of issue by the
board of directors and not on the date when shareholders approves the financial
statements.
Related Party
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 reporting entry
Control is the power over 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. Significant influence may be gained
by share ownership of 20% or more.
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.
Beyond the mere 20% threshold of ownership, the existence of significant influence in
usually evidence by the following factors.
 Representation in the board of directors.
 Participation in policy making process.
 Material transactions between the investor and the investee.
 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. Affiliates: Meaning the parent, the subsidiary and fellow subsidiaries.
2. Associates: Meaning the entities over which one party exercise significant influence.
3. Venturer in a joint venture: Include the subsidiary or subsidiaries of the joint ventures.
4. 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 executive director or non executive 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.
Close family members of an individual include:
 The individual spouse and children
 Children of the individual spouse
 Dependents of the individual or the individual spouse
6. Individuals owning directly or indirectly an interest in the voting power of the reporting
entity that gives them significant influence over the entity, and the close family members
of such individual.
7. Postemployment benefit plan for the benefit employees.
EXAMPLES OF RELATED PARTY TRANSACTION
A related party transaction in a transfer of resources or obligations between related parties,
regardless of whether a price is charged.
PAS 24, paragraph 20, provides the following examples of related party transaction:
1. Purchase and sale of goods
2. Purchase and sale of property and other asset
3. Rendering or receiving services
4. Leases
5. Transfer of research and development
6. License agreement
7. Finance agreements, including loans and equity contributions in cash or in kind
8. Guarantee and collateral
9. Settlement of liabilities on behalf of the entity or by the entity on behalf of another
party
RELATED PARTY DISCLOSURE
PAS 24, paragraph 12, requires disclosure of related party relationship where control
exists irrespective whether there have been transactions between the related parties.
In other words, relationship 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.
If neither the entity or parent nor the ultimate controlling party produces financial
statement available for public use, the name of the next most senior parent that does so
shall also be disclose.
DISCLOSURE OF RELATED PARTY TRANSACTION
PAS 24, paragraph 17, provides that if there have been transaction 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 statement.
As a minimum, the disclosures of related party transaction shall include:
 The amount of the transactions
 The amount of outstanding balances, including commitments, and their terms and
conditions, including whether they are secured, and the nature of the consideration
to be provided in settlement and details of any guarantees given or received
 The allowance of doubtful accounts related to the amount of outstanding balances
 The doubtful accounts expense recognized during the period in respect of bad or
doubtful debts due from related parties
KEY MANAGEMENT PERSONNEL COMPENSATION
PAS 24, paragraph 16, provides that an entity shall disclose key management personnel
compensation in total and for each of the following categories:
  short-term employee benefits;
 post-employment benefits;
 other long-term benefits; termination benefits; and share-based payment.
RELATED PARTY DISCLOSURE NOT REQUIRED
PAS 24, paragraph 3, requires disclosure of related party transaction and outstanding
balances in the separate financial statements of a parent, subsidiary, associates or venturer.
However, paragraph 4 provides that intragroup related party transactions and
outstanding balances are eliminated in the preparation of consolidated financial statement
of the group.
UNRELATED PARTIES
Unrelated parties include the following:
1. Two entities simple because they have a director or key management personnel in
common.
2. Provider of finance, trade unions, public utilities and government agencies in the course
of their normal dealings with an entity of 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 venturer simply because they share joint control over a joint venture.