Related Party Transactions

1
Related Party Transactions

• Sujeewa Mudalige

2
Overview of session
1. Introduction
2. Recognition
3. Disclosure
4. New developments
3
Related Party Disclosures

• Introduction

4
Scope of IAS 24 / LKAS 24

• Parties are related if one party can control or
  exercise significant influence over the other
• IAS 24 covers those parties which are related and
  details a number of exclusions
• Disclosure is required for
• Upwards and downwards control relationships
• Details of the transactions

5
Related Party Disclosures

• Recognition

6
Determining related parties

• Parents
• Subsidiaries
• Fellow subsidiaries
• Joint ventures
• Other entities controlled by owners or key
  management

Control

• Determining Related Parties

Significant influence
Key management personnel
7
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
• Agency arrangements
• Share capital transactions

8
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

9
Exemptions

• Stand alone financial statements of a parent if
  consolidated statements are available
• Financial statements of a wholly owned subsidiary
  if parent incorporated in the same country and
  providing financial statements
• Intra-group transactions that have been
  eliminated on consolidation
• State controlled entities

10
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.

11
Related Party Disclosures

• Measurement

12
Measuring transactions
Cost
Arms length
Cost plus
Methods
Resale price
Free of charge
13
Related Party Disclosures

• Disclosure

14
Disclosures

• Nature of the relationships
• Types of transaction
• Volume and value of the transaction
• Pricing policies
• Balances at year end

15
Improvements project (1)

• Related party definition clarified to include
• Parties with joint control over entity
• Joint ventures
• Post-employment benefit plan
• Significant influence definition - conformed to
  IAS / LKAS 28
• Wholly owned subsidiary exemption no longer
  limited to parent in same country
• State-controlled entities no longer exempt

16
Improvements project (2)

• No longer sufficient to disclose proportions of
  transactions / balances
• must disclose full amounts
• Additional disclosures by category of related
  party
• Terms and conditions (security / consideration)
• Guarantees given / received
• Provisions for doubtful debts (incl P/L expense)
• Settlement of liabilities on behalf of entity
• Pricing policies / management compensation cost
  not required