Hi everyone!
We shall study IAS 24 today!
Let's consider these scenarios.
A) Steve buys raw materials at 0.50k/item from the producer
B) Rose buys the same raw materials at 0.25k/item because the producer is her mother.
After production, its obvious that Rose would have a reduced cost of sale and higher profit than Steve and it won't be fair to compare their results.
Rose's transaction is a related party transaction while that of Steve is an arms length transaction.
RELATED PARTIES:
According to IAS 24, a related party transaction is a transfer of resources, services and obligation between related parties, WHETHER OR NOT A PRICE IS CHARGED.
Related parties include the following:
A) A person or his family member is related to an entity if:
• He has control/joint control of the entity
• He has significant influence over the entity.
• He is a member of the key management personnel of the entity or its parent.
B) An entity (Entity A) is related to another entity (Entity B) if:
• They are both members of the same group i.e. Parent, subsidiary, fellow subsidiary.
• A is a joint venture or associate of B OR A is a joint venture or associate of a member of B's group.
• A & B are joint ventures of the same entity
• A is a joint venture and B is an associate of the same entity
• A is the entity offering the post employment benefit plan (IAS 19) of B or an entity related to it.
NON RELATED PARTIES
The following are considered not related parties by the standard.
1) 2 entities with a the same director or key management personnel are not related.
2) 2 joint venturers that share joint control of a joint venture are not related.
3) Finance providers, trade unions, public utilities and Government departments or agencies that do not control, jointly control or significantly influence the entity in its normal dealings.
4) Customers, suppliers, franchisors, distributors or agents that transact a significant volume of business with the entity merely by virtue of the resulting economic dependence.
DISCLOSURE:
The entity is mainly a Disclosure one, hence, it requires a lot of disclosures in the financial statement, in order to reveal the true picture of the organization.
For instance, the earlier example about Rose & Steve. Rose would have to disclose that her raw materials are gotten at half the price due to a related party. This will prevent users of the financial statement from assuming that her profit will always be that high because the year she buys at arms length, her profit will drop.
Some of these disclosures include:
• Group Relationships i.e. Parent, subsidiary etc. (Wheter or not there were transactions between them)
• Key management personnel compensation for short, long, post employment and termination benefits.
• Related party transactions in the period, the nature, outstanding balances and other information to help users understand the effect on the financial statements.
Exemption from disclosure - (Government Related Entities):
Reporting entities are exempted from the disclosures when related party transactions arise with:
• A government that has control/joint control and significant influence over it
• Another entity that is related to it because of the same government.
Most importantly, in determining related party relationships, attention is given to the substance of the relationship and not merely its legal form.
DAILY CHALLENGE: Control, joint control and significant influence are mentioned severally in the standard. Define these terms according to the provisions of IFRS 10, 11 and IAS 28.
For futher clarifications, mail:
Nneomakristen@gmail.com
Have a wonderful day!
We shall study IAS 24 today!
Let's consider these scenarios.
A) Steve buys raw materials at 0.50k/item from the producer
B) Rose buys the same raw materials at 0.25k/item because the producer is her mother.
After production, its obvious that Rose would have a reduced cost of sale and higher profit than Steve and it won't be fair to compare their results.
Rose's transaction is a related party transaction while that of Steve is an arms length transaction.
RELATED PARTIES:
According to IAS 24, a related party transaction is a transfer of resources, services and obligation between related parties, WHETHER OR NOT A PRICE IS CHARGED.
Related parties include the following:
A) A person or his family member is related to an entity if:
• He has control/joint control of the entity
• He has significant influence over the entity.
• He is a member of the key management personnel of the entity or its parent.
B) An entity (Entity A) is related to another entity (Entity B) if:
• They are both members of the same group i.e. Parent, subsidiary, fellow subsidiary.
• A is a joint venture or associate of B OR A is a joint venture or associate of a member of B's group.
• A & B are joint ventures of the same entity
• A is a joint venture and B is an associate of the same entity
• A is the entity offering the post employment benefit plan (IAS 19) of B or an entity related to it.
NON RELATED PARTIES
The following are considered not related parties by the standard.
1) 2 entities with a the same director or key management personnel are not related.
2) 2 joint venturers that share joint control of a joint venture are not related.
3) Finance providers, trade unions, public utilities and Government departments or agencies that do not control, jointly control or significantly influence the entity in its normal dealings.
4) Customers, suppliers, franchisors, distributors or agents that transact a significant volume of business with the entity merely by virtue of the resulting economic dependence.
DISCLOSURE:
The entity is mainly a Disclosure one, hence, it requires a lot of disclosures in the financial statement, in order to reveal the true picture of the organization.
For instance, the earlier example about Rose & Steve. Rose would have to disclose that her raw materials are gotten at half the price due to a related party. This will prevent users of the financial statement from assuming that her profit will always be that high because the year she buys at arms length, her profit will drop.
Some of these disclosures include:
• Group Relationships i.e. Parent, subsidiary etc. (Wheter or not there were transactions between them)
• Key management personnel compensation for short, long, post employment and termination benefits.
• Related party transactions in the period, the nature, outstanding balances and other information to help users understand the effect on the financial statements.
Exemption from disclosure - (Government Related Entities):
Reporting entities are exempted from the disclosures when related party transactions arise with:
• A government that has control/joint control and significant influence over it
• Another entity that is related to it because of the same government.
Most importantly, in determining related party relationships, attention is given to the substance of the relationship and not merely its legal form.
DAILY CHALLENGE: Control, joint control and significant influence are mentioned severally in the standard. Define these terms according to the provisions of IFRS 10, 11 and IAS 28.
For futher clarifications, mail:
Nneomakristen@gmail.com
Have a wonderful day!
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