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Intermediate Accounting 3 Reviewer - Notes - Part 2

IA3 Reviewer 2

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740 views3 pages

Intermediate Accounting 3 Reviewer - Notes - Part 2

IA3 Reviewer 2

Uploaded by

dwenbeagarcia
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Intermediate Accounting 3: Chapter 8 Notes – Part 2

Related Standards

 PAS 24 - Related Party Disclosures

 PFRS 8 - Operating Segments

Learning Objectives

1. Identify examples of related parties.

2. Understand disclosure requirements for related parties.

3. Define an operating segment.

4. Describe the management approach to identifying reportable segments.

5. Explain the quantitative thresholds for reportable segments.

PAS 24: Related Party Disclosures

Objective and Scope

 PAS 24 ensures transparency by prescribing disclosures on related party relationships,


transactions, outstanding balances, and commitments.

 Core Principle: Financial performance may be impacted by the existence of related party
relationships, regardless of whether transactions occurred.

Related Party Definitions

1. Related Parties include:

o Investors with control, joint control, or significant influence.

o Key management personnel.

o Close family members of key individuals.

o Post-employment benefit plans.

2. Types of Control:

o Control: Ability to direct financial and operational policies.

o Significant Influence: Power to participate in financial and operational decisions without


control.

o Joint Control: Shared control over economic activity via contract.

3. Related Party Transactions:


o Transfers of resources, services, or obligations, with or without a price.

Non-Related Parties

 Not considered related simply due to transactions or shared management (e.g., providers of
finance or utility services).

Disclosure Requirements

1. Parent-Subsidiary Relationships: Disclose whether or not transactions occurred.

2. Key Management Compensation: Include breakdown (e.g., salaries, benefits).

3. Related Party Transactions: Nature, terms, outstanding balances, and substantiation if on arm's
length terms.

PFRS 8: Operating Segments

Objective

 Provide users with insight into the nature and financial effects of an entity’s business activities
and operating environment.

Scope of PFRS 8

 Applies to publicly listed entities or those in the process of listing.

 Segment information is required in consolidated financial statements of a listed parent entity.

Defining Operating Segments

 An operating segment is a component that:

1. Engages in revenue-generating activities with associated costs.

2. Is regularly reviewed by the chief operating decision-maker (CODM).

3. Has available discrete financial information.

Management Approach to Segments

 The management approach uses internal reports reviewed by CODM to identify reportable
segments.

Reportable Segments and Aggregation

 Aggregation Criteria: Segments with similar characteristics (e.g., product nature, production
processes) can be combined.

 Quantitative Thresholds:

o Revenue: Segment revenue is at least 10% of total revenue.


o Assets: Segment assets are at least 10% of total assets.

o Profit/Loss: Segment profit or loss is at least 10% of the absolute combined profit or
loss.

Limits and Additional Disclosures

 External Revenue: Reported segments must cover at least 75% of total external revenue.

 Major Customer Disclosure: Single customer contributing 10% or more of total revenue.

 Entity-Wide Disclosures:

o Revenue and non-current assets by country.

o Asset breakdown by domicile vs. foreign locations.

Application of Concepts

 Problem-solving exercises encourage the practical application of theory, emphasizing the real-
world relevance of related party disclosures and segment reporting.

Key Takeaways

1. Importance of Related Party Disclosures: Ensures stakeholders are informed of relationships


that may influence financial results.

2. Segmentation for Financial Clarity: PFRS 8’s requirements allow stakeholders to view financial
performance by operational segments, facilitating better analysis.

3. Quantitative and Management-Based Identification: Criteria and management input ensure


segments reflect both materiality and strategic relevance.

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