RELATED PARTIES

TECH.YfC›TL Kh’O\fi’hEGCE

To understand tire concept of related parties.

J'p i‹;Icnti[y related parties.

To bxotc›the requirement [or disclosu.I-e of related

party relationship.

'f'p fizow the requirements for disclosllre ofrr.loled

pnrfy ironsoc›sons.

90
 DEFINITION
ftelo/r,d pony - Parties are considexd O be related if one party
bas:
a. The ability to control the other party.

b. The ability to exercise significant influence over the other

c. Joint control over the entity.

Control is the power over the investee or the power to
govern t4ie financial and operating policies of an entity so as
tn obtain benehts.

Gnntrol ’ie ownership dircctb' or indirectly though

suba›diarie of more thao half of the voting power of an
entity.
.'iigni/ico.tit in hence is the power to participate in the
financial and operating policy decision uf an entity, but not
control ot tho<. pohcies.
Significant influence mny be Barnett by share o vnerslup uf 20%
OE II1OW.

It‘ an investor hplds, directly or indirect.ly through ubsidiaries,

?0% or mDrc of the voting power of the iiit'cske, it is
presumed that the investor has significant inoucnce, unless it
ean .be cleoi-ly demonstrated that this is not the ca.e.

Beyond thc mere ?0°2\ thieshold of me nei=ship, the RxistenC8 of

significant influence is usually ei idenccd by the foLowing
factors:
a. Representation in the board of dii-ectors
b. Participation.in pohcy making prowss
c. Material transactions between the investor and the inve tee
’ d. Interchange of mimap•erial personnel
e. Provision of essential technical information

Jvint control is the contr8Ctually agreed sharing of control over

91
*amples of rotated parties
- âintities tkat @ectly or indirec£r th* ^8' one
lllterinediaries. control or are controlled. " *•n
‹xininion conwl with the repo Jfi tJ-

Inch ent.ities pertaizi squarely K

parent, the s:ubsidiary and fe2nw subsidiaries.

.£ssocia%s — 'l2ie« ave the eIlJqtigS0 '*r which one per\

exevciee• sigaifcant influence.
The term associAe includes the aubeidii+J OP stibsidienq
of the asix»iate.

3. Venmrer in a joint venture.

A joint. venture ii'ic1u l‹•.• the siibsidiRry or subsidiaries *f

the ,luiet venture.
Kay- manngemeut personnel are thoue persons haviny
authority and reaponsibili • for planning, directing not
mntrolling the activities of the entity, directly or indñvetly,
'uu luding aiw executive direJor or nunexecuuve director.
Close family members of an indiviclual are those tamil
a›«o›he›’s Thu nny be expected tc i tAuence or \»:
1fIt›enc«8
tl tit indivJdual in their- ‹J‹r›ahiyib•us i me ent;t,.
t;1ose funnily meniA•r« Jof
• iJuai include:
al
The individual's 8i›ouee and cj,;j p j
b. Children of the individual'8 spouse
g. DepRndenta of tllo individual or the indii3ilual' spouae.
G. Individu8lS ownin indir•ct1yon intere•st in
the votinp pp '° °'*'•b entity t1›ai i.ht:m
y
influence OVER t
memdbers e eNi , 8n c C80 3hli\
„gJ, J‹fividuols.

O 8n entity,
‹»Q any for the
ntityihat i« ,
e
 p related parzy zzyygppfp g
obtipatkne heta'een relp i i* c transfer o/ resour re« or
pñee ie ch-urged. ted Po-rl-irx, t'egardle.ss o/ u:he.lher a

PAS ?4, porag*aP 2d, pruvidcs the ?ollois'inp examples of

«laRd
1. Archaic and eale of g;›gpt
2.
Purcha:x and sale of propprty ••d »:her- «s«et
i &ndering or lT›Ceiving sej•vJggg

ñ. Transfer of re.search and development

ti. Li«ese opreeinent
7, l• inance arrangements, i deluding loans and equity
‹:ontribuHons in cash or in kind
8. GuRmntce and coLatei>1
9. Sntt)R1llCIlb 0$ Eabilities an behalf of the entity- or b,y the
entit3• on hehalf of another party

Related party disclosures

PAi? 2d, ,pu› ogro,y›h I??, reguit-ea di.stloaure. o/ related porly

relntkrxNps i1›heri• cnnti-ol exists irrc'sjx•.t:fine of‘ u'li.at,lier there
,hoce heex tt-aiktcxiioii.v het.u:ecu IU ixloted parlJ•c.

In other o'ords, i-c1ationship.o brta'cen parents and

subsidiaries shull he dlSClOBCd Pfigardlaas Of z'hethcr there
.ia›•e been transactions &tween those related pni9i«s.

An entiry shafl dixlose the name of the entity's parent end if

different the ultimate controlling raG..

lf neither the entity's parent nor the ultimate nntruGnp party

p,gpqggj ap , tg com •‹ivai1able foi• public tise, the naaie
of the next most seniur parent that dec.s so 6hsll also be
diacloaed.
Disclosures of related party transa9flOrl

tI’ans‹zr.lions beliceelt !-e@Iz,;j fjzzJies,

an enl.ity *!**!! disc/os
as
nhou/ the lro,nso.c!.i@N6end oc1!s!andinQ balances necesszzp Jpg
an undet'starJ,i,ll,fl of the fi.nancial ata.teoien.Is.

A.s a minimum, the

shaP include: diSclogures of related 9$b tPRfl octiot

a. The amount of the transaction.

b. The amount nf outstanding balance, ter***-* and oonétion,
whether secured or unsecured, and natw of consideraq ,
to be provided in settlement.

c. The allowance for do ubtful actounts related to the

outstanding balance.
d. '£1ae expense recognized during the period in respect ,t
doubtful accounts due from relntsd partes.

Disclosures that related pai'ty ti'ansactions weiz made on

termi equivalent tu thnse that prevail in arm's length
transact,ions are made only if such terms can be substantiated.

Key management personnel compensation

PA.S 24, paragraph 16, provides that an entity shall disclose
key manageiiient personnel compensation in total and foi-
each ot’ the following categories:
a. Jhol't-itvm employee beneGtq
b. Postemploy ment benefits, fo,
pensions

c. Other long-term benefits

d. Termination benefit9
=• Share basedr*yment r
t £lIl«ac ioias
options , for e, a p pJff}e
e
94
$Jgyq}gtP.q parties

rn•el•ted pqyyes include the follor

lng:

o •t key
.pg,O eIltities ause they have a
bec ,g,g,gion.
,;,;,;,ggement
p blic qtilities and
rade union•, ll
pJ Jpali,nga
2. providers of finance, t q£their ****”*'*
nciestin {he cours*
guve rnme nt age
y by vir ue only of tho dealings.
with an entit se

}c y pg,er, supplier, with

e,g}agent
3. C S
@ ring e ft
}i•gnchihOfi0°
91g volume of bua °^°
t/t/tsects a
vh» an enhty
i dependent.
p Jy by vir*<* p( ie resultkl8
oint ';oetrol °*"*
a
j{);Ilt Vefl?ure.

jgient -rel at e d entities

govern
ptovidi llg the i*O °**'
r
entity is pgp„,p ted fr >
A reportiiis
0

disclosures with:
for j;';ansa"ti

"

»v»rn ment that

h0 (,-ol or »-igni }C&R
influence over t ], jtiirit c*^
h8« cnntro
entitle
() d O
olled r ti›' co n ti e
e ntiti e s DC RtP O Al
Other J’ the
uelic*'
r
g Cflti:_' is it?fiuired

In applj.;pg the e ,e,Tiption, the -•P

th• io3pivi
ng:
„„p,y £i Alt and the Ri ot12§-i3 of lhe
a. Thy- nam^ pi’ ‹he g
with the $epy, illg entity.
relationship Ch
atiofl pature 8RJ ginount Of‘ Cthe
b. The in fQl-in is•it.h
.›iRdj,›tdutil 3
goveT'I1TT1€£t*"
 Related n«rty discloourtibHot required
PAS 24, paragraph 3, requires disg} sura of related
transactions and outstanding balaf2p, ‹R aeyarolk. Ji,g,
Wht oz VfiI1ttJre‹,
statements of a parent, 9ub8idiuy, ggqty;gp
However, Paragraph 4 provide.s that intra Ot2@
ti-ansactions and outatanq¿,g balances are
preparation of consolidated financial sf•tements t›i
group. q¿
Pricing policies
Accounting recognition cf a transfer of «sources is
based on the price •b7eed upon between the Betwtt,
un«lated parties, the price i8 all arm's length
Between related parties, thore may be a degree of
fi0xibilityin the price setting proces.s that to net present
between uri-e1„p parties.

F‹hS 2J did not provide for the measurement of related psr;;

tran4actitina. Hoo'evcr, a variety of methods is used to pr,‹;,
tran8actions between related parties.
1. Uncontrolled price method — This n-et9 the price by
reference to comparable goods sold in an econ,oniically
comparable market to a hujer unrelated to the seller.

g. Resale pFice method — This method is often uaed where

gooda sre transferred between related parties before a .sale
p an independent par-ty is made.

This reduces the >aalc price by a mar@p, representing an

gmount from which the reseller would to recover costs
seek
and make an appropriate profit.

Cost plus method - Thia uethod seeks to add an

>PP***Pnite markup to the 8upp@2'$ (
4. ñfO@PiCe znethcd - Lit8P£tlly, Il
o price is charged, as in the
caae of free p pit
management
extell i0n «f a»£I «r«j;t
a debt. services
9.6 and thE
QUESTIONS

1. &ftnc each of the fol1ou'ipg;

b.
c. C!untrol
** •*•sn1ñcant inAuence

2. Give examples of related paNje¿.

' ' e *^ °' e" ° > °f°d parts transactions.

4. EK lein reJsred party disc1‹isurc9.

5. S?hat ave rhe minimum diocloeures ?t›r rvlatt'd party

k Explain key management p /âil*nel compensation. '

II. \\’hat are the cii-c umet anc».s where related party
disclosures are n.ct required?

9. Explall2 dlholosii res af trsnsaotions with pot'e/’/im.eni

related ':nisties.

10. Explain the pricing poñciea br relakd par:y tranaectioiis.

PRDBI•EMS
Problem 4-1 ltlultiple choice iJ',@, ¿q)
1, Related partieR include all of t e foPn'ñriog, eacePt
h
fld fellow Subsidiar
ies
b. .4s9ociates ñ
c. Key' management personnelpearsoññ*
Bd 2J+* ' > "'°"' e›,
0$ such key monogement share joint cont,;j
d. Nvo ventui•ers »i›ns1r bec• ise
ovgi• a venture
joigt
? .4 related party transaction is fi transfer
a. Between related parties
w'hen price in charged.
ñ
b, Between related pai-;ies,
is charged. regar‹11ess of whether' a pritt
c. Between unrelated partiee whcn a price i9 charged,
d. Between unrelat,ed parties, regardless of m hether j
price iS charged.
3. Unre•lateh parties include which of the following?
a. Pt-ovider» of finance in the cour.se of their norma
drillings with an entity by t-irttiuonly of those d•-
alings
b. t?›ove•rnment agencies
C. Pringle customer u'ich whom an entity transacts ,
significant volume or‘ business mei-ely b3' virtue fat
th vestilting economic dependence.
d. ll t›f these are unrelated p:irtien
4. (Close family members otan individual include all , excep
a. The individual's spousc and children
b. IChildren of the individttal's spouse
c. Dependents the individual or 1.ndividual's
of
d. Brothers rind sisters ot the individual
5. The minimum diseli›«u i-eye about related pari
811 of’ the foPovs'ing, except
a. 1’hc amr›unt OI £h8 I) nnsaction
c. Am‹3unt of 013(i›tnnding alaiice
outstanding dG lib tful bslancc
d, Na tu,c of
°** °"'*** 'e lated tri tl
the relat.ionship

88
 ppoblem 4-2 Mul ‹ple choi
ce (IFRS)
j. Which ia not included in key management personnel
compensation?
a. Short-term benefit
b. Share baaed
c. Tei•minatiOn $;; jetnt
d. Reimbursement of out-of-poelret expeneoa
2- Itch of the follOW g ia oot a mandaod disclosuYe about
related pa-Pty transactions?
Relationahip between
parent and subeidiaries
b. Namea
with during the aasociates that an entaty hns dealb
c. Name of the entity's perent and, if different, the
controlling party.
d. If neither thu entity's parent nor the ultimate
controlling entit;• produces financial statements
ax•ailab1e for public use, then the nRme of the next
mo«t senior parent that does so.
3. Which of the following i.s nof n required minimum
disclosure about related porty trnneaction?
n. The amount. of related pnrty transaction
b. The omount uf the out«»inding balance
e. The amount of similar transactaon with unrelnted
partie.o to estsblioh thnt onmparable related party
tzaris.ackcn has been entered at erin'a lengt.h
d. Duulitful debt i-elated to the outstanding balance

4.
Related partJ• transoctic›n. lI>'l iitlc' all, encept

b. SolJ a coi to the uncle of the entity- linance director.

c. Sold goods to pnotliei- entity ownen by the daughter
of the managing director
d. .411 of these are related part;r traneactaona.
¿;, f¿JJ pp ¿},e gp ,piIlg pp,; yplutcd porty tronsnctaons, except
a. Transferred Qtwide from inventuzy tu a str&dinvy
b. @ld an ent,it:ycoi• to the wife of the mana@ng director
c. Sold Cti o net ** °* ^°°"*‘°*°
d. Took out a hu$•e brink loan
9it
 6. An entity that Entered
P°^ tranaa,tj,
into a JQ ,ated
WOuJ d he requi red ,to g;qc1ose all of th«
i'foi-mation, ezcept

a. Nature of the relationship »tsvcen the perties.

b. Natui'e of an3'’ ?uture tr-snz'zz**“*** plannad beti„.q
the p:irties anJ. th•. Wrn›e inV() VQd.
£. Peso smount of the trsflOfiCf1OR•
d. '1¿1ount due f:rom o›' to r* ›* °°
re.portifig pe'riod.

?. Y’2aich i.« not a required ir1«md par*y ›** °°"*"

a. ThO UI111 ii the chiof exccutix-e officer of tho entity

.b. The pai'ent of the entity
e. An ei1ti!r th:it has a «»‹n»•n direttor
d. Joint vootwe in which the entity is 'a venturer
8..411 of the foAo«•iiig erg refitted paNies, exrept
e. Joint venture in whioh she entity is s **ñ*t11’**
b. .t postemployment beiie5t plc n for- the employees
c. An executit-e diYe.cixL of the entity
d. 'f'hc pa%nar of a key manager is a msjoi' st ippiivr r›f
tl;e entit#
9.
Which of rbi2 fo£owins is not n iv•lated party of an enti;y,

a. .1 sliarehulder of enfity «wning twenty percsitc

tibe
b. An entity pi’ovi@ig banking FaCilities to the entity
assoei›ire of the entity
d. Key rn.snagcmcnt’peracnnel ct the endty
lo. Y'hich of the following included in key
should be
management P¥reonneI coglpeHsatio ?
2'l
^ Social contribution.•
b. >°^***°Ployment benefifis

bene security contribtttlGrl

fite g and pog¿pj§yp ,J
-' Soci& aeciu-i,ty COntributions,
and dividenJl 10 6h &nefits
areho lder.s