Far.2848_related Party Disclosures. (1)

Since 1977

FAR

OCAMPO/CABARLES/SOLIMAN/OCAMPO

FAR.2848 – Related Party Disclosures

MAY 2020

DISCUSSION QUESTIONS 1.

2.

3.

Which statement is incorrect regarding related party relationships and transactions? a. Related party relationships are a normal feature of commerce and business. b. Related parties may enter into transactions that unrelated parties would not. c. Transactions between related parties may not be made at the same amounts as between unrelated parties. d. The profit or loss and financial position of an entity may be affected by a related party relationship only if related party transactions occur. Which of the following illustrates that mere existence of related party relationship may be sufficient to affect the transactions of the entity with other parties? a. A subsidiary may terminate relations with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same activity as the former trading partner. b. One party may refrain from acting because of the significant influence of another—for example, a subsidiary may be instructed by its parent not to engage in research and development. c. Both a and b. d. Neither a nor b. A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the 'reporting entity'). A person or a close member of that person's family is related to a reporting entity if that person: a. Has control or joint control over the reporting entity. b. Has significant influence over the reporting entity. c. Is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. d. Any of the above.

4.

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include: a. That person’s children and spouse or domestic partner. b. Children of that person’s spouse or domestic partner. c. Dependants of that person or that person’s spouse or domestic partner. d. All of the above.

5.

In which of the following is an entity not related to a reporting entity? a. The entity and the reporting entity are members of the same group. b. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

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c. d.

Both entities are joint ventures of the same third party. An entity with a director or key manager in common with the reporting entity.

6.

In which of the following is an entity not related to a reporting entity? a. The entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. b. The entity is controlled or jointly controlled by a person who has control, joint control or significant influence over the reporting entity. c. One entity is a joint venture of a third entity and the other entity is an associate of the third entity. d. Both entities are associates of the same third party.

7.

Which of the following are related parties? a. Two venturers who share joint control over a joint venture. b. Providers of finance, trade unions, public utilities, and departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with an entity. c. A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence. d. None of the above.

8.

Parent entity has a controlling interest in Subsidiaries A, B and C and has significant influence over Associates 1 and 2. Subsidiary C has significant influence over Associate 3. This situation is illustrated as follows:

Which statement is incorrect? a. For Parent’s separate financial statements, Subsidiaries A, B and C and Associates 1, 2 and 3 are related parties. b. For Subsidiary A’s financial statements, Parent, Subsidiaries B and C and Associates 1, 2 and 3 are related parties. c. For the financial statements of Associates 1, 2 and 3, Parent and Subsidiaries A, B and C are related parties. d. Associates 1, 2 and 3 are related to each other.

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FAR.2848

EXCEL PROFESSIONAL SERVICES, INC. 9.

Given the following fact pattern:

In accordance with PIC Q&A 2017-04, which statement is incorrect? a. Entity B is a related party of A in the consolidated financial statements of A. b. Entity B is a related party of C in the separate financial statements of C. c. Entity D is not a related party of A in the separate financial statements of A. d. Entity D is a related party of A in the consolidated financial statements of A. 10. What is a related party transaction? a. A transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. b. A transaction in which the entity receives goods or services as consideration for its own equity instruments. c. A transaction in which the entity receives goods or services but has no obligation to settle the transaction with the supplier. d. All of these. 11. Entity X is a manufacturer of automobile spare parts. It transacts business through a business model that has worked for several years and has made the entity a successful enterprise. Entity X believes in working with reliable and dependable vendors and also sells only to entities that it can either control or exercise significant influence over. Which of the following is not considered a related party transaction? a. Entity X purchases everything it needs from Entity Y, a well-known supplier. Due to the high quality of the material that Entity Y has provided over the last 10 years, Entity X has never purchased from any other supplier. Thus it may be considered economically dependent on Entity Z. b. Entity X sells 70% of its output to a company owned by a director and the balance to an entity that is its “associate” by virtue of Entity X owning 35% of the share capital of that company. c. Entity X stores inventory in a warehouse that is leased from the wife of its director. The lease rentals are at arm`s length. d. Entity X has provided an interest-free loan to a company owned by the chief executive officer (CEO) of Entity X for the purposes of financing the purchase of delivery vans which the company owned by the CEO is using for transporting goods from the warehouse of the supplier to the warehouse used by Entity X for storing inventory. 12. During the current year, an entity paid the following to its chief executive officer: • Annual salary of P2 million • Share options and other share-based payments valued at P1 million • Contributions to retirement benefit plan amounting to P0.8 million • Reimbursement of his travel expenses for business trips totaling P1.2 million

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Which statement is incorrect? a. 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 director (whether executive or otherwise) of that entity. b. Compensation includes all employee benefits (as defined in PAS 19 Employee Benefits) including employee benefits to which PFRS 2 Share-based Payment applies. c. The entity should disclose key management personnel compensation of P3.8 million. d. None of the above. 13. PAS 24 requires a reporting entity to disclose: a. Transactions with its related parties. b. Relationships between parents and subsidiaries irrespective of whether there have been transactions between those related parties. c. Both a and b. d. Neither a nor b. 14. To enable financial statement users to form a view about the effects of the related-party transactions, PAS 24 requires certain disclosure to be made. PAS 24 requires a reporting entity to disclose: a. Name of the entity’s parent and, if different, the ultimate controlling party. b. If neither the entity’s parent nor its ultimate controlling entity produces financial statements available for public use, then the name of the next most senior parent that does so. c. Both a and b. d. Neither a nor b. 15. The principal concern with accounting for related party transactions is: a. Differences between economic substance and legal form. b. The size of the transactions. c. The absence of legally binding contracts. d. The lack of accurate data to record transactions. 16. Which disclosure is not necessary for a related party transaction? a. Description of the transaction b. The amount of the outstanding related-party balances and their terms-and conditions along with details of guarantees given and received. c. Provisions for doubtful debts related to the amount of outstanding related-party balances and expense recognized during the year in respect of bad or doubtful debts due from related parties. d. The amounts of similar transactions with unrelated (third) parties to establish that comparable related-party transactions have been entered at arm’s length. 17. The minimum disclosures prescribed under PAS 24 are to be made separately for certain categories of related parties. Which of the following is not among the list of categories specified under the Standard for the purposes of separate disclosure? a. Entities with joint control or significant influence over the entity. b. The parent company of the entity. c. Joint ventures in which the entity is a venturer. d. An entity that has a common director with the entity.

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FAR.2848

EXCEL PROFESSIONAL SERVICES, INC. DO-IT-YOURSELF (DIY) DRILL 1.

2.

3.

4.

5.

PAS 24 requires disclosure of a. Related party relationships b. Related party transactions balances c. Related party commitments d. All of the above

8. and

outstanding

Which of the following statements about PAS 24 is(are) true? I. The main issue of PAS 24 is recognition and measurement of related party transactions. II. Transactions between related parties are not conducted in an “arms-length” and therefore financial information becomes unreliable unless disclosure is made of such related party transaction. III. Control relationship should always be disclosed whether or not there are related party transactions. a. I and II only c. I and III only b. II and III only d. I, II and III Related parties include a. Providers of finance b. Major customers c. Trade unions d. Key management personnel members of such individuals

and

close

family

Which of the following is not a related party as envisaged by PAS 24? a. A director of the entity. b. The parent company of the entity. c. A shareholder of the entity that holds 1% stake in the entity. d. The son of the chief executive officer of the entity. According to PAS24 Related party disclosures, which ONE of the following is not a related party of The Parnaby Company? a. A shareholder of The Parnaby Company owning 30% of the ordinary share capital b. An entity providing banking facilities to The Parnaby Company c. An associate of The Parnaby Company d. Key management personnel of The Parnaby Company

6.

According to PAS24 Related party disclosures, which ONE of the following fall within the definition of an entity's related party? a. Another entity in which the entity owns 5% of the voting rights b. An executive director of the entity c. The partner of a key manager in a major supplier to the entity d. A customer with whom an entity transacts a significant volume of business

7.

According to PAS24 Related party disclosures, the following are related parties, except a. A supplier with whom an entity transacts a significant volume of business b. An associate’s subsidiary and the investor that has significant influence over the associate c. A joint venture’s subsidiary and the investor that has joint control over the joint venture d. A post-employment benefit plan for the benefit of the employees of the entity's parent

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The Atrato Company carried out the following four transactions during the current period. Which of the four are related party transactions according to PAS24 Related Party Transactions? a. Transferred goods from inventory to a shareholder owning 10% of the company's ordinary shares b. Sold a company car to the wife of the managing director c. Sold an asset to The Little Company, a sales agent d. Took out a P1 million bank loan

9.

Which statement is correct regarding related party disclosures? a. Related party relationships are unusual feature of commerce and business. b. Related parties may enter into transactions that unrelated parties would not. c. The profit or loss and financial position of an entity may not be affected by a related party relationship if related party transactions do not occur. d. In considering each possible related party relationship, attention is directed to the legal form of the relationship.

10. The Sulafat Company has a 70% subsidiary Harbinger and is a venturer in Thabit, a joint venture company. During the current financial year, Sulafat sold goods to both companies. Consolidated financial statements are prepared combining the financial statements of Sulafat and Harbinger. Under PAS24 Related party disclosures, in the separate financial statements of Sulafat for the current year, disclosure is required of transactions with a. Thabit only b. Harbinger only c. Both Harbinger and Thabit d. Neither Harbinger nor Thabit 11. PAS 24 requires disclosure of compensation of key management personnel. Which of the following would not be considered “compensation” this purpose? a. Short-term benefits. b. Share-based payments. c. Termination benefits. d. Reimbursement of out-of-pocket expenses. 12. If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the a. Nature of the relationship between the parties to the transactions. b. Nature of any future transactions planned between the parties and the terms involved. c. Amount of the transactions for each of the periods for which an income statement is presented. d. Amounts due from or to related parties as of the date of each statement of financial position presented. 13. Which of the following is not a required disclosure for related party transactions? a. The nature of the relationship. b. A description of the transactions. c. The amounts due from or to related parties. d. The impact of the transactions on current year's income.

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- done -

FAR.2848

EXCEL PROFESSIONAL SERVICES, INC. LECTURE NOTES SUMMARY OF PAS 24 RELATED PARTY DISCLOSURES Objective The objective of PAS 24 is to ensure that an entity's financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties. Who Are Related Parties? A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the 'reporting entity'). (a) A person or a close member of that person's family is related to a reporting entity if that person: (i) has control or joint control over the reporting entity; (ii) has significant influence over the reporting entity; or (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. (b) An entity is related to a reporting entity if any of the following conditions applies: (i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). (iii) Both entities are joint ventures of the same third party. (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity. (v) The entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity. (vi) The entity is controlled or jointly controlled by a person identified in (a). (vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). The following are deemed not to be related: • two entities simply because they have a director or key manager in common • two venturers who share joint control over a joint venture • providers of finance, trade unions, public utilities, and departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision-making process) • a single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence

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What Are Related Party Transactions? A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of whether a price is charged. Disclosure Relationships between parents and subsidiaries. Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate controlling party produces financial statements available for public use, the name of the next most senior parent that does so must also be disclosed. Management compensation. 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 • share-based payment benefits 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 directors (whether executive or otherwise) of the entity. Related party transactions. If there have been transactions between related parties, disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements. These disclosure would be made separately for each category of related parties and would include: • the amount of the transactions • the amount of outstanding balances, including terms and conditions and guarantees • provisions for doubtful debts related to the amount of outstanding balances • expense recognised during the period in respect of bad or doubtful debts due from related parties Examples of the Kinds of Transactions that Are Disclosed If They Are with a Related Party • purchases or sales of goods • purchases or sales of property and other assets • rendering or receiving of services • leases • transfers of research and development • transfers under licence agreements • transfers under finance arrangements (including loans and equity contributions in cash or in kind) • provision of guarantees or collateral • commitments to do something if a particular event occurs or does not occur in the future, including executory contracts (recognised and unrecognised) • settlement of liabilities on behalf of the entity or by the entity

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FAR.2848