lkas 24 related party transactions

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LKAS 24

Related party Disclosures

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The objective

The objective is to prescribe the reporting requirements for related party

information so that users of the financial statements can see information about an

entity’s related parties and form a view about the possibility that an entity’s

financial position and profit or loss have been affected by the existence of related

parties and by transactions and outstanding balances with such parties.

A related party relationship could have an effect on the profit or loss and financial

position of an entity.

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What is a related party?

A related party is a person or entity that is related to the entity that is preparing itsfinancial statements (the reporting entity). (a) A person or a close member of that person’s family is related to a reporting entity ifthat person: (i) is a member of the key management personnel of the reporting entity or of aparent of the reporting entity; (ii) has control over the reporting entity; or

(iii) has joint control or significant influence over the reporting entity or has significantvoting power in it.

(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 meansthat each parent, subsidiary and fellow subsidiary is related to the others).

(ii) either entity is an associate or joint venture of the other entity (or of a member ofa group of which the other entity is a member).

(iii) both entities are joint ventures of a third entity.

(iv) either entity is a joint venture of a third entity and the other entity is an associate of the third entity. (v) entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reportingentity is itself n, the sponsoring employers are also related to the plan. (vi) the entity is controlled or jointly controlled by a person identified in (a). (vii) a person identified in (a)(i) has significant voting power in the entity. (viii) a person identified in (a)(ii) has significant influence over the entity or significant voting power in it. (ix) a person or a close member of that person’s family has both significant influence over the entity or significant voting power in it and joint control over the reporting entity. (x) a member of the key management personnel of the entity or of a parent of the entity, or a close member of that member’s family, has control or joint control over the reporting entity or has significant voting power in it.

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Entity A

Entity X

Entity B

Eg:


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Subsidiary B

Parent

Subsidiary A

Subsidiary C

Associate 1

Associate 2

Associate 3

Eg: 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.


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Ms.YMrs.XMr.X Ms.Z

Entity X

Eg:

Entity J is owned in equal shares by the members of the X family—Mr and Mrs X andtheir daughters Ms Y and Ms Z. The entity is managed by the family members.Their positions at entity J are: Mrs X, operations director; Mr X, administrationdirector; Y, financial director; and Z, sales director.


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Ms.YMrs.XMr.X Ms.Z

Entity J

Eg:

Entity J is owned in equal shares by the members of the X family—Mr and Mrs X andtheir daughters Ms Y and Ms Z. The entity is managed by the family members.Their positions at entity J are: Mrs X, operations director; Mr X, administrationdirector; Y, financial director; and Z, sales director.


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Ms.YMrs.XMr.X Ms.Z

Entity J

Eg:

Entity J is owned in equal shares and managed by Mr and Mrs X. Their daughters neither own shares in, nor manage, entity J.


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Related party disclosure

Entity ZEntity YEntity X

Entity J

Eg:

Entity H

Joint Control Joint

ControlJoint Control

Entities A and X jointly share control over entity B. Entities A and Z jointly sharecontrol over entity C.

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Entity cEntity BEntity A

Eg:

Entity D

60% 10%30%

70%

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Entity HEntity GEntity F

Eg:

Entity I

45% 20%35%

Joint Control

Entities F, G and H own 45 per cent, 35 per cent and 20 per cent respectively of theordinary shares that carry voting rights at a general meeting of shareholders ofentity I. Entities G and H have contractually agreed to share control over entity I.


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Followings are examples of transactions that shall be

disclosed if they are with a related party

(a) purchases or sales of goods (finished or unfinished).

(b) purchases or sales of property and other assets.

(c) rendering or receiving of services.

(d) leases.

Related party transactions

(e) transfers of research and development.

(f) transfers under licence agreements.

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Related party transactions(g) transfers under finance arrangements (including loans and equity contributions in cash or in kind).(h) provision of guarantees or collateral.(i) settlement of liabilities on behalf of the entity or by the entity on behalf of anotherparty.(j) participation by a parent or subsidiary in a defined benefit plan that shares risks between group entities.

In the context of this Section the following are deemed not to be related parties:(a)two companies simply because they have a director in common, (but it is necessary to consider the possibility, and to assess the likelihood, that the director would be able to affect the policies of both companies in their mutual dealings);

(b)two ventures simply because they share joint control over a joint venture;

(c)(i)providers of finance;

(ii)trade unions;

(iii)public utilities; and

(iv)government departments and agencies, in the course of their normal dealings

with an entity by virtue only of those dealings (although they may circumscribe

the freedom of action of an entity or participate in its decisionmaking process);

and(d)a single customer, supplier, franchisor, 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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Eg: Ms B is the financial director of entity K. She is also a non-executive director of entity L. She does not own any shares in entities K and L.In the absence of evidence to the contrary, entities K and L are not related. Note: Ms B is a related party of both entities K and L. She is a member of the key management personnel of entities K and L, i.e through her directorships she has authority and responsibility for planning, directing and controlling the activities of entities K and L.

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If an entity has related party transactions, it shall disclose the nature of the relatedparty relationship as well as information about the transactions, outstanding balancesand commitments necessary for an understanding of the potential effect of therelationship on the financial statements. Those disclosure requirements are inaddition to the requirements in paragraph 33.7 to disclose key management personnelcompensation. At a minimum, disclosures shall include:(a) the amount of the transactions.(b) the amount of outstanding balances and:(i) their terms and conditions, including whether they are secured, and the natureof the consideration to be provided in settlement, and(ii) details of any guarantees given or received.17


(c) provisions for uncollectible receivables related to the amount of outstandingbalances.(d) the expense recognised during the period in respect of bad or doubtful debts due from related parties.Such transactions could include purchases, sales, or transfers of goods or services;leases; guarantees; and settlements by the entity on behalf of the related party or vice versa.

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Auditing purpose what needs to be done

•Compute a materiality level and perform vouching.

•Cross check with inter company.

•Check the journal entries passed through inter company accounts

•Obtain confirmations.

•Prepare a separate working for each inter company current account and

document the nature of transactions recorded.

•Do not attach ledger ages to the section.

lkas 24 related party transactions

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