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- Disclosure of related party transactions: Practical examples
Disclosure of related party transactions: Practical examples
- By Rob Mackay
- Published 30/04/2010
- April 2010
- Unrated
While the great majority of related-party transactions are conducted on normal commercial terms, the special relationship inherent between the involved parties creates potential conflicts of interest which can result in actions which benefit the people involved as opposed to the shareholders.
AASB 124 Related Party Disclosures (December 2009) has been revised for periods commencing on or after 1 January 2011 but is available for early adoption. As part of the revision, the definition of a related party has been expanded and clarified. Under the revisions, a related party is defined as:
(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 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).
In essence, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party when making financial and operating decisions.
Consider the following scenario:
Parent owns 55% of the share capital of Subsidiary and has the ability to control it.
Subsidiary holds the following investments:
Parent transacts with Sub A, JCE and Associate A.
Which transactions should be disclosed as related party transactions in Parents financial statements?
Parent should disclose transactions with Sub A, JCE and Associate A in their financial statements.
Sub A is a related party of Parent because Sub A, Subsidiary and Parent are members of the same group (AASB 124.9(b)(i)).
JCE is a related party of Parent because JCE is a joint venture of Subsidiary, and Subsidiary and Parent are members of the same group (AASB 124.9(b)(ii)).
Associate A is a related party of Parent because Associate A is an associate of Subsidiary, and Subsidiary and Parent are members of the same group (AASB 124.9(b)(ii)).
Under the previous definition of a related party, Associate A would not have been considered a related party of Parent because it did not satisfy the definition of a related party.
Consider the following scenario:
Parent owns shares that entitle it to 100% of the voting rights in Subsidiary and 30% of the voting rights in Associate.
The structure is illustrated as follows:
Subsidiary transacts with Association. Neither Subsidiary nor Associate transacts with Parent.
How should Subsidiary’s transactions with Associate be disclosed:
(a) Subsidiary’s financial statements;
(b) Parent’s separate financial statements; and
(c) Parent’s consolidated financial statements?
(a) Subsidiary’s financial statements
Subsidiary is required to disclose transactions with Associate in their financial statements.
Associate is a related party of Subsidiary as Associate is an associate of Parent, and Parent and Subsidiary are members of the same group (AASB 124.9(b)(ii)).
Under the previous definition of a related party, these transactions would not have required disclosure as Subsidiary has no ability to exercise control or significant influence over Associate and Associate and Subsidiary are not under the common control
of Parent.
(b) Parent’s separate financial statements
Parent is not required to disclose the transactions between Subsidiary and Associate in their separate financial statements.
Both Subsidiary and Associate are related parties of Parent but neither entity transacts with Parent. The transactions between Subsidiary and Associate do not impact Parent’s separate financial statements directly.
(c) Parent’s consolidated financial statements
Parent is required to disclose transactions between Subsidiary and Associate in the consolidated financial statements.
AASB 124 Related Party Disclosures (December 2009) has been revised for periods commencing on or after 1 January 2011 but is available for early adoption. As part of the revision, the definition of a related party has been expanded and clarified. Under the revisions, a related party is defined as:
(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 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).
In essence, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party when making financial and operating decisions.
Consider the following scenario:
Parent owns 55% of the share capital of Subsidiary and has the ability to control it.
Subsidiary holds the following investments:
- 75% of the share capital of its subsidiary Sub A;
- 50% of the share capital of the jointly controlled JCE; and
- 25% of the share capital of Associate A, with the ability to exercise significant influence.
Parent transacts with Sub A, JCE and Associate A.
Which transactions should be disclosed as related party transactions in Parents financial statements?
Parent should disclose transactions with Sub A, JCE and Associate A in their financial statements.
Sub A is a related party of Parent because Sub A, Subsidiary and Parent are members of the same group (AASB 124.9(b)(i)).
JCE is a related party of Parent because JCE is a joint venture of Subsidiary, and Subsidiary and Parent are members of the same group (AASB 124.9(b)(ii)).
Associate A is a related party of Parent because Associate A is an associate of Subsidiary, and Subsidiary and Parent are members of the same group (AASB 124.9(b)(ii)).
Under the previous definition of a related party, Associate A would not have been considered a related party of Parent because it did not satisfy the definition of a related party.
Consider the following scenario:
Parent owns shares that entitle it to 100% of the voting rights in Subsidiary and 30% of the voting rights in Associate.
The structure is illustrated as follows:
Subsidiary transacts with Association. Neither Subsidiary nor Associate transacts with Parent.
How should Subsidiary’s transactions with Associate be disclosed:
(a) Subsidiary’s financial statements;
(b) Parent’s separate financial statements; and
(c) Parent’s consolidated financial statements?
(a) Subsidiary’s financial statements
Subsidiary is required to disclose transactions with Associate in their financial statements.
Associate is a related party of Subsidiary as Associate is an associate of Parent, and Parent and Subsidiary are members of the same group (AASB 124.9(b)(ii)).
Under the previous definition of a related party, these transactions would not have required disclosure as Subsidiary has no ability to exercise control or significant influence over Associate and Associate and Subsidiary are not under the common control
of Parent.
(b) Parent’s separate financial statements
Parent is not required to disclose the transactions between Subsidiary and Associate in their separate financial statements.
Both Subsidiary and Associate are related parties of Parent but neither entity transacts with Parent. The transactions between Subsidiary and Associate do not impact Parent’s separate financial statements directly.
(c) Parent’s consolidated financial statements
Parent is required to disclose transactions between Subsidiary and Associate in the consolidated financial statements.
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Article Series
This article is part 2 of a 2 part series. Other articles in this series are shown below:
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Disclosure of related party transactions: Practical examples