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The accounting standard says….
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.Does all three (3) criteria need to be met for a person to be considered a related party to the reporting entity? OR Is it just one (1) of these criteria needs to be met for a person to be considered a related party?
Thanks!
Just one!
Why important? So that readers / users of the financial statements are being transparently acquainted with what could be excessively material information. In ACCA language, it’s to give the readers of the financial statements full information that may influence their interpretation of those financial statements
Ok?
Yep!
One final thing…
Mr P has a 25% shareholding in Entity A.
Mr P has a 30% shareholding in Entity B.Mr P is able to exert significant influence over Entity A and Entity B.
Required:
Explain whether or not Entity A and Entity B are related parties.Is this answer correct?
A related party is a person or entity that is related to the entity that is preparing its financial statements.
If Entity A were the reporting entity, Mr A would be a related party because he has the ability to exert significant influence over the reporting entity.
If Entity B were the reporting entity, Mr P would be a related party because he has the ability to exert significant influence over the reporting entity.
However, the answer given in Kaplan Study Text was:
Mr P is a related party of both Entity A and Entity B as he is able to exercise significant influence over each entity.
Mr P does not control either Entity A or Entity B. Therefore, A and B are not related parties.
The last sentence above was different from my answer. Why did they make such statement that A and B are not related parties?
When answering questions, aren’t we not supposed to identify each reporting entity and then determine how other entity’s or persons results in a related party as this is in line with the definition of a related party (a person or entity that is related to the reporting entity)
I’m confused there…
If Mr P had a controlling influence over the two entities, then those two entities would be related (entities under common control)
There would have been many students in that exam room that claimed that entity A was related to entity B because they were both significantly influenced by Mr P. If someone had written that, they simply would not have scored the mark that was available
Ask yourself this “Did I answer the question that was set or did I see the words “related party” and write down what I knew?”
The question asks you to explain whether the entities are or are not related. Did you do that?
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