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Hi slight confusion on associates and whether to disclose them as related parties.
CB is an entity specialising in importing a wide range of non-food items and selling them to retailers. George is CB’s chief executive officer and founder and owns 40% of CB’s equity shares.
Which TWO of the following transactions should be disclosed in the financial statements of CB in accordance with IAS 24 Related party disclosures?
A CB’s largest customer, XC, accounts for 35% of CB’s revenue. XC has just completed negotiations with CB for a special 5% discount on all sales.
NO
B During the accounting period, George purchased a property from CB for $500,000. CB had previously declared the property surplus to its requirements and had valued it at $750,000.
Yes George the CEO made a purchase.. so it is a related party.
C George’s son, Arnold, is a director in a financial institution, FC. During the accounting period, FC advanced $2 million to CB as an unsecured loan at a favourable rate of interest.
Yes Georges and Arnold are father and son. Related party.
D FG and CB are associates within the same group. During the current year, the parent, HI required CB to sell goods to FG at cost
Why is point D not a related party? Is it because of the associate relationship?
Question 2)
16.9 XT owns 75% of R. XT also owns 40% of V, over which it exercises significant influence. R owns 100% of P. XT operates a defined benefit pension plan for all of its employees and sells 60% of its output to its main customer, G. Which of the following would be considered related parties of XT, in accordance with international
financial reporting standards?A R, V and G
B R, G and the pension plan
C R, V, P and G
D R, V, P and the pension planXT Owns 75% of R, and R owns 100% of P. so P and R are related parties. the answer goes on to suggest that the associate V is also a related party. However in the question above point D was about an associate and we did not class it as a related party- so why in this example is a related party? and what it is about pension plans.. that makes G a related party. I thought customers whom an entity transacts with does not make it a related party?
thanks Chris!
Hi Abi,
Yes, it’s a bit confusing. We’ll start with the second one a it is possibly a bit easier.
G isn’t a related party as customers are by definition not a related party, even though they are clearly a major customer. They do have an influence on the business but not in the way in which the standards define influence (the power to participate in the operating and financing decisions). It’s worth noting that unions and utilities providers are also not related parties.
Again, by definition the pension plan is a related party. So it should be answer D in that R, V, P and the pension plan are all related parties.
In the first example, the key here I think is that it is looking for the disclosures in the accounts of CB, so HI is a related party to CB as it is the parent company and any transactions between the two would be disclosed. However,the other associate is not a related party as CB does not have any influence over FG, it is the parent who has the influence. The key to take from it is that two associates are not related parties.
Thanks
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