FR - Related Party Transaction

Question 1

What are the Handbook references for related party transaction

Answer 1

ASPE - 3840
IAS 24 - Related party disclosure

Question 2

What is a related party transaction

Answer 2

Is the exchange that occurs between parties that are related and occur with condition that differs from the exchange with parties not related
“non-arm length transaction”

Question 3

Explain what a related party includes

Answer 3

• Entity exercises direct or indirect control or significant influence
• Parties subject to common control, joint control common significant influence
• Management of the entity, including the director
• Members of the immediate family of an individual who is a related party

Question 4

Provide 3 examples if the related transaction does not occur unless they meet one of the definition

Answer 4

• Providers of finance
• Trade unions
• Public Utilities
• Government department
  -Two ventures simply because they share joint control or joint venture

Question 5

What are the two amounts of accounting for the related parties

Answer 5

1. Carrying amount - amount the item was recorded at by the transferor (Book Value)
2. Exchange amount - amount if consideration paid or received as agreed to by the related parties. The amount parties agreed to, may not be equal to FV
   - Are measured amount, gain or loss is recognized in income for the period

Question 6

Explain how the transaction is used in monetary RPT

Answer 6

• Cash or other monetary assets, such as A/R are included in the exchange between the parties
  -Transaction is measured at the carrying amount

Question 7

Explain how the transaction is used in non-monetary RPT

Answer 7

NM asset other than cash or other monetary items are exchanged between the parties
- Measured at carrying amount, any difference between the carrying amount of the items exchange is included in equity

Question 8

What are the 5 steps of the related party decision tree

Answer 8

1. Has the related party transaction occur?
2. Is the transaction in the normal course of operation?
3. Is the change in ownership interest in the item transferred substantive
4. Is the amount of the exchange supported by independent evidence?
5. Is the transaction a non-monetary exchange or transfer of a non-monetary asset
   5a. Is the transaction an exchange of product or property hed for sales in the normal course of operation to facilities sales?
   5b. Does the transaction have commercial substance

Question 9

Explain the decision for the first step of the decision tree

Answer 9

• RPT occurs when there is a transfer of economic resources or obligation between related parties
• Recognize that in determining whether the transaction is RPT, parties must be deemed to be related prior to transaction

Question 10

Explain the decision for the second step of the decision tree

Answer 10

• For the normal course of operation - it is usually transaction that occur frequently or regularly for purpose of gaining revenue
  Ex. Law firm may provide legal service to related party, this would be consider normal course of operation
  -If not in the normal course of operation - Step 3,
• If in normal course of operation - Step 5

Question 11

Explain the decision for the third step of the decision tree

Answer 11

• The change in ownership is substantive of item considered to occur when transaction results in unrelated parties have acquired to give at least 20% of total equity ownership interest
• If it does not have any significant change in ownership, measure at carrying amount
• If it does have significant change in ownership - Step 4

Question 12

Explain the decision for the fourth step of the decision tree

Answer 12

The amount of exchange supported by independent evidence for the value of exchange refers to support that exchange was value not influenced by RP
- Evidence: Independent appraisal valuation, comparable recently quoted in an active market, Independent bids on a transaction
- If not supported by independent evidence - measure at carrying amount
- If supported by independent evidence - Step 5

Question 13

Explain the decision for the five-step of the decision tree

Answer 13

• Monetary transaction where it is cash or claim to cash
• If it is monetary -measured at exchange amount
• If non-monetary transaction - have to determine two other criteria

Question 14

Explain the decision for 5a of the decision tree

Answer 14

• Is the transaction an exchange of product or property held in the normal course of operation - entities are exchanging items that are in the same line in business order to make a sale
• Related convenience stores were to exchange inventory of different brands of soda intention of selling soda to customer
• If the transaction is held in the normal course of operation - carry amount is used
• If transactions that are not an exchange of items held for sale in the normal course of operation - Step 5b.

Question 15

Explain the decision for 5b of the decision tree

Answer 15

Does the transaction have commercial substance - future cash flow is expected to change significantly as a result of the transaction
- Transaction with commercial substance - measured at the exchange amount
- Transaction without commercial substance - measured at the carrying amount

Question 16

Provide the 4 disclosures of the related party transaction

Answer 16

• Relationship of the related party
• Transaction details
• Measurement basis used
• Amount and term for any receiveable/ payables
• Amount recognized for the transaction classified by FS
• Contractual obligation with related parties, separate from contractual obligation

Question 17

Provide the difference between IFRS and ASPE

Answer 17

• IFRS - RPT are not recorded differently than non-RPT, generally recorded at exchange amount by the two parties
  IFRS requires significant disclosure such as
  1. Nature of the related party relationship
  2. Name of the entity parent company
  3. Key management compensation in total and for each categories