Related Parties and Changes in Foreign Exchange Rates Flashcards
what is the accounting standard related to the disclosure of related parties
IAS 24 Related Party Disclosures
what is the accounting standard relating to foreign exchange rate changes
IAS 21 The Effects of Changes in Foreign Exchange Rates
does IAS 24 related parties affect the financial statements at all
no, just the notes
what is the objective of IAS 24 related parties
ensure that financial statements disclose the fact that the results may have been affected by the existence of related parties and transactions with those parties
what are some examples of transactions related parties might enter that unrelated parties would not
transfer of assets at prices above or below their true value
supply of services at reduced or increased prices
lending at interest rates that differ from market rates
does there have to be a transaction with the related party to trigger a disclosure
no
solely the existence triggers the requirement
does IAS 24 ban transactions with related parties
no they just need to be disclosed
what are the criteria for a related party (person)
the person or a close member of that person’s family is related to a reporting entity if either:
- P has control, joint control or significant influence over the reporting entity
- P is a member of the key management personnel of either the reporting entity of a parent or the reporting entity
who are the key management personnel
persons having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly
e.g. C suite, directors (executive and independent)
what are the criteria for a related party (entity)
- through consolidation the entity and reporting entity are in the same group e.g. parent/subsidiary, belong to same parent
- the entity is a pension scheme for the employees of the reporting entity or of any entity relayed to the reporting entity
- the entity is controlled by a person who is related to the reporting entity, is a member of the KMP
- the entity provides KMP services to the reporting entity or its parents
what transactions relating to third parties should be disclosed
- purchase/sale of goods
- purchase/sale of non-current tangible assets
- provision of services
- leases
- provisions of guarantees
why might it be difficult to identify related parties
some companies wish not to disclose them for privacy reasons
what are some potential indicators of related parties
- payment of services at inflated prices
- sale of securities (shares at a discounted price)
- circular arrangements between parties
- lease agreements at more or less than market value
- unusual material transactions particularly close to year end
what are the disclosure requirements for IAS 24
- parent/subsidiary relationships (even if no transactions between parties)
- employee benefits paid or payable to KMP
- information about transactions with related parties including the nature of the relationship and any outstanding balances at year end
If an entity does not have foreign activities, is IAS 21:The Effects of Changes in Foreign Exchange Rates relevant
no
what are the ways in which an entity carried out foreign activites
- transactions in a foreign currency
- has a foreign subsidiary
- may have to present its financial statements in foreign currency
what is the functional currency
the currency of the primary economic environment
what currency they do their day to day operations in
should be fairly self evident
what is the foreign currency
everything except the functional currency of the entity
what is the presentation currency
currency of the entity’s financial statements - usually the same as the functional currency
what is a foreign operation
a subsidiary or branch of the reporting entity that carries out activities in a currency other than the reporting entity’s functional currency or in a different country
examples of foreign currency transactions
buying or selling of goods or services whose price is denominated in a foreign currency
borrows/lends when the amounts payable or receivable are denominated in a foreign currency
acquires or disposes of assets or, incurs or settles liabilities denominated in a foreign currency
how to determine the functional currency
should be fairly evident
but:
what currency are sales/purchases being denominated
what country’s regulations do they follow
what currency is the labour paid in
what is the spot exchange rate
the exchange rate for immediate delivery
how are foreign currency transactions recognised initially
spot exchange rate on the day of the transaction
where do effects of the changes in the exhange rates of transactions on subsequent measurement go
SOFP
what is the subsequent measurement for monetary items
use spot rate at the end of the period
examples of monetary items
Trade receivables, trade payables
know exactly how much will exchange hands
what is the subsequent measurement for non-monetary items carried at cost
use exchange rate at date of the transaction
what is the subsequent measurement for non-monetary items carried at fair value
use exchange rate at date fair value was measured
what are non monetary items
dont know exactly how much money will change hands
e.g. inventory, PPE
where are differences in initial and subsequent measurement recognised in accounts
as income or expense in SPL
abbreviation for foreign exchange
forex
what is the process of translating accounts to a foreign currency
- translate assets and liabilities at closing rate at end of the period
- translate income and expenses at the exchange rates on dates of individual transactions (ALLOW TO USE AVERAGE RATE AS THIS IS TEDIOUS)
- exchange differences are recognised in OCI
what is the translation process of translation of a foreign operation
same as translation to foreign currency
why must an entity translate the financial statements of a foreign operation
to consolidate financial statements
what accounting standard deals with foreign exchange rate changes
IAS 21:The Effects of Changes in Foreign Exchange Rates
what does IAS 21 say to do with share capital
it does not refer to share capital
what is the rule of thumb for share capital
translate using historical date (acquisition date of shares)
