CONCEPTUAL FRAMEWORK
AND
ACCOUNTING STANDARDS
2020 EDITION
BY: C. VALIX, J. PERLTA, C. A. VALIX
CHAPTER 13
RELATED PARTY
DISCLOSURES PAS
24
RELATED PARTY
a person or entity that is related to the entity that is
preparing its financial statements.
Parties are considered to be related if one party has :
The ability to
control the
other party.
The ability to exercise
significant influence
over the other party.
Joint
control
over
the
reporting entity.
CONTROL
Definition
The power over the investee or the power to govern the
financial and operating policies of an entity so as to obtain
benefits.
Is ownership directly or indirectly through subsidiaries more
than half of the voting power of
an entity.
If an investor holds, directly or indirectly through subsidiaries,
20% or more of the voting power of the investee, it is
presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case.
SIGNIFICANT
INFLUENCE
The power to participate in the financial and operating
policy decisions of an entity, but not control of those policies.
It may be gained by share ownership of 20% or more.
JOINT CONTROL
Beyond the mere 20% threshold of ownership, the existence of
significant influence is usually evidenced by the following factors:
A. Representation in the board of directors
B. Participation in policy making process
C. Material transactions between the investor and the investee
D. Interchange of managerial personnel
E. Provision of essential technical information
The contractually agreed sharing of control over an economic
activity.
A corporation, partnership, or other entity in which two or
more venturers have an interest, under a contractual
arrangement that establishes joint control over the entity. Each
venturer usually contributes cash or other resources to the
jointly controlled entity.
Examples of related parties
Affiliates - meaning the parent, the subsidiary
and fellow subsidiaries
Associates - meaning the entities over which one
party exercises significant influence
Venturer in a joint venture
A joint venture includes the subsidiary or subsidiaries
of the joint venture.
Key management personnel are those personnel
having authority and responsibility for planning,
directing and controlling the activities of the entity,
directly or indirectly, including any executive director
or non-executive director
Close family members of an individual are those
family members who may be expected to influence or
be influenced by that individual in their dealings with
the entity.
Close family members of an individual include:
a. The individual's spouse and children
b. Children of the individual's spouse
c. Dependents of the individual or the
individual's spouse
Individuals owning directly or indirectly an interest in
the voting power of the reporting entity that gives
them significant influence over the entity, and close
family members of such individuals.
Postemployment benefit plan for the benefit of
employees.
Examples of related party transaction (PAS 24 par. 20)
A related party transaction is a transfer of resources or
between related parties, regardless of whether price is
charged.
1.
2.
3.
4.
5.
6.
7.
Purchase and sale of goods
Purchase and sale of property and other asset
Rendering or receiving services
Leases
Transfer of research and development
License agreement
Finance arrangements, including loans and equity
contributions in cash or in-kind
8. Guarantee and collateral
9. Settlement of liabilities on behalf of the entity or by the entity
on behalf of another party.
Related party disclosures
PAS 24, paragraph 12 requires disclosure of related party
relationships where control exists irrespective of whether there
have been transactions between the related parties.
In other words, relationships between parents and subsidiaries
shall be disclosed regardless of whether there have been
transactions between those related parties.
An entity shall disclose the name of the entity's parent and if
different, the ultimate controlling party.
If neither the entity's parent nor the ultimate
controlling party produces financial statements
available for public use, the name of the next
most senior parent that does so shall also be
disclosed.
Disclosures of related party transaction
PAS 24, paragraph 17, provides that if
there have been transactions between
related parties, an entity shall disclose the
nature of the related party relationship as
well as information about the transactions
and outstanding balances necessary for an
understanding of the financial statements.
As a minimum, the disclosures of related party transactions shall
include:
a. The amount of the transaction.
b. The amount of outstanding balance, terms, and conditions
whether secured or unsecured and nature of consideration
to be provided in settlement.
c. The allowance for doubtful accounts related to the
outstanding balance.
d. The doubtful accounts expense recognized during the
period in respect of the amount due from related parties.
Key management personnel compensation
PAS 24, paragraph 16, provides that an entity shall
disclose key management personnel compensation in
total and for each of the following categories:
a. Short-term employee benefits
b. Postemployment benefits, for example, retirement
pensions
c. Other long-term benefits d. Termination benefits
d. Share based payment transactions, for example,
share options
Related party disclosures not required
PAS 24, paragraph 3, requires disclosure of related party transactions
and outstanding balances in the separate financial statements of a
parent, subsidiary, associate, or venturer.
However, Paragraph 4 provides that intragroup-related party
transactions and outstanding balances are eliminated in the
preparation of consolidated financial statements of the group.
Unrelated parties include the following:
1. Two entities simply because they have a director or key
management personnel in common.
2. Providers of finance, trade unions, public utilities, and
government agencies in the course of their normal dealings
with an entity by virtue only of those dealings.
3. A single customer, supplier, franchisor, or general agent with
whom an entity transacts a significant volume of business
merely by virtue of the resulting economic dependence.
4. Two venturers simply because they share joint control over a
joint venture.
Example Problem:
PROBLEM 13-2 (IFRS)
Gibson Company reported the following remuneration and other
payments made to the entity's chief executive officer during the
current year:
Annual Salary
P2,000,000.00
Share Options and other share-based payments.
1,000,000.00
Contributions
500,000.00
Reimbursement of travel expenses for business trips 1,200,000.00
What total amount should be disclosed as compensation to key
management personnel?
Answer: P3,500,000.00