Actualidad de las Tarifas eléctricas de acuerdo a las regulaciones

Text reference. Related parties are covered in Chapter 10 of the text.

Top tips. This question dealt with the importance of the disclosure of related party transactions and the criteria

determining a related party. Additionally, it required candidates to identify related parties, and to account for goodwill and a loan made to one of the related parties which was a foreign subsidiary. Don't forget, from your group accounting knowledge, that goodwill relating to the foreign subsidiary is treated as a foreign currency asset and translated at the closing rate of exchange.

Easy marks. Part (a) should earn you five very easy marks, as it is basic knowledge. Part (b) is application, but very

straightforward. This leaves only nine marks for the more difficult aspects.

Examiner's comment. The importance of related parties and their criteria was quite well answered, although

candidates often quoted specific examples rather than the criteria for establishing related parties. The identification of related party relationships was well answered, but the accounting for the goodwill of the foreign subsidiary (and the loan made to it) were poorly answered.

Marking scheme

Marks

(a) (i) _{Reasons and explanation 5}

(ii) _{Egin 5} Spade 3 Atomic 3 (b) Goodwill 5 Loan 5 Available 26 Maximum 25

(a) (i) Why it is important to disclose related party transactions

The directors of Egin are correct to say that related party transactions are a normal feature of business. However, where entities are members of the same group, for example parent and subsidiary, the financial performance and position of both entities can be affected. An obvious

instance of this is where one group company sells goods to another at artificially low prices. Even where there are no actual transactions between group companies, a parent normally influences the way in which a subsidiary operates. For example, a parent may instruct a subsidiary not to trade

with particular customers or suppliers or not to undertake particular activities. In the absence of other information, users of the financial statements assume that a company pursues its interests independently and undertakes transactions on an arm's length basis on terms that could have been

obtained in a transaction with a third party. Knowledge of related party relationships and transactions affects the way in which users assess a company's operations and the risks and opportunities that it faces. Therefore details of an entity's controlling party and transactions with related parties should be disclosed. Even if the company's transactions and operations have not been affected by a related

party relationship, disclosure puts users on notice that they may be affected in future.

Under IAS 24 Related party disclosures a related party is a person or entity that is related to the entity that is preparing its financial statements (the 'reporting entity').

Persons

IAS 24 states that a person or a close member of that person's family is related to a reporting entity if that person:

(1) Has control or joint control over the reporting entity;

(2) Has significant influence over the reporting entity; or

(3) Is a member of the key management personnel of the reporting entity or of a parent of the

reporting entity.

Entities

An entity is related to a reporting entity if any of the following conditions applies:

(1) The entity and the reporting entity are members of the same group (which means that each

parent, subsidiary and fellow subsidiary is related to the others).

(2) One entity is an associate* or joint venture* of the other entity (or an associate or joint

venture of a member of a group of which the other entity is a member). (3) Both entities are joint ventures* of the same third party.

(4) One entity is a joint venture* of a third entity and the other entity is an associate of the third entity.

(5) The entity is a post-employment benefit plan for the benefit of employees of either the

reporting entity or an entity related to the reporting entity.

(6) The entity is controlled or jointly controlled by a person identified in the definition above.

(7) A person identified above as having control or joint control over the reporting entity has

significant influence over the entity or is a member of the key management personnel of the

entity (or of a parent of the entity).

*Including subsidiaries of the associate or joint venture.

(ii) Nature of related party relationships

Within the Egin Group

Briars and Doye are related parties of Egin because they are members of the same group (both

subsidiaries of Egin). For the same reason, as fellow subsidiaries, Briars and Doye are also related parties of each other. Eye is also a related party of Egin because it is an associate of Egin. (Egin

has significant influence over Eye.)

Briars and Doye may be related parties of Eye. There is only one director in common and IAS 24

states that entities are not necessarily related simply because they have a director (or other member of key management personnel) in common, or because a member of key management personnel of one entity has significant influence over the other entity. However, Eye is an associate of Egin, and

therefore a member of the group that Briars and Doye are members of (see (2) under 'Entities'

above).

Although Tang was sold several months before the year end it was a related party of Egin, Briars and Doye until then. Therefore the related party relationship between Tang and the Egin group should be disclosed even though there were no transactions between them during the period. Blue is a related party of Briars as a director of Briars controls it. Because the director is not on the

management board of Egin it is not clear whether Blue is also a related party of Egin group. This

would depend on whether the director is considered key management personnel at a group level. The director's services as a consultant to the group may mean that a related party relationship exists. The issue would depend on whether this role meant that this person was directing or controlling a major part of the group's activities and resources.

Between Spade and the Egin Group

of Spade simply because both have an investment in Doye. A related party relationship will only exist

if one party exercises influence over another in practice.

The directors have proposed that disclosures should state that prices charged to related parties are set on an arm's length basis. Because the transaction took place between related parties by

definition it cannot have taken place on an arm's length basis and this description would be misleading. Doye sold plant and equipment to Spade at normal selling prices and this is the

information that should be disclosed, provided the terms can be substantiated.

Between Atomic and the Egin Group

Atomic is a related party of Egin because it can exercise significant influence over it. Atomic's

significant influence over Egin gives it significant influence over Briars and Doye as they are

controlled by Egin. Eye is not a related party of Atomic as atomic has no ability to exercise control

or significant influence over Eye

(b) Goodwill arising on the acquisition of Briars

IAS 21 The effect of changes in foreign exchange rates states that goodwill arising on the acquisition of a foreign subsidiary should be expressed in the functional currency of the foreign operation and retranslated at the closing rate at each year-end. Goodwill is calculated and translated as follows:

Euros m Rate $m

Consideration transferred 50 25.0

Non-controlling interests (45  20%) 9 2 4.5

Less fair value of identifiable net assets at acquisition (45) (22.5)

Goodwill at acquisition 14 7.0

Impairment (3) 2.5 (1.2)

Exchange loss (balancing figure) (1.4)

At 31 May 20X6 11 2.5 4.4

Goodwill is measured at $4.4 million in the statement of financial position. An impairment loss of $1.2 million is recognised in profit or loss and an exchange loss of $1.4 million is recognised in other comprehensive income (items that may subsequently be reclassified to profit or loss, and taken to the

translation reserve in equity.

Loan to Briars

The loan is a financial liability measured at amortised cost. The loan is measured at fair value on initial

recognition. Fair value the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This would normally be the

actual transaction price. However, Egin and Briars are related parties and the transaction has not taken place on normal commercial terms.

IFRS 9 states that it is necessary to establish what the transaction price would have been in an orderly

transaction between market participants at the measurement date. The amount that will eventually be repaid to Egin is $10 million and the normal commercial rate of interest is 6%. Therefore the fair value of the loan is its discounted present value, which is retranslated at the closing rate at each year-end.

Therefore the loan is measured at the following amounts in the statement of financial position:

$'000 Rate Euros 000

At 1/6/20X5 (10  2

1

1.06 ) 8,900 2 17,800

Interest (unwinding of discount) (8,900  _{6%) 534 2.3 1,228}

Exchange loss 4,557

At 31/5/20X6 (10  1

1.06) 9,434 2.5 23,585

The unwinding of the discount is recognised as a finance cost in profit or loss for the year and the

exchange loss is also recognised in profit or loss.

Note. It would also be possible to calculate the finance cost for the year ended 31 May 20X6 at the closing rate. This would increase the exchange loss and the total expense recognised in profit and loss would be the

30 Engina

Text reference. Related parties are covered in Chapter 10.

Top tips. A good test of your ability to apply IAS 24 to a practical scenario.

Marking scheme

Marks Style of letter/report 4 Reasons 8 Goods to directors 4 Property 5 Group 4 Maximum 25 REPORT To: The Directors

Engina Co Zenda Ruritania From: Ann Accountant Date: 12 May 20X3

Related Party Transactions

The purpose of this report is to explain why it is necessary to disclose related party transactions. We appreciate that you may regard such disclosure as politically and culturally sensitive. However, there are sound reasons why

International Financial Reporting Standards require such disclosures. It should be emphasised that related party

transactions are a normal part of business life, and the disclosures are required to give a fuller picture to the users of accounts, rather than because they are problematic.

Prior to the issue of IAS 24, disclosures in respect of related parties were concerned with directors and their relationship with the group. The IASB extends this definition and also the required disclosures. This reflects the objective of the IASB to provide useful data for investors, not merely for companies to report on stewardship activities.

Unless investors know that transactions with related parties have not been carried out at 'arm's length' between independent parties, they may fail to ascertain the true financial position.

Related party transactions typically take place on terms which are significantly different from those undertaken on normal commercial terms.

IAS 24 requires all material related party transactions to be disclosed.

It should be noted that related party transactions are not necessarily fraudulent or intended to deceive. Without proper disclosures, investors may be disadvantaged – IAS 24 seeks to remedy this.

Sale of goods to the director

(a) Disclosure of related party transactions is only necessary when the transactions are material. For the

purposes of IAS 24, however, transactions are material when their disclosure might reasonably be expected

to influence decisions made by users of the financial statements, irrespective of their amount.

(b) The materiality of a related party transaction with an individual, for example a director, must be judged by reference to that individual and not just the company. In addition, disclosure of contracts of significance

(c) Mr Satay has purchased $600,000 (12  $50,000) worth of goods from the company and a car for $45,000, which is just over half its market value.

(d) The transactions are not material to the company, and because Mr Satay has considerable personal wealth, they are not material to him either.

(e) However, IAS 24 confirms that directors are related parties and transactions with directors should be disclosed. In addition, IAS 24 requires disclosure of compensation paid to directors. Compensation includes subsidised goods and benefits in kind. Details of the transaction should be disclosed, including the amount of the transactions and any outstanding balances.

Hotel property

(a) The hotel property sold to the Managing Director's brother is a related party transaction, and it appears to have been undertaken at below market price.

(b) IAS 24 envisages disclosure of the substance of the transaction.

(c) IAS 24 requires disclosure of 'information about the transaction and outstanding balances necessary for an understanding of the potential effect of the relationship upon the financial statements'.

(d) Not only must the transaction itself be disclosed, but the question of impairment needs to be considered. The value of the hotel has become impaired due to the fall in property prices, so the carrying value needs to be adjusted in accordance with IAS 36 Impairment of assets. The hotel should be shown at the lower of carrying value ($5m) and the recoverable amount. The recoverable amount is the higher of fair value less costs of disposal ($4.3m – $0.2m = $4.1m) and value in use ($3.6m). Therefore the hotel should be shown at $4.1m.

The sale of the property was for $100,000 below this impaired value, and it is this amount which needs to be disclosed. This would highlight the nature of the transactions within the existing property market conditions.

Group structure

(a) Local companies legislation and the Stock Exchange often require disclosure of directors' interests in a company's share capital. IAS 24 requires disclosure of the 'ultimate controlling party'. Mr Satay controls Engina as a result of his ownership of 80% of the share capital of Wheel.

(b) IAS 24 requires disclosure of the related party relationship between Engina and Wheel and also of

transactions between the two companies, despite the fact that Engina is a wholly owned subsidiary.

(c) Engina's transactions with Car Ltd will also need to be disclosed. IAS 24 states that companies under

common control are related parties, and the two companies are under the common control of Mr Satay.

31 Preparation question: Leases

In document JAIME ALEXIS GERARDO CASTRO SANTOS (página 84-99)