INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA

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1 INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA INAUGURAL IFRS FOR SMES WORKSHOP SAFARIPARK HOTEL 19 th to 20 th November 2015 Session Two : Related Parties Credibility. Professionalism. AccountAbility

2 1. Introduction 1. Introduction 2. Scope of section Definition of related party 4. Disclosures

3 1. Introduction The objective of section 33 is to ensure that an SME s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties.

4 1. Introduction Related party relationships are a normal feature of commerce and business. For example, entities frequently carry on parts of their activities through subsidiaries, joint ventures and associates. In these circumstances, the entity s ability to affect the financial and operating policies of the investee is through the presence of control, joint control or significant influence.

5 1. Introduction A related party relationship could have an effect on the profit or loss and financial position of an entity. Related parties may enter into transactions that unrelated parties would not. For example, an entity that sells goods to its parent at cost might not sell on those terms to another customer.

6 1. Introduction Also, transactions between related parties may not be made at the same amounts as between unrelated parties. The profit or loss and financial position of an entity may be affected by a related party relationship even if related party transactions do not occur. The mere existence of the relationship may be sufficient to affect the transactions of the entity with other parties.

7 1. Introduction For these reasons, knowledge of related party transactions, outstanding balances and relationships may affect assessments of an entity s operations by users of financial statements, including assessments of the risks and opportunities facing the entity.

8 2. Scope of section 33 Section 33 requires an entity to include in its financial statements the disclosures necessary to draw attention to the possibility that its financial position and profit or loss have been affected by the existence of related parties and by transactions and outstanding balances with such parties.

9 3. Definition of R (a) A person or a close member of that person s family is related to a reporting entity if that person: (i) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity; (ii) has control over the reporting entity; or (iii) has joint control or significant influence over the reporting entity or has significant voting power in it.

10 3. Definition of R (b) An entity is related to a reporting entity if any of the following conditions applies: (i) 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). (ii) either entity is an associate or joint venture of the other entity (or of a member of a group of which the other entity is a member).

11 3. Definition of R (iii) both entities are joint ventures of a third entity. (iv) either entity is a joint venture of a third entity and the other entity is an associate of the third entity. (v) 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.

12 3. Definition of R (vi) the entity is controlled or jointly controlled by a person identified in (a). (vii) a person identified in (a)(i) has significant voting power in the entity. (viii) a person identified in (a)(ii) has significant influence over the entity or significant voting power in it.

13 3. Definition of R The following are not necessarily related parties: (a) two entities simply because they have a director or other member of key management personnel in common. (b) two venturers simply because they share joint control over a joint venture.

14 3. Definition of R (c) any of the following simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision-making process): (i) providers of finance. (ii) trade unions. (iii) public utilities. (iv) government departments and agencies.

15 3. Definition of R (d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, merely by virtue of the resulting economic dependence.

16 4. Disclosures 1. Disclosure of parent-subsidiary relationships Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been related party transactions. An entity shall disclose the name of its parent and, if different, the ultimate controlling party.

17 4. Disclosures 2. Disclosure of key management personnel compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. An entity shall disclose key management personnel compensation in total.

18 4. Disclosures 3. Disclosure of related party transactions A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. Examples of related party transactions that are common to SMEs include, but are not limited to:

19 4. Disclosures (a) transactions between an entity and its principal owner(s). (b) transactions between an entity and another entity when both entities are under the common control of a single entity or person. (c) transactions in which an entity or person that controls the reporting entity incurs expenses directly that otherwise would have been borne by the reporting entity.

20 4. Disclosures At a minimum, disclosures shall include: (a) the amount of the transactions. (b) the amount of outstanding balances and: (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and (ii) details of any guarantees given or received.

21 4. Disclosures (c) provisions for uncollectible receivables related to the amount of outstanding balances. (d) the expense recognized during the period in respect of bad or doubtful debts due from related parties. Such transactions could include purchases, sales, or transfers of goods or services; leases; guarantees; and settlements by the entity on behalf of the related party or vice versa.

22 4. Disclosures The following are examples of transactions that shall be disclosed if they are with a related party: (a) purchases or sales of goods (finished or unfinished). (b) purchases or sales of property and other assets. (c) rendering or receiving of services. (d) leases. (e) transfers of research and development.

23 4. Disclosures (e) transfers under licence agreements. (g) transfers under finance arrangements (including loans and equity contributions in cash or in kind). (h) provision of guarantees or collateral. (i) settlement of liabilities on behalf of the entity or by the entity on behalf of another party. (j) participation by a parent or subsidiary in a defined benefit plan.

24 QUESTIONS AND DISCUSSIONS!

Sri Lanka Accounting Standard-LKAS 24. Related Party Disclosures

Sri Lanka Accounting Standard-LKAS 24 Related Party Disclosures CONTENTS SRI LANKA ACCOUNTING STANDARD-LKAS 24 RELATED PARTY DISCLOSURES paragraphs OBJECTIVE 1 SCOPE 2 4 PURPOSE OF RELATED PARTY DISCLOSURES