- 10 Marks
Question
You are the Director of Finance at the Ghana Water Development Authority, an entity under the Ministry of Forestry and Water. The Authority has a five-member Board chaired by the daughter of the Sector Minister. The Chief Executive Officer of the Authority has just been appointed by Government for an initial term of four years.
The Chairperson of the board runs boutique services. The Authority buys a lot of presents from this boutique whenever they are confronted with the need to give out presents to any high-profile person. The Chairperson has made a request to the Authority to finance her boutique services with an amount of GH¢546,000 to enable her business to pay some urgent bills. No terms or conditions were provided in the request. Such an assistance from a financial institution would attract the current prevailing bank interest on loans at a rate of 35% per annum. Recently, another member of the Board contracted a loan from the Bank for her child’s university entrance fees at that rate.
Management of the Authority indicated that the amount was not significant to the Authority and has been approved by the Head of the entity and the Chief Director. The approved document has been handed over to you for payment. Considering the PFM Laws and IPSAS, you engaged the Chief Director about the request, but you were directed to go ahead and pay and use the appropriate accounting treatment in such circumstances. You accordingly raised the necessary documentation and effected the payment.
Required:
In relation to IPSAS 20: Related Party Disclosures:
i) Explain the implications of this transaction on the Authority and state how you would account for this transaction in the financial statements of the entity.
ii) State SIX situations where related party transactions may lead to disclosures by a reporting entity.
iii) Explain TWO reasons for disclosing related party transactions/relations.
Answer
i) Implications of the Transaction and Accounting Treatment:
The first step is recognizing that this is a related party transaction, which under IPSAS 20 has implications on governance, conflict of interest, and transparency. The boutique is a related party because the Chairperson, who has significant influence over the Authority, also controls the boutique. The Chairperson’s control over both entities raises ethical and financial concerns, as well as a potential conflict of interest.
The transaction should not be classified as an ordinary business expense. Since there are no clear repayment terms, it should be recorded as a loan or an advance to the related party. Without proper authorization from the Minister of Finance, this transaction does not comply with government financial regulations and could be considered a misuse of public funds. If the loan is not repaid, it may be necessary to classify it as a loss or an unauthorized expenditure.
IPSAS 20 requires full disclosure of related party transactions to maintain transparency in financial statements. This means the financial statements must include:
- The nature of the related party relationship
- The amount involved
- The terms and conditions (if any)
- The rationale for the transaction
ii) Situations Where Related Party Transactions May Require Disclosure:
- When an entity provides or receives services from a related party
- When an entity sells or purchases goods or property from a related party
- When there are leasing agreements between related parties
- When an entity provides financial assistance, loans, or credit facilities to a related party
- When there are cost-sharing arrangements between related parties
- When an entity enters into licensing or intellectual property-sharing agreements with a related party
iii) Reasons for Disclosing Related Party Transactions:
- Transparency and Accountability: Public entities manage funds on behalf of the public, so disclosing related party transactions ensures accountability and public trust.
- Prevention of Resource Misuse: Ensuring that funds are allocated fairly and in the best interest of the public rather than benefiting a specific individual or entity.
- Topic: International public sector accounting standards
- Series: Nov 2024
- Uploader: Salamat Hamid