Question Tag: Related Party Transactions

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  • 10 Marks

PSAF – Nov 2024 – L2 – Q2b – Related Party Transactions and Disclosures

Explains related party transactions and their implications under IPSAS 20.

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.

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  • 7 Marks

CR – May 2016 – L3 – Q7a – Related Party Disclosures (IAS 24)

Discuss the appropriate disclosure of related party transactions and director remuneration under IAS 24 for IBRO Plc.

a) IBRO Plc provided the remuneration of its management board made up of executive and non-executive directors (including 2 foreign nationals) as follows:

  • Annual basic salary
  • Bonus scheme (Annual compensation)

Four of the directors of IBRO Plc obtained loans from the company at concessional rates, while 2 directors are part of the bondholders of the company’s loan stock with convertible features to their advantage.

In the group financial statements, with the related parties note under IAS 24 – Related Party Disclosures, IBRO Plc disclosed the total remuneration paid to directors and non-executive directors. No further breakdown of the remuneration was provided. The remuneration of the non-executive directors, however, was not included in the key management disclosures.

IBRO Plc was of the opinion that in its jurisdiction, providing information about individual director’s remunerations would be a disservice to them, especially because they have served the company meritoriously. Consequently, the CFO of the company is proposing to disclose the related party information in the annual financial statements in an ambiguous manner to prevent users of the financial statements from linking remuneration information to specific individual directors.

Required:
Discuss the appropriate disclosure for the above transactions within the context of IAS 24 – Related Party Disclosures in the financial statements of IBRO Plc for the year ended December 31, 2014.

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  • 15 Marks

AAA – May 2022 – L3 – Q7 – Risk Management in Audits

Evaluate key risk areas for auditors in consolidating Nigerian and UK company accounts, considering transfer pricing and related party transactions.

BARCHI International Limited is a company with corporate registrations in both the United Kingdom (U.K.) and Nigeria. The Chairman of the company is based in Nigeria and from time to time travels to the U.K. to oversee the office there and order for the purchase of some of the articles for sale. To ensure steady supply of the products, some of the products are also ordered from China. The purchases from the U.K. are charged to the Nigerian entity in pound sterling, while the purchases from China are charged to the Nigerian company in American dollars.

In September 2020, the Chairman embarked on a trip to Dubai for two weeks where he spent part of his annual holiday. During this period, he hosted a couple of friends with the costs that were paid for by the company as the costs were above his approved annual holiday expenses. He subsequently traveled to the U.K. and was quarantined for two weeks due to COVID-19 before moving to the usual business lodge that he uses. Despite using that period to oversee the U.K. company, all the costs incurred were borne by the Nigerian company.

The products bought in the U.K. and sent to Nigeria were charged at cost plus 25%, while the Nigerian company was responsible for insurance and freight. The goods purchased from China were forwarded to Nigeria at the cost of landing in Nigeria plus 30%. The China-made products are less expensive and therefore give better profits despite the cost of the long-distance freight.

Money was transferred to the Chairman’s account for the company’s purchases in the U.K., the purchases made in China, and the Chairman’s personal expenses. An agent in China bought the goods which were paid for by the Chairman.

The U.K. company staff handled the documentation of all the transactions of the Chairman while there and transferred them to Nigeria subject to the approval of the Chairman.

Separate records were not maintained for the Chairman’s expenses in the U.K. However, his comparison of the results of the two units showed that for the immediate past financial year, the Nigerian company had performed sub-optimally and way below the targeted profit in relation to the U.K. company. The Chairman is very unhappy about this as he expects that his personal visit to the U.K. would reduce the purchasing and associated costs.

It is usual for the Chairman to account for the cost of purchases based on his personal expenses attributable to each purchase together with the actual cost of purchases. The U.K. component is elated about this costing method which favors it and would wish that this arrangement continues.

The two units prepare separate financial statements which are audited by separate accounting firms before the two financial statements are consolidated in Nigeria for the Chairman’s evaluation.

Required:

Evaluate, with appropriate justifications, from the scenario above, the areas of risk which the auditor needs to consider. (15 Marks)

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  • 20 Marks

AAA – May 2023 – L3 – Q3 – Risk Management in Audits

Evaluate risks in PK Industries' scenario, discuss related party risk assessment per ISA 550, and provide audit guidelines based on ISA 600.

Messrs PK Industries Limited was incorporated and operates its business in Nigeria. The company has existed over the years. During most of this period, it imported some major components from China. Imports usually take some time to arrive after necessary forms have been completed and submitted to the bank.

Two of the directors have two other companies that supply fuel and other local resources needed by the company. The company’s directors are aware of this but prefer to do their business rather than patronize other suppliers.

In the last few years, the turnover of the company fluctuated between ₦500 million and ₦1 billion. The two other companies owned by the two directors are currently trading on loans granted by the company.

Following what was considered to be an increasingly harsh economic environment and high cost of power supply, the company registered a subsidiary company with a production outfit in Ghana while still maintaining its head office operations in Nigeria. Part of the raw materials needed in Ghana are procured in Nigeria and transported to Ghana through hired trailers. This process is being used until a suitable supplier is found in Ghana.

The company decided to hold the next Annual General Meeting (AGM) in the company’s premises in Ghana, with all the directors/shareholders traveling to Ghana on a direct flight from Abuja to Accra at the company’s expense. It was decided that this was an opportunity to evaluate the Ghanaian environment for further business decisions.

The audit of the Nigerian company and its Ghanaian company were done by different firms.

Required:

(a) Evaluate the risks involved in the scenario above. (5 Marks)

(b) Discuss the risk assessment procedures that the auditor of Messrs PK Industries Limited needs to adopt as required by ISA 550. (11 Marks)

(c) Prepare the key guidelines to the audit in accordance with ISA 600. (4 Marks)

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q12 – Forensic Auditing

Identifying examples unrelated to revenue-related fraud.

Which of the following is NOT an example of Revenue Related Fraud?

A. Accounting and documentary
B. Lifestyle of employees
C. Related party transactions
D. Management override of significant internal control activities
E. Sale of assets that is very similar to subsequent purchases at similar amounts

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  • 15 Marks

AAA – Nov 2018 – L3 – Q5 – Ethical Issues in Auditing

Examining professional skepticism, its necessity across audit stages, and its application in audits.

As a result of recent global financial crises, audit inspection reports in various jurisdictions have noted areas requiring professional judgment. Such areas include fair value, related party transactions, and going concern assessments, where regulators and oversight bodies believe that auditors should clearly demonstrate professional scepticism.

Required:

a. Explain the term “Professional Scepticism.” (3 Marks)

b. Identify the stages in the audit process where professional scepticism is necessary. (3 Marks)

c. Discuss three ways in which the application of professional scepticism can be demonstrated by the auditor. (9 Marks)

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  • 8 Marks

ATAX – Nov 2018 – L3 – Q4c – Transfer Pricing

Advisory on maintaining the arm's length principle in inter-company transactions for Abbey Limited.

(c) You are the tax controller of Abbey Limited, the holding company of a group of companies involved in various businesses including: trading, manufacturing, distribution, and packaging. The companies from time to time supply goods and services to each other at pre-determined prices.

You are required to:
Advise the board of Abbey Limited on the factors to be considered when the entities transact business amongst themselves to ensure that the arm’s length principle is upheld.
(8 Marks)

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  • 10 Marks

CR – May 2019 – L3 – Q5b – Regulatory framework and ethics

The question requires identifying and discussing the ethical issues arising from conflicts of interest, board dynamics, and related party transactions within Bolgatanga Ltd and how to address them appropriately.

Bolgatanga Ltd (Bolgatanga), currently operating in the biotechnology research and healthcare sector, is a Ghanaian listed company which prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 December each year. On 1 January 2015, Bolgatanga acquired 80% interest in Wa Ltd (Wa). You are a newly qualified accountant at Bolgatanga and report directly to Mr. Dominic Atubiga, the Financial Controller (FC). Early 2017, Bolgatanga acquired Sissala Ltd (Sissala), a private company, and has recently had an application for additional funds rejected from its current bankers on the basis that there are insufficient assets to offer security.

You have been reviewing the minutes of Bolgatanga’s last board meeting, dated 28 December 2017. The minutes indicate that the sales director resigned on 1 December 2017. In her resignation letter to the board, the sales director states that she can no longer work with Dominic Atubiga, who is dominating the board and allowing a close friendship with, and advice from, Salifu Adams (Managing Director of Sissala) to compromise his judgement.

The Human Resources department is currently in the process of recruiting a new sales director. Dominic Atubiga tells the board that, in the interim, the marketing department will just have to cope until a replacement sales director is appointed. Speaking to other staff in Bolgatanga, you have become aware that the wife of the Managing Director of Bolgatanga is a partner in Brother and Co., a firm of solicitors which the company uses to provide legal advice in relation to the market development activities of Wa. However, Brother and Co. has confirmed that the FC’s wife works in a different division and that she has no involvement in the services provided. It is your understanding that legal fees of GH¢500,000 (included in administration expenses) were paid by Bolgatanga to Brother and Co. during the year ended 31 December 2017.

Required:
Discuss the ethical issues arising from the information provided, and the appropriate steps to address them.

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  • 4 Marks

CR – Nov 2016 – L3 – Q2e – Other information in the annual report

Determine the classification and disclosure of related party transactions for Mane Ltd in accordance with IAS 24

Mane Ltd is an entity specializing in importing a wide range of non-food items and selling them to retailers. Aqeel is Mane’s CEO and founder and owns 40% of Mane’s equity shares:

i) Mane’s largest customer, Zico, accounts for 35% of Mane’s revenue. Zico has just completed negotiations with Mane for a special 5% discount on all sales.
ii) During the accounting period, Aqeel purchased a property from Mane for GH¢500,000. Mane had previously declared the property surplus to its requirements and had valued it at GH¢750,000.
iii) Aqeel’s son, Sherif, is a director in a financial institution, Cheap Capital. During the accounting period, Cheap Capital advanced GH¢2 million to Mane as an unsecured loan at a favorable rate of interest.

Required:
Explain, with reasons, the extent to which each of the above transactions should be classified and disclosed in accordance with IAS 24 Related Party Disclosures in Mane’s financial statements for the period.
(4 marks)

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  • 4 Marks

AT – NOV 2021 – L3 – Q2b – International taxation

Explain the underlying principle of transfer pricing in international taxation.

What is the principle underlying the concept of Transfer Pricing? (4 marks)

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  • 10 Marks

AT – Nov 2020 – L3 – Q5b – Business income – Corporate income tax

Tax computation for Percy-Perry Construction Ghana Ltd and Percy-Perry Engineering Company USA Ltd, addressing related party transactions and withholding tax implications.

Percy-Perry Engineering Company (USA) Ltd is incorporated in the USA and has Percy-Perry Construction (Ghana) Ltd as its subsidiary in Ghana. The foreign company was awarded a road construction contract by the Government of Ghana at a total sum of GH¢9 million on 1 January 2019. The company subcontracted the job to Percy-Perry Construction Ghana Ltd at GH¢7 million. Both companies entered into a technical service agreement under which the parent company would provide equipment and technical personnel for the execution of the contract.

The contract was successfully executed by Percy-Perry Construction Ghana Ltd during the year ended 31 December 2019, and the statement of comprehensive income of the company showed the following:

Description Amount (GH¢)
Contract Fees 7,000,000
Less:
– Cost of Materials (910,000)
– Hiring of Equipment (795,000)
– Technical Personnel Cost (555,000)
– Other Administration Expenses (223,000)
– Depreciation (110,000)
Net Profit 4,407,000

The following additional information is provided:

  • The equipment hired from the parent company at GH¢795,000 could have been hired from another company at GH¢600,000.
  • If the parent company did not provide the technical personnel, Percy-Perry Construction Ghana Ltd could have employed the same personnel at GH¢450,000.
  • Capital allowances for the year have been agreed at GH¢65,000.
  • The contract fees were subject to withholding tax.

Required: i) Compute the Companies Income Tax payable by Percy-Perry Construction Ghana Ltd for the relevant year of assessment and comment on the treatment of any two of the transactions.
(5 marks)

ii) Compute the Companies Income Tax payable by Percy-Perry Engineering Company (USA) Ltd to the Ghana Revenue Authority for the relevant year of assessment.
(2 marks)

iii) Explain THREE (3) objectives of the Ghana Investment Promotion Centre (GIPC).
(3 marks)

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  • 6 Marks

AT – Nov 2020 – L3 – Q3c – International taxation

A paper to the Commissioner-General outlining factors to consider in a related party transaction for SuccessVehicles Ltd.

Two vehicles of the same model and brand were sold by SuccessVehicles Ltd to two buyers at different prices. The first buyer bought one of the vehicles at the equivalent of US$84,500 and the second buyer bought the other vehicle at US$91,000. This arrangement, the Tax Authority finds difficult to accept and plans to confront SuccessVehicles Ltd on the matter.

The Commissioner-General has invited you as a final level student of ICAG to advise him on the factors to consider before approaching SuccessVehicles Ltd on the matter, as the Commissioner-General suspects related party issues.

Required:
Write a paper to the Commissioner-General on the issues to consider before approaching SuccessVehicles Ltd on the matter.

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  • 20 Marks

AT – Dec 2023 – L3 – Q1 – International taxation

Calculating tax adjustments for related party transactions between Abirem Ltd and Gomoa Ltd, including pricing and dividend issues.

Gomoa Ltd, a resident of the United States of America, established two companies, Komenda Ltd (resident in South Africa) and Abirem Ltd (resident in Ghana). The Ghana Revenue Authority (GRA) requested information about Abirem Ltd for tax purposes.

The details for the 2021 year of assessment are as follows:

Additional information:
i) Gomoa Ltd invoiced goods to Abirem Ltd at a price of GH¢1,900,000, which is 10% higher than the market price.
ii) Dividend of GH¢700,000 paid by Abirem Ltd to Gomoa Ltd has been incorporated into Abirem Ltd’s cost.
iii) Management and technical services fee of GH¢1,290,000 paid to the group by Abirem Ltd has been added to operating expenses.
iv) Goods invoiced to Komenda Ltd by Gomoa Ltd amounted to GH¢1,000,000, priced 15% below the arm’s length price.
v) Dividend of GH¢200,000 received by Abirem Ltd from a resident company is included in its revenue. Abirem Ltd holds 25% of the resident company’s voting power.
vi) The Managing Director of Abirem Ltd took goods for personal use, valued at GH¢200,000 (cost), with a margin of 20%.
vii) The Managing Director of Abirem Ltd took additional goods worth GH¢130,000 at cost for home consumption, which was not added to the cost of goods above. The goods were sold at a 10% markup.
viii) Abirem Ltd paid GH¢20,000 in tax in South Africa at a rate of 27% on goods sold, which was included in its revenue.
ix) Abirem Ltd received a loan from Komenda Ltd for operations. Loan details are as follows:

  • Loan amount: GH¢10 million
  • Interest on loan payable: GH¢1,000,000
  • Foreign exchange loss on the loan: GH¢200,000
    x) Equity at the start of the year: GH¢2,000,000, and at the end of the year: GH¢2,800,000
    xi) GH¢400,000 was transferred from retained earnings to share capital.
    xii) Financial gain from derivative: GH¢2.5 million, and financial cost from derivative: GH¢6 million, included in operating expenses.

Required:
Calculate the tax payable by Abirem Ltd for the 2021 year of assessment.

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  • 6 Marks

AT – Nov 2023 – L3 – Q1b – Anti-avoidance measures

Explain the Comparable Uncontrolled Price (CUP) method in transfer pricing with an example and state situations for its application

The transfer pricing rules require the use of the “most appropriate” method to price related party transactions. One of such methods is ‘Comparable Uncontrolled Price method’.

Required:
i) Explain with a simple numerical example, the comparable uncontrolled price. (4 marks)
ii) State TWO (2) situations where it is most appropriate to apply the comparable uncontrolled price method. (2 marks)

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