- 15 Marks
FR – L2 – Q59 – Related Party Disclosures
Question
(a) The determination of related party status depends on the substance of the relationship, not just the legal form.
Required:
(i) Define a related party transaction and state any TWO examples of such transactions. (3 marks)
(ii) Based on IAS 24 Related Party Disclosures, state any FOUR conditions under which an entity can be said to be related to another.
(b) Cedar Plc has two subsidiaries, Sycamore Ltd and Birch Ltd. The share capital of Cedar Plc is held by Alan and Akwasi at 60% and 40%, respectively. Alan is the Chair of Cedar Plc, while Akwasi is the Managing Director.
Sycamore Ltd is wholly owned by Cedar Plc. On 31 December 20X4, Sycamore Ltd sold a parcel of land it vacated some years back to Birch Ltd for GH¢2m. The latter company, owned and managed by Alan’s son, intends to develop the potential of the site as a location for an events center. The carrying amount at that date was estimated to be GH¢5m. This sale has not been reflected in the Financial Statements of Sycamore Ltd for the year ended 31 December 20X4.
Outline how the above transactions should be recorded in the financial statements of Sycamore Ltd and the consolidated financial statements of Cedar Plc for the year ended 31 December 20X4. (8 marks)
Answer
(a)
(i) A related party transaction is a transfer of resources, services, or obligations between parties that are connected or related, regardless of whether or not a price is charged.
Examples of such transactions include:
- Purchase or sale of goods;
- Purchase or sale of property and other assets.
(ii) Under IAS 24 Related Party Disclosures, an entity is related to a reporting entity if any of the following conditions applies:
- The party controls the entity, or is controlled by it.
- It has significant influence over the entity.
- It has joint control over the entity.
- The parties are under common control.
(b) Disclosures in the financial statements of Sycamore Ltd:
Since Sycamore Ltd is a subsidiary of Cedar Plc, and Birch Ltd is owned by the son of the chairman of Cedar Plc, Birch Ltd and Sycamore Ltd are therefore related parties. Details of this transaction should be disclosed in the Financial Statements of Sycamore Ltd as follows:
(i) The nature of the related party relationship (the fact that the son of the chairman of Cedar Plc is the owner and manager of Birch Ltd).
(ii) The amount of the transaction (sale of the piece of land for GH¢2m while the market value was GH¢5m).
Disclosures in the consolidated financial statements of Cedar Plc:
(i) The nature of the related party relationship (that Birch Ltd is owned and managed by the son of the chairman of Cedar Plc).
(ii) The amount of the transaction concluded (i.e., GH¢2m).
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