Related Parties and Changes in Foreign Exchange Rates

Question 1

what is the accounting standard related to the disclosure of related parties

Answer 1

IAS 24 Related Party Disclosures

Question 2

what is the accounting standard relating to foreign exchange rate changes

Answer 2

IAS 21 The Effects of Changes in Foreign Exchange Rates

Question 3

does IAS 24 related parties affect the financial statements at all

Answer 3

no, just the notes

Question 4

what is the objective of IAS 24 related parties

Answer 4

ensure that financial statements disclose the fact that the results may have been affected by the existence of related parties and transactions with those parties

Question 5

what are some examples of transactions related parties might enter that unrelated parties would not

Answer 5

transfer of assets at prices above or below their true value

supply of services at reduced or increased prices

lending at interest rates that differ from market rates

Question 6

does there have to be a transaction with the related party to trigger a disclosure

Answer 6

no

solely the existence triggers the requirement

Question 7

does IAS 24 ban transactions with related parties

Answer 7

no they just need to be disclosed

Question 8

what are the criteria for a related party (person)

Answer 8

the person or a close member of that person’s family is related to a reporting entity if either:

• P has control, joint control or significant influence over the reporting entity
• P is a member of the key management personnel of either the reporting entity of a parent or the reporting entity

Question 9

who are the key management personnel

Answer 9

persons having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly

e.g. C suite, directors (executive and independent)

Question 10

what are the criteria for a related party (entity)

Answer 10

• through consolidation the entity and reporting entity are in the same group e.g. parent/subsidiary, belong to same parent
• the entity is a pension scheme for the employees of the reporting entity or of any entity relayed to the reporting entity
• the entity is controlled by a person who is related to the reporting entity, is a member of the KMP
• the entity provides KMP services to the reporting entity or its parents

Question 11

what transactions relating to third parties should be disclosed

Answer 11

1. purchase/sale of goods
2. purchase/sale of non-current tangible assets
3. provision of services
4. leases
5. provisions of guarantees

Question 12

why might it be difficult to identify related parties

Answer 12

some companies wish not to disclose them for privacy reasons

Question 13

what are some potential indicators of related parties

Answer 13

• payment of services at inflated prices
• sale of securities (shares at a discounted price)
• circular arrangements between parties
• lease agreements at more or less than market value
• unusual material transactions particularly close to year end

Question 14

what are the disclosure requirements for IAS 24

Answer 14

• parent/subsidiary relationships (even if no transactions between parties)
• employee benefits paid or payable to KMP
• information about transactions with related parties including the nature of the relationship and any outstanding balances at year end

Question 15

If an entity does not have foreign activities, is IAS 21:The Effects of Changes in Foreign Exchange Rates relevant

Answer 15

no

Question 16

what are the ways in which an entity carried out foreign activites

Answer 16

• transactions in a foreign currency
• has a foreign subsidiary
• may have to present its financial statements in foreign currency

Question 17

what is the functional currency

Answer 17

the currency of the primary economic environment

what currency they do their day to day operations in

should be fairly self evident

Question 18

what is the foreign currency

Answer 18

everything except the functional currency of the entity

Question 19

what is the presentation currency

Answer 19

currency of the entity’s financial statements - usually the same as the functional currency

Question 20

what is a foreign operation

Answer 20

a subsidiary or branch of the reporting entity that carries out activities in a currency other than the reporting entity’s functional currency or in a different country

Question 21

examples of foreign currency transactions

Answer 21

buying or selling of goods or services whose price is denominated in a foreign currency

borrows/lends when the amounts payable or receivable are denominated in a foreign currency

acquires or disposes of assets or, incurs or settles liabilities denominated in a foreign currency

Question 22

how to determine the functional currency

Answer 22

should be fairly evident

but:
what currency are sales/purchases being denominated

what country’s regulations do they follow

what currency is the labour paid in

Question 23

what is the spot exchange rate

Answer 23

the exchange rate for immediate delivery

Question 24

how are foreign currency transactions recognised initially

Answer 24

spot exchange rate on the day of the transaction

Question 25

where do effects of the changes in the exhange rates of transactions on subsequent measurement go

Answer 25

SOFP

Question 26

what is the subsequent measurement for monetary items

Answer 26

use spot rate at the end of the period

Question 27

examples of monetary items

Answer 27

Trade receivables, trade payables

know exactly how much will exchange hands

Question 28

what is the subsequent measurement for non-monetary items carried at cost

Answer 28

use exchange rate at date of the transaction

Question 29

what is the subsequent measurement for non-monetary items carried at fair value

Answer 29

use exchange rate at date fair value was measured

Question 30

what are non monetary items

Answer 30

dont know exactly how much money will change hands

e.g. inventory, PPE

Question 31

where are differences in initial and subsequent measurement recognised in accounts

Answer 31

as income or expense in SPL

Question 32

abbreviation for foreign exchange

Answer 32

forex

Question 33

what is the process of translating accounts to a foreign currency

Answer 33

1. translate assets and liabilities at closing rate at end of the period
2. translate income and expenses at the exchange rates on dates of individual transactions (ALLOW TO USE AVERAGE RATE AS THIS IS TEDIOUS)
3. exchange differences are recognised in OCI

Question 34

what is the translation process of translation of a foreign operation

Answer 34

same as translation to foreign currency

Question 35

why must an entity translate the financial statements of a foreign operation

Answer 35

to consolidate financial statements

Question 36

what accounting standard deals with foreign exchange rate changes

Answer 36

IAS 21:The Effects of Changes in Foreign Exchange Rates

Question 37

what does IAS 21 say to do with share capital

Answer 37

it does not refer to share capital

Question 38

what is the rule of thumb for share capital

Answer 38

translate using historical date (acquisition date of shares)