Chapter 65: Related Party Transactions Flashcards
(24 cards)
What are related party transactions (RPTs)?
Exchanges between parties that are ‘related’ and may occur under different conditions than non-related parties
What defines related parties?
Parties where one can significantly influence or control the decisions of another, either directly or indirectly
What is another term commonly used for related parties?
‘Non-arm’s length’
List the types of parties included as related parties
- Any party controlled by the entity
- Any party that can exert control or influence over the entity
- Parties under common control or influence
- Management of the entity, including directors
- Immediate family members of a related party
Who are the related parties of Terra Inc.?
- 60% owner, Wave Corp.
- 40% owner, Julian French
- Bigly Inc., 100% owned by Wave Corp.
- Immediate family members of Julian French
- All members of management of Terra Inc.
- Immediate families of management members
- Mallow Corp., 100% owned by Terra Inc.
What are the two possible amounts used to measure an RPT under ASPE?
- Carrying amount
- Exchange amount
What is the carrying amount in RPT measurement?
The amount recorded by the transferor (book value)
What is the exchange amount in RPT measurement?
The amount of consideration agreed upon by the related parties
How are gains and losses treated when RPTs are measured at carrying amount?
- Gains are credited to contributed surplus
- Losses are debited to existing contributed surplus or retained earnings
What happens when RPTs are measured at exchange amount?
Gains or losses are recognized in income for the period
True or False: An asset can be recorded at more than its fair value.
False
What indicates that impairment of an asset may exist before transfer?
When the exchange amount is significantly below the book value
What constitutes a related party transaction?
Transfer of economic resources or obligations between related parties or provision of services, regardless of consideration
What determines if a transaction is in the normal course of operations?
It is usually, frequently, or regularly undertaken by the enterprise to generate revenue
What types of transactions are explicitly excluded from the normal course of operations?
- Sale of property, plant, and equipment (unless treated as inventory)
- Settlement of debt
- Transactions involving the entity’s capital
What is a substantive change in ownership?
Occurs when unrelated parties acquire or give up at least 20% of total equity ownership interest
What is required for the amount of the exchange to be supported by independent evidence?
Evidence that the exchange value was not influenced by related party status
List the types of independent evidence that can support the exchange amount
- Independent appraisals or valuations
- Comparable market prices
- Comparable independent bids
- Similar transactions with unrelated parties
What happens to transactions that are not supported by independent evidence?
They are measured at the carrying amount
What type of transactions are measured at the exchange amount in Step 5?
Monetary transactions
What defines a transaction as having commercial substance?
When future cash flows are expected to change significantly as a result of the transaction
How are transactions without commercial substance measured?
At the carrying amount
Under IFRS, how are RPTs recorded?
Not recorded differently than non-RPTs, generally at the agreed exchange amount
What does IFRS require concerning disclosures of RPTs?
Significant disclosures that exceed those required under ASPE
