Related Party Transactions IFRS FOR SMEs Section 33/IAS 24 Presented by: CPA Sporta Fred (PhD. Fellow) Thursday 24th November 2016 Credibility . Professionalism . Accountability By CPA Sporta Fred

Content Objective Scope Definitions Disclosures By CPA Sporta Fred

1.0 Objective The objective of IAS 24 & section 33 is to ensure that an entity's financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties. By CPA Sporta Fred

1.2: scope IFRS for SME; IAS 24 (2a-d) This Standard shall be applied in: (a) Identifying related party relationships and transactions; (b) Identifying outstanding balances, including commitments, between an entity and its related parties; (c) Identifying the circumstances in which disclosure of the items in (a) and (b) is required; and (d)Determining the disclosures to be made about those items. By CPA Sporta Fred

1.3: Related party IFRS for SMEs/IAS 24(9a) A person or close family member is related to a reporting entity if that person: Has control or joint control of the reporting entity Has significant influence over the reporting entity Is a member of key management of the reporting entity or of a parent of the reporting entity By CPA Sporta Fred

1.4:Who is a close family member IFRS for SMEs/IAS 24(9a) Family member who may be expected to influence or be influenced by that person in their dealings with the entity: Includes person’s children, spouse or domestic partner Children of that person’s spouse or domestic partner Dependants of that person or that person’s spouse or domestic partner . By CPA Sporta Fred

1.5: Who is a related party? IFRS for SMEs/ IAS 24(9b) An entity is related to a reporting entity if: Entity and reporting entity are members of the same group One entity is an associate or joint venture of the other Both entities are joint ventures of the same third party One entity is a joint venture of a third party and the other entity is an associate of the third party By CPA Sporta Fred

Con..ed Who is a related party? IFRS for SMEs/ IAS 24(9a) Entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity Entity is controlled or jointly controlled by a person identified in the preceding slides A ‘person’ identified in the preceding slides as having control or joint control over the reporting entity has significant influence over the entity or is a member of key management personnel of the entity By CPA Sporta Fred

Determining related parties Parents Subsidiaries Fellow subsidiaries Joint ventures Other entities controlled by owners or key management Control Determining Related Parties Significant influence Key management personnel

1.6: What is a related party transaction? IFRS for SMEs/ IAS 24(9) A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. By CPA Sporta Fred

1.7: Examples of related party transactions that require disclosure; IFRS for SMEs/ IAS 24(21) Purchase or sale of goods Purchase or sale of property and other assets Rendering or receiving services Guarantees or collateral provided Settling the liabilities on behalf of a related party (or vice versa) Leases Transfers of research and development Transfers under licence agreements Transfers under finance arrangements (including loans and equity contributions in cash or in kind) By CPA Sporta Fred

Example Mr. Grant is a director and major shareholder of MORTAR. His son, Fergus, is an independent tax consultant and he advised MORTAR on certain issues associated with the acquisition of both PESTLE and POWDER for which he was paid shs.100,000 during 2012, with a further shs.20,000 due to him at 31 December 2012. Both these amounts are included in MORTAR’s draft financial statements for the year ended 31 December 2012. Mr. Grant’s daughter, Emer, is employed in MORTAR’s Personnel Department, receiving an annual salary of shs.30,000.  Requirement Illustrate the disclosures required in MORTAR’s group financial statements in accordance with IAS 24 Related Party Disclosures. By CPA Sporta Fred

Solution Fergus and Emer Grant, through their relationship with their father (who is a director and therefore considered to be ‘key management’), Mr Grant, are also related parties of MORTAR. Fergus is not an employee of MORTAR and therefore amounts paid to him of shs100,000, together with the amount outstanding at 31 December 2015 of shs20,000 should be disclosed in the 2015 financial statements. The following information should be provided: Description of the relationship; Details of the transaction; Amounts involved; and Amounts due at 31 December 2015. By CPA Sporta Fred

Cont…ed Solution Emer is an employee of MORTAR (but not key management) and therefore there is no requirement to disclose the emoluments paid to her. Disclosure Note: Mr Grant is a director and major shareholder if MORTAR. His son, Fergus, is an independent tax consultant and he advised MORTAR on certain issues associated with the acquisition of both PESTLE and POWDER for which he was paid shs100,000 during 2015, with a further shs20,000 due to him at 31 December 2012. Both these amounts are included in MORTAR’s draft financial statements for the year ended 31 December 2015. Mr Grant’s daughter, Emer, is employed in MORTAR’s Personnel Department. By CPA Sporta Fred

Example; Key management Personnel A person, X, has a 100 per cent investment in Entity A and is a member of the key management personnel of Entity C. Entity B has a 100 per cent investment in Entity C. For Entity C`s financial statements, Entity A is related to Entity C because X controls Entity A and is a member of the key management personnel of Entity C. [Paragraph 9(b)(vi)–(a)(iii)] For Entity C`s financial statements, Entity A is also related to Entity C if X is a member of the key management personnel of Entity B and not of Entity C. [Paragraph 9(b)(vi) – (a)(iii)] For Entity C`s financial statements, Entity A is also related to Entity C if X i s a member of the key management personnel of Entity B and not of Entity C. [Paragraph 9(b)(vi) By CPA Sporta Fred

Example; Close family members Close members of the family holding investments A person, X, is the domestic partner of Y. X has an investment in Entity A and Y has an investment in Entity B. If X has significant influence over Entity A and Y has significant influence over Entity B, Entities A and B are not related to each other. By CPA Sporta Fred

Example; Close family members For Entity A`s financial statements, if X controls or jointly controls Entity A, Entity B is related to Entity A when Y has control, joint control or significant influence over Entity B. [Paragraph 9(b)(vi)—(a)(i) and 9(b)(vii)–(a)(i)] For Entity B`s financial statements, if X controls or jointly controls Entity A, Entity A is related to Entity B when Y has control, joint control or significant influence over Entity B. [Paragraph 9(b)(vi)—(a)(i) and 9(b)(vi)–(a)(ii)] By CPA Sporta Fred

1.8:Parties deemed not to be related IAS 24(11) Two entities simply because they have a director or key manager in common; Two venturers' who share joint control over a joint venture; Providers of finance, trade unions, public utilities, and departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with an entity A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence. By CPA Sporta Fred

WHY ARE RELATED PARTY DISCLOSURES NECESSARY? A related party relationship could affect a reporting entity’s performance and financial position. For example, transactions between related parties may not be made at the same amounts as between unrelated parties, and knowledge of this is likely to be important to readers of the financial statements. Knowledge of related party transactions may affect a user’s assessment of the reporting entity’s operations, or risks and opportunities facing the entity A related party relationship could have an effect on the reporting entity’s results Transaction between related parties may not be made at arm’s length By CPA Sporta Fred

POTENTIAL RELATED PARTY INDICATORS Arrangements whereby one party agrees to pay expenses on behalf of another Circular arrangements between parties Engaging in business deals (e.g. leases) at more or less than market value Payments for services at inflated prices Sale of land with arranged financing Sale of securities Unusual transactions close to end of reporting period By CPA Sporta Fred

DISCLOSURE REQUIREMENTS IFRS for SMEs /[IAS 24.16] Relationships between parents and subsidiaries. An entity must disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate controlling party produces financial statements available for public use, The name of the next most senior parent that does so must also be disclosed. By CPA Sporta Fred

DISCLOSURE REQUIREMENTS ; IFRS for SMEs/IAS 24(17) Management compensation. Disclose key management personnel compensation in total and for each of the following categories: [IAS 24.17] short-term employee benefits post-employment benefits other long-term benefits termination benefits share-based payment benefits By CPA Sporta Fred

DISCLOSURE REQUIREMENTS; IFRS for SMEs/ [IAS 24.18] If an entity has had related party transactions during the periods covered by the financial statements, it shall disclose; The nature of the related party relationship Information about those transactions and outstanding balances, Commitments for users to understand the potential effect of the relationship on the financial statements. These disclosure requirements are in addition to those in paragraph 17. By CPA Sporta Fred

DISCLOSURE REQUIREMENTS; IFRS for SMEs/[IAS 24.18] At a minimum, disclosures shall include: (a) the amount of the transactions; (b) the amount of outstanding balances, including commitments, and: (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and (ii) details of any guarantees given or received; By CPA Sporta Fred

DISCLOSURE REQUIREMENTS; IFRS for SMEs/ [IAS 24.18] (c) provisions for doubtful debts related to the amount of outstanding balances; and (d) the expense recognised during the period in respect of bad or doubtful debts due from related parties. By CPA Sporta Fred

DISCLOSURE REQUIREMENTS; IFRS for SMEs/ [IAS 24.19] The disclosures required by paragraph 18 shall be made separately for each of the following categories: (a) the parent; (b) entities with joint control or significant influence over the entity; (c) subsidiaries; (d) associates; (e) joint ventures in which the entity is a venturer; (f) key management personnel of the entity or its parent; and (g) Other related parties. By CPA Sporta Fred

Government-related entities; IFRS for SMEs/ IAS 24 (25) A reporting entity is exempt from the disclosure requirements of paragraph 18 in relation to related party transactions and outstanding balances, including commitments, with: (a) a government that has control, joint control or significant influence over the reporting entity; and (b) another entity that is a related party because the same government has control, joint control or significant influence over both the reporting entity and the other entity. By CPA Sporta Fred

Example - IFRS for SMEs/IAS 24 (25) Exemption from disclosure (paragraph 25) Government G directly or indirectly controls Entities 1 and 2 and Entities A, B, C and D. Person X is a member of the key management personnel of Entity 1.For Entity A`s financial statements, the exemption in paragraph 25 applies to: a.transactions with Government G; and b.transactions with Entities 1 and 2 and Entities B, C and D. However, that exemption does not apply to transactions with Person X. By CPA Sporta Fred

Judgements IFRS for SMEs/IAS 24(27) of the related party relationship and other factors such as whether it is: (a) Significant in terms of size; (b) Carried out on non-market terms; (c) Outside normal day-to-day business operations, such as the purchase and sale of businesses; (d) Disclosed to regulatory or supervisory authorities; (e) Reported to senior management; (f) Subject to shareholder approval. By CPA Sporta Fred

By CPA Sporta Fred

By CPA Sporta Fred

Related parties for only part of the year Company A acquires 25% of Company B, regular supplier, on 1/9/2015 for which it equity accounts. During the year ended 31/12/2015 Company B makes sales to A of 2,000. The total sales till 1/9/2015 were 1,100. The companies are related from 1/9/2015 and 900 should be disclosed as a related party transaction.

Notes to the financial statements By CPA Sporta Fred

Notes to the financial statements By CPA Sporta Fred

Cont…ed Notes By CPA Sporta Fred

Cont…ed Notes By CPA Sporta Fred

Section 33; disclosure requirements Disclose parent-subsidiary relationships, including the name of the parent and (if any) the ultimate controlling party. Disclose key management personnel compensation in total for all key management. Disclose the following for transactions between related parties: Nature of the relationship Information about the transactions and outstanding balances necessary to understand the potential impact on the financial statements Amount of the transaction Provisions for uncollectible receivables Any expense recognised during the period in respect of an amount owed by a related party Government departments and agencies are not related parties simply by virtue of their normal dealings with an entity By CPA Sporta Fred

ANY QUESTIONS, COMMENTS… By CPA Sporta Fred

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