PURPOSE
I propose to start series of articles on How-to in IFRS? Some of
it comes from my working experience at foreign banks and the Big 4 and some
from my teaching notes at the IFRS certification courses. Hope you will enjoy
the read..!! Happy reading :)
How-to
Know your Related Parties?
OVERVIEW
Related party transactions (RPT) are a very common in business
nowadays. They are often assumed to be not a good thing. Though this may be
true is some corporate scams where the board of directors and promoters take
shareholders for a ride, in most cases there are valid commercial reasons for
dealing with related parties.
The Companies Act, 2013 in India comprehensively provides
guidance on the related parties which is not a part of this article. I
expressly only write about how to know your related party according to IAS 24.
WHO IS ENTITY’S RELATED PARTY?
A party is
related to an entity, if the party:
1.
is controlled by the entity,
or controls the entity (including common control, joint control, significant
influence);
2.
is an associate of the
entity;
3.
is a joint venture;
4.
is a member of key management
personnel of the entity
5.
is a close member of the
family of any individual in (1) or (4)
6.
is an entity jointly
controlled or significantly influenced by any individual in (4) or (5)
7.
is a post-employment benefit
plan for the benefit of employees of the entity or a related party of the
entity
FEW MORE TIT-BITS
* Key management personnel include
all those who have authority and responsibility for planning, directing, and
controlling the activities of an entity. These persons need not necessarily be directors.
* Close members of the family definition provides a list of persons included in the family as:
o
Domestic partner
o
Children
o
Children of domestic partner
o
Dependants
o
Dependants of domestic partner
It is an inclusive definition but by no means the list is exhaustive. The
definition tries to address cross-border and cross-cultural dimension
issues as far as possible.
WHAT TO DISCLOSE?
§ Regardless
of the existence of related party transactions, we have to disclose the
following:
a.
Relationships between parents and subsidiaries
b.
If control exists, such a relationship
c.
Key management personnel compensation in total
plus short-term benefits, post-employment benefits, other long term benefits, termination
benefits and share based payments
§ Minimum
disclosures for RPT:
a.
Transaction amount
b.
Outstanding Balances
c.
Doubtful debt provisions for outstanding
balances and expenses recognised
§ Disclosure
categories
The above disclosures are required for each of
the category listed under:
a.
Parent
b.
Entities with joint control or significant
influence over the entity
c.
Subsidiaries
d.
Associates
e.
Joint ventures
f.
Key management personnel
g.
Other related parties
LET’S KNOW HOW-TO WITH CASE EXAMPLE
Facts: CureMe Pharma Ltd is a
large MNC operating from India and is known to properly disclose all its
related party transactions in the financial statements prepare under IFRS. The company
is seeking advice from IFRS specialists on which of the transactions and to
what extent be reported, and how the notes to accounts should appear.
1. Remuneration and
other payments made to CEO Mr. Gupta during the year 2014-15 were:
a.
Annual salary of 5 crores (including contribution to employee provident
fund of 1 crore)
b.
Share options and other share based payments of 1 crore
c.
Reimbursement of his travel expenses for business amounting to 12 lakhs
2. Sales made during
the year 2014-15 to:
a.
LifeMe Pharma Ltd., parent company: 50 crores
b.
BeingMe Pharma Marketing Ltd., an associate: 2.5 crores
3. Trade receivables at
March 31, 2015, include:
a.
Due from LifeMe Pharma Ltd. 10 crores (net of provisions 7 crores)
b.
Due from BeingMe Pharma Marketing Ltd. 50 lakhs (these receivables are
fully backed by corporate guarantee from BeingMe)
Solution:
I. All the above mentioned transactions are required to be
disclosed in CureMe Pharma Ltd.’s financial statements prepared under IFRS.
The only exception is the reimbursement of the
travel expenses of the CEO amounting to 12 lakhs; as this is not KMP compensation.
II.
Notes to Accounts – Extract – Related Party Transactions
1) CureMe Pharma Ltd., enters into related party
transactions in the normal course of business. During the year 2014-15, these transactions
were entered into with related parties as defined under IAS 24. The
transactions resulted in balances due from those parties that, at March 31, 2015,
were:
i) With the parent
company (LifeMe Pharma Ltd.)
a. Sales = INR 50
crores
b. Trade Receivables due
from parent company = INR 10 crores
c. Provision for
doubtful debts = INR 3 crores
ii) With an associate
a. Sales = INR 2.5
crores
b. Included in trade receivables
due from an associate * INR 50 lakhs
*Amount due from an associate is secured by a corporate
guarantee given by the associate.
iii) For the year ended March 31, 2015, the
following payments were made to its CEO Mr. Gupta, part of the key management personnel:
a. Short term
benefits (Salary) = INR 4 crores
b. Post-employment benefits (employee provident fund
contribution) = 1 crore
c. Share based payments
including ESOP = 1 crore
d. Total = INR 6
crores
