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PREFACE CONTENTS
This series of workbooks has been written by the project team of the European
Union project Accounting Reform II in the Russian Federation.
2. INTRODUCTION.......................................................................3
The workbooks cover the concepts of International Financial Reporting
Standards (‘IFRS’). They are intended to be practical self-instruction aids 2. DEFINITIONS............................................................................4
that practicing accountants can use to upgrade their knowledge, understanding
and skills.
3. DISCLOSURE...........................................................................7
Each workbook is designed for a maximum of three hours of study.
The project team would like to express thanks to those who have contributed
their time and thoughts to the content of the workbooks.
Contact
e-mail Web
natalia.lelyavina@ru.pwc.com www.accountingreform.ru
Tel. + 7 095- 967-6047 Fax. + 7 095- 967-6001
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Related Parties
The related party relationships can have an impact on the profit, or loss, of an
OBJECTIVE
undertaking. Transactions may be made that would not be made with
Related Party Disclosures are the subject of International Accounting Standard
unrelated parties, or on different terms or prices, than would have been made
24. The standard is short, but has a major impact on the level of disclosure in
with unrelated parties.
financial statements.
The profits and financial position of an undertaking may be affected, even if no
Financial statements must contain the disclosures necessary to highlight the
transactions occur between the related parties. A parent company can give
possibility that an undertaking’s financial position and its profit, or loss, may
instructions to other members of a group that could limit the commercial
have been affected by the existence of related parties, and by transactions and
actions of those other group members.
outstanding balances with such parties.
Disclosure must be made of the existence of the related party relationships Example
where control exists, even though there have been no transactions. Parent companies may limit the trade of a subsidiary to one country, limit its
product range, or insist that no local research and development is carried
To achieve this, you need to identify who are the related parties of the out. Some car manufacturers in Western Europe make different parts of cars
undertaking, and then trace the transactions and balances incurred with them. in different countries, so that no one country makes all the parts. This
provides flexibility when negotiating with unions and governments, as the
companies can threaten to move production to another country to wring
SCOPE concessions from the unions and governments. Due to the central control of
The standard will be applied in: their parents, these local subsidiaries cannot operate like independent firms.
1. Identifying related party relationships and transactions;
Knowledge of the related parties, their transactions and balances may impact
2. Identifying outstanding balances between an undertaking and related
the assessments of the undertakings by the users of financial statements,
parties;
especially assessments of risks and opportunities facing the undertaking.
3. Identifying when the disclosures should be made; and
4. Determining what disclosures should be made.
Example
The standard relates to separate financial statements of undertakings, parent A bank may give a loan to an independent firm, knowing that the loan will be
companies, venturers, investors and consolidated groups. used for the firm’s business. A similar loan to a subsidiary company may be
used to finance its parent’s business, or the business of other group
Groups of companies companies, thus increasing the bank’s risk in making the loan.
Members of the same group are considered to be related parties. Their
intragroup transactions and balances are disclosed in the financial statements
of the individual undertakings, but eliminated on consolidation.
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Related Parties
Example Example
Adopted children would be included as close family members. Companies Your chief executive is fired. To settle his contractual claims, your firm pays
and investment vehicles owned by family members would also be him $200.000, plus provide a car for the next 3 years, valued at $10.000 per
considered as related parties, if they had any interaction with the year. This information will be detailed as termination benefits.
undertaking. Compensation to your management team includes both the right to buy a
specific number of shares at a discount price to that of the market, and a
Close family members are included to avoid related parties disguising their share option scheme, which allows participants to fix the price today of
activities by using family members. future share purchases. Both will be detailed under equity compensation
benefits.
COMPENSATION
Compensation includes all employee benefits, including payments in kind, Compensation may not be paid to the individual directly.
such as the provision of a company car. Employee benefits are all forms of It may be paid to another firm, but must be shown in the same manner, with a
consideration paid, payable or provided by the undertaking, or on behalf of the note detailing to whom it is paid.
undertaking, in exchange for services rendered to the undertaking. It also
includes such consideration paid on behalf of a parent of the undertaking in Example
respect of the undertaking. Among your directors are 2 people who are not paid directly by the
undertaking. Their directors’ fees are paid to their employers. Ivan is an
The following classifications of compensation are important, as disclosure of architect, and his firm receives $30.000 for his services. Elena works for the
compensation has to be shown under these 5 headings, and in total. government, and you pay the government $35.000 for her services. No other
compensation is paid in respect of them by your undertaking.
Compensation includes:
(1) short-term employee benefits, such as wages, salaries and social security Both amounts will be disclosed, next to the names of Ivan and Elena,
contributions, paid annual leave and paid sick leave, profit-sharing and together with the fact that the money is paid to the architect’s firm and the
bonuses (if payable within twelve months of the end of the period) and non government respectively.
monetary benefits (such as medical care, housing, cars and free or
subsidised goods or services) for current employees; There is no difference in presentation whether Ivan and Elena receive the
(2) post-employment benefits such as pensions, other retirement benefits, money from their employers, or not. Nor is there any difference in
post-employment life insurance and post-employment medical care; presentation if it is not known whether they receive the money.
(3) other long-term employee benefits, including long-service leave or
sabbatical leave, jubilee or other long-service benefits, long-term disability CONTROL
benefits and, if they are not payable wholly within twelve months after the Control is the power to govern the financial and operating policies of an
end of the period, profit-sharing, bonuses and deferred compensation; undertaking so as to obtain benefits from its activities.
(4) termination benefits; and
(5) equity compensation benefits.
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Related Parties
Example Example
The government has a small shareholding in your defence company, but has Significant influence may be reflected in board membership, and/or a
the right to appoint, and dismiss all directors. The government has control, substantial shareholding of between 20% and 50%. A majority shareholding
even if it decides not to exercise it. It may let the company appoint its own is more than a significant influence, as at would yield control, in most
directors, but retains the right to dismiss any directors it chooses. The circumstances.
benefits the government derives from this structure may be political, rather
than economic. The control may be needed to avoid the company being In considering each possible related party relationship, attention is directed to
controlled by a foreign power. the substance of the relationship and not merely the legal form.
The following are not necessarily related parties:
JOINT CONTROL
Joint control is the contractually-agreed sharing of control over an economic (1) a client, supplier, franchisor, distributor, or general agent with whom
activity. an undertaking transacts a significant volume of business, merely by
virtue of the resulting economic dependence.
Example (2)
You have a joint-venture agreement with a foreign sales agent. You provide providers of finance, such as banks,
the goods, which your agent sells in a foreign territory. trade unions,
The agreement identifies the product range, promotional material, public utilities, and
management support, limit of the sales area, and transfer price. government departments and agencies,
You share the profits, with 40% coming you, 60% to the agent. simply by virtue of their normal dealings with an undertaking (even though they
This is an example of joint control. may affect the freedom of action of an undertaking, or participate in its decision
making process); and
(3) two venturers simply because they share joint control over a joint
KEY MANAGEMENT PERSONNEL venture.
This includes all directors and their equivalents.
Example
It also includes persons having authority and responsibility for planning,
You set up a foreign representative office with a firm from an unrelated
directing and controlling the activities of the undertaking, directly or indirectly.
business. The joint venture is structured in order to share the costs of the
office. The other firm is unlikely to be a related party.
Example
Executives from your parent company may give instructions to your staff in
(4) two undertakings simply because they have a director or other
important matters, such as strategic planning and treasury functions. For
member of key management personnel in common,
your company, these are key management personnel.
notwithstanding (4) and (6) in the definition of ‘related party’.
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Related Parties
3. Disclosure (2)
(3)
post-employment benefits;
other long-term benefits;
(4) termination benefits; and
Relationships between parents and subsidiaries shall be disclosed,
(5) equity compensation benefits.
irrespective of whether there have been transactions between those related
parties. An undertaking shall disclose the name of the undertaking’s parent
If there have been transactions between related parties, an undertaking shall
and, if different, the ultimate controlling party.
disclose the nature of the related party relationship as well as information
about the transactions and outstanding balances necessary for an
Example understanding of the potential effect of the relationship on the financial
If the undertaking’s parent is itself a subsidiary of another company, the statements.
parent is not the controlling party. It is necessary to establish which company
is at the top of the group structure to identify the controlling party. These disclosure requirements are in addition to the requirements to disclose
key management personnel compensation. At a minimum, disclosures shall
If neither the undertaking’s parent nor the ultimate controlling party produces include:
financial statements available for public use, the name of the next most senior (1) the amount of the transactions;
parent that does so shall also be disclosed. (2) the amount of outstanding balances and:
(i) their terms and conditions, including whether they are
To enable users of financial statements to form a view about the effects of secured, and the nature of the consideration to be provided in
related party relationships on an undertaking, it is appropriate to disclose the settlement; and
related party relationship when control exists, irrespective of whether there (ii) details of any guarantees given or received;
have been transactions between the related parties. (3) provisions for doubtful debts related to the amount of outstanding
balances; and
This is especially true of groups of companies, where a parent can decide the (4) the expense recognised during the period in respect of bad or
operating and financial strategies of other group members. doubtful debts due from related parties.
(7) other related parties, including major shareholders. Related party transactions
The Company is controlled by Parent Ltd (incorporated in [name of country])
The classification of amounts payable to, and receivable from, related which owns 51% of the Company’s shares. The remaining 49% of the shares
parties in the different categories as required in this paragraph is an are widely held. The ultimate parent of the Group is Ultimate Parent Ltd
extension of the disclosure requirement in IAS 1 Presentation of Financial (incorporated in [name of country]).
Statements for information to be presented either on the balance sheet or The following transactions were carried out with related parties:
in the notes.
i) Sales of goods and services
The categories are extended to provide a more comprehensive analysis of 2002 2001
Sales of goods:
related party balances and apply to related party transactions.
[Name(s) of joint venture(s)} 618 557
[Name(s) of associate(s)} 168 93
The following are examples of transactions that are disclosed if they are
Household Paints Ltd 337 279
with a related party:
1,123 929
(1) purchases or sales of goods (finished or unfinished);
Sales of services:
(2) purchases or sales of property and other assets; Parent Ltd (legal services) 67 127
(3) rendering or receiving of services; Ultimate Parent Ltd (consultation services) 84 69
(4) leases; [Name(s) of associate(s)] 16 35
(5) transfers of research and development; 167 231
(6) transfers under license agreements;
(7) transfers under finance arrangements (including loans and
equity contributions in cash or in kind); Sales to the joint ventures were carried out on commercial terms and
(8) provision of guarantees or collateral; and conditions and at market prices.
(9) settlement of liabilities on behalf of the undertaking or by
the undertaking on behalf of another party. Sales to Household Paints Ltd are based on a long-term agreement, which
enables Household Paints Ltd to purchase certain goods slightly under the
Disclosures that related party transactions were made on terms equivalent to normal sales price. Household Paints Ltd is a firm belonging to the wife of E
those that prevail in arm’s length transactions are made only if such terms can Choo, a director of the Company.
be substantiated.
As an average the goods were sold at 5% under the normal sales price in
Items of a similar nature may be disclosed in aggregate, except when separate 2002 (4% under the normal sales price in 2001). Sales to the associated
disclosure is necessary for an understanding of the effects of related party undertakings and to Parent Ltd and Ultimate Parent Ltd were carried out at
transactions on the financial statements of the undertaking. cost.
1 December 2002
Sample Accounting Note –
Taken from Illustrated Corporate Financial Statements 2002 – PWC
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Related Parties
9
Related Parties
The above transactions were carried out on commercial terms and conditions,
except for the goods and services purchased from the associated undertaking
and from Parent Ltd, which were at cost. There were no purchases from the
joint ventures.
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Related Parties
2002 2001
Receivables from related parties:
[Name(s) of joint venture(s) 26 23
[Name(s) of associate(s)] 54 46
Household Paints Ltd 14 11
Parent Ltd 14 17
108 97
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Related Parties
2002 2001
iv) Loans from related parties Loan from Ultimate Parent Ltd:
At the beginning of year 2,300 2.495
Repaid during the year (2,300) (195)
At the end of the year - 2,300
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Related Parties
The loan from Ultimate Parent Ltd was provided interest free, and there was
no specified repayment date.
v) Loans to directors
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Related Parties
2002 2001
Loans to the directors of the Company (and their
families)
At the beginning of year 196 168
Loans advanced during the year 343 62
Loan repayments received (49) (34)
At the end of the year 490 196
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Related Parties
2002 2001
In 2002, loans were advanced to B van der Hoek At the beginning of year 660 674
of Local Currency 173; repayable monthly over two years; Loans advanced during the year - 50
interest rate 7.7% and to J Kelly of Local Currency 170; repayable monthly Loan repayments received (70) (64)
over two years; interest rate 7.7%. At the end of the year 590 660
The related interest income in 2002 was Local Currency 30 (2001: Local The loans are due on 1 January 2004 and carry interest at 7.0%.
Currency 16). No provision has been required in 2002 and 2001 for the loans No provision has been required in 2002 and 2001 for the loans made to
made to directors. associated undertakings.
Certain loans advanced to directors during the year amounting to viii) Share options granted to directors
Local Currency 50 (2001: Local Currency 30) are secured by shares in listed
companies, which are held as collateral for these loans, and are repayable in The aggregate number of share options granted to the directors of the
monthly instalments over four year terms. Company during 2002 was 125 (2001: 175). The share options were given on
The fair value of these shares was Local Currency 65 the same terms and conditions as those offered to other employees of the
at the balance sheet date (2001: Local Currency 39). Company.
vi) Directors’ remuneration The outstanding number of share options granted to the directors of the
Company at the end of the year was 480 (450 at the end of 2001).
In 2002 the total remuneration of the directors was Local Currency 2.2
million (2001: Local Currency 1.3 million). ix) Commitments and contingencies
The amount for 2002 included termination benefits of Local Currency 0.4 The Company has guaranteed a loan made by a bank to V Ribollet, a director
million and Local Currency 0.2 million paid, respectively, to two directors, A of the Company, in a total amount of Local Currency 17 (2001: Local
Tardos and J Laakso, who left the Group during the year (2001: Local Currency 17). The loan is repayable in 2003.
Currency Nil).
4.
vii) Loans to associates
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Related Parties
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Related Parties
2. They are related parties, as they are under common control of the major
shareholder, even if the major shareholder does not exercise that control.
3. They are related parties, as the franchise agreement relates only to Tula.
Company cannot expand its business without the agreement of the company
that sold it the franchise. The company’s operating policies are also governed
by the franchise agreements.
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Related Parties
Trading Transactions
During the year, group companies entered into the following transactions with related parties who are not members of the Group:
Sales of goods Purchases of goods Amounts owed to Amounts owed by
31/12/03 31/12/02 31/12/03 31/12/02 31/12/03 31/12/02 31/12/03 31/12/02
Markov Holdings Limited $700 $650 675 876 1868 1500 0 0
Subsidiaries of Limmasol 1500 1200 456 235 1003 900 0 0
Holdings Limited
Associates and a jointly 0 0 0 0 0 0 512 323
Controlled entities
Other $800 $0
Sales of goods to related parties were made at the Group’s usual list prices, less average discounts of 20 per cent. Purchases were made at market price discounted to
reflect the quantity of goods purchased and the relationships between the parties.
Other: A property was sold to a major shareholder for $800,000. This represents a discount of 30% on the fair value as established by the real estate agents Vintor
International Limited.
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Related Parties
This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of ZAO
“PricewaterhouseCoopers” and OOO “Rosexpertiza” and can in no way be taken to reflect the views of the European Union.
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