IAS 10 POST REPORTING PERIOD EVENTS & IAS 24 RELATED PARTY TRANSACTIONS BY SADIQ M. O. B.SC,ACA,ACTI IAS 10 – POST REPORTING PERIOD EVENTS INTRODUCTION Under the previous regime it used to be post balance sheet events standard but by the introduction of IFRS it is now known as post reporting period events standard. And the objective is that the standard specifies how to recognize, treat and disclose post reporting period events. SCOPE The issue addressed by this standard (IAS10), is to what extent anything that happens during the post reporting period should be reflected in those financial statements. It distinguishes between events that provide information about the state of the entity at the end of the reporting period and those that concern the next financial period. A secondary issue is the cut-off point beyond which the financial statements are considered to be finalized. DEFINITION OF TERMS EVENTS AFTER THE REPORTING PERIOD: Those post reporting period events, both favourable and unfavourable that occur between the end of the reporting period and the date when the financial statements are authorised for issue. REPORTING PERIOD Reporting period is the accounting year end of a company. POST REPORTING PERIOD This is the period between the reporting period and the authorization date of an entity. EVENTS Event is referred to as the economic activities of an entity, which has financial implication. AUTHORISATION DATE Authorisation date is the date when the financial statements could be considered legally authorised for issuance. The date serve as a “cut-off point” after the end of the reporting period up to which the post reporting period events are to be examined in order to ascertain whether such events are to be examined for qualification for treatment by IAS 10. GENERAL PRINCIPLES - Where there is need for shareholders approval after they have already been issued. i.e. date of original issuance. - Where an entity is required to issue financial statements to supervisory board made up of wholly non executives – i.e. date on which management authorise them for issue to the supervisory board. ADJUSTING EVENT AFTER REPORTING PERIOD Those post reporting period events that provide evidence of conditions that existed at the end of the reporting period. The financial statements should be adjusted to reflect adjusting events after the end of reporting period. EXAMPLES OF ADJUSTING EVENT - The bankruptcy of a customer after reporting period, suggests a lost of trade receivable at the end of the reporting period. - The sale of inventory at a price substantially lower than its cost after reporting period confirms its net realizable value at the end of the reporting period. - The sale of property, plant and equipment for a net selling price that is lower than the carrying amount is indicative of an impairment before the end of the reporting period. - The determination of an incentive or bonus payments after the reporting period when an entity has a constructive obligation at the end of the reporting period. - The determination of a pending litigation case against the company after the reporting period - The discovery of fraud or error that show that the financial statement are incorrect. NON ADJUSTING EVENTS AFTER THE REPORTING DATE Those post reporting period events that are indicative of condition that arose only after the reporting period. The financial statement should not be adjusted -to reflect non adjusting events rather it should be disclosed as a note to the financial statement. EXAMPLE - Declaration of an equity dividend - Decline in the market value of investments after the reporting period. - Entering into major purchase commitments in the form of issuing guarantees after the reporting period. - Commencing a law suite relating to events that occurred after the reporting period. - Change in tax rate or tax law enacted or announced after reporting period. DISCLOSURE-GENERAL - Date and authorization - Date when financial statements were authorised for issue. - Who gave the authorization - If any party has power to amend the financial statements after issuance, disclose this fact. FOR NON ADJUSTING EVENTS - The nature of the event - An estimate of the financial affect - A statement, if such an estimate cant be made. GOING CONCERN If it is obvious that the company cannot apply going concern assumption at the time of preparation of accounts either it. - Intends to liquidate or cease trading or - No realistic alternative but to liquidation/cessation In this instance there must be fundamental change in the basis of accounting rather than an adjustment to the amounts recognized within the original basis of accounting. Adjust the accounts and disclose the followings: - That fact - Basis used (i.e. realizable value) - Reason for not using going concern. CASE STUDY The preparation of the financial statements of Excellent Corp for the accounting period ended December 31, 2009 was completed by the management on March 15, 2010. The draft financial statements were considered at the meeting of board of directors held on March 20, 2010 on which date the board approved them and authorise them for issuance. The annual general meeting (AGM) was held on April 10, 2010 after allowing for printing and requisite notice period mandated by the corporate statute. At the AGM the shareholders approved financial statements. The approved financial statement was filed by the corporation with the Company Law Board on April 20, 2010. SOLUTION TO CASE 1 The date of authorization of financial statements of Excellent Corp, for the year ended December 31, 2009 is March 20 2010, the date when the board approved them and authorised them for issue. Thus, all post reporting period events between December 31, 2009 and March 20, 2010 need to be considered by Excellent Corp for purpose of evaluating whether they are be accounted for or reported under IAS 10. CASE STUDY 2 Suppose in the above case the management of Excellent Corp was required to issue the financial statements to a supervisory board consisting mainly of non executives including representative of trade union. The management of Excellent Corp had issued the draft financial statements to the supervisory board on March 16, 2010. The supervisory board approved them on March 17, 2010 and the shareholders approved them in the AGM held on April 10, 2010. The approved financial statements were filed with the company law Board on April 20, 2010. SOLUTION TO CASE 2 CASE 2 The date of authorization of financial statements would be March 16, 2010, the date the draft financial statements were issued to the supervisory board. So all events between December 31, 2009 and March 16, 2010 need to be considered for the purpose of evaluating whether they are to be accounted for or reported under IAS 10. CASE STUDY 3 Shiny Corp carries its inventory at the lower of cost and net realizable value at December 31, 2009 the cost of inventory determined under FIFO method, as a reported in its financial statement for the year ended was $10m. Due to severe recession and other negative economic trends, in the market, the inventory could not be sold during the month of January 2010. 1. On January 10, 2010 Shiny Corp entered into an agreement to sell the entire inventory to a competitor for $6m issued. 2. The capital of Shiny Corp comprised 100,000 equity shares. The company announced a bonus issue of 25,000 shares on February 15, 2010. Financial statement was authorised for issue on March 10, 2010. - How should Shiny Corp account for this two post reporting date events. SOLUTION TO CASE 3 i. Shiny Corp should recognize a write down of and 4m in financial statements for the year ended December 31, 2009. ii. IAS 33, Earnings per share requires a disclosure of transactions as “stock splits” or rights issue” which are of significant importance after the reporting period. This is a non adjusting event and only disclosure is needed. IAS 24 – RELATED PARTY DISCLOSE Objective The purpose of the standard is to create awareness for related party relationships and extent to which an entity’s financial position, profitability or cashflow may have been affected by transactions of such parties. It only deals with disclosures and not recognition or measurement issues. It also emphasis that it is not that transaction with related party is bad because there could be valid economic reasons for it but the possibility of management using it to manipulate the financial statements is the issue. SCOPE The requirements of IAS 24 are to be applied in - Identifying related party relationship and transactions - Identifying the outstanding balances including commitments due to those transactions. - Identifying the circumstances in which disclosure of items in 1 & 2 is required. - Determine the disclosure that are to be made about those items, considering IAS 27, the transactions of parent with its subsidiaries would be disclosed as related party transactions in individual entity’s financial statements, although the consolidated financial statement of the parent will not show any related party transaction because this would have been nil out. DEFINITION OF TERMS A RELATED PARTY: Is a person or entity that is related to the entity, which is preparing its financial statements (reporting entity). Any of these three (3) would determine a related party: A person that is a. Has control or joint control over the reporting entity b. Has significant influence over the reporting entity c. Is a member of the key management personnel of the reporting entity or the parent of reporting entity. Examples of related parties: i. Subsidiary ii. Associate iii. Joint Venture iv. Key management personnel of the entity or its parent close member of the family of any individual referred to (i) or (iv) v. The party is a post employment benefit plan for the benefit of employees of the entity or any related party of the entity. A RELATED PARTY TRANSACTION: Is a transfer of resources services or obligations between related parties, regardless of whether price is charged or not. CLOSE FAMILY MEMBERS OF A PERSON: Those family members who may be expected to influence or be influenced by that person in their dealings with the entity. They include; 1. The person’s domestic partner and children 2. Children of the person’s domestic partner 3. Dependents of the person or the person’s domestic partner. COMPENSATION: Includes all employee benefits (IAS 19 Employee Benefit and IFRS 2 Share Base Payments). It also includes consideration paid on behalf of a parent of the entity in respect of the entity. CONTROL: The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.(Husbands, Trade unions etc) JOINT CONTROL: The contractually agreed sharing of control/ significant influence. The power to participate in the financial and operating decisions of an entity but not having control over those policies. SIGNIFICANT INFLUENCE: The participation in determining the financial and operating policies of an entity. KEY MANAGEMENT PERSONNEL: Those persons having authority and responsibility for planning, directing and controlling the activities of an entity. Either directly or indirectly and include directors (executive or otherwise) of that entity. They need not be directors IAS 24 paragraph 10 states that in considering each related partly relationship, attention is directed to the substance of the relationship not merely the legal form. DISCLOSURES In order to enable users of financial statements to better understand the financial position of an entity and to form a view about the effects of related party transactions on an entity, IAS 24 has mandated extensive disclosure requirements with respect to related party transactions. IAS 24 paragraph 21 provides examples of general disclosures of transactions with related party: - Purchase or sales of goods and sale of property or other assets. - Rendering or receiving of services - Leases. - Transfer of research and development, transfer under licence agreements and finance agreements. - Provision of guarantees or collateral. - Settlement of liabilities by a related party on behalf of the entity or by the entity on behalf of the related party. • An entity should disclose - Relationship between parents and subsidiaries regardless of whether there have been any transactions between them. - The name of the entity’s parent and if different, the ultimate controlling party, if neither produces financial statement for public use, the name of the next most senior parent that does so shall be disclosed. i.e. first parent in the group above the immediate parent. • IAS 24 paragraph 17 state that entity should disclose “any management personnel” compensation in total and for each of these categories: 1 Short term employee benefits 2 Post employment benefits 3 Other long term benefits 4 Termination benefits 5 Share – based payments • IAS 24 paragraph 18 states the minimum disclosure to be made by an entity where there is transaction between related parties - The amount of the transactions - The amount of outstanding balances • Their terms and conditions • Whether they are secured or unsecured • The nature of settlement consideration • Details of guarantees given or received - Provisions for doubtful debts against balances outstanding - Provisions for doubtful debts recognized as an expense IAS 24 paragraph 27 states that in assessing the level of detail to be disclosed the entity should evaluate factors such as “closeness of the relationship” and “other factors” such as whether it is - Significant in terms of size - Carried out on non-market terms - Outside normal day-to-day business operations such as purchase and sale of business - Disclose to regulatory or supervisory authorities - Reported to Senior Management - Subject to shareholder’s approval CASE 1 Facts - P Inc (Parent Company) owns a subsidiary, S Corp - Person C is the CEO “key management personnel” of S corp - Entity Z Ltd is jointly controlled by person C Required - Is S corp, a related party of Z Ltd for the purpose of the financial statements of Z Ltd. Solution - Yes, under IAS 24, S corp is a related party of Z Ltd for the purpose of financial statements of Z Ltd CASE 2 John Smith (father) and John Doe (son) are related parties (“Close members of the family”) in accordance with IAS 24. John Smith (father) is in “joint control” of Amazing Inc. John Doe (son) has “joint control” over joint venture Good Ltd. Required For the purpose of the financial statements of Amazing Inc and Good Ltd, are related party disclosures required in terms of IAS 24. Solution For the purpose of financial statement of - Amazing Inc: Good Ltd, the entity joint controlled by John Doe (son) is a related party - Good Ltd: Amazing Inc the entity under “joint control of John Smith (father) is a related party So related party transactions between them, would attract disclosure requirements of IAS 24. EXEMPTION Some parties by virtue of their relationship with the entity may appear as related parties falling within the scope of IAS 24 but the following parties are not necessarily related as envisaged by the standard. - Providers of finance, trade unions, public utilities and government departments and agencies (that do not control, jointly control or significantly influence the reporting entity) are not necessarily related parties simply by virtue of their normal dealings with an entity, even if they participate in decision-making process or affect freedom of action. - Customers, suppliers, franchisors, distributors, or general agents with whom an entity transacts a significant volume of business are not related to an entity solely because the entity is economically dependent on them. - Two entities are not related parties simply because they have common directors or other members of key management personnel in common. - Two ventures are not related parties simply because they share joint control over a joint venture. CASE 3 Interesting Inc is a manufacturer of automobile spare parts, it transacts business through a business model that has worked for several years and has made the entity a successful enterprise that is rated in the top ten businesses in its field by a trade journal. i. Interesting Inc purchases everything it needs from Excellent Inc a well-known supplier. Due to the high quality of material provided by it, Interesting Inc has never purchased from any other supplier, thus it may be considered economically dependent on Excellent Inc. ii. Interesting Inc sells 70% of its output to a company owner by a director and the balance to an entity that is it’s “associate” by virtue of Interesting Inc owing 35% of the share capital of that company. Required Based on the requirement of IAS 24, identify which transaction would need to be disclosed as related party transactions. Solution i. Excellent Inc does not automatically become a related party by virtue of the fact that Interesting Inc purchases all its raw materials from Excellent Inc and is economically dependent on it. ii. 70% of the sales to an entity owned by a “director” (key management person) and 30% of the sales to any entity that Interesting Inc has significant influence (35% stake) constitute sales to related party and would need to be disclosed as such.
Posted on: Fri, 19 Jul 2013 14:09:26 +0000
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