Understanding Related Party Transactions under ASPE

Accounting for related party transactions is one of the most complicated areas of applying Accounting Standards for Private Enterprises (ASPE), and it is an area of accounting regularly cited for deficiencies by practice inspection. This course is designed to address the challenges faced by preparers of ASPE financial statements and practitioners with respect to the recognition, measurement, presentation, and disclosure of related party transactions and balances under ASPE.

Everyone loves a good party. However, some parties can entail complications and ambiguities, especially when it comes to related parties in the field of accounting.

IAS 24 and Related Party Transactions

The participation in a defined benefit plan that shares risks between group entities would also be deemed as a related party transaction for each individual group entity (IAS 24:22). IAS 19:42 provides further guidance on such plans.

If there have been transactions between related parties, the entity must disclose the nature of the related party relationship and information about the transactions and outstanding balances, including commitments, necessary for an understanding of the potential effect of the relationship on the financial statements (IAS 24:18). There is an element of judgement in determining the level of detail required to meet the requirements of IAS 24:18. The disclosures set out the minimum requirement and preparers should consider whether further details are required to provide the user with a sufficient understanding of financial statements.

The IFRS Interpretations Committee (the Committee) considered whether it was necessary to supplement the minimum disclosures regarding ‘transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements’.

Materiality Considerations

The concept of materiality should be considered carefully with regard to related party transactions. The definition of materiality in IAS 1:7, amended by Definition of Material (Amendments to IAS 1 and IAS 8) for periods beginning on or after 1 January 2020, states that information is material if omitting, misstatement or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements.

IAS 1:7 goes on to explain that materiality depends on the nature or magnitude of information, or both, and entities must assess whether information is material either individually or in aggregate with other information. IFRS Practice Statement 2 Making Materiality Judgements (September 2017) provides further guidance on assessing qualitative and quantitative materiality factors. The interaction of both of these factors is usually required in making a judgement and with regards to related party transactions it is more often the nature (qualitative factors) rather than the amount that affects the decision to disclose.

Under IAS 24, entities are not required to name the related parties involved except when disclosing relationships of control. Entities should consider the level of detail needed to provide useful information in respect of the above requirements. Although not strictly a requirement of IAS 24, entities may consider that naming the related party and explaining the relationship with that party is necessary to provide users with sufficient understanding of the transaction.

The classification of amounts payable to, and receivable from, related parties in the different categories prescribed by IAS 24:19 is an extension of the disclosure requirements in IAS 1:77-80A for information to be presented in either the statement of financial position or in the notes. IAS 24 does not provide further detail on the presentation of related party transactions. However, IAS 24:24 does state that items of a similar nature can be disclosed in aggregate except where separate disclosure is deemed necessary to understand the effects of related party transactions in the financial statements.

IAS 24 does not require entities to disclose the basis on which related party transactions took place. IAS 1:38 requires comparative information to be disclosed for all amounts reported in the current period’s financial statements unless an IFRS permits or requires otherwise. As IAS 24 does not provide any exemption from disclosure of comparative information, disclosures of transactions and balances with related parties must therefore include those in the prior period.

IAS 1:38 also requires comparative information for narrative and descriptive information if it is relevant to understanding the current period’s financial statements. It would therefore be necessary to include explanations of how terms and conditions of loans, commitments or guarantees with related parties compare to the prior year. The purpose of IAS 24 is to highlight where the financial statements may have been affected by a related party transaction and it is therefore unlikely that prior year comparatives would be required if that party was not a related party during the prior year.

Disclosure Exemptions for Government-Related Entities

Certain disclosure exemptions exist for entities that are under the control, joint control or significant influence of a government:

• government-related entities of the same government (IAS 24:25).

Entities that meet the above criteria are not required to provide the disclosures in IAS 24:18.

• the name of the government and the nature of its relationship with the reporting entity (i.e. -for other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent. Types of transactions include those listed in paragraph 21.

The disclosures above are intended to provide more useful information for users of the financial statements in relation to government-related entities. Judgement will be required to determine whether the level of detail provided is sufficient.

Examples of Government-Related Entity Transactions

Government G directly or indirectly controls Entities 1 and 2 and Entities A, B, C and D.

On 15 January 20X1, Entity A, a utility company in which Government G indirectly owns 75% of outstanding shares, sold a 10-hectare piece of land to another government‑related utility company for CU5 million. On 31 December 20X0, a plot of land in a similar location, of a similar size and with similar characteristics, was sold for CU3 million. There had not been any appreciation or depreciation of the land in the intervening period.

In the year ended December 20X1, Government G provided Entity A, a utility company in which Government G indirectly owns 75% of outstanding shares, with a loan equivalent to 50% of its funding requirement, repayable in quarterly instalments over the next five years. Interest is charged on the loan at a rate of 3%, which is comparable to that charged on Entity A’s bank loans. Government G, indirectly, owns 75% of Entity A’s outstanding shares. The company also benefits from guarantees by Government G of the company’s bank borrowing. See note X [of the financial statements] for disclosure of government assistance as required by IAS 20.

Measurement of Related Party Transactions

Parties to the transaction are related prior to the transaction. When a RPT is measured at the carrying amount, any difference between the carrying amounts of items exchanged is included as a charge to equity, except when the RPT includes a financial instrument. Unless, it is a non-monetary RPT that is an exchange of a product / property held for sale in the normal course of operations for a product / property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.

Disclaimer

Applying financial reporting standards can be quite complex. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances.

BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

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