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Swear to Properly Disclose Related Party Transactions (ASC 850/IAS 24)

Posted on May 2, 2017 by | Tags: ASC 850, IAS 24, Related Parties,

You’ve seen it in the financial statements numerous times. A company discloses that from time to time, they enter into related party transactions in the “ordinary course of business” and that these transactions were at “arm’s length.” But who are related parties and what disclosures are required for related party transactions? In a previous post, we discussed the auditing of related party transactions. This post discusses the requirements for disclosing related party transactions set out in U.S. GAAP (ASC 850) and IFRS (IAS 24).

ASC 850 states related parties include:

  • Affiliates – for example, subsidiaries of the entity
  • Equity method investments – for example, investments in which the entity has significant influence over the operating and financial policies over the investee
  • Trusts for the benefit of employees – for example, pension plans that are managed by or under the trusteeship of the entity’s management
  • Principal owners and management of the entity and members of their immediate families

Who is considered to part of the immediate family? Any family member who might control or influence, or be controlled or influenced, by a principal owner or member of management because of the family relationship.

Related parties also include other parties that can control or significantly influence, or be controlled or influenced by, another party such that either entity may be prevented from fully pursuing its own separate interests.

The determination of who constitutes a related party requires a significant amount of judgment on the part of management.

Transactions with related parties are not uncommon. Examples include:

  • Sales, purchases, and transfers of real and personal property
  • Services received or provided, such as for accounting, management or legal services
  • Leases of property and equipment
  • Borrowing money or guarantees of debt
  • Intra-entity billings based on allocation of common costs

It is important to note that transactions between related parties are considered related party transactions that must be disclosed in accordance with ASC 850 even though they may not be given accounting recognition. For example, an entity may receive services from a related party without charge and not record the receipt of services. Although ASC 850 does not provide accounting guidance for such transactions, it does require proper disclosure.

ASC 850 requires disclosure in the financial statements of material related party transactions, other than compensation arrangements, expense allowances, and other similar items. These disclosures include:

  • The nature of the relationships
  • Description of the transactions and other information necessary to understand the effects of the transactions on the financial statements
  • Dollar amounts of the transactions and any change in the method of establishing the terms from that used in the preceding period
  • Amounts due to or from related parties and terms and manner of settlement
  • Information about current and deferred income tax expense for entities that issue separate financial statements, but file a consolidated tax return

Note, however, that disclosure of related party transactions that are eliminated in the preparation of consolidated or combined financial statements is not required.

What about “arm’s-length” transactions?

If you’re thinking of disclosing related party transactions as being carried out on an arm’s-length basis, be careful. ASC 850 clearly states that it cannot be presumed that such transactions are carried out in this manner. In addition, you cannot disclose related party transactions as being carried out on an arm’s-length basis unless such representations can be substantiated.

Are you an SEC registrant? If so, you have a few more disclosure requirements to consider. Regulation S-X Rule 4-08(k), outlined in ASC 235-10-S99-1, requires disclosure of related party transactions which affect the financial statements. It requires that:

  • Related party transactions should be identified and the amounts stated on the face of the balance sheet, income statement, or statement of cash flows.
  • In cases where separate financial statements are presented for the registrant, certain investees, or subsidiaries, separate disclosure shall be made in such statements of the amounts in the related consolidated financial statements which are (i) eliminated and (ii) not eliminated. Also, any intercompany profits or losses resulting from transactions with related parties and not eliminated and the effects thereof shall be disclosed.

Furthermore, Regulation S-X also requires separate presentation in the balance sheet of the following:

  • Receivables due from related parties
  • Securities of related parties
  • Indebtedness of related parties
  • Receivables arising from the issuance of capital stock to officers or other employees
  • Receivable from a parent or another affiliate

IAS 24 Related Party Disclosures sets out the requirements under IFRS for disclosure of related party transactions, which are substantially similar to the requirements under U.S. GAAP. However, there are a few differences including:

  • IAS 24.17 requires disclosure of key management personnel compensation in total and for various categories. ASC 850 does not require such disclosure, although SEC regulations require similar disclosures outside the financial statements.
  • IAS 24.18(b) requires disclosure of commitments to related parties, whereas ASC 850 does not specifically require such disclosure.
  • IAS 24.25 provides an exemption from the related party disclosure requirements in situations of government control, joint control, or significant influence (here’s looking at you, China). ASC 850 does not provide such an exemption.

Closing thoughts

We hope this post has helped you with identifying and disclosing related party transactions. Still have questions regarding the requirements of related party transactions for both preparers and auditors? Check out our online course Related Parties. And, as always, if you have any questions after reading our posts, please do not hesitate to contact us directly.

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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.

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