How-to IFRS Series..(1/5)

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