Related Party Transactions

ASPE: 3840

Related Party Transactions

ASPE: 3840

Definition
  • Related parties exist when:
    • One party has the ability to exercise, directly or indirectly, control, joint control or significant influence over the other.
    • Two or more parties are related when they are subject to common control, joint control or common significant influence.
    • Related parties also include management and immediate family members
  • Exchange amount is the amount of consideration paid or received as established and agreed to by related parties
  • Fair value is the amount of the consideration that would be agreed in an arm’s length transaction
  • Commercial substance exists when
    • risk, timing and amount of the cash flows of the asset received differs significantly from that of the asset given up; or
    • the entity-specific value of the asset received differs from the entity-specific value of the asset given up
Measurement
  • A related party transaction is measured at the exchange amount when one of the following applies:
    1. A monetary or a non-monetary related party transaction in the normal course of operations that has commercial substance is measured at the exchange amount, except when:
      • A non-monetary related party transaction is an exchange of a product held for sale in the normal course of operations for a product to be sold in the same line of business, to facilitate sales to customers; such transaction measured at the carrying amount of the asset given up
    2. When a monetary or a non-monetary related party transaction that has commercial substance is not in the normal course of operations, is measured at the exchange amount when:
      1. the change in the ownership interests in the item transferred or the benefit of a service provided is substantive; and
        • A change in the equity ownership interests in an item transferred, or the benefit of a service provided, is presumed to be substantive when a transaction results in unrelated parties having acquired or given up at least 20 percent of the total equity ownership interests in the item or service benefits
        • i.e. you transferred an item to a company where non-related parties own more than 20% of the shares
      2. the exchange amount is supported by independent evidence
  • When a related party transaction is measured at the exchange amount, any gain or loss resulting from the transaction is included in income
  • Related party transactions that do not meet the conditions above are measured at the carrying amount of the asset received
    • When a related party transaction is measured at the carrying amount, the difference between the items exchanged is charged to equity (rather than income) by both the buyer and seller
    • A parent buys building from a wholly owned company for $10,000; the building has a book value of $8,000 and fair value of $12,000. Assuming the carrying value is used.
    • Parent makes the following entry
      Dr. Building$8,000
      Dr. Equity (contributed surplus or retained earnings)2,000
      Cr. Cash10,000
Comparison to IFRS
  • Related party disclosures are covered under IAS 24
  • Under IFRS, related party transactions are measured just like any other transaction; however, you need to disclose the details of the related party transaction

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