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:
- 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
- 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:
- 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
- the exchange amount is supported by independent evidence
- the change in the ownership interests in the item transferred or the benefit of a service provided is substantive; and
- 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:
- 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. Cash 10,000
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