11.2 Measurement and recognition of related party transactions
3 min read•august 16, 2024
are a crucial aspect of financial reporting. These transactions between entities with close relationships can significantly impact financial statements, requiring careful and to ensure transparency and accurate representation.
Proper accounting for related party transactions involves choosing between and measurements. Consistent application, special considerations for different transaction types, and with are essential for accurate financial reporting and disclosure of these transactions.
Measurement Bases for Related Party Transactions
Fair Value and Carrying Amount
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Related party transactions typically measured at fair value representing price received for asset sale or paid for liability transfer in orderly transaction between market participants
Carrying amount used in some cases representing recognized amount of asset or liability on balance sheet
Choice between fair value and carrying amount depends on transaction nature, party relationship, and applicable accounting standards
transactions between related parties measured at fair value to reflect
Non-arm's length transactions may require special consideration (measuring at carrying amount or recognizing difference between fair value and transaction price directly in equity)
Consistency and Special Considerations
Measurement basis consistently applied to similar related party transactions ensuring comparability and faithful representation
Special considerations for different transaction types:
Asset transfers may be accounted for at carrying amount in transferor's financial statements
Share-based payment transactions may require modified accounting treatment
Long-term contracts assessed for embedded leases or arrangements requiring separate accounting
Recognition of Related Party Transactions
Disclosure Requirements
Related party transactions disclosed in including relationship nature, transaction types, and amounts involved
Disclosure details:
Outstanding balances
Terms and conditions
Guarantees given or received
Key separately disclosed (compensation and other benefits)
Group transactions between parent and subsidiaries:
Eliminated in consolidated financial statements
Disclosed in separate financial statements
apply to disclosures but relationship nature may make transaction material regardless of size
Accounting Standards Compliance
Specific requirements for recognition and disclosure provided by accounting standards (, )
Standards guide:
Identification of related parties
Transaction types requiring disclosure
Quantitative and qualitative information to be reported
Compliance ensures consistency and comparability across entities
Substance of Related Party Transactions
Economic Substance Evaluation
Evaluate economic substance of related party transactions to determine if different from legal form affecting accounting treatment
Assess potential distortion of and position if not properly accounted for and disclosed
Consider if transactions conducted on terms equivalent to arm's length transactions
Analyze impact on key financial ratios and performance metrics (liquidity ratios, profitability margins)
Professional Skepticism and Manipulation Risk
Assess potential for management to use related party transactions for financial result manipulation or specific accounting outcomes
Auditors apply when evaluating transactions and disclosures ensuring true and fair view of financial statements
Consider:
Unusual transaction terms
Circular flow of goods or services
Transactions lacking clear business purpose
Accounting for Common Related Party Transactions
Sales and Purchases
Recognize between related parties at fair value
Account for difference between transaction price and fair value appropriately
Eliminate intragroup sales and purchases in consolidated financial statements avoiding revenue and expense overstatement
Example: Parent company sells inventory to subsidiary at cost plus 20% markup
Loans and Financing
Initially recognize loans between related parties at fair value
Treat difference between fair value and transaction amount as capital contribution or distribution
Accrue and recognize interest based on market rates even if stated rate differs
Example: Parent company provides interest-free loan to subsidiary, recognize interest expense at market rate in subsidiary's books
Complex Transactions
Assess long-term contracts for embedded leases or arrangements requiring separate accounting
Example: Parent company leases equipment to subsidiary at below-market rate, may need to recognize implicit subsidy
Consider substance of share-based payment transactions involving related parties
Example: Parent grants stock options to subsidiary employees, may require modification of standard accounting treatment