Related Party Disclosures: AASB 124 And Its Application With Real Companies, Essay.

Your assignment should cover ALL of the following parts.

A.In your own words, discuss the rationale behind AASB 124?

B.According to AASB 124, who are related parties?

C.According to AASB 124, what are related party transactions? (five examples is sufficient)

Each group will be allocated 5 companies (one for each member) to research on. Your assignment should cover the following:

A.For each company, identify the related parties and the related party transactions (a template is provided for you to summarize your findings).

B.Critically evaluate each related party transaction and identify those you believe are not at arm’s length. Justify the case(s) that you identified and discuss the incentives behind such transaction(s).

C.Are the disclosures by the company consistent with the requirements of AASB 124?

Part 1: General

AASB 124 describes about the disclosures relating to related party transactions in the financial statements. The requirement of related party disclosures is given under Section 334 of the corporations’ act 2001.

This includes identifications of persons or entities as related parties to the company including compensations paid to key managerial person. This AASB further includes disclosures related to transactions, outstanding balances with company’s related parties in the consolidated financial statements as well as in standalone financial statements (AASB 124, 2015).

The basic objective of related party disclosures is to draw the attention about the profit or loss or financial performance which has been affected by the presence of transactions with related parties including any outstanding balances, commitments with those parties.

The purpose of related party disclosures is given under Paragraphs 5- 8 of AASB 124 (AASB 124, 2015).

• It is normal for the entities to trade with related parties such as joint venture, subsidiaries and associates. By this, entity affects the operating and financial policies through the significant influence or joint control.
• The financial performance will be affected through related party transactions because selling the goods to parent at a price which might be different when goods are sold to different customers.  
• The only existence of related party relationship is sufficient to affect the financial performance even if there were no transactions between them during the year.
• Users of statements may evaluate the financial reports on the basis of the type of related party relationships, volume of transactions between them inclusing any balances and commitments. Further users also assess the threast and opportunities faced by the entity.

 Related parties are described under Paragraph 9 of AASB 124.

Related party means any individual or a firm that is related to the entity who is creating financial reports (or called as reporting enterprise) (AASB 124, 2015).

• Any individual or a close member of that individual’s relatives are related to reporting enterprise if:
  1. That individual controls over reporting enterprise.
  2. That individual has significant authority over reporting enterprise.
  3. That individual is the part of the key managerial personnel of the reporting enterprise or of the parent of the reporting enterprise.
• If any of the following circumstances applies then an entity is related to the reporting enterprise:

1. Any subsidiary, parent are related to the entity or the reporting enterprise.
2. One party is associate or joint venture of the other party.
3. Both entities are joint venture of the same third party.
4. One entity is joint venture while the other entity is associate of the same third party.
5. The entity is a defined benefit plan for the advantage of the employees of   reporting enterprise including the employees of that enterprise those are related to the reporting enterprise.
6. If the entity is controlled by an individual identified in (i).
7. If that entity provides key managerial services to the reporting enterprise or to the parent of the reporting enterprise.

The related party transactions are defined under Paragraph 9 of AASB 124.

Related party transactions means any transactions related to transmission of resources, services or any liabilities among the reporting enterprise and the related parties irrespective of the value charged (Deloitte, 2017).

Following transactions are referred as related party transactions:

• Purchases or selling of both finished and unfinished items.
• Receiving or providing of services.
• Purchases or selling or assets.
• Settlement of liabilities by related party on behalf of reporting enterprise or settlement of liabilities by the reporting enterprise on behalf of related party.
• Provision of  guarantees
• Transfers under lease, license and finance agreements

The company chosen for related party disclosures is “Kathmandu Holdings Limited”. Fiscal year 2015 and 2016 was taken for related party disclosures and the information is found in the notes to financial statements (page no. 56) of annual report (Kathmandu, 2016). 

Following are the related parties; type of relationship and the type of transactions of Kathmandu Holdings Limited are given below:

As per AASB 124, transactions of related parties include transmission of services, assets etc. between reporting enterprise and the related party.

Any transaction entered by the reporting enterprise with related parties must be reported to the committee of the audit to verify about related party transactions and to show that they have entered into a normal course of business and at arm’s length price.

Therefore, related parties for “Kathmandu holdings limited” are identified in answer (a) above (Kathmandu, 2016).

• Milford Group Holdings Limited is incorporated in New Zealand and it is the 100% subsidiary company and there are no transactions occurred during 2016 between them.
• Kathmandu Ltd is the outdoor retailer and incorporated in New Zealand and it is the 100% subsidiary company and there are no transactions occurred during 2016 between them.
• Kathmandu Pty Ltd is also an outdoor retailer and incorporated in Australia and it is the 100% subsidiary company and there are no transactions occurred during 2016 between them.
• Kathmandu (U.K) Ltd is also an outdoor retailer and incorporated in United Kingdom and it is the 100% subsidiary company and there are no transactions occurred during 2016 between them.
• There are 11 key managerial personnel of Kathmandu Holdings limited are also considered as related parties but during 2016, there is no related party transactions occurred.
• Chapman Tripp has rendered defense activity services and property leases activities and the paid legal fees of $ 223, 681 in 2016 whereas in 2015 fees were $ 40, 921 only. This means the transactions is not at arm’s length price.
• John Holland is the related party because he is the director of Kathmandu holdings limited and he is also the consultant of Chapman Tripp. At 31 July, 2016 the group owed outstanding legal fees of $ 2, 652 whereas in 2015 fees were $ 754 only. This means the transactions is not at arm’s length price.
• Chalmers Properties limited is the related party by virtue of subsidiary company of Port Otago limited where the John Harvey is the Director of both the companies. During 2016, Company paid $ 240, 478 as operating lease costs whereas in 2015 the group paid $ 238, 536. Thus, this transaction is occurred at arm’s length price.
• The company has also repaid loans as well advanced loans to their subsidiaries.

Paragraph 13-27 of AASB 124 describes the disclosure requirements (AASB 124, 2015).

In disclosure requirements of AASB 124 it is given that every reporting enterprise needs to disclose the names of related parties, nature of relationships, amount of transactions, outstanding balances and commitments (if any) which affects the profit or loss of the reporting enterprise due to existence of related parties. These disclosures must be in addition to AASB 127 and AASB 12 requirements. Further disclosures also require naming the related parties even if there are no transactions between them during reporting period (Technical Summary, 2012).

Therefore, it is observed that Kathmandu Holdings limited fulfilled the disclosure requirements of AASB 124. Kathmandu Holdings limited not only discloses the transactions but the group has also disclosed the type of relations with the related parties, the amount of transactions of 2016 as well of 2015 which makes it easy for the comparison. All these disclosures are given under notes to financial statements on page number 56 of annual report 2016.  

References

Nelson, K 2012, ‘exposure draft of proposed Amendments to IAS 24 Related Party Disclosures State-controlled Entities and the Definition of a Related Party,’ Accountant and Finance, vol. 2, no. 58, pp. 74-5.

Technical Summary 2012, IAS 24 related party disclosures, viewed on 31 May 2017 from < https://www.ifrs.org/Documents/IAS24.pdf>.

Deloitte 2017, IAS 24-  related party disclosures, viewed on 31 May 2017 from < https://www.iasplus.com/en/standards/ias/ias24>.

AASB standard 2015, Related party disclosures, viewed on 31 May 2017 from < https://www.aasb.gov.au/admin/file/content105/c9/AASB124_07-15.pdf>.

Kathmandu 2016, 2016 Annual Report, viewed on 31 May 2017 from <https://www.kathmanduholdings.com/wp-content/uploads/2012/08/Kathmandu-AR-2016-online.pdf>.