ASPE provides guidance on how to measure and disclose related-party transactions. A related-party transaction is a transaction that happens between the reporting entity and either another entity that is considered "related" or a person that has a direct or indirect relationship with the reporting entity.
There are three steps in accounting for a related-party transaction:
Determine whether the transaction falls under the definition of “related-party”.
Determine how to record the transaction in the books.
Determine what disclosure requirements are associated with the related-party transaction.
Is the transaction a related-party transaction?
ASPE 3840.03 and .04 provide a definition for related-party transactions.
Related-Party:
First we establish if there is a related-party relationship.
Under ASPE a related party relationship exists when "one party has the ability to exercise, directly or indirectly, control, joint control or significant influence over the other.” Parties are related when they are both controlled by the same entity, or there is a relationship of joint control or significant influence. Additionally, management and immediately family members are also considered related-parties.
Related-Party Transaction:
Once we have established that the two parties are related, we then establish if there is a transaction between the two parties.
A related party transaction occurs if there is either: a transfer of economic resources, obligations or services rendered between the related-parties. Consideration (cash or other assets) does not have to be given in order to be considered a related-party transaction.
How to record the item received in the transaction?
ASPE 3840 has a number of different rules to determine how to record the specific related-party transaction.
ASPE 3840 is long and slightly confusing. The simplest way to determine how to record a related party transaction is to use a flow chart. Before we follow through a flow-chart, we need to first establish whether the items in the transaction and/or the transaction itself meets certain definitions. This will dictate the transaction’s path through the flow chart.
Is the item transferred a financial instrument?
ASPE 3856 defines a financial instrument as a contract, where there is a financial asset (cash, A/R, equity instruments) for one entity and a financial liability (obligation to deliver cash or other equity instrument under unfavorable terms) for another entity.
Is the transaction part of the normal course of operations?
This is not clearly defined in the ASPE 3840 criteria. However, in general, a transaction is considered to be part of the normal course of operations if the entity regularly engages in similar transactions with its clients.
Does the transaction have commercial substance?
ASPE 3840.19 defines the term “commercial substance.”A related party transaction is considered to have “commercial substance” when the entity is expected to experience a substantial change in future cash flows, resulting from the transaction. This is considered to have been achieved when one of the following is true:
Either the amount of cash, risk associated with it or timing in obtaining cash flows changes as a result of the transaction; OR
There is a difference in the value of the item given up compared to the one received.
Flow Chart:
The flow chart, below, outlines how to record the item received, based on how it is defined.
Reference: This flow chart was adapted from ASPE 3840.64.
What should be disclosed?
ASPE 3840.51 outlines that entities will need to disclose the following, with respect to any related-party transactions:
The nature of the relationship,
Any contractual obligations between the related parties,
The nature of the transaction,
The amount of the transaction and at how much they have been recognized on the entity’s books,
What measurement basis was used to recognize the transaction,
The amount of outstanding balances and commitments between the parties,
The terms and conditions of any outstanding balances, along with any guarantees given/received,
Any contingencies between the related parties.
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