Ind AS 24, Related Party Disclosures, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams
Question 1 –
Mr. Atul is an independent director of a company X Ltd. He plays a vital role in the Management of X Ltd. and contributes in major decision making process of the organisation. X Ltd. pays sitting fee of Rs.2,00,000 to him for every Board of Directors’ (BOD) meeting he attends. Throughout the year, X Ltd. had 5 such meetings which was attended by Mr. Atul.
Similarly, a non-executive director, Mr. Naveen also attended 5 BOD meetings and charged Rs.1,50,000 per meeting. The Accountant of X Ltd. believes that they being not the employees of the organisation, their fee should not be disclosed as per related party transaction in accordance with Ind AS 24. Examine whether the sitting fee paid to independent director and non-executive director is required to be disclosed in the financial statements prepared as per Ind AS?
As per Ind AS 24, Related Party Disclosures, “Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.”
Accordingly, key management personnel (KMP) includes any director of the entity who are having authority and responsibility for planning, directing and controlling the activities of the entity. Hence, independent director Mr. Atul and non-executive director Mr. Naveen are covered under the definition of KMP in accordance with Ind AS.
Also as per Ind AS 19, ‘Employee Benefits’, an employee may provide services to an entity on a full-time, part-time, permanent, casual or temporary basis. For the purpose of the Standard, Employees include directors and other management personnel.
Therefore, an entity shall disclose key management personnel compensation in total i.e. disclosure of directors’ fee of (Rs.10,00,000 + Rs.7,50,000) Rs.17,50,000 is to be made as employees benefits (under various categories).
Question 2 –
ABC Ltd. is a long-standing customer of XYZ Ltd. Mrs. P whose husband is a director in XYZ Ltd. purchased a controlling interest in entity ABC Ltd. on 1st June, 2017. Sales of products from XYZ Ltd. to ABC Ltd. in the two-month period from 1st April 2017 to 31st May 2017 totalled Rs.8,00,000. Following the shares purchased by Mrs. P, XYZ Ltd. began to supply the products at a discount of 20% to their normal selling price and allowed ABC Ltd. three months’ credit (previously ABC Ltd. was only allowed one month’s credit, XYZ Ltd.’s normal credit policy). Sales of products from XYZ Ltd. to ABC Ltd. in the ten-month period from 1st June 2017 to 31st March 2017 totalled Rs.60,00,000. On 31st March 2018, the trade receivables of XYZ Ltd. included Rs.18,00,000 in respect of amounts owing by ABC Ltd.
Analyse and show how the above event would be reported in the financial statements of XYZ Ltd. for the year ended 31 March 2018 and mention the disclosure requirements also as per Ind AS.
XYZ Ltd. would include the total revenue of Rs.68,00,000 (Rs.60,00,000 + Rs.8,00,000) from ABC Ltd. received / receivable in the year ended 31st March 2018 within its revenue and show Rs.18,00,000 within trade receivables at 31st March 2018.
Mrs. P would be regarded as a related party of XYZ Ltd. because she is a close family member of one of the key management personnel of XYZ Ltd.
From 1st June 2017, ABC Ltd. would also be regarded as a related party of XYZ Ltd. because from that date ABC Ltd. is an entity controlled by another related party.
Because ABC Ltd. is a related party with whom XYZ Ltd. has transactions, then XYZ Ltd. should disclose:
- The nature of the related party relationship.
- The revenue of Rs.60,00,000 from ABC Ltd. since 1st June 2017.
- The outstanding balance of rs.18,00,000 at 31st March 2018.
In the current circumstances it may well be necessary for XYZ Ltd. to also disclose the favourable terms under which the transactions are carried out.
Question 3 –
Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in ABC Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited. ABC Limited has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the Key management personnel in PQR Limited.
(a) Determine the entity to whom exemption from disclosure of related party transactions is to be given. Also examine the transactions and with whom such exemption applies.
(b) What are the disclosure requirements for the entity which has availed the exemption?
(a) As per Ind AS 24, ‘Related Party Disclosures’, if an entity had related party transactions during the periods covered by the financial statements, it shall disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements.
However, as per standard a reporting entity is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with:
(i) a government that has control or joint control of, or significant influence over, the reporting entity; and
(ii) another entity that is a related party because the same government has control or joint control of, or significant influence over, both the reporting entity and the other entity
According to the above paras, for Entity P’s financial statements, the exemption applies to:
(i) transactions with Government Uttar Pradesh State Government; and
(ii) transactions with Entities PQR and ABC and Entities Q, A and B.
Similar exemptions are available to Entities PQR, ABC, Q, A and B, with the transactions with UP State Government and other entities controlled directly or indirectly by UP State Government. However, that exemption does not apply to transactions with Mr. KM. Hence, the transactions with Mr. KM needs to be disclosed under related party transactions.
(b) It shall disclose the following about the transactions and related outstanding balances referred to :
(a) the name of the government and the nature of its relationship with the reporting entity (ie control, joint control or significant influence);
(b) the following information in sufficient detail to enable users of the entity’s financial statements to understand the effect of related party transactions on its financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent.