Discussion Question:

Mr. Businessman is the Chairman of “Empire Business Group (EBG)” – a large industrial and financial conglomerate of an Asian Country. This group was founded in early 40’s.

According to a recent report issued by the group, EBG comprised of 25 companies with assets worth Rs 15,860 millions by the end of year 2010 with the plan of establishing 5 new units in the coming 3 years. The group with a well diversified investment structure is enjoying a significant existence in Cement, Sugar, Textile, Insurance, Power, Aviation, and Financial sectors in the country.

Mr. Businessman's rise started in late 80’s, when he purchased Hypothetical Financial Bank Limited (HFBL) - ranked among the country’s 5 strongest banks. HFBL is now one of the most professionally lead Business entity in the country with net assets base of over Rs.150 billion, and enjoying deposits base over Rs. 325 billion. This has ranked EBG among the top five business families in the country. Mr. Businessman has significantly come a long way… and no doubt, EBG is still growing.

Among other factors responsible for such prestige, is the group’s truly high class modern, innovative and flexible Information and Financial Reporting System (IFRS) which ensures input of strictly & truly verified data and output of error-free information. This is the reason that every financial information disseminated by the group is respected in the outer world.

These days, the group’s one export oriented textile unit named High Textile Mills Limited (HTML) is planning to install a hi-tech plant of finest quality to increase its current production by 250% with the 0.95 efficiency level. This plan needs an investment of Rs. 1,250 million. The group has planned to raise Rs. 250 million of these amounts through the public issue and the balance from HFBL as a loan for a period of 7 years on quarterly installment basis.

The bank is under the chairmanship of Mr. Businessman who is also working as CEO of the textile company. In this case there is no problem in getting loan for the company. But Chief Financial Officer (CFO) of HFBL has raised his concern that this dual relationship of Mr. Chairman as the chairman can influence the bank’s Board of Directors to issue loan on soft terms. Moreover, being related party, both HFBL and HTML has to issue their annual reports to the shareholders of the concerned entities and this deal is a big concern for these reports as significant information. 

Requirement:

As a student of accounting, you are required to give your opinion on the CFO’s concern while considering the provisions (relevant to this deal) of IAS - 24 on “Related Party Disclosures” applicable to HFBL’s Annual Report 2011? 

Note: Study Material for the relevant problem is also provided here.

IAS – 24 Related Party Disclosures

Note: This document contains selected sections of IAS – 24, ranging from Sec. 13 to Sec. 24 to discuss “Disclosure” only.

All entities

13.  Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been transactions between them.  An entity shall disclose the name of its parent and, if different, the ultimate controlling party.  If neither the entity’s parent nor the ultimate controlling party produces consolidated financial statements available for public use, the name of the next most senior parent that does so shall also be disclosed.

14. To enable users  of financial statements to form  a view about the effects of related party relationships on  an  entity, it  is appropriate to  disclose the  related party relationship when control exists,  irrespective of whether there have  been transactions between the  related parties.

15. The requirement to disclose related party relationships between a parent and its subsidiaries is in addition to the disclosure requirements in IAS 27, IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures.

16.      Paragraph 13 refers to the next most senior parent. This is the first parent in the group above the immediate parent that produces consolidated financial statements available for public use.

17.  An entity shall disclose key management personnel compensation in total and for each of the following categories:

(a)   Short-term employee benefits;

(b)   Post-employment benefits;

(c)   Other long-term benefits;

(d)   Termination benefits; and

(e)   share-based payment.

18.  If an entity has 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.  These disclosure requirements are in addition to those in paragraph 17. At a minimum, disclosures shall include:

(a)   The amount of the transactions;

(b)   The amount of outstanding balances, including commitments, and:

(i)  Their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and

(ii) Details of any guarantees given or received;

(c) Provisions for doubtful debts related to the amount of outstanding balances; and

(d) The expense recognized during the period in respect of bad or doubtful debts due from related parties.

19. The disclosures required by paragraph 18 shall be made separately for each of the following categories:

(a)   The parent;

(b)   Entities with joint control or significant influence over the entity;

(c)   Subsidiaries;

(d)   Associates;

(e)   Joint ventures in which the entity is a venture;

(f)    Key management personnel of the entity or its parent; and

(g)   Other related parties.

20. The classification of amounts payable to, and  receivable from, related parties in the  different categories as  required in  paragraph 19  is  an  extension of  the disclosure requirement in IAS 1 Presentation of Financial  Statements for information to  be  presented either in  the  statement of  financial position or  in  the  notes. The categories are extended to provide a more comprehensive analysis of related party balances and apply to related party transactions.

21. The following are examples of transactions that are disclosed if they are with a related party:

(a)   Purchases or sales of goods (finished or unfinished);

(b)   Purchases or sales of property and other assets;

(c)   Rendering or receiving of services;

(d)   Leases;

(e)   Transfers of research and development;

(f)   Transfers under license agreements;

(g) Transfers under finance arrangements (including loans and equity contributions in cash or in kind);

(h)   Provision of guarantees or collateral;

(i)    commitments to do  something if  a  particular  event occurs or  does  not occur    in   the  future,  including  executory  contracts*    (recognised and unrecognized); and

(j)    Settlement of liabilities on behalf of the entity or by the entity on behalf of that related party.

22. Participation by a parent or subsidiary in a defined benefit plan that shares risks between group entities is a transaction between related parties (see paragraph 34B of IAS 19).

23. Disclosures that related party transactions were made on terms equivalent to those that prevail in arm’s length transactions are made only if such terms can be substantiated.

24. Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the entity.