Chapter 24 – Earnings Per Share Page 349
6. Cyan is a company listed on a recognised stock exchange. Its financial
statements for the year ended 31 December 20X7 showed earnings per share of CU0.850.
On 1 July 20X8 Cyan made a 3 for 1 bonus issue. According to IAS33 Earnings per share, what figure for the 20X7 earnings per
share will be shown as comparative information in the financial statements for the year ended 31 December 20X8?
A CU0.212
B CU2.550
C CU3.400
D CU0.283
7. The Suhail Company is listed on a recognised stock exchange.
At 31 December 20X7, the company had CU50,000 ordinary shares of CU0.25 in issue. Profit before tax for the year was CU50,000 and the tax
charge was CU12,500.
According to IAS33, what is Suhails basic earnings per share for the year?
A CU0.250
B CU0.375
C CU0.500
D CU0.188
8. The Viera Company is listed on a recognised stock exchange.
During the year ended 31 December 20X7, the company had 5 million ordinary shares of CU1 and 500,000 6 irredeemable preference shares of
CU1 in issue.
Profit before tax for the year was CU800,000 and the tax charge was CU200,000.
According to IAS33, what is Vieras basic earnings per share for the year?
A CU0.114
B CU0.109
C CU0.160
D CU0.120
Chapter 24 – Earnings Per Share Page 350
9. The Polyphony Company had 100,000 equity shares in issue on 1 January
20X7. On 1 July 20X7 it issued 20,000 new shares by way of a 1 for 5 bonus. On 1 October 20X7 it issued 28,000 new shares for cash at full market price.
When calculating basic earnings per share, how many shares should be divided into the profit after tax, according to IAS33 Earnings per share?
A 100,000
B 117,000
C 148,000
D 127,000
Chapter 25 – Related Party Disclosures Page 351
Chapter 25 RELATED PARTY DISCLOSURES
1 Business Context
It is generally assumed that directors attempt to promote the interests of the shareholders in their dealings with other entities.
Given the variety of stakeholders who have interests in an entity, there is a risk that some relationships will lead to conflicting interests. Examples might include transactions between
entities under common control, for example a parent and a subsidiary, or transactions between an entity and its directors. In these circumstances the normal rules of commercial
arrangements may not apply, and thus the reported performance of the entity may be distorted.
A conflict of interest may arise where a director seeks to promote his or her self-interest rather than that of the shareholders. In these circumstances, the two parties to the transaction are
said to be related to each other, and transactions that take place between them to be related party transactions.
Some related party transactions are difficult to identify, for example where no price is charged for the transaction, such as the provision of management services for no charge by a parent
to a subsidiary. Another example is where a newly acquired subsidiary terminates long- standing trading arrangements on the instructions of its new parent. It is difficult to identify this
‘non-trading’ as a related party transaction.
Corporate governance structures seek to control such relationships. As part of this process, IAS 24 Related party disclosures aids transparency by requiring disclosure in the financial
statements of any such relationships and the transactions stemming from them.
2 Chapter Objectives
This chapter explains the disclosure requirements of IAS 24 in relation to related party transactions. IAS 24 contains no recognition or measurement requirements; it merely requires
disclosure of the nature of related party relationships and of any transactions between such parties.
On completion of this chapter you should be able to:
understand the scope and objectives of IAS 24 on related party disclosures;
interpret the important terminology and definitions which relate to the identification of related party relationships and transactions;
understand and demonstrate a knowledge of the key principles concerning related
party disclosures in the financial statements; and
apply knowledge and understanding of IAS 24 in particular circumstances, through the application of its principles to given scenarios.
Chapter 25 – Related Party Disclosures Page 352
3 Objectives, Scope and Definition of IAS 24
3.1 Objectives
The principal objective of IAS 24 is to ensure that an entitys financial statements contain the disclosures necessary to draw attention to the possibility that its financial position, and profit
or loss, may have been affected by the existence of related parties and by related party transactions.
IAS 24 not only requires transactions with key management personnel, for example the directors, to be disclosed, but also ensures that important information about the rewards and
incentives available to them are clearly set out in the financial statements.
Knowledge of related party transactions, any outstanding balances with a related party and the nature of related party relationships may affect the assessment of an entitys operations
by users of the financial statements. Such assessments are likely to include the risks and opportunities facing an entity.
Related party relationships are, however, a normal feature of commerce and business, so IAS 24 does not attempt to prevent such relationships or impute revised values to related party
transactions.
The key emphasis of IAS 24 is that appropriate disclosure is made.
3.2 Scope
IAS 24 should be applied in identifying whether a related party relationship exists and whether related party transactions have taken place in the period. Its application is also required in
identifying whether there are any outstanding balances between the entity and a related party. The standard also sets out the circumstances in which disclosures are appropriate and what
those disclosures should be. [IAS 24.2]
IAS 24 requires the disclosure of related party transactions and outstanding balances with related parties in the separate financial statements of a parent entity. Such disclosures should
also be made in the financial statements of an investor in a joint venture and a venturer where appropriate. [IAS 24.3]
Related party transactions and outstanding balances arising from transactions with other entities in a group are disclosed in an individual entitys financial statements, although such
intra-group transactions are eliminated on consolidation in the financial statements of the group.
3.3 Related parties
A party may be related to an entity in a number of ways. Some related party relationships are easier to identify than others. For example a joint venture undertaking of an entity is related to
that entity, as are the key management personnel of an entity or its parent.
The term ‘key management personnel’ includes the directors but goes much wider to include any person who has authority or responsibility for running the business. Because such
personnel are key to the successful operation of the entity, the definition of a related party extends to the close members of their family and any entity that is controlled, jointly controlled
or significantly influenced by either the key management personnel or a close member of their family. [IAS 24.9]
Control is the ability to obtain benefits by governing the financial and operating policies of an entity. Joint control is the sharing of control through a contractual arrangement and significant
influence is the ability to participate in, rather than control, the financial and operating policy decisions. [IAS 24.9]
Chapter 25 – Related Party Disclosures Page 353
Close members of family of an individual are family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. Examples of
close family members include the individuals domestic partner and any dependants of the individual or of his or her partner. [IAS 24.9]
Other relationships that are specifically identified as being a related party include a post- employment benefit plan for the benefit of the entity’s employees. [IAS 24.9]
4 Substance over Form
In identifying a related party relationship, attention should be directed to the substance of the relationship rather than focusing on its legal form. For example, two entities that have a
common director are not necessarily related parties, nor are two venturers purely because they share joint control over a joint venture. Significant volumes of business with a customer
or supplier do not necessarily create a related party relationship with them.
Illustration 1
Mint is an entity that complies with the minimum requirements of IAS 24. The following relationships have been identified:
1 Toffee is a separate entity in which one of Mint’s junior managers owns 10 of the share capital.
This is not a related party. A junior manager is unlikely to be a member of ‘key management personnel’ in Mint and with only a 10 holding in Toffee is unlikely to
have significant influence over it.
2 The daughter of a director of Mint. The daughter is a related party. The director is a related party as a member of ‘key
management personnel’ and his or her daughter falls within the definition of close family members.
3 A director of Mint owns 60 of the share capital of another entity called Chocolate. Chocolate is a related party as it is under the control of a member of ‘key management
personnel’. 4 Miss Butterscotch owns 25 of the share capital of Mint.
Miss Butterscotch is probably a related party since a 25 shareholding is likely to provide her with the ability to exert significant influence. This will depend, however, on
who owns the remaining 75 holding.
5 A director of Mint is also a director of Sugar which is independent of Mint but is not a shareholder in either entity.
If the director is one amongst many on the board of Sugar and there are no others who are directors of Mint and Sugar, then it is unlikely that there is common control or
influence. The act of merely being a director on both boards does not mean that the second entity is automatically a related party of the first entity. There is probably no
related party relationship.
6 Cream is an entity owned by the niece of the finance director of Mint. The niece is not a sufficiently close relative of Mint’s finance director for Cream to
constitute a related party.
