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Understanding ASPE Section 3840, Related Party Transactions

2 | Understanding ASPE Section 3840, Related Party Transactions

Four questions for private business owners: Related Party TransactionsA better working world begins with asking better questions. Better questions lead to better answers. To help preparers of financial statements with Canadian accounting standards for private enterprises (ASPE) Section 3840, Related Party Transactions, we’ve summarized the key aspects of the Section and offer relevant practical considerations for private mid-market companies through four commonly asked questions.

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n1 What constitutes a related party?

Typical examples of related parties of an entity encountered in practice include its shareholders, its ultimate shareholders, its directors, its management, its parent company, its subsidiaries (when non-consolidated financial statements are presented), entities in which it has significant influence, a joint venture in which it has an interest, entities under common control and entities controlled by immediate family members of its shareholders or its ultimate shareholders.

Paragraph 3840.04 describes the most commonly encountered related parties of a reporting entity, including:

(a) An enterprise that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the reporting enterprise

(b) An individual who directly, or indirectly through one or more intermediaries, controls the reporting enterprise

(c) The other party, when an investment is accounted for by the equity method and the reporting enterprise is either the investor or the investee

(d) Management: any person(s) having authority and responsibility for planning, directing and controlling the activities of the reporting enterprise

(e) An individual having an ownership interest in the reporting enterprise that results in significant influence or joint control

(f) Members of the immediate family of individuals described in (b), (d) and (e). (Immediate family comprises an individual’s spouse and those dependent on either the individual or the individual’s spouse.)

(g) The other party, when a management contract or other management authority exists and the reporting enterprise is either the managing or managed party

(h) Any party that is subject to significant influence, whether by reason of an ownership interest, management contract or other management authority, by another party that also has significant influence over the reporting enterprise

(i) Any party that is subject to joint control by the reporting enterprise

Understanding ASPE Section 3840, Related Party Transactions | 3

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n2 How is a common control business combination accounted for?

A common control business combination is measured at the exchange amount or carrying amount depending on the circumstances.

Paragraph 3840.29 states that a monetary related party transaction or a non-monetary related party transaction that has commercial substance and is not in the normal course of operations is measured at the exchange amount if the change in ownership interests in the item transferred or the benefit of a service provided is substantive and the exchange amount is supported by independent evidence. If these criteria are not met, the transaction is measured at the carrying amount.

The accounting for a common-control business combination is described in paragraph 3840.44 and depends on whether the above criteria are met:

� When the criteria in paragraph 3840.29 are met, the business combination is accounted for in accordance with Section 1582, Business Combinations. Refer to the Understanding ASPE document on Section 1582 for guidance on the application of Section 1582.

� When the criteria discussed above in paragraph 3840.29 are not met, the appropriate accounting is as follows:

− The acquiring enterprise records the acquired assets and liabilities at their carrying amount in the balance sheet of the transferred business

− If appropriate, a non-controlling interest is recognized in accordance with Section 1602, Non-Controlling Interests. Any change in the non-controlling interest is recognized as an equity transaction in accordance with Section 1602

− No previously unrecognized intangible assets or goodwill are recognized

− The financial statements of the combined enterprise reflect the earnings, assets and liabilities of the acquired enterprise for the entire period in which the transfer occurred and for all prior periods rather than only from the date of acquisition


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n3 How is a related party transaction measured?

Below is an illustrative decision tree from Section 3840 that can be used to determine the measurement basis of a related party transaction.

(a) Carrying amount – The amount of an item transferred, or cost of services provided, as recorded in the accounts of the transferor, after adjustment, if any, for amortization or impairment in value. (Paragraph 3840.03(a))

(b) Exchange amount – The amount of consideration paid or received as established and agreed to by related parties. (Paragraph 3840.03(b))(c) Normal course of operations – A related party transaction is in the normal course of operations when it is of a type that is usually, frequently or

regularly undertaken by an enterprise for the purpose of generating revenue(d) Commercial substance – Relates only to non-monetary transactions a non-monetary related party transaction has commercial substance when the

entity’s cash flows are expected to change significantly as a result of the transaction

Yes Yes

Yes

No

YesNo

Yes

Yes

No

No No

Measure at the carrying amount (a) Measure at the exchange amount (b)

Related party transaction occurs (Paragraph 3840.03 (h))

Is the transaction in the normal course of operations? (c)

(Paragraphs 3840.24–3840.28)

Is the change in the ownership interests in the item transferred

substantive? (Paragraphs 3840.32– 3840.38)

Is the amount of the exchange supported by independent

evidence? (Paragraphs 3840.40–3840.42)

Is the transaction a non-monetary exchange or transfer of a non-monetary asset? (Paragraph

3840.18)

Is the transaction an exchange of product or property held for sale in the normal course of operations?

(c) (Paragraph 3840.22)

Does the transaction have commercial substance? (d)

(Paragraphs 3840.1 –3840.20)


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n4 What are the disclosure requirements for related party transactions and balances?

As noted in paragraph 3840.51, an enterprise shall disclose the following information about its transactions with related parties:(a) A description of the relationship between the

transacting parties(b) A description of the transaction(s), including those

for which no amount has been recognized(c) The recognized amount of the transactions classified

by financial statement category(d) The measurement basis used(e) Amounts due to or from related parties and the

terms and conditions relating thereto(f) Contractual obligations with related parties, separate

from other contractual obligations(g) Contingencies involving related parties, separate

from other contingencies

Paragraphs 3840.52–3840.60 provide additional clarification on the disclosure requirements above.

To learn more about these items or for application guidance, please contact our Private Mid-Market practice at [email protected].

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1567865 ED NoneThis publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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