May 2021 Q3 b.
GHBank Ltd is a government-controlled bank. GHBank Ltd was taken over by the government of Ghana during the recent financial sector clean up by the Bank of Ghana. GHBank Ltd does not directly trade with other government-controlled banks but has underwritten the development of the nationally owned postal service and the newly created railway ministry. The directors of GHBank Ltd are concerned about the volume and cost of disclosing its related party interests because they extend theoretically to all other government-controlled enterprises and banks. The directors require general advice on the nature and importance of the disclosure of related party relationships and specific advice on the disclosure of the above relationships in the financial statements.
Required:
Advise the directors of the company on how to deal with the above transaction in the financial statements in accordance with IAS 24: Related Party Disclosures. (5 marks)
View Solution
Under IAS 24: Related Party Disclosures, disclosures are required in respect of an entity’s transactions with related parties. Related parties include parents, subsidiaries, members of key management personnel of the entity or of a parent of the entity and post-employment benefit plans. Where there have been related party transactions during the period, management discloses the nature of the relationship, as well as information about the transactions and outstanding balances, including commitments, necessary for users to understand the potential impact of the relationship on the financial statements. Disclosure is made by category of related party and by major type of transaction. Management only discloses that related party transactions were made on terms equivalent to those which prevail in arm’s length transactions if such terms can be substantiated.
Government-related entities are defined as entities which are controlled, jointly controlled or significantly influenced by the government. The financial crisis in the financial services sector in Ghana widened the range of entities subject to the related party disclosure requirements. This is not only peculiar in Ghana but many countries. The financial support provided by government to financial institutions in many countries meant that the government controls significantly influenced some of those entities.
A government-controlled bank would, in principle, be required to disclose details of its transactions, deposits and commitments with all other government-controlled banks and with the Bank of Ghana or central bank. However, IAS 24 has an exemption from all of the disclosure requirements of IAS 24 for transactions between government-related entities and the government, and all other government-related entities.
GHBank Limited is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, in relation to the following:
(a) a government which has control, joint control or significant influence over the reporting entity; and
(b) another entity which is a related party because the same government has control, joint control or significant influence over both the reporting entity and the other entity.
Those disclosures are replaced with a requirement to disclose:
- The name of the government and the nature of their relationship; and
- The nature and amount of any individually significant transactions; and
- The extent of any collectively significant transactions qualitatively or quantitatively. (1 mark per valid point up to a maximum of 5 marks)