Related Party Transactions, written by Jack W. Paul, Ph.D., CPA, Professor of Accounting at Lehigh University, discusses the pervasiveness of related party transactions throughout a wide spectrum of business dealings.  

This Portfolio analyzes the nature of related party transactions and discusses how these transactions are treated under generally accepted accounting principles. It also reviews the applicable corporate governance features pertaining to related party transactions. 

Related Party Transactions surveys the history and concepts pertaining to related party transactions and the rather considerable pertinent accounting literature, including Financial Accounting Standards Board pronouncements, Securities and Exchange Commission rules and regulations, stock exchange listing requirements and AICPA and PCAOB auditing pronouncements. 

This Portfolio discusses in detail the accounting and disclosure requirements pertaining to a number of topics dealing with asset transfers among related parties, including sales, purchases, nonmonetary transactions, lease arrangements, and transfers of financial instruments. Although generally accepted accounting principles contain guidance concerning the disclosure of related party transactions, the accounting standards are mainly silent when it comes to accounting for these transactions.  

This Portfolio analyzes when related party transactions should be accounted for differently from transactions between unrelated parties. It also offers suggestions regarding possible approaches to the accounting for related party transactions under differing circumstances.

Related Party Transactions allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Introduction, Background, and Scope of Portfolio

A. Perspective

1. Treatment of Related Party Transactions-General

2. Why Related Party Disclosures?

3. The Many Varieties of Related Party Transactions

4. Authoritative Literature

5. Summary of Related Party Transactions and Key Terms

B. Background and History

C. Concepts Related to Financial Statement Disclosure

1. Relevance

2. Reliability

3. Comparability and Consistency

4. Materiality

D. Fraud Concerns

1. Frequency of Fraudulent Related Party Transactions

2. Related Party Transactions as a Fraud Risk Indicator

3. The Role Related Party Transactions Play in Fraud Cases

4. Conclusions

E. Scope of Portfolio

II. Authoritative Literature and Guidance

Introductory Material

A. Accounting and Disclosures: U.S. GAAP-FAS 57

1. Accounting Recognition

2. Disclosures Required by FAS 57

3. Transactions Reported in Separate Statements of Affiliates

4. Management Representations of Equivalency

5. Disclosure of Control Relationships

B. SEC Regulations for Public Companies

1. Financial Statement Disclosures: Regulation S-X Requirements

2. Non-Financial Statement Disclosures: Regulation S-K Requirements

a. Transactions With Related Persons: Item 404(a)

(1) Covered Transactions

(2) Categories of Related Persons

(a) Directors and Executive Officers

(b) Significant Shareholders (Certain Beneficial Owners)

(3) Item 404(a) Disclosures

(4) Additional Disclosures for Transactions Involving Indebtedness

(5) Exclusions

(a) Exclusions Pertaining to Indebtedness

(b) Employment Arrangements

(c) Directors' Compensation

(d) Certain Indirect Material Interests

(e) Other Exclusions

b. Disclosure of the Process for Review, Approval or Ratification of Transactions With Related Persons: Item 404(b)

c. Transactions With Promoters and Certain Control Persons: Item 404(c)

(1) Promoters

(2) Certain Control Persons

C. Stock Exchanges

1. New York Stock Exchange

a. Rules Pertaining to Related Party Transactions

b. Shareholder Approval Policy: Issuance of Stock

(1) Issuances to Related Parties

(2) Issuances to Related Entities

(3) Exception to Shareholder Approval

2. NASDAQ

a. Audit Committee Approval of Related Party Transactions

b. Shareholder Approval Policy

(1) Related Persons Defined

(2) Issuances Resulting in Change of Control

(3) Share Transactions Consummated by Related Parties

(4) Related Persons Having an Interest in a Target Company

(5) Exceptions to the Shareholder Approval Policy

III. Sales, Purchases, Transfers, and Leases Between Related Parties

Introductory Material

A. GAAP Accounting and Disclosures

1. Accounting Treatment-Related Parties Not Under Common Control

2. Accounting Treatment-Related Parties Under Common Control

a. Definition of Under Common Control

b. Accounting Treatment

3. Sales

a. Sales Between Related Parties Not Under Common Control

b. Sales Between Related Parties Under Common Control

(1) Recurring Sales of Short-Term Assets Objective Valuation

(2) Sales Using Carry-Over Amounts

(3) Receivables From Related Parties

c. Summary Accounting for Sales

4. Purchases-Long-Term Obligations

a. Accounting

(1) Parties Are Unrelated

(2) Related Parties

b. Disclosures

(1) Parties Not Related

(2) Disclosures-Related Parties

c. Purchase Obligations That Are Leases

5. Nonmonetary Transactions

a. Nonmonetary Transactions Excluded From the General Rule

b. Types of Nonmonetary Transactions

(1) Exchanges of Nonmonetary Assets or Services

(2) Nonreciprocal Transfers to Owners

(3) Nonreciprocal Transfers to Other Than Owners

c. Measurement Issues

(1) Determining Fair Value

(2) Exchanges Lacking Commercial Substance

d. Accounting for Nonmonetary Transactions

(1) Exchanges

(a) Commercial Substance Assumed

(b) Exchanges Lacking Commercial Substance

(c) Exchanges Between Related Parties Under Common Control

(d) Summary-Accounting for Nonmonetary Exchanges

(i) Exchanges Having Commercial Substance

(ii) Exchanges Lacking Commercial Substance

(2) Nonreciprocal Transfers to Owners

(a) Distributions of Nonmonetary Assets: Dividends-In-Kind

(b) Distributions to Redeem or Reacquire Outstanding Stock

(i) Shareholders Not Related Parties Under Common Control

(ii) Related Parties Under Common Control

(c) Liquidations, Reorganizations, and Settlements Related to Prior Combinations

(3) Nonreciprocal Transfers to Other Than Owners

e. Involuntary Conversions

f. Disclosures-Nonmonetary Transactions

6. Transfers of Financial Instruments

a. Sales

(1) Related Parties Not Under Common Control

(2) Related Parties Under Common Control

b. Transfers Accounted for as Secured Borrowings

7. Leases

a. Types of Leases

(1) Classification by Lessees

(2) Classification by Lessors

(a) Direct Financing Leases

(b) Leveraged Leases

(c) Sales-Type Leases

(d) Operating Leases

b. Accounting for Leases

(1) Lessees

(a) Capital Leases

(b) Operating Leases

(2) Accounting by Lessors

(a) Direct Financing Leases

(b) Sales-Type Leases

(c) Operating Leases

c. Related Parties

(1) Form Does Not Reflect Economic Substance

(2) Related Parties Under Common Control: Affiliated Enterprises

d. Disclosures

B. SEC Regulations for Public Companies

1. Sales

2. Purchases-Long-Term Obligations

3. Transfers-Nonmonetary Transactions

4. Sales and Purchases of Registered Securities

a. Reporting Transactions

b. Blackout Trading Restrictions

5. Leases

C. New York Stock Exchange

1. Sales and Purchases of Securities by Officers and Directors

2. Specific NYSE Guidance

a. Periodic Investment Programs

b. Securities of Other Companies

c. Stock Options

IV. Corporate Governance and the Control Environment

Introductory Material

A. The Corporate Governance Rules of Sarbanes-Oxley

1. Section 301: Public Company Audit Committees

2. Section 302: Corporate Responsibility for Financial Reports

3. Section 402: Enhanced Conflict of Interest Provisions

4. Section 406: Code of Ethics for Senior Financial Officers

5. Section 407: Disclosure of Audit Committee Financial Expert

B. SEC Regulations Covering Corporate Governance

1. SEC Regulation S-X-Recording Compensation Expenses

2. SEC Regulation S-K-Corporate Governance Requirements

a. Item 401: Directors, Executive Officers, Promoters, and Control Persons

b. Item 402: Executive Compensation

c. Item 403: Security Ownership

d. Item 405: Compliance With Section 16(a) of the Exchange Act

e. Item 406: Code of Ethics

f. Item 407: Corporate Governance

(1) Item 407(a): Director Independence

(2) Item 407(b): Board Meetings and Committees

(3) Item 407(c): Nominating Committee Policies

(4) Item 407(d): Audit Committee

i. Independence Standards Relating to Audit Committees

ii. Audit Committee Responsibilities

(a) Responsibilities Relating to Registered Public Accounting Firms

(b) Procedures for Responding to Complaints

(c) Authority to Engage Advisers

(d) Funding

iii. Audit Committee Disclosures Required Under Item 407(d)

iv. Additional Disclosures: Audit Committee Financial Expert

(5) Item 407(e): Compensation Committee

(6) Item 407(f): Shareholder Communications

C. New York Stock Exchange Corporate Governance Standards

1. Independent Directors

2. Executive Sessions

3. Communication With Non-Management Directors

4. Nominating/Corporate Governance Committee

5. Compensation Committee

a. CEO Compensation

b. Other Compensation Committee Functions

c. Items to Be Included in the Compensation Committee Charter

6. Audit Committee

a. Committee Composition

b. Committee Member Independence

c. Committee Charter

d. Internal Audit Function

e. Duties and Responsibilities of the Audit Committee

(1) Responsibilities Relating to External Auditors

(2) Additional Responsibilities

(3) Evaluation of Independent Auditors

(4) Release of Financial Information

(5) Risk Assessment and Control

(6) Discussions With Independent Auditor

(7) Reporting to the Board

7. Corporate Governance Guidelines

8. Code of Business Conduct and Ethics

9. Foreign Private Issuer Disclosure

10. Certification Requirements

11. Public Reprimand Letter

12. Web Site Requirement

13. Exceptions to NYSE Corporate Governance Standards

a. Controlled Companies

b. Limited Partnerships and Companies in Bankruptcy

c. Closed-End and Open-End Funds

(1) Closed-End Funds

(2) Open-End Funds

(3) Business Development Companies

d. Other Entities

e. Foreign Private Issuers

f. Preferred and Debt Listings

D. NASDAQ Corporate Governance Standards

1. Independent Directors

a. Executive Sessions

b. Executive Officer Compensation

c. Compensation Committee

d. Nomination of Directors

2. Audit Committee

a. Committee Composition

b. Committee Charter

c. Specific Responsibilities of Audit Committees

d. Exemption From NASDAQ Audit Committee Standards

3. Notification of Material Noncompliance

4. Code of Conduct

5. Exemptions From the NASDAQ Qualitative Listing Standards

a. Foreign Private Issuers

b. Management Investment Companies

c. Asset-Backed Issuers and Other Passive Issuers

d. Cooperatives

e. Controlled Companies

E. Corporate Governance Summary and Illustrative Cases

V. Financial Statement Audit Issues

A. AICPA Audit Rules

1. Accounting Considerations

2. Audit Procedures

a. Gaining an Awareness of Related Party Transactions

b. Becoming Familiar With the Enterprise

c. Indicators of Related Party Transactions

d. Determining the Existence of Related Parties

e. Identifying Transactions With Related Parties

f. Examining Related Party Transactions

g. Performing More Extensive Procedures

h. Adequacy of Financial Statement Disclosures

i. Representations That Infer Comparability With Arm's-Length Transactions

B. PCAOB Audit Rules

1. Approach to the Audit

2. Related Party Aspects of an Internal Control Audit

a. Fraud Considerations

b. Identifying Significant Accounts

c. Evaluating Control Deficiencies

d. Effect of Substantive Procedures

e. Impact of Related Party Transactions on an Audit of Internal Control

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Principal Acronyms and Abbreviations Used in Portfolio

Worksheet 2 FAS 57 Definitions

Worksheet 3 Disclosures Required by FAS 57

Worksheet 4 Disclosures Required by FAS 57 in Consolidated Statements

Worksheet 5 Regulation S-K, Section 404(a) Disclosures Transactions With Related Persons

Worksheet 6 Regulation S-K, Section 404(a) Lease Disclosures Transactions With Related Persons Excerpts From Frozen Food Express Industries, Inc. Proxy Statement on Schedule 14A (Aug. 29, 2006)

Worksheet 7 Regulation S-K, Section 404(a) Indebtedness Disclosures Excerpts From Amgen, Inc. Proxy Statement on Schedule 14A (Mar. 22, 2006)

Worksheet 8 Regulation S-K, Section 404(b) Disclosure of Process For Reviewing Transactions With Related Parties

Worksheet 9 Regulation S-K, Section 404(c) Disclosure of Transactions With Promoters Excerpts From 21st Century Telesis, Inc. Form 10 (Aug. 19, 1998)

Worksheet 10 EITF Issue No. 02-5: Definition of "Common Control" in Relation to FASB Statement No. 141

Worksheet 11 EITF 85-21: Changes of Ownership Resulting in a New Basis of Accounting

Worksheet 12 Nonmonetary Transactions: Definitions

Worksheet 13 Nonmonetary Exchanges Unrelated Parties and Related Parties Not Under Common Control Exchange Having Commercial Substance - Gain

Worksheet 14 Nonmonetary Exchanges Unrelated Parties and Related Parties Not Under Common Control Exchange Having Commercial Substance - Loss

Worksheet 15 Nonmonetary Exchanges Unrelated Parties and Related Parties Not Under Common Control Exchange Without Commercial Substance - Gain

Worksheet 16 Nonmonetary Exchanges Unrelated Parties and Related Parties Not Under Common Control Exchange Without Commercial Substance - Loss

Worksheet 17 Nonmonetary Exchanges Exchange Between Related Parties Under Common Control

Worksheet 18 Disclosure of Nonmonetary Exchange Among Related Parties Excerpts From The Coca-Cola Company, Form 10-K, Item 9 (Dec. 31, 2004)

Worksheet 19 Transfers of Financial Instruments: Definitions

Worksheet 20 Leases: Definitions

Worksheet 21 Regulation S-K, Item 406 Code of Ethics Excerpts From North American Scientific, Inc.'s Proxy Statement on Schedule 14A (Apr. 25, 2007)

Worksheet 22 New York Stock Exchange Listed Company Manual Section 303A.02(a) Disclosures Pertaining to Director Independence

Worksheet 23 New York Stock Exchange Listed Company Manual Corporate Governance Guidelines (June 1, 2006)⁵⁷⁸

Worksheet 24 New York Stock Exchange Listed Company Manual Code of Ethics Guidelines⁵⁷⁹

Worksheet 25 Sample Disclosure of Corporate Governance Differences NYSE Listed Company Manual Section 303A.11 Excerpts From Elan Corporation's Web site: www.elan.com

Worksheet 26 NASDAQ Definition of an Independent Director Excerpts From NASDAQ Manual Section 4200 Definitions: Independent Director

Worksheet 27 Summary of Corporate Governance Features

Worksheet 28 SEC Enforcement Actions

Bibliography

OFFICIAL

Public Laws:

Securities and Exchange Commission (SEC):

Accounting and Auditing Enforcement Releases

Acts

News Digest

Regulations

Reports

Securities Act Industry Guides

Staff Accounting Bulletins

Federal Reserve System

Court Cases:

UNOFFICIAL

American Institute of Certified Public Accountants (AICPA):

AICPA Accounting Interpretations

AICPA Accounting Principles Board Opinions

AICPA Accounting Research Bulletins

AICPA Statements on Auditing Standards

AICPA Technical Practice Aids

Financial Accounting Standards Board (FASB):

FASB Concepts Statements

FASB Emerging Issues Task Force

FASB Statements of Standards

FASB Technical Bulletins

International Accounting Standards Committee:

Statements of International Accounting Standards

Public Company Accounting Oversight Board:

Stock Exchange Regulations:

Books, Handbooks, and Treatises:

Articles:

BNA Portfolios: