Definition of a related party:
A related party is a party who can significantly influence or control the entity either by forcing certain transaction upon an entity or restricting an entity from carrying out a particular activity (Epstein & Mirza, 2005).
A party is related to an entity if:
– Directly, or indirectly through one or more intermediaries, the party:
i. Controls, is controlled by, or is under common control with, the entity (this includes parent, subsidiaries and fellow sub-subsidiaries);
– The party is an associate of the entity
– The party is a joint venture in which the entity is a venture
– The party is a member of the key management personnel in entity or its parent;
– The party is a close member of the family etc (ACCA text, 2006).
The following reasons may cause congress to disallow loses realized from transaction between related parties:
1) The transaction has more than one purpose and one of them is not trading
2) The loss was incurred in some other capacity rather than that of trading.
3) Congress wants to manipulate the financial results.
4) The transaction was made with an abnormal terms of trade
5) The transaction appears not to have a logical business reason
6) The substance of the transaction differ from the form of the transaction
7) The transaction was not processed in the usual or routine way
8) The volume and value of the transaction was significantly high
9) Congress did not want to disclose the relationship with the related party
Epstein, B. J. & Mirza, A. A. (2005): Interpretation and Application of International Accounting and Financial Reporting Standards. Wiley: New Jersey, Canada
ACCA text, (2006): Business Taxation. Foulks Lynch: Berkshire, England