CIMA F2 Syllabus C. Group accounts - Related parties and groups - Notes ^{1 / 2}

Where a company is part of a group, the financial statements (of a subsidiary) may be influenced by related party transactions

Potential problems

1. Lots of post acquisition trading between P and S

2. This trading not necessarily at arms length

   (not commercial rates)

3. This will distort S's profits (either in a good or bad way)

4. S may gain other advantages 

   eg. Technology/research, cheap finance, etc.

Therefore P can ‘flattered’ S’s accounts (especially if it's going to sell S)

The potential buyer would not necessarily be able to determine that this had happened from either the consolidated or S's own financial statements

In Own Accounts

P and S are related

• Transactions, balances etc all stay in the accounts

• They are, though, disclosed as being related party transactions

• Even if at arms length

In Group accounts

• All intragroup transactions and balances are eliminated