Question

In reference to intercompany and the way they are reported in the financial statements of each company in which they participate. What would be the result if a company records the transactions of the results of an operation between companies, but the company with which it performed them does not do so? What ethical factors would be affected if this practice has been done repeatedly? according to FASB

Answer 1

As per Standards issued by FASB relating to RELATED PARTY TRANSACTIONS AND DISCLOSURES ie., (ASC-850), A company is required to disclose the type, nature and amount of transaction involved along with name of the entity (party) and nature of relationship involved.

This practise of disclosing the related party transactions is mandated as to assess the real intention behind the performance of transaction as it involves factors like price ( whether arms length transaction and the amount of discount involved), necessity of transaction ( is it really in need or to avoid any complications) etc.,

One of the major disclosure requirement includes "with which party the transaction has been performed" as it also involves the factors like nature of relationship , frequency of transaction between the two, reasonability of price for performing the transactions with that entity etc.,

If such entity name has not been disclosed, it would affect the INTEGRITY (quality of being honest and having strong priciples as decided to be followed) and TRANSPARENCY regarding the business operations involved and it also arises a question among the stake holders regarding the entity whose name hasn't diclosed about the monetary relationship involved.