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• W331455431 abstract "EXECUTIVE SUMMARY * The complexity and risks associated with recognition and disclosure of related-party transactions are significant. Guidance for accounting for these transactions is difficult to find, and these transactions have been associated with some accounting failures in recent years. * Particularly challenging scenarios for preparers occur when an entity converts related-party debt into equity, when related-party debt is forgiven, and when other related-party liabilities are forgiven. * Best practices for accounting for related-party transactions include knowing who the related parties are; providing clear documentation; making clear, adequate disclosures; and proceeding with caution. ********** Related-party transactions have been routinely identified as playing a role in accounting failures and fraud in recent years. Developments ranging from the passage of the Sarbanes-Oxley Act of 2002 to enforcement actions against registered entities in emerging markets have highlighted the complexity and risks in the recognition and disclosure of related-party transactions. Companies accused of fraud disclosed slightly more related-party transactions than companies that had not been accused of fraud in a study of public SEC fraud allegations from 1998 to 2007 performed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), of which the AICPA is a member. Seventy-nine percent of fraud-accused companies disclosed a related-party transaction in the proxy statement filed during the first fraud period, compared with 71% of no-fraud companies studied during the comparable period. Eighteen percent of the companies alleged to have committed fraud in that study were accused of using related-party transactions to disguise misstatements on their financial statements. Yet the rules on accounting for these transactions have remained stagnant, and very little accounting guidance exists to assist preparers of financial statements with reporting for them. Moreover, related-party transactions involve substance over form issues and might be embedded in documentation that is less clear or thorough than the documentation that ordinarily exists between unrelated parties. In short, preparers can find the guidance difficult to apply to specific transactions. Three types of related-party transactions are especially prone to confusion and error when it comes proper reporting. TYPE 1: OWNER'S DEBT CONVERTED TO EQUITY One interesting scenario is when an entity converts related-party debt into equity Preparers might struggle with the issues involved in these transactions because they are not routine and the accounting guidance is slim. In many cases in which an entity has debt outstanding to an owner, and the owner enters into a transaction to convert that debt to equity, the fair value of the equity exchanged does not equal the outstanding balance of the debt. Preparers then must determine whether to recognize a gain or a loss--or some other type of transaction, such as a capital contribution--for the difference between the fair value of the equity and the carrying value of the debt. For example, if an entity has $50 million in debt outstanding to its owner and exchanges that debt for $80 million in equity (which might happen because of the related-party nature of the relationship), the entity has the following possible alternatives: 1. Recognize no gain or loss (in which case the credit to equity would be for $50 million); or 2. Recognize a loss on the transaction, representing the fact that $80 million of equity was exchanged for only $50 million of debt. In circumstances outside of troubled debt restructuring, the relevant accounting guidance (FASB ASC Section 470-5040, Debt Modifications and Extinguishments) states that extinguishment transactions between related entities may be in essence capital transactions. …" @default.
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• W331455431 title "What's a Little Debt between Friends? How to Apply Accounting Rules for Related-Party Transactions" @default.
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