Property sold to related party

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Teddynana13
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Joined: 28 Jul 2021, 19:49

Property sold to related party

Post by Teddynana13 »

Hi all!
I have this question re the below transaction.

Property that has been classified as inventory (stated at cost) has been sold to the director's son. However no cash transaction took place yet.
I understand that according to IAS24 the nature and amount of the transaction should be disclosed.
However what should the double entries be?
What about profit/loss from the sale?
Also, if there is no valuation in place, how can i determine that this transaction is at arm's length?

Thank you in advance,
Christiana
JRSB
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Re: Property sold to related party

Post by JRSB »

Presumably it wasn't 'obviously' below arm's length terms ( eg $1) - in which case what assessment was made in accepting the offered price? If it is considered to be an arm's length transaction then the journals will be the same as a normal sale. Why hasn't it been paid for? If you wouldn't normally sell a property on credit then it doesn't look like arm's length terms.
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Marek Muc
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Re: Property sold to related party

Post by Marek Muc »

if the economic substance is that it was more like a capital distribution to owners in their capacity as owners, then it would be appropriate to debit the equity (i.e. DR equity / CR assets distributed)
Teddynana13
Posts: 2
Joined: 28 Jul 2021, 19:49

Re: Property sold to related party

Post by Teddynana13 »

There is a sale agreement in place, but no cash has been received to date. Yes i agree that it does not seem at arms length. I need to look into it more.

It seems to be more like distribution to owners. In this case what amount should go in equity? Cost? Fair Value?

Thank you.
JRSB
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Re: Property sold to related party

Post by JRSB »

You said the property had been sold so the potential distribution is only the difference between sale price and market price, plus interest that would have been paid for a third party not paying for 6 month or whatever , so only the value of the benefit as distinct from an arm's length arrangement.
In the UK you'd need to think about whether there are distributable reserves too.
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