The Effect of the International Accounting Standards on the Related Party Transactions Disclosure

Abstract

Problem statement: Several recent North American corporate scandals have brought attention to the potential for accounting manipulations associated with Related Party Transactions (RPTs), which have lead to a decline in perceived earnings quality. We examine the value relevance of disclosed RPTs in Greek corporations. Approach: We focus on two types of RPTs: sales of goods and sales of assets, using a value relevance approach. Results: From 2002-2007, we find that the reported earnings of firms selling goods or assets to related parties exhibit a lower valuation coefficient than those of firms in Greece without such transactions. This result is not observed during 2005-2007 after a new fair value measurement rule for RPTs came into effect. Conclusion: Our evidence suggests that the new RPT regulation in Greece is perceived to be effective at reducing the potential misuse of RPTs for earnings management purposes. Since RPTs have been the subject of numerous scandals in North America, our evidence from the Greek stock markets suggests that new RPT accounting standards could prove an efficient solution to this issue.

Related‐party transactions and corporate performance following the adoption of International Financial Reporting Standards in Taiwan

“…They found that the three measures either increased or decreased at different point of time of IFRS adoption. Antonios et al () suggested that the new regulation of related‐party transactions in Greece could be an effective mechanism to minimize manipulative related‐party transactions. Meanwhile, Ge, Drury, Fortin, Liu, and Tsang () examined the value relevance of disclosed related‐party transactions among Chinese firms.…”

“…For examples, Callao, Jarne, and Laínez (2007) showed that adopting IFRS significantly affected financial reports in Spain; Voulgaris, Stathopoulos, and Walker (2014) indicated that the pro-IFRS firms' financial positions in Spain were largely different from those following local accounting standards; Daske, Hail, Leuz, and Verdi (2008) found that adopting IFRS resulted in poor corporate performance in their sample companies of 26 countries. Among all, whether or not earnings management is minimized after IFRS adoption remains the main issue that is under scrutiny (see for examples, Capkun, Collins, & Jeanjean, 2016;Jeanjean & Stolowy, 2008); however, to the best of our awareness, the literature is relatively scarce, except for Antonios et al (2011) who found that IFRS is effective in reducing manipulative related-party transactions; and they also suggested that IFRS could provide an efficient solution to related-party transactions disclosure issue. As compared with the traditional company law in Taiwan that did not clearly define related-party transactions, the purpose of International Accounting Standard 24 is to ensure that the financial statements include necessary disclosures relating to the existence (both control and significant influence) of related parties and transactions with such related parties.…”

“…With lower transaction costs within the related parties' internal market, the companies can better fulfill their economic needs in the challenging business world and thus better efficiency. On other hand, managers might exploit these transaction resulting in negative effects on shareholders' wealth (Antonios, Ioannis, & Panagiotis, ; Pozzoli & Venuti, ; Williams & Taylor, ). Most frauds are linked to related‐party transactions; an example of these is Enron corporate scandal, which led to the Sarbanes‐Oxley Act limiting the types of related‐party transactions in which companies can engage.…”

“…Moreover,Daske et al (2008) examined changes in market liquidity, cost of capital, and Tobin's Q due to mandatory IFRS adoption. They found that the three measures either increased or decreased at different point of time of IFRS adoption Antonios et al (2011). suggested that the new regulation of relatedparty transactions in Greece could be an effective mechanism to minimize manipulative related-party transactions.…”

The Breadth and Depth of Related Party Transactions Disclosures

“…Based on the data from firms listed on Shanghai stock exchange that disclose gross profit ratios of RPTs, they find that the quality of governance plays a role in determining the used of manipulated transfer prices in RPTs. Reference [22] examines the value relevance of RPTs disclosures before and after the adoption of IFRS in Greece. Focusing on related sales of goods and sales of assets, they find that the adoption of IFRS is perceived to be effective at reducing the potential misuse of RPTs for earnings management purpose.…”