Determining the Accounting for Receivables from Officers and Directors.

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Memorandum to file
Date:
From:
Re: Determining the Accounting for Receivables from Officers and Directors.
Facts
Philadelphia Communications Inc. (“Philly”) is a public company that completed an initial public offering (IPO) a few months ago. John Sigar is the current CEO and member of the board of directors. He is the only family member involved in the business and owns significant amount of the company’s stock. While, we were doing audit testing for accounts receivable we came across number of Notes Receivable from several Mr Sigar’s cousins.
They have taken advances frequently but never failed to pay when they came due. The notes are secured by shares of Philly’s convertible preferred stock, which were purchased by the …show more content…

It does not matter if it is a private entity or public company like in this case. The financial reports must provide disclosure for the transactions. FASB ASC 850-10-50-5 discusses issue concerning disclosure of transactions that occur at an arm’s length base. This reference states that it cannot be presumed that related parties’ transaction are undertaken on an arm's length basis. This is because the market conditions that competitive and free might not exist. This describes the relationship evident in the case of Philly’s transaction with the
CEO's cousins. Any form of representations concerning CEO’s cousins and Philadelphia
Communications Inc. does not mean that, the transactions were executed on terms applicable at arm’s length. It can only be presumed so if and only if the representations of the transactions can be substantiated.
The company management should supply more additional information concerning the notes and receivable concerning related parties for further clarifications. The management should provide the names of the parties issued with the notes that are secured by convertible preferred stock purchased by family members. This is per the requirement of FASB ASC
850-10-50-4. The management should also provide information concerning related parties transactions to help in comparison of financial results with the past. The payments terms and the interest accruing to such notes and receivables should be specified and

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