 Hello and welcome to this session. This is Professor Farhad in which we will discuss related party transactions. We will explain what is related party transactions and specifically we are going to focus on the disclosure. What do we need to disclose when we do have related party transaction? So first, what is related party transactions? Well, this happens when companies conduct a business transaction, which is happens on a regular basis in which one of the parties has the ability to influence the policies or decision of the other company. What does that mean? We have company A and company B. Company A might sell something to company B or they might buy something from company B. However, if we have company A and company B, company A can tell company B how much to pay for the product that we're selling or if they are buying something from company B, they will determine the price that they are purchasing. In other words, they are influencing the decision of company B. Same thing if they borrow money from them or if they lend money to them. We call this not an arm length transaction. And this is an important concept in tax. Because generally speaking, when you go into a business transaction between company A and company B, the value should be equal. If you if company A gives $100 in value, they should have equal to $100 and they should receive a value of $100, which is called competitive market. In these transactions competitive market don't exist because I might give you $100 and I might buy something for $150 or I might buy something from you for only $75. You give you give me something worth $75. Well, the competitive market is not at work here. What's happening here is we are dealing on the side and we are determining the price ourselves. So what are some examples of this type of transaction, which is not an arm length transaction, borrowing and lending money at below market interest rate. So I lend you money, but I will charge you zero or practically a very low interest rate. Same thing, I will borrow money from you. I will ask for an appraisal value and that appraisal value will differ from the real value. Why? Because I can influence. I'll tell you, could you please give me a value for this piece of property or for this piece of equipment? You might give me a value that's not really the true value. We can do an exchange of non-monetary assets where I exchange one asset into another, but the value is not equal. When you transact with shell corporations, shell corporations are companies that only exist on paper. Most likely you have a related party transaction. So those are some examples of related party transaction. Now the question is what do we need to do? What would gap require us to do? What do we need to do? What do we need to disclose when we have those related party transaction? The best way is to look at those disclosure and look at an actual example from the real world and specifically would look at a Tesla example. Before we looked at the example, most likely you are a student or a CPA candidate if you're watching. And that's great. You are here for a reason. You needed some help. Go a step further. Go to farhatlectures.com and access my additional information, multiple choice, true, false, additional lectures that's going to help you do better in your accounting courses as well as the CPA exam. It doesn't matter which review course you are taking. I can help you in addition to that review course. Connect with me on social media, LinkedIn, like this recording on YouTube. Connect with me on Instagram, Facebook, Twitter and Reddit. So what type of information do I need to disclose? Well, the nature of the relationship involved. What is the relationship? Do I own 20% of your company, 25? Do I own 100% of it? Just describe what type of relationship do we have to describe the transaction itself, the amount involved for each period. And how does it affect income? How is it affecting income? Okay, also the amount of there's any account receivable, any accounts payable. I have to show this. Let me show you an example from Tesla. I'm sure you guys know who Elon Musk is. And this is a note describing related party between Elon Musk and Tesla. November 2018, our CEO purchased from us this amount of shares, 284,575 shares of common stock and a private placement at a per share price equal to the last closing price of our stock prior to the execution of the purchase agreement for an aggregate of 20 million. Again, 2019, Elon Musk purchased additional shares February 20. So notice, we're showing, we're showing that in several years. In June 20, entered into an agreement with us for an interim term of 90 days. During this term, we resumed our annual evaluation of all available option for providing directors and officers and deptified coverage, which we had suspended during the height of shelter in place requirement. Let's take a look at a note from Tesla related party transaction just to give you an idea, a sense of what is it involved. For example, here we have Elon Musk in November 2018, our CEO purchased from us 284,575,000 shares of our common stock and a private placement at a per share price equal to the last closing price of our stock prior to the execution of the purchase agreement for an aggregate of 20 million as adjusted to give the effect of the stocks. But simply put, since the CEO purchasing, investing purchasing shares from its own company, we have to tell the users that that's important because this is not considered. Remember, we talked about arm length transaction, maybe what Elon Musk got is a different price, what you and I will get in case we wanted to buy 20 million worth of shares from Tesla. So it's very important for the users to know what is the cash coming from. That's that may not be the true value. Maybe Elon Musk overpaid. Why would they overpaid? Well, they would show that there's more value for the company or Elon Musk underpaid. Why would if they underpaid, that means they're trying to get a break. They're trying to make a profit from the company in a sense they're buying the stock at a discount. I don't know what the deal is, but the point is you have to disclose this. So you have to compare how much 20 million, how much shares they would have bought you, given this formula and compare it to 284. Elon Musk either paid more or less. I don't know, but the point is you disclose. So users know there is not an arm length transaction that's going on. And this is a good example of it. What should you do now as a student go to Farhat lectures and work MCQs through false additional exercises that's going to help you understand the concept better and do better on your exam. Good luck, study hard, and of course, stay safe.