Newcars plc is a vehicle dealership; it sells both new and good quality second-hand cars. The company is large and has a large number of shareholders. The only large block of shares is held by Arthur, who owns 25% of Newcars plc. Arthur is a member of Newcars plc’s board of directors and he takes a keen interest in the day-to-day management of the company.

Arthur also owns 25% of Oldcars plc. Oldcars plc sells inexpensive second-hand cars which tend to be either relatively old or have a high mileage. Arthur is also a member of the board of directors of Oldcars plc.

Apart from Arthur, Newcars plc and Oldcars plc have no shareholders in common.

The only thing that they have in common, apart from Arthur’s interest in each, is that Newcars plc sells a large number of cars to Oldcars plc. This usually happens when a customer of Newcars plc has traded in a car that is too old to be sold from Newcars plc’s showroom. Most of these cars are immediately resold to Oldcars plc and go into Oldcars plc’s normal trading stock. These sales account for approximately 5% of Newcars plc’s turnover. Oldcars plc acquires approximately 20% of its cars from Newcars plc.

Required

(a) Explain whether Newcars plc and Oldcars plc are related parties in terms of the requirements of FRS 8, Related party disclosures. List any additional information that you would require before making a final decision. (7 marks)

(b) Assuming that Newcars plc and Oldcars plc are related parties, describe the related parties’ disclosures that would have to be made in the companies’ financial statements in respect of the sale and purchase of cars between the two companies.

(6 marks)

(c) Explain why it is necessary to disclose such information in respect of transactions involving related parties. (7 marks)

CIMA, Financial Accounting – UK Accounting Standards, May 2001 (20 marks)