Q$2$

On $1$ June $2012,$ Eagle, a public limited company, was formed out of the reorganisation of a group of companies with foreign operations. The directors require advice on the disclosure of related party information but are reluctant to disclose information as they feel that such transactions are a normal feature of business and need not be disclosed.

Under the new group structure, Eagle owns $80\%$ of Bluebird, $60\%$ of Crow, and $30\%$ of Dove. Eagle exercises significant influence over Dove. The directors of Eagle are also directors of Bluebird and Crow but only one director of Eagle sits on the management board of Dove. The management board of Dove comprises five directors. Originally the group comprised five companies but the fifth company, Falcon, which was a $70\%$ subsidiary of Eagle, was sold on $31$ January $2013.$ There were no transactions between Falcon and the Eagle Group during the year to $31$ May $2013.30\%$ of the shares of Eagle are owned by another company, Hunter, which exerts significant influence over Eagle. The remaining $40\%$ of the shares of Crow are owned by Farmer.

During the current financial year to $31$ May $2013,$ Crow has sold a significant amount of plant and equipment to Farmer at the normal selling price for such items. The directors of Eagle have proposed that where related party relationships are determined and sales are at normal selling price, any disclosures will state that prices charged to related parties are made on an arm$$s length basis.

One of the directors of Bluebird who is not on the management board of Eagle owns the whole of the share capital of a company, Griffon, that sells goods at market price to Bluebird. The director is in charge of the production at Bluebird and also acts as a consultant to the management board of the group.

Required:

$($a$)$ Discuss why it is important to disclose related party transactions, explaining the criteria which determine a related party relationship.

$($b$)$ Describe the nature of any related party relationships and transactions which exists:

$$ within the Eagle Group including Falcon

$$ between Farmer and the Eagle Group

$$ between Hunter and the Eagle Group

Comment on whether transactions should be described as being at $$arm$$s length$.$