Arm's Length Transactions and QAD's Enterprise Applications

Posted on: February 10, 2010 | By: SuperUser Account | QAD Financials

An arm’s length transaction involves the buying and selling of goods, services, properties, or stocks between two parties that are completely separate from one another. Generally speaking, an arm’s length transaction is the most common of all types of transactions. Here are some examples of qualifications that must be met in order for the activity to be defined as an arm’s length transaction.

Arm’s length transactions are generally thought to only take place between parties that have no kind of familial or business connection to one another. For example, purchasing goods from a company owned by a relative, even if both entities are not affiliated parties, would not be considered a true arm’s length transaction. In like manner, purchasing goods or services from a company that is owned by the same parent organization is often thought to not qualify as an arm’s length transaction, even if the two companies operate independently.

The main purpose of the arm’s length transaction is to ensure there are no hints of a conflict of interest that would give one or both companies an advantage in the market. This means that the type of discounts or offers that are used will be the same kinds of offers that would be extended to any possible customer.

There are places around the world where local laws and customs tend to encourage the use of the arm’s length transaction. Higher taxes and stiffer regulations may cause the business environment to be such that doing business with a related entity is simply not cost efficient.
In some places around the world, an arm’s length transaction is considered to be possible between two companies with some sort of distant connection. An example of this situation is where a company operates in two different countries, but is part of the same international business. Typically country specific statutory requirements require this level of transaction detail to support statutory filing and audit requirements.

Within QAD’s Enterprise Applications are standard programs for these types of transactions. The Sales order and customer schedule are sued on the selling side and the purchase order and the supplier schedule are used on the procurement side. The result of these transactions is the recognition of a sale and a receivable from the selling side and inventory or expense and a liability on the procurement side. These transactions are processed in the same manner as all other transactions and the associated documentation set supports the arm’s length audit requirement.

For more information regarding setup of this functionality, you can contact:
Andrew Vitullo, CPA
Principal, Logan Consulting

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