[Anonymous]

I honestly do not understand the statement below so can someone please help me better understand this: Thank you!

[Becker’s Auditing page A4-47]

A related party transaction is NOT considered to be an arm’s length transaction. {Why and what does arm’s length transaction mean?}

[Anonymous]

Here's an example. I hope it makes sense.

You and I are best friends and I own some of your company and you own some of mine. Any transactions that we enter into are going to be negotiated so as to make sure that profit is maximized for both of us. For instance, I grow trees and you make paper. I would sell my trees to your paper mill for less than I would sell them to another paper mill because I know that once that paper is sold, I will actually end up with a greater profit because I get a cut of your company's profit. This is not an arms length transaction because normally, at the end of the “arm” there is a market force driving the price up or down.

Does this make sense, or did I confuse the issue?

[Anonymous]

Are we really best friends? LOL! Just kidding.

Thank you for taking time to explain. It's a lot clearer to me now. English is not my first language so figures of speech confuse me more often than not. I was imagining “arm's length” was like stretching one's arms like welcoming a guest or something.

[tarepanda]

@amordiva. My first language is English but I worked in an overseas office in int'l tax, and navigating through this stuff in a foreign language can be tricky! I remember when I first started, I kept seeing a term which literally translated in English as “normal price”. Kept wondering, WTH is this ‘normal price'…is there even such a thing? Then I realized that the term was referring to ‘arm's length price.' I guess certain terms just can't get translated word for word.

2012 (Kaplan)
REG: 70, 72
2013 (Kaplan, Wiley Test Bank & textbooks, Ninja audio)
FAR 2/21/13: 75
REG rematch 4/2/13: 84
AUD: 5/22/13: 86
BEC: 7/30/13 ... 86!

[iampei]

i always consider an arms length transaction as a “fair” transaction. Allow me to explain:

A fair transaction is a sale or purchase under the same conditions and rules as someone else might have if they want to purchase the same thing.

You bake cookies for sale

You sell cookies to everyone at a fixed price of $3 per cookie.

You sell cookies to a friend at $1 per cookie. THIS IS NOT AN ARMS LENGTH TRANSACTION.

Of course the cookie explanation is extremely simplified. but that's what it is. A “fair” transaction.

[Author]

Replies