Spotlight on: Fahran’s Flex – A model for visualising related party transactions
With companies like Company X which have a material level of related company transactions, Fahran’s Flex provides a framework to visualise and remember how we can KYC2. Fahran’s Flex reminds us to look beyond the related parties to the ultimate buyers and sellers, in order to identify the UEA. Note that transactions from and to related parties are not regarded as UEA since in substance they are merely transfers between legal entities controlled by the same UBO. In the case of Company X, it is a case of related buyers but not related suppliers.
Let’s continue our analysis on Company X.
Based on its balance sheet, Company X seems to have borrowings from related parties and officer/ shareholders while also lending to related parties. In 20×3 in particular, it took on a long term loan of $4,336, and increased its trade payables by $1,656 which it seems to be using to fund the increase in its related party trade and non-trade receivables $5,471 and partially pay back its loan from officer/ shareholders. A more in-depth writeup on an approach to cash flow analysis is available here.
As we can tell from the example, examining what the UEA of Company X gives us an idea of where it gets and spends its cash. From this, we can tell how the company is allocating its capital. For the case of Company X, its capital is mostly allocated to fund related party receivables, and a banker would need to analyse further on the related parties and the UEA to get more answers.