This standard establishes requirements for the disclosure of:
a) Related party relationships
b) Transactions between a reporting enterprise and its related parties.
The requirements of this Standard apply to the financial statements of each reporting enterprise as also to consolidated financial statements presented by a holding company.
As per AS 18, Related party means “at any time during the year, one party has an ability to:
- Control* the other party
- Exercise significant influence over the other party in making financial and/or operating decisions
- Ownership, direct or indirect, of more than 50% of the voting power of an enterprise,
- In case of a company – control of the composition of the board of directors In case of any other enterprise – control of the composition of the corresponding governing body
- Substantial interest in voting power and the power to direct the financial and/or operating policies of the enterprise
Who is covered under Related party relationships
- Holding companies, subsidiaries and fellow subsidiaries;
- Associates and joint ventures of the reporting enterprise;
- Investors in respect of which reporting enterprise is an associate or a joint venture;
- Individuals owing direct or indirect interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual;
- Key management personnel and his relatives; and
- Enterprises over which any person, who is a key management personnel or has direct and indirect interest in voting power, can exercise significant influence
- Requirement of statutes: The statutes governing an enterprise often require disclosure of related party transactions in the financial statements.
- To reflect that transaction may not be at arm’s length price: Without related party disclosures, there is a general presumption that transactions reflected in the financial statements are on an arm’s length basis i.e. the transaction occurs between two unrelated parties and is not affected by any relationship.
- Effect on Financial position and operating results: The operating results and financial position of an enterprise may be affected by a related party relationship even if related party transactions do not occur. The mere existence of the relationship may be sufficient to affect the transactions of the reporting enterprise with other parties
- Recording of all possible transactions: Related party transactions needs to be disclosed as sometimes, transactions would not have taken place if the related party relationship had not existed.
What needs to be disclosed under AS 18
The reporting enterprise should disclose the following:
- The name of the transacting related party;
- A description of the relationship between the parties;
- A description of the nature of transactions;
- Volume of the transactions either as an amount or a part thereof;
- Any elements of the related party transactions which is necessary for an understanding of the financial statements;
- Outstanding amount from related parties at the balance sheet date;
- Provisions for doubtful debts due from related parties at the balance sheet date; and
- Amounts written off or written back of debts due from or to related parties.
Cases when disclosure is not required
- Intra-group transactions
- Enterprises who have statutory requirement of confidentiality
- Related party relationships of State-controlled enterprises with other state-controlled enterprises
Examples of Related party transactions
The following are examples of the related party transactions in respect of which disclosures may be made by a reporting enterprise:
- Purchases or sales of goods (finished or unfinished);
- Purchases or sales of fixed assets;
- Rendering or receiving of services;
- Agency arrangements;
- Leasing or hire purchase arrangements;
- Transfer of research and development;
- License agreements;
- Finance (including loans and equity contributions in cash or in-kind);
- Guarantees and collaterals; and
- Management contracts including for deputation of employees.
Case studies on AS 18
Case Study 1: For ABC Ltd.
|Transactions||Amount (in Rs.)|
|Sales to XYZ Ltd., a subsidiary||2,00,000|
|Sales to PQR Ltd., a subsidiary||3,00,000|
|Purchase from DEF Ltd., a subsidiary||6,00,000|
|Purchase from LMN Ltd., a joint venture||1,00,000|
Solution: Disclosure required as per AS 18
|Transactions||Amount (in Rs.)|
|Sales to subsidiaries||5,00,000|
|Purchase from Subsidiaries||6,00,000|
|Purchase from joint venture companies||1,00,000|
Case Study 2: A Ltd holds 75% of voting power of B Ltd and B Ltd owns 50% voting interest in C Ltd. Further, A Ltd also holds 25% of the voting interest in C Ltd. Would A Ltd deem to have control over C Ltd or would it only be considered as exercising significant influence?
Solution: A Ltd would be considered to control C Ltd. As per AS 18, control includes ownership, directly or indirectly, of more than 50% of the voting power of another enterprise. As A Ltd is a majority shareholder B Ltd, therefore, it has control over it.
Further, as A Ltd and B Ltd together are majority shareholders (i.e. 50% + 25%) in C Ltd. A Ltd has indirect control over it. Accordingly, A Ltd has the ability to control C Ltd, indirectly via the share ownership in B Ltd apart from its individual shareholding in C Ltd.
Comparison between AS 18 and Ind AS 24
|Particulars||AS 18||Ind AS 24|
|Definition of Related party relationship||It uses the term “relatives of an individual”||It uses the term “a close member of that person’s family”|
|Definition of State controlled enterprises||It is an enterprise which is under the control of the Central Government and/or any State Government(s)||There is an extended coverage of Government Enterprises, as it defines a government-related entity as an entity that is controlled, jointly controlled or significantly influenced by a government|
|Coverage of Key Management Personnel in Related party relationships||Existing AS 18 covers key management personnel of the entity only||Ind AS 24 covers key management person of the parent as well|
|Coverage of entities that are post employment benefit plans as Related parties||Existing AS 18 does not specifically covered entities that are post employment benefit plans, as related parties||Ind AS 24 specifically includes post employment benefit plans for the benefit of employees of an entity or its related entity as related parties|
|Disclosure of information by Government related entities||Existing AS 18 presently exempts the disclosure of such information||Ind AS 24 requires disclosures of certain information by the government related entities|
|Disclosure of Volume of the transactions||Existing AS 18 gives an option to disclose the “Volume of the transactions either as an amount or as an appropriate proportion”||Ind AS 24 requires “the amount of the transactions” need to be disclosed|
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