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Indian Accounting Standard 24 requires disclosures to be made by a parent entity regarding its transactions with associates, joint ventures or subsidiaries, collectively referred to as Related party. Hence related party refers to an entity or person that is related to the reporting entity.
The objective of this standard is to bring to notice the fact that an entity’s financial statements and profit or loss can be affected by transactions with the related party transactions and disclose outstanding balances including commitments to such parties.
This standard shall be applied to:
The standard also requires disclosure of related party relationships transactions, outstanding balances including commitments in the consolidated financial statements, separate financial statements, and individual financial statements. In case a statute or regulatory body or similar competent authority governing an entity prohibits the entity from disclosing certain information that is required by this standard, then the disclosure of such information is not warranted. For instance banks, stock broking entities are not permitted to disclose customer related information, hence such information need not be disclosed.
Related party transactions are an integral part of businesses in today’s world. The transactions between the related parties are generally conducted at negotiated terms and hence they must be disclosed. Additionally, for an investor, knowledge of related parties facilitates a more informed decision to invest in an entity. Also, for every reader of the financial statements accurate disclosure of all the related party relationships, transactions, and outstanding balances presents a correct picture of the risk and opportunities for an entity.
Let’s have a look at the disclosures that need to be made:
The disclosures for similar items can be made in aggregate except when separate disclosure is necessary to understand the effects of related party transactions on the financial statements. Examples of related party transactions are purchase and sale of goods, assets, rendering, or receiving of services, leases, transfers, and so on.
The Reporting entity is exempt from the disclosures requirement with the government who has control or joint control or significant influence over the reporting entity and another entity that is a related party because the same government has control or joint control of or significant influence over both the reporting and other entity. As a result of such exemption, the entity need not disclose related party transactions and outstanding balances including commitments. If the above exemption applies, an entity must disclose the following:
Related party is a person or entity that is related to the reporting entity that is an entity that prepares financial statements. A person or close family member is related to reporting entity if that individual:
A Close member of the family includes person’s children, spouse or domestic partner, brother, sister, father and mother, children of that person’s spouse or domestic partner and dependants of that person’s or person’s spouse or domestic partner. An entity is related to a reporting entity if the following conditions are met:
Related party transactions are the transfer of services or obligations, resources between a reporting entity, and related party irrespective of the fact that a price is charged.
The Government refers to government, government agencies, and similar bodies whether local, national, or international.
A government-related entity is an entity that is controlled, jointly controlled, or significantly influenced by the government.
Compensation includes all employment benefits such as short-term employment benefits, post-employment benefits, other long-term employer benefits, termination benefits, and share-based payments.