Accounting Standard (AS) 18: Related Party Disclosure
The scope and objective of the standard is to establish requirements for disclosure of
(a) related party relationship
(b) transaction between a reporting enterprise and its related parties.
This disclosure would make the financial statements of the reporting enterprise more transparent and allow the users to compare both intra-enterprise with corresponding earlier accounting period and inter-enterprise as well.
However disclosure is not required
(i) if there is statutory bar on the reporting enterprise on confidentiality (banks) in respect of constituents
(ii) in case of consolidated financial statements in respect members of the group (holding & subsidiary) with exception for transaction with Associated Enterprise accounted for under equity method
(iii) in the financial statement of State (Central or State) controlled enterprises with other state controlled enterprise even related party relationship exists.
When parties are considered related?
If at any time during the reporting period one party has the ability
(a) to control the other party
(b) to exercise significant influence over the other party in making financial and/or operating decisions, then by virtue of AS -18 both parties would be considered as related.
(i) ownership directly or indirectly, of more than 50 percent of the voting power of an enterprise
(ii) the composition of the board of directors (company) or the Governing Body (other enterprise)
(iii) a substantial interest in voting power and the power to direct by Statute or by agreement, the financial/operating policies of the enterprise (20 percent or more interest in voting power)
(b) Significant Influence:
(i) refers to participation in the financial and/or operating policy decisions of an enterprise but not control of those policies.
(ii) may be gained by ownership in share (including investment through intermediaries restricted to mean subsidiaries as defined in AS-21 Consolidated Financial Statement)
Related party disclosures are applicable only to the following related party relationships:
1. enterprises that directly or indirectly through one or more intermediaries control or are controlled by or under common control with the reporting enterprise
2. associates and joint venturers of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or joint venturer,.
3. individuals owning directly or indirectly an 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.
4. key management personnel and relatives of such individuals.
5. enterprise over which any person in (3) and (4) is able to exercise significant influence (including enterprise owned by directors or major shareholders of the reporting enterprise and enterprise that have a member of key management in common with the reporting enterprise).
Related party transactions involve transfer of resources or obligations between related parties, regardless of whether or not .a price is charged, e.g. use of logo/brand name provision of management services, providing financial guarantee use of common infrastructure etc.
Type of disclosure under AS-18
(a) in case of related party relationship by virtue of significant influence (not control) e.g. those of associates, key management personnel, relatives, there is no need. to disclose the related party relationship unless there have been actual transaction during the reporting period with such related parties.
(b) in the event of transaction between related parties during the existence of a related party relationship (control or significant influence) the reporting enterprise should disclose:
(i) the name of transacting related party
(ii) description of the relationship between parties
(iii) description of nature of transaction
(iv) volume of transaction, either in amount or approximate proportions
(v) any other element of the related party transactions necessary for understanding of financial statements (e.g. transfer of major asset taken at price different from normal commercial terms i.e. not at fair value)
(vi) either in amount or proportion of outstanding items and provisions for doubtful debts pertaining to related parties on B/S date.
(vii) amounts written off/back in the accounting period in respect of debts due from or to related parties.