Accounting Standard (AS) 18: Related Party Disclosure
AS 18 prescribes the requirements for disclosure of related party relationship and transactions between the reporting enterprise and its related parties.
The requirements of the standard apply to the financial statements of each reporting enterprise as also to consolidated financial statements presented by a holding company.
Related Party Relationships
Related party – parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions.
AS 18 deals only with related party relationships described in (a) to (e) below:
(a) Enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries).
(b) Associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture.
(c) 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.
(d) Key management personnel and relatives of such personnel and
(e) Enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise.
In the context of AS 18, the following are deemed not to be related parties:
- Two companies simply because they have a director in common (unless the director is able to affect the policies of both companies in their mutual dealings).
- A single customer, supplier, franchiser, distributor, or general agent with whom an enterprise transacts a significant volume of business merely by virtue of the resulting economic dependence and
- The parties listed below, in the course of their normal dealings with an enterprise by virtue only of those dealings (although they may circumscribe the freedom of action of the enterprise or participate in its decision-making process):
- Providers of finance
- Trade unions
- Public utilities
- Government departments and government agencies including government sponsored bodies.
Related party disclosure requirements as laid down in AS 18 do not apply in circumstances where providing such disclosures would conflict with the reporting enterprise’s duties of confidentiality as specifically required in terms of a statute or by any regulator or similar competent authority.
No disclosure is required in consolidated financial statements in respect of intra- group transactions.
No disclosure is required in the financial statements of state-controlled enterprises as regards related party relationships with other state-controlled enterprises and transactions with such enterprises.
Definitions of other Terms used in AS 18
Related party transaction: A transfer of resources or obligations between related parties, regardless of whether or not a price is charged.
- ownership, directly or indirectly, of more than one half of the voting power of an enterprise, or
- control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise, or
- a substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise.
For the purpose of AS 18, an enterprise is considered to control the composition of the board of directors of a company or governing body of an enterprise, if it has the power, without the consent or concurrence of any other person, to appoint or remove all or a majority of directors/members of the governing body of that company/enterprise.
An enterprise is deemed to have the power to appoint a director/ member of the governing body, if any of the following conditions is satisfied:
- A person cannot be appointed as director/member of the governing body without the exercise in his favour by that enterprise of such a power as aforesaid or
- A person’s appointment as director/member of the governing body follows necessarily from his appointment to a position held by him in that enterprise or
- The director/member of the governing body is nominated by that enterprise; in case that enterprise is a company, the director is nominated by that company/subsidiary thereof.
An enterprise/individual is considered to have a substantial interest in another enterprise if that enterprise or individual owns, directly or indirectly, 20% or more interest in the voting power of the other enterprise. Similarly, an individual is considered to have a substantial interest in an enterprise, if that individual owns, directly or indirectly, 20 per cent or more interest in the voting power of the enterprise.
An Associate: An enterprise in which an investing reporting party has significant influence and which is neither a subsidiary nor a joint venture of that party.
Participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies. It may be exercised in several ways, for example, by representation on the board of directors, participation in the policy making process, material inter-company transactions, interchange of managerial personnel or dependence on technical information.
Significant influence may be gained by share ownership, statute or agreement.
As regards share ownership, if an investing party holds, directly or indirectly through intermediaries, 20 per cent or more of the voting power of the enterprise, it is presumed that the investing party does have significant influence, unless it can be clearly demonstrated that this is not the case.
Conversely, if the investing party holds, directly or indirectly through intermediaries, less than 20% of the voting power of the enterprise, it is presumed that the investing party does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investing party does not necessarily preclude an investing party from having significant influence.
Key Management Personnel:
Those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.
A non-executive director of a company should not be considered as a key management person by virtue of merely his being a director unless he has the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.
The requirements of AS 18 should not be applied in respect of a non-executive director even if he participates in the financial and/or operating policy decision of the enterprise, unless he falls in any of the categories of ‘related party relationships’ discussed above.
Relative: In relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise.
Joint Venture: a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control.
Joint Control: the contractually agreed sharing of power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.
Holding Company: a company having one or more subsidiaries.
Subsidiary: a company-
- in which another company (the holding company) holds, either by itself and/or through one or more subsidiaries, more than one-half, in nominal value of its equity share capital; or
- of which another company (the holding company) controls, either by itself and/or through one or more subsidiaries, the composition of its board of directors.
Fellow subsidiary: a company is considered to be a fellow subsidiary of another company if both are subsidiaries of the same holding company.
Name of the related party and nature of the related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties. This is to enable users of financial statements to form a view about the effects of related party relationships on the enterprise.
If there have been transactions between related parties, during the existence of a related party relationship, 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 as an appropriate proportion;
- Any other elements of the related party transactions necessary for an understanding of the financial statements;
- The amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date;
- Amounts written off or written back in the period in respect of debts due from or to related parties.
Items of a similar nature may be disclosed in aggregate by type of related party except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the reporting enterprise.