Accounting Standard - 18Related Party Disclosures

Presented by

Paresh Shah

Requirements

• Related party relationships arise on the basis of control/significant influence.

• If it is based on control, disclosures about relationship (name & nature of relationship) be given even if there is no transaction with the related party.

• If it is based on significant influence, disclosures need to be given only if transactions are there with the related party.

Scope

• Related party relationships; and

• Transactions between a reporting enterprise and its related parties.

Why related party disclosures

• Normal feature of business: It is common for enterprises to carry on separate parts of their activities through subsidiaries/associates/joint venture enterprises.

• To reflect the reality that transaction may not be at arms-length: If related party disclosures are not given, users of financial statements would presume that transactions reflected in financial statements are at arm’s length between independent parties.

• Existence of related parties affects financial position and operating results: The mere existence of the relationship may be sufficient to affect the transactions of the reporting enterprise with other parties.

• Transactions would not have otherwise taken place: Some of the transactions may not have taken place if the related party relationship had not existed.

• Statutory requirement to disclose: e.g. Transactions with the directors or similar key management personnel, their remuneration and borrowings.

Exemption from disclosure requirement

• To enterprises who have statutory obligation of confidentiality

• Intra-group transactions in consolidated financial statements

• State-controlled enterprises

Who is Related Party

• If at any time during the year 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.

Related party relationships to which AS- 18 applies

1. Enterprises that directly or indirectly through intermediaries, control the reporting enterprise. Enterprise that directly or indirectly through one or more intermediaries, are

controlled by the reporting enterprise Enterprise that directly or indirectly through one or more intermediaries, are under

the common control of the reporting enterprise

2. Associates and joint ventures of the reporting enterprise and the investing party or venture in respect of which reporting enterprise is an associate or a joint venture.

3. Individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise and relatives of such individual.

4. Key management personnel and relatives of such personnel.

5. Enterprises over which any person described in 3 & 4 above is able to exercise significant influence.

Control means …

• Control through intermediaries mean ownership, directly or indirectly, of more than one half (> 50%). Indirectly means through subsidiaries

• Control of composition of the board of directors

• A substantial interest in voting power and the power to direct, by statute or agreement, the financial and / or operating policies of the enterprise.

Significant Influence

The following amounts to significant influence:

• Participation in only financial policy decisions of an enterprise.

• Participation in only operating policy decisions of an enterprise.

• Participation in financial and operating policy decisions of an enterprise.

Significant influence 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,

- Dependence on technical information.

Significant influence may be gained by share ownership, statute or agreement.

If an investing party holds, directly or indirectly through intermediaries 20 % or more of the voting power of the enterprise, it is presumed that investing party has significant influence, unless the contrary be clearly demonstrated.

Key Management Personnel and Relative• Key management persons are those persons who have the authority

and responsibility for planning, directing and controlling the activities of the reporting enterprise. For ex. Following are KMP:• Managing Director,

• Whole time director

• Manager

• Any person in accordance with whose directions or instructions the BOD of the company is accustomed to act.

• Relative in relation to an individual means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence and be influenced by that individual in his dealing with the reporting enterprise.

Disclosures

Particulars Control Exists between related parties

Control does not exists between related parties

There have been transactions between the related parties during the period

Name of the party and relationship to be disclosed and transactions are to be disclosed

Transaction between parties to be disclosed. Disclosure in respect of relationship is also required.

There were no transactionsbetween the related parties during the period

Only name of the party and relationship to be disclosed

No disclosure is required.

The name of the transacting related party

• Description of the relationship between the parties

• Description of the nature of transactions

• Volume of the transactions

• Any other information for better understanding

• Outstanding amounts of related parties

Examples of the related party transactions in respect of which disclosures has to be made by a reporting enterprise:

• Purchases or sale of goods (finished or unfinished);• Purchases or sale 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;• Management contracts including for deputation of employees.

Case Study 1

• X Ltd. sold to Y Ltd. goods having a sales value of Rs. 25 lakhs during the F. Y. 31.03.2013. Mr. A the Managing Director and Chief Executive of X Ltd. owns nearly 100% of the Capital of Y Ltd. The sales were made to Y Ltd. at nominal selling price of X Ltd. The Chief Accountant of X Ltd. does not consider that these sales should be treated any differently from any other sales made by the Company despite being made to Controlled Company, because the sales were made at normal and too, at arm’s length prices.

Solution 1

• A transfer of resources of obligation between related parties is related party transaction irrespective of whether a price is charged or not. Also it does not matter what is the basis of pricing. Hence, these transactions should be distinctly disclosed as per AS – 18.

Case Study 2

• P Ltd. owns 70% of the voting power of Q Ltd. Q Ltd. in turn owns 50% of the voting interest in R Ltd. Further, P Ltd. also directly owns 15% of the voting interest in R Ltd. Would P Ltd. be deemed to have control over R Ltd. or would it only be considered as exercising significant influence?

Solution 2

• P Ltd. would be considered to control R Ltd. The definition of control of AS-18, includes ownership directly or indirectly, of more than half of the voting power of another enterprise. As P Ltd. is a majority shareholder in Q Ltd., it has control over it. Further, as P Ltd. and Q Ltd. together are majority shareholders (i.e. 15% + 50%) in R Ltd.. P Ltd. has indirect control over it. Accordingly, P Ltd. has the ability to control R Ltd., indirectly, via the share ownership in Q Ltd. apart from its individual shareholding in R Ltd.