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Accounting Standard 18 – Related Party Disclosures

By- A.B.Sonpal / For Ca Final

Friends, this is again one of the easiest Accounting Standards that we have. In this note you shall find
ample of examples that covers the whole standard, thus you need not refer any book as these are more
than sufficient. My examples incorporates practice manual questions, exam questions and questions
from several books including institute study material. Thus you shall cover this entire standard in just 16
points. Hope it does the required benefit.

1. This AS was introduced in the year 2000. A limited revision to this standard was made in 2003,
pursuant to which Para 26 was revised and Para 27 was introduced.

2. This AS is more of a disclosure as this AS prescribes no accounting treatment, it prescribes only

disclosures requirement.

3. This AS applies to both :-

 Independent statement of Reporting Enterprise
 Consolidated Financial Statement (except for intra-group transaction).

4. Related Party transaction may be said to be those transaction which may or may not have the
characteristics of arm’s-length transaction. These transactions affect the decisions of the
business of one enterprise for the benefit of another enterprise.

5. Related party transactions are required to be disclosed to determine the financial position and
performance of the enterprise.

6. Related party disclosures shall not apply if such disclosures conflict with the reporting
enterprise’s statutory duty of confidentiality.

E.g. Bank A is a subsidiary of Bank B and Bank B has a current account with Bank A, through which it
issues housing loan cheques to it’s client. Is Bank A required to disclose this current account?

Ans. Even though as per AS 18 holding and subsidiary are related on the basis of Para (3a) but in this
case Bank B shall have no disclosures as such disclosure shall conflict with the statutory duty of
confidentiality. Banks are obliged by law, to maintain confidentiality of it’s customer’s transaction.

AS 18 exempts disclosures of related parties and transaction if such disclosures would conflict
with the reporting enterprise’s duties of confidentiality under law
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Suppose in the above example Bank A allowed Bank B to use it’s premise without rent. Is disclosure
required now?

Yes. Confidentiality requirements only apply to dealings in capacity as Banker and customer and not in
other capacities.

7. A disclosure about intra-group transaction in consolidated financial statement is not required as

the same gets eliminated in consolidation.

8. Related Parties
Related Party means one party which has the ability to control and exercise significant influence
over another party at any time during the reporting period.

9. Only transactions for the period during which the related party relationship existed, are required
to be disclosed.

10. State-Controlled enterprises are not required to disclose in their financial statements,
relationship with other State-Controlled enterprise.

11. This standard deals with only Related Party relationship described in Para 3 (a) to 3(e). Following
are the points under Para 3 :

a) Enterprise that directly or indirectly through subsidiary, control or are controlled or

are under common control with the reporting enterprise. ( including Holding,
Subsidiary and fellow Subsidiary )

b) Associate and Joint- Venture of the reporting enterprise and the Investing party of
which Reporting enterprise is an Associate or Joint Venture.

c) Individuals owing directly or indirectly interest in voting power of the Reporting

Enterprise and such power gives them the control or significant influence over
enterprise.

d) Key Managerial person and relative of such personal.

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e) Enterprises over which individual or Key-Managerial person is able to exercise
significant influence. ( including enterprise owned by Directors or major shareholders of
reporting enterprise that have a member of key management in common with the
reporting enterprise )

Meaning of Subsidiary

If A holds more than 50 % of share capital in B or A has the power to compose majority of Board of
Directors in B then B is said to the subsidiary of A.

Meaning of Control

Control includes any of the following:

a. One party holding more than 50 % of voting power of another enterprise.

b. One party has the power to compose the governing body of another party. ( majority of
directors )

c. One part has substantial interest and power to direct financial and operating policies of
another party. ( Chairman )

Substantial Interest

20 % or more voting power.

Associate-

Entity in which Investing Reporting party has significant influence and which is neither the subsidiary nor
joint venture of that party.

Significant Influence

Power to participate in the financing/operating matters of an enterprise. Significant influence may also
be gained through share ownership. If Investing party holds directly or indirectly through subsidiaries,20
% or more of voting power of the enterprise, it is presumed that the investing party does have
significant influence. It implies participation but not control of financing/operating policies
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Key Managerial Person

Those who have the authority and responsibility for planning, directing, and controlling the activities of
the reporting enterprise.

Relatives in relation of individual means, spouse, son, daughter, brother, sister, father and mother who
may be influenced by that individual in his dealing with the reporting enterprise.

Examples

 Altd has three subsidiaries, Bltd, Cltd, and Dltd. Are they all related?

Ans: For A ltd – B ltd, C ltd and D ltd ( subsidiaries) are related parties. For B ltd, C ltd and D ltd - A ltd (
holding company ) is a related party. In addition for B ltd – C ltd and D ltd ( fellow subsidiaries ) are
related parties. Similarly for C ltd – B ltd and D ltd are related parties and for D ltd – B ltd and C ltd are
related parties.

 A ltd holds 55 % voting power in B ltd and has 25 % voting power (+) Power to direct the
majority of governing body of D ltd Further B ltd has 60 % voting power in C ltd and D ltd has 80
% voting power in E ltd. What conclusions can you derive from the aforesaid ?

Ans: We can conlude the following :

 B ltd is subsidiary of A ltd

 B ltd is controlled by A ltd
 D ltd is controlled by A ltd
 C ltd is a subsidiary of B ltd
 A ltd through it’s subsidiary B ltd is controlling C ltd
 E ltd is a subsidiary of D ltd
 E ltd is controlled by D ltd
 E ltd and A ltd are not related to each other
 E ltd and C ltd are not related
 E ltd and B ltd are not related
 C ltd and D ltd are related since they common control ( i.e. common control by A ltd )

 A ltd has two associates B ltd and C ltd. A ltd has 25 % voting power in B ltd and 30 % voting
power in C ltd. Are B ltd and C ltd related?
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Ans : Associate and Joint venture of reporting enterprise and Investing party of which Reporting
Enterprise is a joint venture or associate, are related. Since B is neither an associate of C ltd nor a Joint
Venture nor is directly or indirectly controlled by Cltd. So B ltd and C ltd are not related party.

 P ltd has 70 % voting power in Q ltd and 15 % voting power in R ltd. Q ltd has 51 % voting power
in R ltd. Is P ltd related to R ltd?

Ans : P ltd will be deemed to have control over R ltd as it has the ability to control R ltd via share
ownership in Q ltd and apart from direct shareholding. P ltd has direct control through Q ltd and
indirectly through it’s subsidiary it is also controlling R Ltd. As per holding structure given above P ltd has
an economic interest of 65 % ( Direct holding + indirect holding through Q ), so P ltd also has significant
influence over R ltd.

 X ltd holds 51 % in Y ltd and Y ltd holds 51 % in Z ltd and O ltd holds remaining 41 % in Z ltd.
Discuss.

Ans : We see that Y ltd is controlled by X ltd and is also a subsidiary of X ltd. Y ltd is controlling Z ltd and
is the holding company of Z ltd (since voting power > 50 % ). We also see that X ltd through it’s
subsidiary Y ltd is controlling Z ltd. So it can be concluded that X,Y,Z ltd are related to each other. But O
ltd is related to Z ltd as it has significant influence over Z ltd ( since it has voting power > 20 % ). But O ltd
is not related to X ltd and Yltd as they are not controlling or being controlled or exercising any significant
influence over each other.

 Mr. A and Mrs. A have 34 % voting power in XY ltd and they are the partner in the partnership
firm which is the sole supplier of raw material to XY ltd. Is XY ltd related to the partnership firm?

Ans : The partnership firm and the management is related party as per AS – 18 para 3 (e). Hence full
details of the transaction shall be disclosed even if the transaction is entered at arm’s length price.

 X ltd held 70% of Share Capital of Y ltd. During the year X ltd sold 60 % of the share hoding in Y
ltd, there were transactions between X ltd and Y ltd before and after the sale of holding by X ltd.
Should all the transactions between X and Y be disclosed?

Ans : Only those transactions relating to the period in which, the related party relationship existed need
to be reported. Hence, only the transactions before the sale fall within the scope of disclosure
requirements under AS 18.
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 AB ltd is the single largest shareholder of XY ltd. AB ltd holds 19 % voting power in XY ltd. AB
limited has the power to appoint the Chairman and one director ( out of 12 ) of XY ltd. AB ltd
participates in the financial/operating policy decision of X ltd taken in Board meeting. Discuss

Ans : AB ltd does not control XY ltd as the share-holding does not exceed 50%. Nor it has the power to
compose the majority of Directors nor it has substantial interest with the power to direct financial and
operating policy of XY ltd. So all the three conditions of control that we studied are not applicable.
Virtue of ownership of 19 % and power to participate in the operating and financing decisions at Board
Meeting makes AB ltd exercise significant influence even if the voting power in not more than 20%.

 B holds 6 % share capital of X ltd, Mrs B holds 12 % of share capital and B’s brother in law holds
10 % of share capital. Does A have significant influence over X ltd ?

Ans : The definition of the term ‘’relative’’ as provided in AS 18 does not cover brother in law. Hence,
the transaction is not covered as a related party under AS 18.

12. Exceptions to related party

Following are not considered to be related party ( Para 4 )

a) Two company which has a common director who has no power to influence the transactions
between them. ( Like if A ltd and B ltd have common Director Mr. C, this does not make A ltd
and C ltd related just because it has a common director until we can prove that C exercises
significant influence in B ltd or A ltd )

b) Single Customer/ supplier/ distributor with whom an enterprise transacts significant volume of
business merely by virtue of resulting economic dependence.

c) The parties listed below in the course of their normal dealing with the enterprise :
 Provider of Finance
 Trade Union
 Government Department
 State Controlled Entity

Example

Bank A holds 25 % voting power in Bank B and provides loan to Bank B. Is Bank A related to Bank B?
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Ans : Bank A is the provider of finance as it provides loans to Bank B. As per Para 4 (c), a provider of
finance is deemed not to be a related party. However, in this case, exemption allowed, wont be
available to Bank B as Bank A exercises significant ownership by virtue of holding 25 % voting power in
Bank B.

Accordingly, Bank A would be construed to be related party in financial statement of Bank B.

Does A required to disclose the transaction with B ltd in it’s financial statement?

Ans: No. Bank B is the client of Bank A and banks are obliged by law, to maintain confidentiality of it’s
customer’s transaction. Since such disclosure shall conflict with the statutory duty of confidentiality, no
disclosures shall be made.

13. Key Managerial person

Managing Director, Whole time director, Deemed director.

Thus the remuneration paid to the above shall be disclosed as it amounts to related paert
transaction.

Non- Executive Director

Not a Key Managerial person, so remuneration paid to it shall be ignored.

14. Disclosures

There have been transaction between Related party during the existence of related party relationship,
the reporting party shall disclose :

 Relationship between the party

 Nature of transaction
 Name of transacting Related Party
 Volume of transaction
 Amount w/off against ant debt due from Related Party

15. If no transactions have taken place and related party are related due to Significant Influence
then No Disclosures, and ‘’where control exists’’ and related party are related due to control and
no transactions have taken place between them then only the following disclosures are required
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 Name of the Related Party
Para 21
 Nature of Transaction

16. Relative of Key Managerial person is also Related Party

Example

AB PLC (UK) has two wholly owned subsidiaries BB ltd and XY INC ( USA ). Would the relationship
between BB ltd and XY INC disclosed if there is no transaction that has taken place between them ?

Ans : No. Para 21 of AS – 18 requires disclosures of the ‘’name of the related party and nature of related
party relationship where control exists’’ should be disclosed whether or not there have been transaction
between them. The use of the word ‘’ where control exists’’ implies that disclosure is required only if
control exist. While AS 18 includes fellow subsidiaries as a related party relationship, there is no
existence of control. Hence no disclosure is required as there is no transaction between them.

Last discussion

Ind AS 24
Related Party Disclosures
Uses the term “a close member of that
person’s family”
Includes the persons specified within the
meaning of ‘relative’ under the
Companies Act 1956 and that person’s
domestic partner, children of that
person’s domestic partner and
dependants of that person’s domestic
partner.
There is 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.”
Further, “Government refers to
government, government agencies and
similar bodies whether local, national or
international.”
Covers KMP of the parent as well.
There is extended coverage in case of Co-venturers or co-associates are not related
joint ventures. Two entities are related to
AS 18
Related Party Disclosures
Uses the term “relatives of an individual”
Covers 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. Hence, the definition as
per Ind AS 24 is much wider.
Defines state-controlled enterprise as “an
enterprise which is under the control of the
Central Government and/or any State
Government(s)”.
Covers key management personnel (KMP) of
the entity only
to each others.
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each other in both their financial
statements, if they are either co-
venturers or one is a venturer and the
other is an associate.
Does not specifically mention this. Mentions that where there is an inherent
difficulty for management to determine the
effect of influences which do not lead to
transactions, disclosure of such effects is not
required.
Specifically includes post employment Does not specifically cover entities that are
benefit plans for the benefit of employees post employment benefit plans, as related
of an entity or its related entity as related parties.
parties.
Requires an additional disclosure as to the No such requirement.
name of the next most senior parent
which produces consolidated financial
statements for public use
Requires extended disclosures for Does not specifically require.
compensation of KMP under different
categories.
Requires “the amount of the Gives an option to disclose the “Volume of
transactions” need to be disclosed, the transactions either as an amount or as an
appropriate proportion”.
Requires disclosures of certain Presently exempts the disclosure of such
information by the government related information.
entities
Does not include such clarificatory text Includes clarificatory text, primarily with
and allows respective standards to deal regard to control, substantial interest
with the same. (including 20% threshold), significant
influence (including 20% threshold).

Questions asked in : Nov 01, May 06, Nov 07 and Nov 2012.

Thanks, Class Over

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