Related Party Disclosures (AS 18)

PHD Chambers of Commerce and Industry Corporate Financial Reporting and Changing Paradigms

23 February 2002
AS 18 Related Party Disclosures

AS-18 Related Party Disclosures

Applicability
Effective in respect of accounting periods commencing on or after 1 April 2001 Mandatory

AS 18 Related Party Disclosures

What it entails
The standard establishes requirements for the disclosure of:
related party relationships; and transactions between a reporting enterprise and its related parties.

AS 18 Related Party Disclosures

Rationale
Presumption of arms length transactions which may not be valid when related party relationships exist. - Transactions may not have been entered into with unrelated parties or may not have taken place at all; - Terms and conditions may be different from normal commercial terms.

AS 18 Related Party Disclosures

Who is a related party ?

Ability to : Control ; or Exercise significant influence in making financial and/or operating decisions

AS 18 Related Party Disclosures

Control
Ownership, directly or indirectly, of more than one half of the voting power Control of composition of board of directors of a company A substantial interest in voting power (20% or more) AND power under statute/agreement to direct financial and/or operating policies of the enterprise

AS 18 Related Party Disclosures

Significant Influence
Participation in financial and/or operating policy decisions but not control; May be gained by Share ownership - Statute; and - Agreement Assumed to exist in case of holding of 20% or more voting power directly or indirectly. This assumption is however rebuttable.

AS 18 Related Party Disclosures

Related party relationships Common control

Enterprises that directly, or indirectly through one or more intermediaries

control, are controlled by, are under common control with

the reporting enterprise.

AS 18 Related Party Disclosures

Related party relationships (continued)

associates and joint ventures (and vice versa)

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

AS 18 Related Party Disclosures

Related party relationships (continued)

individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise giving them control or significant influence over the enterprise, AND relatives of such individuals (spouse, children, parents, siblings)

AS 18 Related Party Disclosures

Related party relationships (continued)

key management personnel AND their relatives.

AS 18 Related Party Disclosures

Related party relationships (continued)

enterprises over which any person in (c) or (d) is able to exercise significant influence

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

AS 18 Related Party Disclosures

Relationships Covered
Control of another enterprise (parent); Control by another enterprise (subsidiary); Under common control (fellow subsidiary); Associates/ joint ventures/ co-venturer; Investor in respect of which the enterprise is an associate; Individuals owning, directly or indirectly, voting power that gives them control or significant influence and their relatives; Key management personnel and their relatives; and Enterprises over which major owners, key management personnel or their relatives are able to exercise significant influence.

AS 18 Related Party Disclosures

Not Considered Related Parties

Two companies simply because they have a director in common A single customer, supplier, franchiser, distributor or general agent Providers of finance, trade unions, public utilities, government departments and government agencies in the course of their normal dealing

AS 18 Related Party Disclosures

Disclosures
Name of the related party and nature of the related party relationship where control exists, even if there have been transactions between the related parties.

AS 18 Related Party Disclosures

Disclosures during existence of related party relationships

Name of transacting related party; Description of the relationship; Description of the nature of transactions; Volume of transactions either as an amount or as an appropriate proportion; any other element of the transaction necessary for an understanding of the financial statements; amounts or appropriate proportions of the outstanding items pertaining to related parties at balance sheet date and provision for doubtful debts due for such parties; and amounts written off or written back in the period in respect of dues from or to related parties.

AS 18 Related Party Disclosures

Examples of related party transactions

purchase or sales of goods; purchase or sale of fixed assets; rendering or receiving services; agency agreements; leasing or hire purchase arrangements; transfer of research and development; license agreements; financing (includes equity contributions in cash or kind); guarantees and collaterals; and management contracts including for deputation of employees.

AS 18 Related Party Disclosures

Aggregation

Items of a similar nature may be disclosed in aggregate by type of related party

.

AS 18 Related Party Disclosures

Disclosures
of related parties: Parties where control exists: XYZ Limited ( Holding Company) Other related parties: Fellow subsidiaries: XYZ Services Limited, Sweden XYZ Finance Inc., USA Associates: XYAB Private India Limited Directors: Mr. ABC Mr. EFG
List

AS 18 Related Party Disclosures

Disclosures
Transactions

with related parties:

Sales, services & other income: Fellow subsidiaries Rs 567,789 Associates Rs 123,456 Capital Expenditure Rs 987,654

Fellow

subsidiaries

Shares issued on amalgamation Holding company (equity shares) Rs 213,645 Managerial remuneration Rs 2,345

AS 18 Related Party Disclosures

Other disclosure issues

Items of a similar nature may be disclosed in aggregate by type of related party
.

XYZ Ltd.

Sales to ABC Ltd., a subsidiary Sales to DEF Ltd., a subsidiary Purchases from GHI, a joint venture company Purchases from ABC Ltd., a subsidiary
Disclosure: Sales to subsidiaries Purchases from subsidiaries Purchases from joint venture companies

Rs. 100,000 200,000 300,000 400,000

300,000 400,000 300,000

AS 18 Related Party Disclosures