AS-18 Related Party DisclosuresAS-18 Related Party Disclosures

Need of AS on Related Party TransactionsNeed of AS on Related Party Transactions There is general presumption that transaction There is general presumption that transaction reflected in the financial statements are executed on reflected in the financial statements are executed on arm’s-length basis between independent parties. arm’s-length basis between independent parties. However that presumption may not be valid when However that presumption may not be valid when related party relationship exist because related related party relationship exist because related parties may enter into transactions which unrelated parties may enter into transactions which unrelated parties would not enter into. parties would not enter into.

AS-18 Related Party DisclosuresAS-18 Related Party DisclosuresNeed of AS on Related Party TransactionsNeed of AS on Related Party Transactions

Several related companies may have been Several related companies may have been developed to fulfill the desires of bad developed to fulfill the desires of bad management. e.g. Companies formed to evade management. e.g. Companies formed to evade taxes, Companies formed to avoid labour laws, taxes, Companies formed to avoid labour laws, Companies formed to siphon fundsCompanies formed to siphon funds

AS-18 Related Party AS-18 Related Party DisclosuresDisclosures

Objective of AS-18Objective of AS-18

Objective of AS-18 is to establish the requirement for disclosures of

Related Party

Relationships

Transactions between a

reporting enterprise& its related parties.

Definitions under AS-18Definitions under AS-18

Related PartyRelated Party:: Parties are considered to be Parties are considered to be related if at any time during the reporting related if at any time during the reporting period one party has the ability to period one party has the ability to controlcontrol the the other party or exercise other party or exercise significant influencesignificant influence over the other party in making financial and/or over the other party in making financial and/or operating decisions.operating decisions.

ControlControl Significant InfluenceSignificant Influencea)a) Ownership, Ownership, directly or indirectlydirectly or indirectly, ,

of of more than one halfmore than one half of the voting of the voting power of an enterprise, orpower of an enterprise, or

b)b) Control of the Control of the compositioncomposition of the of the board of directors in the case of a board of directors in the case of a company or of the composition of company or of the composition of the corresponding governing body the corresponding governing body in case of any other enterprise, orin case of any other enterprise, or

c)c) A substantial interestA substantial interest in voting in voting power power andand the the power to directpower to direct, by , by statute or agreement, the financial statute or agreement, the financial and/or operating policies of the and/or operating policies of the enterprise.enterprise.

Significant Influence- Significant Influence- participationparticipation in the in the financial and/or financial and/or operating policy operating policy decisions of an decisions of an enterprise, enterprise, but not but not control of those control of those policies.policies.

Significant InfluenceSignificant Influence

Significant influence can be exercised in several Significant influence can be exercised in several ways, e.g.ways, e.g.

By representation on the board of directorsBy representation on the board of directors participation in the policy making processparticipation in the policy making process material inter-company transactionsmaterial inter-company transactions dependence on technical informationdependence on technical information if an investing party holds, directly or indirectly if an investing party holds, directly or indirectly

through intermediaries 20 % or more of the voting through intermediaries 20 % or more of the voting power of the enterprise. (rebut table presumption)power of the enterprise. (rebut table presumption)

AS-18 deals only with related party AS-18 deals only with related party relationships described in (a) to (e) below:relationships described in (a) to (e) below:

a)a) Enterprises that directly, or indirectly through Enterprises that directly, or indirectly through one or more intermediaries control or controlled one or more intermediaries control or controlled by or under common control with the reporting by or under common control with the reporting enterpriseenterprise

b)b) Associates, and joint ventures of the reporting Associates, and joint ventures of the reporting enterprise and the investing party or venturer in enterprise and the investing party or venturer in respect of which the reporting enterprise is an respect of which the reporting enterprise is an associate or a joint venture;associate or a joint venture;

c)c) Individual owning, directly or indirectly, an Individual owning, directly or indirectly, an interest in the voting power of the reporting interest in the voting power of the reporting enterprise that gives them control or significant enterprise that gives them control or significant influence over the enterprise, and relatives of influence over the enterprise, and relatives of any such individual;any such individual;

d)d) Key management personnel and relatives Key management personnel and relatives of such personnel; andof such personnel; and

e)e) Enterprises over which any person Enterprises over which any person described in (c) or (d) is able to exercise described in (c) or (d) is able to exercise significant influence. This includes significant influence. This includes enterprises owned by directors or major enterprises owned by directors or major shareholders of the reporting enterprise and shareholders of the reporting enterprise and enterprises that have a member of key enterprises that have a member of key management in common with the reporting management in common with the reporting enterprise.enterprise.

Para-3Para-3

a)a) Enterprises that directly, or Enterprises that directly, or indirectly through one or more indirectly through one or more intermediaries intermediaries controlcontrol or or controlled bycontrolled by or or under common under common controlcontrol with the reporting with the reporting enterpriseenterprise

Holding company:Holding company: a company having one or more a company having one or more subsidiaries.subsidiaries.

Subsidiary:Subsidiary: a company: a company:

a)a) In which another company (the holding In which another company (the holding company) holds, either by itself and/or company) holds, either by itself and/or through one or more subsidiaries, more than through one or more subsidiaries, more than one half in the nominal value of its equity one half in the nominal value of its equity share capital; orshare capital; or

b)b) Of which another company (the holding Of which another company (the holding company) controls, either by itself and /or company) controls, either by itself and /or through one or more subsidiaries, the through one or more subsidiaries, the composition of its board of directors. composition of its board of directors.

Fellow Subsidiary-Fellow Subsidiary- a company is a company is considered to be a fellow considered to be a fellow subsidiary of another company if subsidiary of another company if both are subsidiaries of the both are subsidiaries of the same same holding company.holding company.

A Ltd.

B Ltd. C Ltd.60% 75%

Fellow Subsidiaries

Para-3Para-3

b)b) Associates, and joint ventures of the Associates, and joint ventures of the reporting enterprise and reporting enterprise and

the investing party or venturer in the investing party or venturer in respect of which the reporting respect of which the reporting enterprise is an associate or a joint enterprise is an associate or a joint venture;venture;

Para-10Para-10

Associate:Associate: an enterprise in which an investing an enterprise in which an investing reporting party has reporting party has significant influencesignificant influence and and which is which is neither a subsidiary nor a joint neither a subsidiary nor a joint venture of that party.venture of that party.

A Joint Venture:A Joint Venture: a contractual agreement a contractual agreement whereby two or more parties undertake an whereby two or more parties undertake an economic activity economic activity which is subject to joint which is subject to joint control.control.

Para 3Para 3

c) Individual owning, c) Individual owning, directly or indirectlydirectly or indirectly, an , an interest in the voting power of the reporting interest in the voting power of the reporting enterprise that gives them enterprise that gives them control or control or significant influencesignificant influence over the enterprise, and over the enterprise, and relativesrelatives of any such individual; of any such individual;

RelativesRelatives

Para 10 of AS-18Para 10 of AS-18

RelativeRelative- in relation to an individual, means the - in relation to an individual, means the spouse, son, daughter, brother, sister, father spouse, son, daughter, brother, sister, father and mother who may be expected and mother who may be expected to influenceto influence, , or or be influenced bybe influenced by, that individual in his/her , that individual in his/her dealings with the reporting enterprise.dealings with the reporting enterprise.

Relatives under the Companies Act,1956Relatives under the Companies Act,19561.1. Members of HUFMembers of HUF

2.2. Husband and WifeHusband and Wife

3.3. Related as per Schedule 1-A of the Companies Act, Related as per Schedule 1-A of the Companies Act, 19561956

- brother (including step brother) and brother’s wife- brother (including step brother) and brother’s wife

- Sister (including step sister) and Sister’s Husband- Sister (including step sister) and Sister’s Husband

- Father and Mother including step mother- Father and Mother including step mother

- Son (Including step son) and son’s wife- Son (Including step son) and son’s wife

- daughter (including step daughter) and daughter’s - daughter (including step daughter) and daughter’s husbandhusband

-Paternal and Maternal grandfathers and -Paternal and Maternal grandfathers and grandmothersgrandmothers

- Grand children through either son or daughter - Grand children through either son or daughter and their spousesand their spouses

Relatives under the Companies Bill, 2008Relatives under the Companies Bill, 2008

““relative” with reference to any relative” with reference to any individual means the spouse, individual means the spouse, brother, sister and brother, sister and all lineal all lineal ascendants and descendantsascendants and descendants of such of such individual related to him either by individual related to him either by marriage or adoption.marriage or adoption.

Relatives under the Income Tax Act, Relatives under the Income Tax Act, 19611961

““Relative” in relation to an individual, Relative” in relation to an individual, means the husband, wife, brother or means the husband, wife, brother or sister or sister or any lineal ascendant or any lineal ascendant or descendantdescendant of that individual of that individual

Relative under Para 9 of Relative under Para 9 of IAS-24IAS-24

Close members of the family of an Close members of the family of an individual are those family members individual are those family members who may be expected who may be expected to influenceto influence or or be influencedbe influenced by,by, that individual in that individual in their dealings with the entity.their dealings with the entity.

Para 3Para 3(d) (d) Key management personnel and Key management personnel and

relatives of such personnel; relatives of such personnel;

Para 10 of AS-18 defines KMPPara 10 of AS-18 defines KMP

Key Management Personnel-Key Management Personnel- those persons those persons who have the who have the authority and responsibilityauthority and responsibility for for planning, directing and controllingplanning, directing and controlling the activities of the reporting enterprise.the activities of the reporting enterprise.

Examples of Key Management PersonnelExamples of Key Management Personnel(Para 14 of AS 18)(Para 14 of AS 18)

In the case of companyIn the case of company Managing Director (s)Managing Director (s) Whole time director (s)Whole time director (s) ManagerManager Any person in accordance with whose Any person in accordance with whose

directions or instructions the board of directors directions or instructions the board of directors of the company of the company is accustomed to act.is accustomed to act.

Whether Non-Executive Directors on Whether Non-Executive Directors on the Board are related parties?the Board are related parties?

(ASI 21)(ASI 21) A non executive director of a company should A non executive director of a company should

not be considered as key management person not be considered as key management person under AS 18 by virtue of merely his being director under AS 18 by virtue of merely his being director unless he has the authority and responsibility for unless he has the authority and responsibility for planning, directing and controlling the activities of planning, directing and controlling the activities of the reporting enterprise.the reporting enterprise.

The requirements of AS 18 should not be applied The requirements of AS 18 should not be applied unless he falls in any of categories of para3 of unless he falls in any of categories of para3 of AS18.AS18.

Para 3Para 3

e)e) Enterprises over which any person Enterprises over which any person described in described in (c) or (d)(c) or (d) is able to exercise is able to exercise significant influencesignificant influence. This includes . This includes enterprises owned by directors or major enterprises owned by directors or major shareholders of the reporting enterprise shareholders of the reporting enterprise and enterprises that have a member of and enterprises that have a member of key management key management in commonin common with the with the reporting enterprise.reporting enterprise.

Related party transactionRelated party transaction

PPara 10 of AS 18 defines Related Party ara 10 of AS 18 defines Related Party Transactions- Transactions- a transfer of resources or a transfer of resources or obligations between related parties, obligations between related parties, regardless of whether or not price is charged.regardless of whether or not price is charged.

Examples of Related Party Transactions:Examples of Related Party Transactions:1.1. Purchase or Sale of GoodsPurchase or Sale of Goods2.2. Purchase or Sale of Fixed AssetsPurchase or Sale of Fixed Assets3.3. Rendering or receiving of services.Rendering or receiving of services.

Examples of Related Party Transactions:Examples of Related Party Transactions:

4.4. Leasing or Hire Purchase AgreementsLeasing or Hire Purchase Agreements5.5. Transfer of Research and DevelopmentTransfer of Research and Development6.6. Financing TransactionFinancing Transaction7.7. Management services provided by one Management services provided by one

company to another.company to another.8.8. Group Branding or advertising without any Group Branding or advertising without any

cost.cost.9.9. Use of common infrastructures such as Use of common infrastructures such as

premises, vehicles, etc. without any cost.premises, vehicles, etc. without any cost.

Practical Case StudiesPractical Case Studies

A Ltd. Holds control over X Ltd and exercises A Ltd. Holds control over X Ltd and exercises significant influence over Y Ltd and Z Ltd. In significant influence over Y Ltd and Z Ltd. In this situation X Ltd. Y Ltd. & Z Ltd. are this situation X Ltd. Y Ltd. & Z Ltd. are related to A Ltd and vice versa. Whether X related to A Ltd and vice versa. Whether X Ltd, Y Ltd & Z Ltd. are related to each other?Ltd, Y Ltd & Z Ltd. are related to each other?

What will be difference in your answer if Mr. S What will be difference in your answer if Mr. S is able to exercise significant influence on a is able to exercise significant influence on a group of enterprise?group of enterprise?

No, Because para3 (a) of AS 18 includes the No, Because para3 (a) of AS 18 includes the relationship between A Ltd with X Ltd, Y Ltd relationship between A Ltd with X Ltd, Y Ltd & Z Ltd but not between X Ltd, Y Ltd & Z & Z Ltd but not between X Ltd, Y Ltd & Z Ltd. Further Para3(b) includes the relationship Ltd. Further Para3(b) includes the relationship between an enterprise and its associate but between an enterprise and its associate but does not include as related parties various does not include as related parties various associates of the same enterprise.associates of the same enterprise.

In Second Case if Mr. S (i.e. individual) is able In Second Case if Mr. S (i.e. individual) is able to exercise the significant influence on a group to exercise the significant influence on a group of enterprises, all those enterprises will be of enterprises, all those enterprises will be related party under para3(e) of AS 18related party under para3(e) of AS 18

Practical Case StudiesPractical Case Studies

X Ltd holds 25% in Y Ltd and Y Ltd X Ltd holds 25% in Y Ltd and Y Ltd holds 30% in Z Ltd, whether X Ltd holds 30% in Z Ltd, whether X Ltd and Z Ltd are related parties? i.e. and Z Ltd are related parties? i.e. Whether associate of an associate is a Whether associate of an associate is a related party?related party?

They are not related parties under 3(b). They are not related parties under 3(b). However, whether X Ltd and Z Ltd are related However, whether X Ltd and Z Ltd are related parties under para3(e) of AS 18 needs to be parties under para3(e) of AS 18 needs to be evaluated.evaluated.

Whether remuneration paid to Key Management Whether remuneration paid to Key Management Personnel is related party transaction?Personnel is related party transaction?

ASI 23ASI 23

Yes, It is related party transaction requiring Yes, It is related party transaction requiring disclosures under AS 18.disclosures under AS 18.

Disclosures:Disclosures:

Para 21Para 21

Name of the related party and nature of the Name of the related party and nature of the related party relationship related party relationship wherewhere control existscontrol exists should be disclosed should be disclosed irrespective of whether or irrespective of whether or notnot there have been any transactions between there have been any transactions between the related parties.the related parties.

Disclosures:Disclosures:If there have been transactions between related If there have been transactions between related

parties, during the existence of a related parties, during the existence of a related party relationship, the reporting enterprise party relationship, the reporting enterprise should disclose the following:should disclose the following:

i.i. The name of the transacting related party;The name of the transacting related party;ii.ii. A description of the relationship between the A description of the relationship between the

partiespartiesiii.iii. A description of the nature of the A description of the nature of the

transactions;transactions;

iv.iv. Volume of the transactions either as an amount Volume of the transactions either as an amount or as an appropriate proportionor as an appropriate proportion

v.v. Any other elements of the related party Any other elements of the related party transactions necessary for an understanding of transactions necessary for an understanding of the financial statements;the financial statements;

vi.vi. The amount or appropriate proportions of The amount or appropriate proportions of outstanding items pertaining to related parties at outstanding items pertaining to related parties at Balance Sheet date and provisions for the Balance Sheet date and provisions for the doubtful debts due from such parties at that datedoubtful debts due from such parties at that date

vii.vii. Amount written off or written back in the period Amount written off or written back in the period in respect of debts due from or to the related in respect of debts due from or to the related parties.parties.