Related Party Disclosures

The standard 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 consolidate financial statements presented by a holding company.

Objective

The objective of this Statement is to establish requirements for disclosure of:

• Related party relationships and
• Transactions between a reporting enterprise and its related parties.

Scope

AS 18 should be applied:

• In reporting related party relationships and transactions between a reporting enterprise and its related parties.
• Only to the related party relationships described in (a) to (e) below.
• To the financial statements of each reporting enterprise as also to consolidated financial statements presented by a holding company.

This Statement deals only with related party relationships described in (a) to (e) below:

• 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).
• 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.
• 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.
• Key management personnel and relatives of such personnel and
• 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.

Terms used in the AS-18

In the context of this Statement, the following are deemed not to be related parties:

• 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 this Statement 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.

• Related party transaction: A transfer of resources or obligations between related parties, regardless of whether or not a price is charged.
• Related party: Parties are consider 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.

Illustration

Identify the related parties in the following cases as per AS-18

A Ltd. holds 51% of B Ltd.

B Ltd holds 51% of O Ltd. Z Ltd holds 49% of O Ltd.

Solution

A Ltd., B Ltd. & O Ltd. are related to each other. Z Ltd. & O Ltd. are related to each other by virtue of Associate relationship. However, neither A Ltd. nor B Ltd. is related to Z Ltd. and vice versa.

Control

• 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 this Statement, 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 that company/enterprise. An enterprise is deemed to have the power to appoint, if any of the following conditions is satisfied:

• A person cannot be appointed as director/member without the exercise in his favour by that enterprise of such a power as aforesaid or
• A person’s appointment as director/member follows necessarily from his appointment to a position held by him in that enterprise or
• The director/member 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 per cent or more interest in the voting power of the other 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.

Significant influence: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, 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, vice versa. 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.

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.