Accounting Standard 18: Related Party Disclosures

Accounting Standard 18: Related Party Disclosures

· Applicability of AS 18 has been restricted to enterprises whose debt or equity securities are listed in any stock exchange in India or are in the process of listing and all commercial enterprises whose turnover for the accounting period exceeds Rs 50 crores.

· The statement deals with following related party relationships: (i) Enterprises that directly or indirectly control (through subsidiaries) or are controlled by or are under common control with the reporting enterprise; (ii) Associates, Joint Ventures of the reporting entity; Investing party or venturer in respect of which reporting enterprise is an associate or a joint venture; (iii) Individuals owning voting power giving control or significant influence; (iv) Key management personnel and their relatives; and (v) Enterprises over which any of the persons in (iii) or (iv) are able to exercise significant influence. Remuneration paid to key management personnel falls under the definition of a related party transaction (ASI-23).

· Parties are considered related if one party has ability to control or exercise significant influence over the other party in making financial and/or operating decisions.

· Following are not considered related parties: (i) Two companies merely because of common director, (ii) Customer, supplier, franchiser, distributor or general agent merely by virtue of economic dependence; and (iii) Financiers, trade unions, public utilities, government departments and bodies merely by virtue of their normal dealings with the enterprise.

· Disclosure under the standard is not required in the following cases (i) If such disclosure conflicts with duty of confidentially under statute, duty cast by a regulator or a component authority; (ii) In consolidated financial statements in respect of intra-group transactions; and (iii) In case of state-controlled enterprises regarding related party relationships and transactions with other state-controlled enterprises.

· Relative (of an individual) means spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in dealings with the reporting entity.

· Standard also defines inter alia control, significant influence, associate, joint venture, and key management personnel.

· Where there are transactions between the related parties following information is to be disclosed: name of the related party, nature of relationship, nature of transaction and its volume (as an amount or proportion), other elements of transaction if necessary for understanding, amount or appropriate proportion outstanding pertaining to related parties, provision for doubtful debts from related parties, amounts written off or written back in respect of debts due from or to related parties.

· Names of the related party and nature of related party relationship to be disclosed even where there are no transactions but the control exists.

· Items of similar nature may be aggregated by type of the related party. The type of related party for the purpose of aggregation of items of a similar nature implies related party relationships. Material transactions; i.e., more than 10% of related party transactions are not to be clubbed in an aggregated disclosure. The related party transactions which are not entered in the normal course of the business would ordinarily be considered material (ASI-13).

· A non-executive director is not a key management person for the purpose of this standard. Unless,

o he is in a position to exercise significant influenceby virtue of owning an interest in the voting power or,

o he is responsible and has the authority for directing and controlling the activities of the reporting enterprise. Mere participation in the policy decision making process will not attract AS 18. (ASI-21).