Wednesday, December 22, 2010

IAS 18

Accounting Standard (AS) 18

(issued 2000)

Related Party Disclosures

Contents

OBJECTIVE

SCOPE Paragraphs 1-9

DEFINITIONS 10-14

THE RELATED PARTY ISSUE 15-19

DISCLOSURE 20-27

The following Accounting Standards Interpretations (ASIs) relate to AS 18:

 ASI 13 - Interpretation of paragraphs 26 and 27 of AS 18

 ASI 19 - Interpretation of the term ‘intermediaries’

 ASI 21 - Non-Executive Directors on the Board - whether

related parties

 ASI 23 - Remuneration paid to key management personnelwhether

a related party transaction

The above Interpretations are published elsewhere in this Compendium.

Accounting Standard (AS) 18*

(issued 2000)

RelatedPartyDisclosures

(This Accounting Standard includes paragraphs set in bold italic type

and plain type, which have equal authority. Paragraphs in bold italic

type indicate the main principles. This Accounting Standard should be

read in the context of its objective and the Preface to the Statements of

Accounting Standards1.)

Accounting Standard (AS) 18, ‘Related Party Disclosures’, issued by the

Council of the Institute of Chartered Accountants of India, comes into effect

in respect of accounting periods commencing on or after 1-4-2001. This

Standard ismandatory in nature2 in respectof accountingperiods commencing

on or after 1-4-20043 for the enterprises which fall in any one or more of the

following categories, at any time during the accounting period:

(i) Enterprises whose equity or debt securities are listed whether in

India or outside India.

* A limited revision to this Standard has been made in 2003, pursuant to which

paragraph 26 of this Standard has been revised and paragraph 27 has been added to

this Standard (See footnote 9 to this Standard).

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard.

3 AS 18 was earlier made mandatory in respect of accounting periods commencing

on or after 1-4-2001 only for the following enterprises:

(i) Enterprises whose equity or debt securities are listed on a recognised

stock exchange in India, and enterprises that are in the process of issuing

equity or debt securities that will be listed on a recognised stock

exchange in India as evidenced by the board of directors’ resolution in

this regard.

(ii) All other commercial, industrial and business reporting enterprises,

whose turnover for the accounting period exceeds Rs. 50 crores.

The relevant announcement was published in 'The Chartered Accountant', April

2002, page 1242.

348 AS 18 (issued 2000)

(ii) Enterprises which are in the process of listing their equity or debt

securities as evidenced by the board of directors’ resolution in

this regard.

(iii) Banks including co-operative banks.

(iv) Financial institutions.

(v) Enterprises carrying on insurance business.

(vi) All commercial, industrial and business reporting enterprises,

whose turnover for the immediately preceding accounting period

on the basis of audited financial statements exceeds Rs. 50 crore.

Turnover does not include ‘other income’.

(vii) All commercial, industrial and business reporting enterprises having

borrowings, including public deposits, in excess ofRs. 10 crore at

any time during the accounting period.

(viii) Holding and subsidiary enterprises of any one of the above at any

time during the accounting period.

The enterprises which do not fall in any of the above categories are not

required to apply this Standard.

Where an enterprise has been covered in any one or more of the above

categories and subsequently, ceases to be so covered, the enterprise will not

qualify for exemption from application of this Standard, until the enterprise

ceases to be covered in any of the above categories for two consecutive

years.

Where an enterprise has previously qualified for exemption fromapplication

of this Standard (being not covered by any of the above categories) but no

longer qualifies for exemption in the current accounting period, this Standard

becomes applicable from the current period. However, the corresponding

previous period figures need not be disclosed.

An enterprise,which, pursuant to the above provisions, does notmake related

party disclosures, should disclose the fact.

The following is the text of the Accounting Standard.

Objective

Related Party Disclosures 349

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

(a) related party relationships; and

(b) transactions between a reporting enterprise and its related parties.

Scope

1. This Statement should be applied in reporting related party

relationships and transactions between a reporting enterprise and its

related parties. The requirements of this Statement apply to the financial

statements of each reporting enterprise as also to consolidated financial

statements presented by a holding company.

2. This Statement applies only to related party relationships described

in paragraph 3.

3. This Statement deals only with related party relationships described in

(a) to (e) below:

(a) enterprises that directly, or indirectly through one or more

intermediaries4 , control, or are controlled by, or are under common

control with, the reporting enterprise (this includes holding

companies, subsidiaries and fellow subsidiaries);

(b) 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;

(c) 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;

(d) key management personnel5 and relatives of such personnel; and

4 See also Accounting Standards Interpretation (ASI) 19 published elsewhere in

this Compendium.

5 See also Accounting Standards Interpretation (ASI) 21 published elsewhere in

this Compendium.

350 AS 18 (issued 2000)

(e) enterprises over which any person described in (c) or (d) is able

to exercise significant influence. This includes enterprises owned

by directors ormajor shareholders of the reporting enterprise and

enterprises that have a member of key management in common

with the reporting enterprise.

4. In the context of this Statement, the following are deemed not to be

related parties:

(a) two companies simply because they have a director in common,

notwithstanding paragraph 3(d) or (e) above (unless the director

is able to affect the policies of both companies in their mutual

dealings);

(b) a single customer, supplier, franchiser, distributor, or general agent

withwhoman enterprise transacts a significant volume of business

merely by virtue of the resulting economic dependence; and

(c) 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):

(i) providers of finance;

(ii) trade unions;

(iii) public utilities;

(iv) government departments and government agencies including

government sponsored bodies.

5. 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.

6. In case a statute or a regulator or a similar competent authority governing

an enterprise prohibit the enterprise to disclose certain information which is

required to be disclosed as per this Statement, disclosure of such information

Related Party Disclosures 351

is not warranted. For example, banks are obliged by law to maintain

confidentiality in respect of their customers’ transactions and this Statement

would not override the obligation to preserve the confidentiality of customers’

dealings.

7. No disclosure is required in consolidated financial statements in

respect of intra-group transactions.

8. Disclosure of transactions between members of a group is unnecessary

in consolidated financial statements because consolidated financial

statements present information about the holding and its subsidiaries as a

single reporting enterprise.

9. No disclosure is required in the financial statements of statecontrolled

enterprises as regards related party relationships with other

state-controlled enterprises and transactions with such enterprises.

Definitions

10. For the purpose of this Statement, the following terms are used

with the meanings specified:

Related party - parties are considered 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.

Related party transaction - a transfer of resources or obligations between

related parties, regardless of whether or not a price is charged6 .

Control – (a) ownership, directly or indirectly, of more than one half

of the voting power of an enterprise, or

(b) 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

(c) a substantial interest in voting power and the power to direct, by

6 See also Accounting Standards Interpretation (ASI) 23 published elsewhere in this

Compendium.

352 AS 18 (issued 2000)

statute or agreement, the financial and/or operating policies of the

enterprise.

Significant influence - participation in the financial and/or operating

policy decisions of an enterprise, but not control of those policies.

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.

A 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.

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.

Holding company - a company having one or more subsidiaries.

Subsidiary - a company:

(a) 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

(b) 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.

Related Party Disclosures 353

State-controlled enterprise - an enterprise which is under the control of

the Central Government and/or any State Government(s).

11. For the purpose of this Statement, an enterprise is considered to control

the composition of

(i) the board of directors of a company, if it has the power, without

the consent or concurrence of any other person, to appoint or

remove all or a majority of directors of that company. An

enterprise is deemed to have the power to appoint a director if

any of the following conditions is satisfied:

(a) a person cannotbe appointed as directorwithout the exercise

in his favour by that enterprise of such a power as aforesaid;

or

(b) a person’s appointment as director follows necessarily from

his appointment to a position held by himin that enterprise;

or

(c) the director is nominated by that enterprise; in case that

enterprise is a company, the director is nominated by that

company/subsidiary thereof.

(ii) the governing body of an enterprise that is not a company, if it has

the power, without the consent or the concurrence of any other

person, to appoint or remove all or a majority of members of the

governing body of that other enterprise. An enterprise is deemed

to have the power to appoint a member if any of the following

conditions is satisfied:

(a) a person cannot be appointed as member of the governing

body without the exercise in his favour by that other

enterprise of such a power as aforesaid; or

(b) a person’s appointment as member of the governing body

follows necessarily from his appointment to a position held

by him in that other enterprise; or

(c) themember of the governing body is nominated by that other

enterprise.

354 AS 18 (issued 2000)

12. An enterprise is considered to have a substantial interest in another

enterprise if that enterprise owns, directly or indirectly, 20 per cent or more

interest in the voting power of the other enterprise. Similarly, an individual is

considered to have a substantial interest in an enterprise, if that individual

owns, directly or indirectly, 20 per cent or more interest in the voting power

of the enterprise.

13. Significant influence may be exercised in several ways, for example,

by representation on the board of directors, participation in the policymaking

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

intermediaries7, 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. Conversely, if the

investing party holds, directly or indirectly through intermediaries7 , less than

20 per cent of the voting power of the enterprise, it is presumed that the

investing party does not have significant influence, unless such influence can

be clearly demonstrated. A substantial or majority ownership by another

investing party does not necessarily preclude an investing party fromhaving

significant influence.

14. Key management personnel are those persons who have the authority

and responsibility for planning, directing and controlling the activities of the

reporting enterprise. For example, in the case of a company, the managing

director(s), whole time director(s), manager and any person in accordance

with whose directions or instructions the board of directors of the company

is accustomed to act, are usually considered key management personnel.8

TheRelated Party Issue

15. Related party relationships are a normal feature of commerce and

business. For example, enterprises frequently carry on separate parts of

their activities through subsidiaries or associates and acquire interests in

other enterprises - for investment purposes or for trading reasons - that are

7 See also Accounting Standards Interpretation (ASI) 19 published elsewhere in

this Compendium.

8 See also Accounting Standards Interpretation (ASI) 21 published elsewhere in

this Compendium.

Related Party Disclosures 355

of sufficient proportions for the investing enterprise to be able to control or

exercise significant influence on the financial and/or operating decisions of

its investee.

16. Without related party disclosures, there is a general presumption that

transactions reflected in financial statements are consummated on an arm’slength

basis between independent parties. However, that presumption may

not be valid when related party relationships exist because related parties

may enter into transactions which unrelated parties would not enter into.

Also, transactions between related parties may not be effected at the same

terms and conditions as between unrelated parties. Sometimes, no price is

charged in related party transactions, for example, free provision of

management services and the extension of free credit on a debt. In view of

the aforesaid, the resulting accounting measures may not represent what

they usuallywould be expected to represent. Thus, a related party relationship

could have an effect on the financial position and operating results of the

reporting enterprise.

17. The operating results and financial position of an enterprise may be

affected by a related party relationship even if related party transactions do

not occur. The mere existence of the relationship may be sufficient to affect

the transactions of the reporting enterprise with other parties. For example,

a subsidiarymay terminate relations with a trading partner on acquisition by

the holding company of a fellow subsidiary engaged in the same trade as the

former partner. Alternatively, one party may refrain from acting because of

the control or significant influence of another - for example, a subsidiary

may be instructed by its holding company not to engage in research and

development.

18. Because 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 by this Statement.

19. Sometimes, transactions would not have taken place if the related party

relationship had not existed. For example, a company that sold a large proportion

of its production to its holding company at cost might not have found an

alternative customer if the holding company had not purchased the goods.

Disclosure

20. The statutes governing an enterprise often require disclosure in financial

356 AS 18 (issued 2000)

statements of transactions with certain categories of related parties. In

particular, attention is focussed on transactions with the directors or similar

key management personnel of an enterprise, especially their remuneration

and borrowings, because of the fiduciary nature of their relationshipwith the

enterprise.

21. Name of the related party and nature of the related party

relationship where control exists should be disclosed irrespective of

whether or not there have been transactions between the related parties.

22. Where the reporting enterprise controls, or is controlled by, another

party, this information is relevant to the users of financial statements

irrespective of whether or not transactions have taken place with that party.

This is because the existence of control relationshipmay prevent the reporting

enterprise from being independent in making its financial and/or operating

decisions. The disclosure of the name of the related party and the nature of

the related party relationship where control exists may sometimes be at least

as relevant in appraising an enterprise’s prospects as are the operating results

and the financial position presented in its financial statements. Such a related

party may establish the enterprise’s credit standing, determine the source

and price of its raw materials, and determine to whom and at what price the

product is sold.

23. If there have been transactions between related parties, during

the existence of a related party relationship, the reporting enterprise

should disclose the following:

(i) the name of the transacting related party;

(ii) a description of the relationship between the parties;

(iii) a description of the nature of transactions;

(iv) volume of the transactions either as an amount or as an

appropriate proportion;

(v) any other elements of the related party transactions necessary

for an understanding of the financial statements;

(vi) the amounts or appropriate proportions of outstanding items

Related Party Disclosures 357

pertaining to related parties at the balance sheet date and

provisions for doubtful debts due from such parties at that

date; and

(vii) amounts written off or written back in the period in respect of

debts due from or to related parties.

24. The following are examples of the related party transactions in respect

of which disclosures may be made by a reporting enterprise:

• purchases or sales of goods (finished or unfinished);

• purchases or sales of fixed assets;

• rendering or receiving of services;

• agency arrangements;

• leasing or hire purchase arrangements;

• transfer of research and development;

• licence agreements;

• finance (including loans and equity contributions in cash or in kind);

• guarantees and collaterals; and

• management contracts including for deputation of employees.

25. Paragraph 23 (v) requires disclosure of ‘any other elements of the

related party transactions necessary for an understanding of the financial

statements’. An example of such a disclosurewould be an indication that the

transfer of a major asset had taken place at an amount materially different

from that obtainable on normal commercial terms.

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

9 The Council of the Institute decided to make limited revision to AS 18 in 2003,

pursuant to which paragraph 26 has been revised and an explanatory paragraph 27

has been added (see ‘The Chartered Accountant’, March 2003, pp. 963). The

revisions have come into effect in respect of accounting periods commencing on or

after 1-4-2003. The erstwhile paragraph 26 was as under:

“26. Items of a similar nature may be disclosed in aggregate by type of

related party.”

358 AS 18 (issued 2000)

of related party except when seperate disclosure is necessary for an

understanding of the effects of related party transactions on the financial

statements of the reporting enterprise.10

27.1 1 Disclosure of details of particular transactions with individual related

parties would frequently be too voluminous to be easily understood.

Accordingly, items of a similar nature may be disclosed in aggregate by type

of related party. However, this is not done in such a way as to obscure the

importance of significant transactions. Hence, purchases or sales of goods

are not aggregated with purchases or sales of fixed assets. Nor a material

related party transaction with an individual party is clubbed in an aggregated

disclosure.1 2

1 0 See also Accounting Standards Interpretation (ASI) 13 published elsewhere in

this Compendium.

1 1 See footnote 9.

1 2 See footnote 10.

No comments:

Post a Comment