AS – 18AS – 18

RELATED PARTY DISCLOSURESRELATED PARTY DISCLOSURES

Topic aheadTopic ahead

IntroductionIntroduction What AS-18 IntendsWhat AS-18 Intends DefinitionsDefinitions RelationshipRelationship Applicability Applicability Exemptions & InapplicabilityExemptions & Inapplicability

IntroductionIntroduction

Usefulness of Related Party Disclosures.Usefulness of Related Party Disclosures.

Enhances understanding of financials by the Enhances understanding of financials by the user and provide handful information user and provide handful information relevant to the decision making .relevant to the decision making .

Shields the entity from the general public Shields the entity from the general public presumption that the transaction reflected presumption that the transaction reflected in financial statements are on an arms in financial statements are on an arms length basis among the independent parties.length basis among the independent parties.

Necessity to build relations & transact among Necessity to build relations & transact among related ones arise because of related ones arise because of

Urge to grow rapidlyUrge to grow rapidly Overcome the barred internal synergyOvercome the barred internal synergy External resource leveragingExternal resource leveraging

Generally enterprises build relations by Generally enterprises build relations by reorganizing such as,reorganizing such as,

Interlinked organisation structureInterlinked organisation structure Transaction b/w them is natural.Transaction b/w them is natural. Need not be at par to market value , Need not be at par to market value ,

for the following reasonsfor the following reasons

a)a) Guaranteed businessGuaranteed business

b)b) No selling costNo selling cost

c)c) No risk of bad debtNo risk of bad debt

E.g. TATA Industries - its associatesE.g. TATA Industries - its associates

What AS- 18 intends the corporate to What AS- 18 intends the corporate to do ?do ?

Tell the general Tell the general public in your notes public in your notes to account who are to account who are your relatives , your relatives ,

Tell the transactions Tell the transactions that you entered that you entered with them during with them during the course of the course of relationshiprelationship

First among the list- disclose who are your relatives First among the list- disclose who are your relatives as defined in AS- 18 ?as defined in AS- 18 ?

For time being , related party is a party where there For time being , related party is a party where there is a relationship of control or significant influence .is a relationship of control or significant influence .

Cousins(Associates)

Child(subsidiary)

Spouse( The Joint venture)

Cousins( Associates)

Parents( The Holding Company)

The Company

Nature of Relationship

Name of the Party

Related Party Related Party DisclosuresDisclosures

Related Party Related Party

relationships where relationships where

There is controlThere is control

Disclose Disclose

Disclosure of Related Party Disclosure of Related Party TransactionsTransactions

Definitions:Definitions:A. Related Party :A. Related Party :

Parties are considered related if at Any Time Parties are considered related if at Any Time during the reporting period one party has during the reporting period one party has the ability to CONTROL or exercise the ability to CONTROL or exercise SIGNIFICANT INFLUENCE over the other SIGNIFICANT INFLUENCE over the other party.party.

B. ControlB. Control

Similar to Section 4 and AS 21Similar to Section 4 and AS 21 Voting power more than Half .Voting power more than Half . Control over the Composition of the BoardControl over the Composition of the Board Substantial InterestSubstantial Interest

( 20% of Voting Power) together with power ( 20% of Voting Power) together with power to direct affairs of the enterprise which to direct affairs of the enterprise which flows from either Statute or Share Holder flows from either Statute or Share Holder agreement,agreement,

C. Significant Influence:C. Significant Influence:

Significant Influence is Significant Influence is Participation( & not ability to Participation( & not ability to participate )in the financial & or participate )in the financial & or operating policy decisions of an operating policy decisions of an enterprise, but not control of those enterprise, but not control of those policies.policies.

E.g. Anil Ambani – Honorary E.g. Anil Ambani – Honorary directordirector

Test for significant influenceTest for significant influence

Unless otherwise demonstrated share Unless otherwise demonstrated share holding of more than 20% is presumed holding of more than 20% is presumed to give rise to significant influence. to give rise to significant influence.

E.g.Anil AmbaniE.g.Anil Ambani Unless otherwise demonstrated share Unless otherwise demonstrated share

holding of less than 20% it is presumed holding of less than 20% it is presumed that there is NO significant Influencethat there is NO significant Influence

E.g. Narayan MurthyE.g. Narayan Murthy

D.RelativeD.Relative

Parents , spouse, brother , sister, Parents , spouse, brother , sister, children, who may be expected to children, who may be expected to influence or be influenced.influence or be influenced.

Mere existence of blood relationship Mere existence of blood relationship is not adequateis not adequate

E.g. Ambani brothersE.g. Ambani brothers

E. Key Management PersonnelE. Key Management Personnel

From AS- 18 perspective only 3 positions are From AS- 18 perspective only 3 positions are graded as Key Management Personnelgraded as Key Management Personnel

because only 3 relationship involve in all because only 3 relationship involve in all the following process ,the following process ,

Related Party of Relationship: Related Party of Relationship: The following Five relationship are The following Five relationship are identified for the purpose of disclosure identified for the purpose of disclosure by AS-18,by AS-18,

Relationships which are exempt:Relationships which are exempt:

Two Enterprises merely because of a Two Enterprises merely because of a Common Director,Common Director,

E.g. IDBI ( Nominee Director)E.g. IDBI ( Nominee Director) Provision of finance, trade unions and Provision of finance, trade unions and

utility services.utility services.

E.g. Electricity, water, gas.( Forge power- E.g. Electricity, water, gas.( Forge power- reliance)reliance)

Sole Suppliers or sole selling agentsSole Suppliers or sole selling agents

Related Party transactions exemptions Related Party transactions exemptions from Disclosure:from Disclosure:

Transactions b/w holding & Subsidiary in Transactions b/w holding & Subsidiary in the case of Consolidated Financial the case of Consolidated Financial Statements. Statements.

Transactions where statute permits Transactions where statute permits confidentiality.confidentiality.

E.g. Banking Companies.E.g. Banking Companies. Transaction b/w state controlled Transaction b/w state controlled

enterprises.enterprises.

E.g. Transaction b/w state controlled E.g. Transaction b/w state controlled enterprises.enterprises.

Applicability:Applicability:

Effective Date: 1st April 2001.