Related Party Disclosure

1. 6th B Com

2.  To enable students understand the concepts, treatment for special transactions
like Related Party Disclosure, Employee Benefits, Leases, Financial instruments
and consolidated Financial Statements in the context of Financial Reporting as
per Indian Accounting Standard.

3.  Unit 1 – Related Party Disclosure (Ind AS 24)
 Unit 2 – Employee Benefits (Ind AS 19)
 Unit 3 – Accounting for Leases (Ind AS 17)
 Unit 4 – Financial Instruments (Ind AS 32, 39, 107)
 Unit 5 – Consolidated Financial Statement (Ind AS 27)

4.  Related Party, Related party transaction, Key management Personnel,
 Significant influence, Government related entity,
 Purpose of related party disclosures,
 Disclosure f related party transactions.

5.  Accounting standards – under section 133 of the Companies Act 2013
 Formulated to keep Indian economic & legal environment in mind.
 Ind AS are governed by the provisions of Indian Copyright Act 1957 and the
copyright in Ind AS vests in Government of India.

6.  Related parties is covered in IAS 24,
 Objectives of IAS 24 is to ensure that an entity`s financial statements contain the
disclosures necessary to draw attention to the possibility that its financial position
and profit or loss may have been affected by the existence of related parties and by
transactions and outstanding balances, including commitments, with such parties.
 A related party is a person or an entity that is related to the reporting authority.
The person includes a legal person who can be individuals company, firm, co-
operative society, local authority. It also includes entities incorporated outside
India.

7.  According to section 2(76) of the Company’s act , 2013
 i) a director or his relative.
 a key managerial personnel or his relative;
 i) a firm, in which a director, manager or his relative;
 ii) a private company in which a director or manager or his relative is a member or director;
 iii) a public company in which a director or manager is a director and holds along with his
relatives, more than 2% of its paid-up capital;
 iv) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a director or
manager.
 v) any person on whose advice, directions or instructions a director or manager is
accustomed to act provided that nothing in sub-clauses
 (vi) and(vii) shall apply to the advice ,directions or instructions given in a professional
capacity.
 vi) any body corporate which is-
 A) a holding , subsidiary or an associate company of such company;
 B) a subsidiary of a holding company to which it is also a subsidiary ; or,
 C) an investing company or the venture of a company means a body corporate

8.  Its common for companies to do business with
people and organizations with whom they
already have relationships.
 This kind of business activity is called a
‘related-party transaction’.
 The most common types of related parties are
 Business affiliates
 Shareholder groups,
 Subsidiaries
 Minority-owned companies,
 It also includes – sales, leases, service
agreements, and loan agreements.

9. Sl.
No
Related Parties Examples
1 A director or his relative (Relative – a member of the same HUF,
husband, wife, father, step father, mother, step mother, son, step
son, daughter, step daughter, son’s wife, daughter husband,
brother, step brother, sister, step sister)
Mr. L, Mr. And Mr. N are
directors and the relatives of
these Directors are considered as
related parties.
2 Key managerial personnel or his relative Mr. O is a company secretary, his
relatives will be considered as a
related party.
3 A firm in which a director, manager, or relative is a partner Mr. L is a partner at RST Pvt
Ltd., another firm. This firm will
also be considered as a related
party.
4 A private company in which a director, manager, or relative is a
member or director.
Mr. M is a director in M Pvt Ltd –
in this case M Pvt ltd. Becomes a
related party. Even when Mr. M’s
relative is a member or director in
M Pvt ltd., this company will be
considered as a related party

10. Sl.
No
Related Parties Examples
5 A public company in which a director or manager is a director and holds
along with his relatives more than 2% of its paid-up capital.
Mr. N along with his relatives holds more
than 2% of the paid-up capital of N ltd. In
this case, N Ltd will be considered as a
related party.
6 Any body corporate whose board of directors, MD or manager is
required to act in accordance with the advice, directions or instructions
of a director or manager (NA in cases when these directions are followed
in a professional capacity)
When P Ltd acts on the directions of Mr. L, P
Ltd will be a related party.
7 Any person on whose advice, directions or instructions a director or
manager is required to act (NA when this is done in a professional
capacity)
Mr A holding 51% in LMN Ltd on whose
advice Mr L has to act will be considered as a
related party.
8 Holding, Subsidiary or Associate of such company These all will be considered as related
parties:
– ABC Ltd holding 51% in LMN Ltd (Holding
Company)
– LMN Ltd holding 51% in XYZ Ltd
(Subsidiary Company)
– DEF Ltd holding 30% in LMN Ltd
(Associate Company)
9 Any company which is a subsidiary of a holding company to
which it is also a subsidiary
PQR & LMN are both subsidiaries of
ABC ltd. Thus, PQR also becomes a
related party

11. Arm’s Length Basis
Underwriting the subscription
Any office or place of profit in company
Significant influence
Listed and unlisted company
Related party as per SEBI
Related party as per Companies Act, 2013

12.  Is an expression, commonly used to refer to transactions in
which two or more unrelated and unaffiliated parties agree to
do business, acting independently and in their self-interest.
 Arm’s length price is a price at which buyer and a willing
unrelated seller would freely agree to transact or a trade
between related parties that is conducted as if they were
unrelated, so that there is no conflict of interest in the
transaction.
 Example
 A company named XYZ, USA entered into a contract with its
subsidiary company ABC, India for the purchase of raw material.
 Price per kg or raw materials $10,
 XYZ,USA if decide to purchase RM from other vendor in India,
price would have been $7 per kg.
 Here XYZ has tried to increase its expenses by purchasing from a
related party at higher price than fair price,
 Attempt to shift its profits to its related party located in India.
 The motive is to save taxes in the USA and shift profits to India.
 The transaction between XYZ, USA and ABC India is not at Arm’s
Length.
 If price agreed was $7 then it would have been at arms length.

13.  As per Section 188 of Companies Act, 2013 arm’s length price transaction,
 Transaction between two related parties that is conducted as if they were
unrelated, so that no conflict of interest.
 As per section 92F define Arm’s length price is the price applied or proposed to be
applied,
 When two unrelated persons enter into a transaction in uncontrolled conditions.
 Unrelated person – As per section 92A, the persons said to be unrelated if they are
not associated or deemed to be associated enterprise.

14.  The purchaser of the financial product applies to acquire them directly from the
issuer.
 With underwriting, a financial company, e.g., a bank assumes the risk and
commitment or reselling the total issue of the product to individual investor.
 The types of underwriting are
 Loan underwriting
 Insurance underwriting
 Securities underwriting

15. Means any office or place where such office or place
is held by a director receives from X company
Anything by way of remuneration over and above
the remuneration to which he is entitled as
director by way of salary, fee, commission, perks,
any rent-free accommodation.

16. May be exercised in several ways,
For Example:
By representation on the Board of Directors,
Participation in the policy making process
Material inter-company transaction
Interchange of managerial personnel, or
Dependence on technical information

17. A listed company is a public company.
Has issued shares through an stock exchange
An Unlisted Company
Can be public limited or private limited and not listed on
any stock exchange

18. With an aim to review and strengthen the
regulatory norms pertaining to RPTs, SEBI
constituted a working group in November 2019
Primary Market Advisory Committee (PMAC)
Persons from Industry,
Intermediaries, Stock Exchanges
Advisors
Lawyers
Professional bodies

19.  The SEBI Clause 49 also states certain regulatory requirements for related
party transactions.
 It defines a related party transaction as a transaction that includes the
transfer of resources/services/obligation.
 Its scope is wider than the Companies Act, 2013.
 It includes
 close family members of directors or key managerial personnel,
 a private company in which directors or key managerial personnel,
 plus their relatives have control or significant influence
 Every related party transaction has to be approved by the shareholders by
passing a special resolution and,
 All related parties shall not be allowed to vote on such resolutions.

20. An entity whose actions are attributable to the Foreign
Governing Authority under principles of internal law
Examples
 Any Court
 Arbitrator
 Department
 Commission
 Board
 Bureau
 Agency, authority,
 Federal state, Municipal, foreign.

21. Is to bring to notice the fact that an entity’s financial
statements and profit or loss can be affected by the
transactions and disclose outstanding balances including
commitments to such parties.

22. This standard shall be applied to:
Identifying related parties and transactions with them
Identifying outstanding balance and commitments
between the reporting entity and related parties.
Recognizing the circumstances in which disclosure will
be required in the above-stated situations
Determine the disclosures to be made

23. Related party transactions are an integral part of
businesses in todays’ world.
Transactions between the related parties are generally
conducted at negotiated terms and hence they must be
disclosed.
For an investor, knowledge of related parties facilitates a
more informed decision to invest in an entity.
Financial statements accurate disclosure of all the related
party relationships, transactions and outstanding
balances present a correct picture of the risk and
opportunities.

24.  Relationship between parent and subsidiaries
 Irrespective of whether there have been any transaction or not
 The entity's parent does not produce consolidated financial statements, then the
senior parent must be named in the consolidated financial statements for public use.
 Must report the compensation to the key management personnel in total and
each of the categories
 Short term employee benefits, post employment benefits, termination benefits, share-
based payment, and other long-term benefits'
 Key management services are obtained from another entity,
 Only the amounts incurred for the provision of such services shall be disclosed.
 If the entity has transactions with the related party during the financial year
 Outstanding balance, commitments, provision for doubtful debts, expenses in related
to bad and doubtful debts.
 The above disclosures will be made separately in respect of a parent subsidiaries,
associates