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As 18


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As 18

  1. 1. Related Party Disclosures (AS –18) PHD Chambers of Commerce and Industry “ Corporate Financial Reporting and Changing Paradigms” 23 February 2002
  2. 2. AS-18 Related Party Disclosures <ul><li>Applicability </li></ul><ul><li>Effective in respect of accounting periods commencing on or after 1 April 2001 </li></ul><ul><li>Mandatory </li></ul>
  3. 3. What it entails <ul><li>The standard establishes requirements for the disclosure of: </li></ul><ul><li>related party relationships; and </li></ul><ul><li>transactions between a reporting enterprise and its related parties. </li></ul>
  4. 4. Rationale <ul><li>Presumption of arm’s length transactions which may not be valid when related party relationships exist. </li></ul><ul><ul><li>Transactions may not have been entered into with unrelated parties or may not have taken place at all; </li></ul></ul><ul><ul><li>Terms and conditions may be different from normal commercial terms. </li></ul></ul>
  5. 5. Who is a related party ? <ul><li>Ability to : </li></ul><ul><li>Control ; or </li></ul><ul><li>Exercise significant influence in making financial and/or operating decisions </li></ul>
  6. 6. Control <ul><li>Ownership, directly or indirectly, of more than one half of the voting power </li></ul><ul><li>Control of composition of board of directors of a company </li></ul><ul><li>A substantial interest in voting power (20% or more) AND power under statute/agreement to direct financial and/or operating policies of the enterprise </li></ul>
  7. 7. Significant Influence <ul><li>Participation in financial and/or operating policy decisions but not control; </li></ul><ul><li>May be gained by - </li></ul><ul><li>Share ownership </li></ul><ul><ul><li>Statute; and </li></ul></ul><ul><ul><li>Agreement </li></ul></ul><ul><li>Assumed to exist in case of holding of 20% or more voting power directly or indirectly. This assumption is however rebuttable. </li></ul>
  8. 8. <ul><li>Common control </li></ul><ul><li>Enterprises that </li></ul><ul><ul><li>directly, or indirectly through one or more intermediaries </li></ul></ul><ul><ul><ul><li>control, </li></ul></ul></ul><ul><ul><ul><li>are controlled by, </li></ul></ul></ul><ul><ul><ul><li>are under common control with </li></ul></ul></ul><ul><li>the reporting enterprise. </li></ul>Related party relationships
  9. 9. Related party relationships (continued) <ul><li>associates and joint ventures (and vice versa) </li></ul><ul><li>“ associates and joint ventures of the reporting enterprise </li></ul><ul><li>and </li></ul><ul><li>the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture “ </li></ul>
  10. 10. Related party relationships (continued) <ul><li>individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise giving them “control” or “significant influence” over the enterprise, AND relatives of such individuals (spouse, children, parents, siblings) </li></ul>
  11. 11. Related party relationships (continued) <ul><li>key management personnel AND their relatives. </li></ul>
  12. 12. Related party relationships (continued) <ul><li>enterprises over which any person in (c) or (d) is able to exercise significant influence </li></ul><ul><li>“ 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” </li></ul>
  13. 13. Relationships Covered <ul><li>Control of another enterprise (parent); </li></ul><ul><li>Control by another enterprise (subsidiary); </li></ul><ul><li>Under common control (fellow subsidiary); </li></ul><ul><li>Associates/ joint ventures/ co-venturer; </li></ul><ul><li>Investor in respect of which the enterprise is an associate; </li></ul><ul><li>Individuals owning, directly or indirectly, voting power that gives them control or significant influence and their relatives; </li></ul><ul><li>Key management personnel and their relatives; and </li></ul><ul><li>Enterprises over which major owners, key management personnel or their relatives are able to exercise significant influence. </li></ul>
  14. 14. Not Considered Related Parties <ul><li>Two companies simply because they have a director in common </li></ul><ul><li>A single customer, supplier, franchiser, distributor or general agent </li></ul><ul><li>Providers of finance, trade unions, public utilities, government departments and government agencies in the course of their normal dealing </li></ul>
  15. 15. Disclosures <ul><li>Name of the related party and nature of the related party relationship where control exists, even if there have been transactions between the related parties. </li></ul>
  16. 16. Disclosures during existence of related party relationships <ul><li>Name of transacting related party; </li></ul><ul><li>Description of the relationship; </li></ul><ul><li>Description of the nature of transactions; </li></ul><ul><li>Volume of transactions either as an amount or as an appropriate proportion; </li></ul><ul><li>any other element of the transaction necessary for an understanding of the financial statements; </li></ul><ul><li>amounts or appropriate proportions of the outstanding items pertaining to related parties at balance sheet date and provision for doubtful debts due for such parties; and </li></ul><ul><li>amounts written off or written back in the period in respect of dues from or to related parties. </li></ul>
  17. 17. Examples of related party transactions <ul><li>purchase or sales of goods; </li></ul><ul><li>purchase or sale of fixed assets; </li></ul><ul><li>rendering or receiving services; </li></ul><ul><li>agency agreements; </li></ul><ul><li>leasing or hire purchase arrangements; </li></ul><ul><li>transfer of research and development; </li></ul><ul><li>license agreements; </li></ul><ul><li>financing (includes equity contributions in cash or kind); </li></ul><ul><li>guarantees and collaterals; and </li></ul><ul><li>management contracts including for deputation of employees. </li></ul>
  18. 18. Aggregation <ul><li>Items of a similar nature may be disclosed in aggregate by type of related party . </li></ul>
  19. 19. Disclosures <ul><li>List of related parties: </li></ul><ul><li>Parties where control exists: </li></ul><ul><li>XYZ Limited ( Holding Company) </li></ul><ul><li>Other related parties: </li></ul><ul><li>Fellow subsidiaries: </li></ul><ul><li>XYZ Services Limited, Sweden </li></ul><ul><li>XYZ Finance Inc., USA </li></ul><ul><li>Associates: </li></ul><ul><li>XYAB Private India Limited </li></ul><ul><li>Directors: </li></ul><ul><li>Mr. ABC </li></ul><ul><li>Mr. EFG </li></ul>Illustrative
  20. 20. Disclosures <ul><li>Transactions with related parties: </li></ul><ul><li>Sales, services & other income: </li></ul><ul><li>Fellow subsidiaries Rs 567,789 </li></ul><ul><li>Associates Rs 123,456 </li></ul><ul><li>Capital Expenditure </li></ul><ul><li>Fellow subsidiaries Rs 987,654 </li></ul><ul><li>Shares issued on amalgamation </li></ul><ul><li>Holding company (equity shares) Rs 213,645 </li></ul><ul><li>Managerial remuneration Rs 2,345 </li></ul>Illustrative
  21. 21. Other disclosure issues Items of a similar nature may be disclosed in aggregate by type of related party . XYZ Ltd. Rs. Sales to ABC Ltd., a subsidiary 100,000 Sales to DEF Ltd., a subsidiary 200,000 Purchases from GHI, a joint venture company 300,000 Purchases from ABC Ltd., a subsidiary 400,000 Disclosure: Sales to subsidiaries 300,000 Purchases from subsidiaries 400,000 Purchases from joint venture companies 300,000