This document provides an overview of Accounting Standard 18 on related party disclosures in India. It defines related parties as those able to exercise control or significant influence over an entity's operating and financial policies. Examples of related parties include subsidiaries, associates, key management personnel and their relatives. The document outlines the objective of disclosure requirements, definitions of related party relationships, examples of related party transactions, and disclosure requirements under AS 18. It also provides practical case studies demonstrating the identification and analysis of related parties in different ownership structures.

1. AS – 18
“Related Party Transactions,
Disclosures and Compliances”
Prepared By :
Chaitanya Aggarwal
M/s Agarwal & Saxena | Chartered Accountants

2. Presentation Path
 Objective of AS 18
 Key Definitions
 The Relate party Relationships
 Disclosure
 Practical Case Studies
 Identification of Related Party Transactions
SA 550
 Key implications under Companies Act 2013
 Treatment under Income Tax Act, 1961
 Comparison with Ind AS 24

3. Objective of AS 18
Objective of AS-18 is to
establish
the requirement for
disclosures of
Related
Party
Relationships
Transactions
between a
reporting enterprise
& its related parties.
Need of AS on Related Party Transactions
Several related companies may have been developed to fulfill the
desires of bad management. e.g. Companies formed to evade taxes,
Companies formed to avoid labour laws, Companies formed to
siphon funds

4. Who is a Related Party ?
According to AS18………
“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 ”

5. CONTROL SUBSTANTIAL INTEREST
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
statute or agreement, the financial
and/or operating policies of the
enterprise.
An enterprise/Individual 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.
SIGNIFICANT INFLUENCE
Significant Influence-
participation in the financial
and/or operating policy decisions
of an enterprise, but not control
of those policies.

6. Significant Influence
Significant influence can be exercised in several ways, e.g.
 By representation on the board of directors
 participation in the policy making process
 material inter-company transactions
 dependence on technical information
 Significant influence may be gained by share ownership, statute or
agreement.
If an investing party holds, directly or indirectly through intermediaries
20 % or more of the voting power of the enterprise, it is presumed that
investing party has significant influence, unless the contrary be clearly
demonstrated that this is not the case.

7. a) Enterprises that directly or indirectly through intermediaries, control the
reporting enterprise.
• Enterprise that directly or indirectly through one or more intermediaries, are
controlled by the reporting enterprise
• Enterprise that directly or indirectly through one or more intermediaries, are under
the common control of 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 venture in respect of which 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 personnel and relatives of such personnel; and
e) Enterprises over which any person described in (c) & (d) above is able to
exercise significant influence.
Related party relationships to which AS- 18
applies
(Para 3 of AS 18)

8. Key Management Personnel and
Relative
 Key management persons are those persons who have the authority and
responsibility for planning, directing and controlling the activities of the
reporting enterprise. For ex. Following are KMP:
 Relative in relation to an individual means the spouse, son, daughter,
brother, sister, father and mother who may be expected to influence and be
influenced by that individual in his dealing with the reporting enterprise.

9. Whether Non-Executive
Directors on the Board are related
parties ???
 A non executive director of a company should not be considered
as key management person under AS 18 by virtue of merely his
being director unless he has the authority and responsibility for
planning, directing and controlling the activities of the reporting
enterprise.
 The requirements of AS 18 should not be applied unless he falls
in any of categories of para3 of AS18.

10. Holding company: A company which holds
more than 50 % voting rights in a another
company.
Subsidiary 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 the
nominal value of its equity share capital; or
b) 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.

11. Examples of Related Party Transactions:
Para 10.2 of AS 18 defines Related party transaction – “a
transfer of resources or obligations between related parties,
regardless of whether or not a price is charged”.
 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.
Examples

12. Disclosures
1. 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.
2. 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
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

13. Let’s Understand this with Example:
Mr. A (Director)
X
Lt
d
Y Ltd Z Ltd
If Mr A is director in one company X Ltd &
additionally he is also director in Y Ltd & Z
Ltd, then Company X is Related to Company Y
& Z and vice versa.
i.e. All 3 companies are related to each other.
All the companies in which a individual is a common director would be related to each
other.
A
B
X
Lt
d
Holds
A Ltd
Y Ltd Z Ltd
In this case, X Ltd & Y Ltd are related
party to A Ltd as it has control &
significant influence over the entity.
Z Ltd would not be considered as
related party as A Ltd has only 15 %
holding in Z Ltd & hence it would not
be considered as significant influence.
30% 15%

14. Practical Case Study 1
 A Ltd. Holds control over X Ltd and Y Ltd and
Z Ltd exercises significant influence over A
Ltd. In this situation X Ltd. Y Ltd. & Z Ltd. are
related to A Ltd and vice versa.
Whether X Ltd is related to Y Ltd & Z Ltd.?
 What will be difference in your answer if Mr. S
(Individual) is able to exercise significant
influence on a group of enterprise?

15.  No, Because para3 (a) of AS 18 includes the relationship between
A Ltd with X Ltd, Y Ltd & Z Ltd but not between X Ltd, Y Ltd &
Z Ltd. Further Para3(b) includes the relationship between an
enterprise and its associate, but does not include as relationship
between parties various associates of the same enterprise.
 In Second Case if Mr. S (i.e. individual) is able to exercise the
significant influence on a group of enterprises, all those enterprises
will be related party under para3(e) of AS 18
A
Ltd.
X
Ltd
Holds
Y Ltd Z Ltd
Significant Influence
over A Ltd
Group

16.  X Ltd holds 25% in Y Ltd and Y Ltd holds 30% in Z
Ltd, whether X Ltd and Z Ltd are related parties? i.e.
Whether associate of an associate is a related party??
 They are not related parties under 3(b).
Practical Case Study 2
X Ltd Y Ltd Z Ltd
25% 30%

17. P Ltd. owns 70% of the voting power of Q Ltd.
Q Ltd. in turn owns 50% of the voting interest in R
Ltd. Further, P Ltd. also directly owns 15% of the
voting interest in R Ltd.
Would P Ltd. be deemed to have control over R Ltd.
or would it only be considered as exercising
significant influence?
Practical Case Study 3

18.  P Ltd. would be considered to have significant influence over R Ltd.
 The definition of control of AS-18, includes ownership directly or
indirectly, of more than half of the voting power of another enterprise.
 But in the given case, P Ltd. and Q Ltd. together are shareholders for 50%
i.e.( 15% + 35% (70% of 50%)) in R Ltd.
 Since P Ltd. has more than 20% voting rights in R Ltd & upto 50%, hence ,
P Ltd has significant influence over R Ltd.)
P
Ltd.
Q
Ltd
70%
R
Ltd.
50%
15%

19. Identification of Related Party Transactions
SA 550
Preliminary
evaluation
concerning the
likelihood of related
party transactions
usually made during
the planning of audit
Preparation of Risk
Assessment
Questionnaire
Obtaining an
understandin
g of the
structure of
the entity and
management
responsibilitie
s.
Consider
the
business
purpose of
the various
components
of the entity.
Considering
the control
consciousnes
s within the
entity and
controls over
management
activities.

20. • Two distinct
but mutually
exclusive
aspects-
From
Auditor’s
Perspectiv
e
Adequate
Disclosure
Fraud
Detectio
n
• Transactions may be
entered into without
substance.
• Inadequate disclosure or
outright concealment of
related party transaction is
likely to result in
misleading financial
statements.
• Undisclosed relationship
with a party to a material
transaction may be used to
fabricate transactions,
leading to fraud.
“An Auditor Can not be expected to provide
assurance that all related party transactions will be
discovered”.

21. How will you identify Related
Party Transactions?
Transactions to borrowers
or lenders at no interest or
rates significantly different
from market rates. Sale of Real Estate at a
price significantly
different from its
appraised value.
Loans made with
no schedule
terms for the
time or method
of repayment.Non-Monetary
exchange of
property for
similar property

22. Ideals procedures to be performed solely for the
purpose of identifying related parties or related
party transactions
 Enquiry about management through Management Representation Letter
• Names of all the related parties
• whether there were any transactions with these parties during the
period.
• whether the entity has procedures for identifying and properly
accounting for related party transactions. If so, evaluation of these
procedures must be done.
 Review prior year’s audit documentation & identify names of known
related parties.
 Review minutes of meetings of board of directors and executive or
operating committee to obtain information on material transaction
authorised or discussed .
 Indications of undisclosed relationships, review of the nature and extent
of business transacted with major:
• customers , suppliers, Borrowers and lenders.
 considering whether transactions are occurring but not being given
accounting recognition, such as the client receiving or providing
accounting, management or other services at no charge or a major
stakeholder absorbing corporate expenses.

23. Key implications under
Companies Act’ 2013
 All RPTs require audit committee approval
 Audit committee empowered to obtain external
professional advice
 RPTs not in the ordinary course or not at arm’s
length require:
 approval of board
 – approval of shareholders (special resolution)
where RPTs exceed specified thresholds
 Disclosure required in board’s report
 Related parties in the context of the contract are
to abstain from voting

24. Treatment Under Income tax
Act’ 1961
 Section 40A(2) of the income tax act’ 1961 disallows the
expenditure incurred in respect of specified persons (related
parties )provided the assessing officer is of the opinion that
the expenditure is excessive and unreasonable having regard
to the :
fair market value
of goods
services or
facilities for
which the
payment is made
to persons
legitimate need
of business or
profession of
assessee
the benefit by or
accruing to the
assessee from
the payment

25. Comparison with Ind As 24
AS 18 Ind AS 24
Uses the term “relatives of an
individual”
Covers 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.
Uses the term “a close member of
that person’s family”
Includes the persons specified
within the meaning of ‘relative’
under the Companies Act 1956 and
that person’s domestic partner,
children of that person’s domestic
partner and dependants of that
person’s domestic partner.
Covers key management
personnel (KMP) of the entity only
Covers KMP of the parent as well.
Contd.....

26. AS 18 Ind AS 24
No such requirement Requires an additional
disclosure as to the name of
the next most senior parent
which produces consolidated
financial statements for public
use
Gives an option to disclose the
“Volume of the transactions
either as an amount or as an
appropriate proportion”.
Requires “the amount of the
transactions” need to be
disclosed,
Presently exempts the
disclosure of such information.
Requires disclosures of
certain information by the
government related entities.
.
Contd.....