CA Intermediate · Advanced Accounting

AS 18 Related Party Disclosures: formula sheet

Full chapter guide

Key formulas

Objective of AS 18: Disclose related party relationships and transactions between the reporting enterprise and its related parties; It is a disclosure standard. It does not prescribe recognition or measurement or arm's length pricing.
Applies to: Related party relationships and transactions in the financial statements of the reporting enterprise; The test is whether a related party relationship or transaction exists. Size or profit is not the test.
Exclusion 1: intra-group transactions in consolidated statements: No disclosure in consolidated financial statements in respect of intra-group transactions; The exclusion is for intra-group transactions. Parent-subsidiary relationships are still disclosed as related party relationships.
Exclusion 2: state-controlled enterprises: No disclosure in the financial statements of a state-controlled enterprise of relationships with, and transactions with, other state-controlled enterprises; The exclusion is limited to other state-controlled enterprises. Other relationships, such as with key management personnel, remain disclosable.
Exclusion 3: confidentiality: No disclosure where it conflicts with duties of confidentiality specifically required by a statute or by a regulator or similar competent authority; The exclusion rests on a legal or regulatory requirement. An enterprise's own wish to keep it private does not qualify.
Note: consolidation procedure: Elimination of intra-group balances and transactions on consolidation is done under AS 21; AS 21 gives the elimination procedure. AS 18 separately says intra-group transactions need no disclosure in the consolidated statements.
Control: voting power: Control if voting power held (direct or indirect) > 50%; Exactly 50% is not control by this limb. Count indirect holdings through subsidiaries.
Control: board: Control if control of the composition of the board of directors (company) or governing body (other enterprise) so as to obtain economic benefits from its activities; Power to appoint or remove a majority of the directors is the usual indication of this control. At exactly 50% voting power, this is the test that can still give control.
Significant influence: Significant influence = participation in financial and/or operating policy decisions, without control (judged on facts); AS 18 gives no percentage. The 20% voting power presumption is from AS 23: at 20% or more, significant influence is presumed unless facts show otherwise. Below 20%, look at facts such as board representation or participation in policy decisions.
Related party test: Related if, at any time in the period: one party can control the other, or exercise significant influence over the other; Apply to the situations listed in AS 18: enterprises, individuals, KMP and relatives. Fellow subsidiaries are specifically listed as related parties.
Relative: Spouse, son, daughter, brother, sister, father, mother; Only those who may be expected to influence or be influenced by the individual in dealings with the reporting enterprise.
Group terms: Holding controls subsidiary; fellow subsidiaries share the same holding company; Associate = significant influence, not a subsidiary or joint venture.
Core test: Related party = control OR significant influence (direct or indirect), or a link through key management personnel / relatives; Apply this to every pair of parties before deciding anything else.
Control: Control = (a) ownership, directly or indirectly, of more than one-half of the voting power of an enterprise, OR (b) control, directly or indirectly, of the composition of the board of directors in the case of a company (or of the corresponding governing body in 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; AS 18 has its own definition of control, and this is it. Voting power held indirectly, for example through another enterprise, also counts. A substantial interest means ownership, directly or indirectly, of 20% or more of the voting power.
Significant influence: Significant influence = participation in the financial and/or operating policy decisions, but not control of them; Typically through shareholding, board representation or agreements. It is less than control.
Categories covered: Holding + Subsidiary + Fellow subsidiary + 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 + Individuals with control/influence and their relatives + Key management personnel and their relatives + Enterprises over which key management personnel, their relatives or individuals with voting power can exercise significant influence or control, including those in which they hold a substantial interest in voting power; Use this as a checklist when a question lists several parties. Key management personnel are persons with authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.
Deemed NOT related (by normal dealings alone): Providers of finance, trade unions, public utilities, government departments and agencies, single customer / supplier / franchiser / distributor / general agent; The exclusion holds only if there is no control or significant influence beyond the normal dealings.
Relative: Relative = spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual; Relationship alone is not enough. The test is expected influence in dealings with the enterprise.
Related party transaction: Transfer of resources, services or obligations between related parties, with or without a price; Free or concessional dealings are covered. A price is not necessary.
Arm's length price: Price between independent, unrelated parties acting in their own interest; A benchmark for judging terms. Do not claim a deal was at arm's length unless it can be substantiated.
Disclosure for each related party transaction: Name of related party + nature of relationship + description + volume + outstanding balances + provisions and write-offs; Where control exists, relationship disclosure is required even if there were no transactions.
Items typically disclosed by category: Amount of transactions, amounts outstanding, provision for doubtful debts, amounts written off or written back; Items of a similar nature may be disclosed in aggregate, except where separate disclosure is necessary to understand the effect on the financial statements.
Control relationship disclosure: Control exists → disclose name and relationship, with or without transactions; Applies to parent-subsidiary relationships and to any party that controls or is controlled by the reporting enterprise. Disclose the name of the related party and the relationship, even if no transactions occurred.
Transaction disclosure (if transactions occurred): Name + nature of relationship + nature of transactions + volume + outstanding balances + provisions + write-offs/write-backs; Give these for each type of related party. Volume can be an amount or an appropriate proportion.
Aggregation rule: Similar items → may be aggregated by type of related party; Do not aggregate where separate disclosure is needed to understand the effect on the financial statements.
Types of related party: Holding company, subsidiaries, fellow subsidiaries, associates, joint ventures, key management personnel, relatives of key management personnel; Disclosure is made by type of related party. This list is illustrative, not a prescribed list of heads.
Exemptions: Consolidated statements: eliminated intra-group items need no disclosure; state-controlled enterprises: no disclosure of relationships or transactions with other state-controlled enterprises; Not all transactions with a related party are exempt. The exemptions are narrow.

Quick revision

AS 18 is a disclosure standard: it prescribes what to disclose, not how to measure.
Related party: one party can control the other or exercise significant influence over it in financial or operating decisions.
Control: (a) ownership, directly or indirectly, of more than one half of the voting power of an enterprise; (b) control of the composition of the board of directors of a company, or of the governing body of any other enterprise; or (c) a substantial interest in voting power together with the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise. A substantial interest means ownership, directly or indirectly, of 20% or more of the voting power.
Significant influence: participation in financial or operating policy decisions, but not control.
Individuals whose voting interest gives control or significant influence, key management personnel, and the relatives of both are related parties. So are enterprises over which any of these persons has control or significant influence.
Holding company, subsidiaries and fellow subsidiaries are all related parties of one another.
As per AS 18's list of related parties, associates and joint ventures of the reporting enterprise are covered, as are investing parties and venturers. Apply the definitions of control and significant influence in each case.
Transactions include transfer of resources, services or obligations, whether or not a price is charged.
Disclose the name and relationship of the related party, the nature and volume of transactions, and outstanding balances.
Where control exists, disclose the name of the related party and the relationship irrespective of whether there have been transactions, for example between a holding company and its subsidiary.
Merely having a director in common does not by itself make two companies related, unless the director can affect the policies of both in their mutual dealings, for example as key management of both. Likewise, normal dealings as a supplier, customer, financier, trade union, public utility or government department, or economic dependence on a single customer or supplier, do not by themselves make parties related. Always test whether control or significant influence exists.
Exemptions: no disclosure is required in consolidated financial statements for intra-group transactions, and a state-controlled enterprise need not disclose relationships and transactions with other state-controlled enterprises. Disclosure is also not required where it would conflict with confidentiality duties specifically required by a statute, regulator or similar competent authority.
Check the exact wording in ICAI material for any exclusions before finalising an answer.

Common mistakes

Saying AS 18 requires related party transactions to be at arm's length. Fix: Remember that AS 18 only requires disclosure. It does not set prices or approve transactions.
Treating all state-controlled enterprises as exempt from all disclosure. Fix: The exclusion covers relationships with, and transactions with, other state-controlled enterprises. Other relationships, such as with key management personnel, are still related party relationships and remain disclosable.
Treating exactly 50% voting power as control. Fix: Control by shareholding needs more than 50%. At exactly 50% check board control; otherwise it may still be significant influence, depending on the facts.
Treating every relative as a related party. Fix: A relative counts only if they may be expected to influence, or be influenced by, the individual in dealings with the reporting enterprise. Judge by the facts.
Treating two companies with a common director as related parties automatically. Fix: Check whether the director can control or significantly influence both. Without that, the common directorship alone does not make them related.
Treating a bank or financial institution lending to the company as a related party. Fix: Providers of finance are not related merely because of normal dealings. Look for nominee directors with real influence or other control rights before treating them as related.
Treating a transaction as outside AS 18 because no price was charged. Fix: Remember the definition says 'whether or not a price is charged'. Free loans and free premises are covered.
Saying AS 18 prohibits transactions not at arm's length. Fix: AS 18 is a disclosure standard. It never fixes or restricts prices.
Saying no disclosure is needed when there were no transactions. Fix: Remember that control relationships must be disclosed even when no transactions took place.
Treating a major supplier, customer or bank as a related party. Fix: Ordinary dealings or dependence alone do not make a party related. Look for control, significant influence or key management personnel links.

Exam tips

Write the objective in one line first. It is an easy mark in theory questions.
In scope questions, list the three exclusions and state each condition exactly: intra-group transactions in consolidated statements, other state-controlled enterprises, and confidentiality required by law.
If a question brings in consolidation, say that intra-group transactions need no disclosure in the consolidated statements, and attribute the elimination procedure to AS 21.
In case-based questions, a good format is Provision, Facts, Conclusion. Do not leave the conclusion implicit.
In MCQs, rule out options that claim AS 18 prescribes measurement or pricing.
If the question gives size or listing details, mention the entity's level and any relaxation.
Write the definition first, then the facts and the conclusion. This provision-facts-conclusion layout earns marks even if your final label is debatable.
Always check the wording 'more than one half'. Questions often use exactly 50% or 20% to test the boundary.