AS 18: Related Party Relationships and Deemed Related Parties

Understand Related Party Relationships and Deemed Related Parties

Key rules to remember

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.

How to solve Related Party Relationships and Deemed Related Parties questions

1. 1List each party named in the question and note its link to the reporting enterprise.
2. 2Ask first whether there is control or significant influence, direct or indirect, in either direction or through a common controller.
3. 3Check the category: holding, subsidiary, fellow subsidiary, associate, joint venture, individual with voting power, key management personnel, relative, or enterprise controlled by them.
4. 4Check the exclusions: financier, trade union, utility, government department or single customer or supplier. Ask if the link goes beyond normal dealings.
5. 5Treat a common director as a flag only. Related only if the director can control or significantly influence both enterprises.
6. 6For individuals, confirm whether they are key management personnel or a relative who may influence or be influenced.
7. 7State the conclusion for each party with a one-line reason, using the words 'control' or 'significant influence'.
8. 8If the question asks for disclosure, note that relationships where control exists must be disclosed irrespective of whether there were any transactions. For other related parties, disclosure of transactions is required where there were transactions during the period.

Quickest way: Control-or-influence filter

Common mistakes in Related Party Relationships and Deemed Related Parties

• Treating two companies with a common director as related parties automatically.

  The overlap of a person looks like a link between the two companies.

  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.

  A large loan feels like influence.

  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.

• Calling a major customer or sole supplier a related party.

  Economic dependence is confused with control.

  Fix: A single customer, supplier, franchiser, distributor or general agent is not related merely because of dependence.

• Leaving out fellow subsidiaries.

  Students think only of the holding-subsidiary pair.

  Fix: Enterprises under common control are covered. Two subsidiaries of the same parent are related to each other.

• Treating every relative of a director as related.

  The word relative suggests automatic inclusion.

  Fix: Relatives are those who may be expected to influence, or be influenced by, the individual in dealings with the enterprise. Apply that test.

• Treating government departments and government-controlled enterprises alike.

  Both are called government.

  Fix: The exclusion for government departments and agencies does not extend to a government-controlled enterprise. Do not apply it to such an enterprise. Note also that AS 18 does not require disclosure of related party relationships between state-controlled enterprises, nor of transactions between them. Disclosure is still required for other related parties of a state-controlled enterprise.

Worked examples