Advanced Accounting · AS 18 Related Party Disclosures

AS 18 Related Party Transactions and Types

Updated 4 October 2026 · Fact-checked

Under AS 18, a related party transaction is a transfer of resources, services or obligations between related parties, whether or not a price is charged. Examples are purchases, sales, leases, guarantees and management contracts. To solve questions, first identify the related party, then name the transaction type and disclose it.

Understand Related Party Transactions and Types

AS 18 does not stop you from dealing with related parties. It makes you show those dealings openly, because related parties may not bargain as independent strangers would.

AS 18 defines a related party transaction as a transfer of resources or obligations between related parties, regardless of whether a price is charged. So a free loan, a free use of premises or a guarantee given without any fee still counts. Many students miss this.

The usual types are:

Purchase or sale of goods (finished or unfinished)
Purchase or sale 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
Management contracts, including deputation of employees

The list is illustrative. Any transfer of resources, services or obligations between related parties is covered.

The arm's length principle means a transaction is priced as if the parties were independent, unrelated and each acting in its own interest. AS 18 does not require every deal to be at arm's length. It requires disclosure of the transaction and its terms. A statement that a transaction was at arm's length should be made only if it can be substantiated.

AS 18 does not apply to some situations, for example transactions with a government-controlled enterprise merely because of government ownership, or relationships only through normal dealings such as banks, trade unions, public utilities and single customers or suppliers.

Key rules to remember

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.

How to solve Related Party Transactions and Types questions

Use this order for any AS 18 transaction question, whether theory or numerical.

1List every party in the question and decide which are related parties to the reporting enterprise, such as holding company, subsidiary, fellow subsidiary, associate, key management personnel and their relatives.
2Ignore the 'price' test. Ask only whether resources, services or obligations moved between related parties.
3Name the transaction type: purchase, sale, lease, guarantee, loan, management contract, and so on.
4Rule out exclusions such as a bank, public utility or single customer relationship that is only normal dealing.
5Note the amount, any outstanding balance at the year end, and any provision or write-off.
6Disclose by related party and by type, with the nature of the relationship. Aggregate similar items only if separate disclosure is not needed.
7Do not claim arm's length terms unless the question states they are supportable. Conclude with the disclosure to be made.

Quickest way: Party, type, amount, balance

When to use it: Use for MCQs and for short written answers in the last 10 minutes of a paper.

MCQ: if an option says a transaction is not disclosable because no price was charged, eliminate it.
MCQ: if an option says AS 18 bans non arm's length deals, eliminate it. It only requires disclosure.
MCQ: a guarantee given for a related party, a free loan and a deputation of staff are all related party transactions.
Written: write a four-column answer: related party, relationship, nature of transaction, amount and balance.
Write one concluding line stating the disclosure required, to secure the step mark.

Common mistakes in Related Party Transactions and Types

Treating a transaction as outside AS 18 because no price was charged.
Students link 'transaction' with a sale or payment.
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.
The arm's length idea is confused with a pricing rule.
Fix: AS 18 is a disclosure standard. It never fixes or restricts prices.
Leaving out guarantees and management contracts from the list of types.
Students remember only purchases and sales.
Fix: Recall the list as goods, assets, services, agency, leases, R&D, licences, finance, guarantees, management contracts.
Disclosing only the transaction amount and skipping the outstanding balance.
The question gives sales figures, so students stop there.
Fix: Always add balances at the year end, and provisions or write-offs on those balances.
Treating every dealing with a bank, public utility or major customer as related party.
Students over-apply the definition of influence.
Fix: Normal dealings alone, such as a single customer or supplier relationship, do not create a related party.

Worked examples

Example 1

Alpha Ltd sold goods of ₹8,00,000 to its subsidiary Beta Ltd, leased a building to Beta Ltd free of rent, and gave a guarantee to Beta's bank for Beta's loan. Beta Ltd owes Alpha Ltd ₹2,00,000 at year end. Identify the related party transactions in Alpha's books and what is to be disclosed.

Show the solution

Beta Ltd is a subsidiary, so it is a related party of Alpha Ltd.
The sale of goods of ₹8,00,000 is a related party transaction (purchase or sale of goods).
The free lease of the building is a lease arrangement. Absence of rent does not exclude it, because a price need not be charged.
The guarantee to Beta's bank is a guarantee, which is a listed type.
Disclose the name of Beta Ltd, the relationship (subsidiary), a description of each transaction, the sale volume of ₹8,00,000, and the outstanding balance of ₹2,00,000.
Also disclose any provision for doubtful debts on the ₹2,00,000 and the terms of the guarantee.

Answer: All three items are related party transactions. Alpha Ltd discloses Beta Ltd as a subsidiary, the sale of ₹8,00,000, the rent-free lease, the guarantee and the balance of ₹2,00,000 receivable.

Example 2

Gamma Ltd's key management personnel, Mr. Rao, is deputed to a company owned by Gamma's managing director to run its operations under a management contract. No fee is charged. Gamma also bought a machine from that company for ₹5,00,000. Explain whether these are disclosable under AS 18, and comment on arm's length.

Show the solution

The company owned by the managing director is a related party of Gamma, since key management personnel have control over it.
The deputation of Mr. Rao is a management contract or deputation of employees, which is a listed type.
No fee is charged, but a price is not necessary, so it is disclosable.
The machine purchase of ₹5,00,000 is a purchase of fixed assets from a related party, so it is also disclosable.
On arm's length: AS 18 does not require the purchase price to equal an arm's length price. If Gamma states that the machine was bought at arm's length terms, it must be able to substantiate this.
Disclose the relationship, nature of each transaction, the amount of ₹5,00,000 and any balance outstanding at the year end.

Answer: Both the free deputation and the ₹5,00,000 machine purchase are related party transactions to be disclosed. AS 18 requires disclosure, not arm's length pricing, and an arm's length statement is made only if it can be substantiated.

Exam tips

In theory questions, give the definition first, then the list of types, then one line on disclosure. This order earns step marks.
In case studies, underline the relationships first. Marks are usually lost by missing a related party, not by the disclosure format.
Remember that a free or concessional dealing is still disclosable. Examiners test this often.
For MCQs, eliminate options that say AS 18 prescribes prices or bans transactions.
Include year end balances and provisions in numerical disclosures, not only the transaction value.

Practice questions from AS 18 Related Party Disclosures

Related Party Transactions and Types in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Related Party Transactions and Types: frequently asked questions

What is a related party transaction under AS 18?

It is a transfer of resources, services or obligations between related parties. It is covered whether or not a price is charged.

What are the types of related party transactions in AS 18?

Typical types are purchase or sale of goods and assets, services, agency, leases, hire purchase, R&D transfers, licences, finance, guarantees and collaterals, and management contracts including deputation of employees. The list is illustrative.

Does AS 18 require transactions to be at arm's length?

No. AS 18 requires disclosure of related party transactions. It does not set or restrict prices. A statement that terms were at arm's length should be made only if it can be substantiated.

Is a guarantee given for a related party disclosable?

Yes. Guarantees and collaterals are listed as related party transactions, so you disclose them with the related party's name, the relationship and the terms.