ICAI Notes- Unit 4: Presentation & Disclosures Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
4.68 
ADVANCED ACCOUNTING 
 
? 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD  18 RELATED PARTY 
DISCLOSURES 
 
After studying this unit, you will be able to comprehend the – 
? Need for disclosure of related party relationship; 
? How to identify the related party relationships; 
? Which parties are not treated as related party; 
? Exemption from Related Party Disclosure in certain situations; 
? Disclosure requirements under AS-18. 
 4.1  INTRODUCTION 
AS 18 prescribes the requirements for disclosure of related party relationship and 
transactions between the reporting enterprise and its related parties.  The 
requirements of the standard apply to the financial statements of each reporting 
enterprise as also to consolidated financial statements presented by a holding 
company. 
 4.2 RELATED PARTY ISSUE – WHY DISCLOSURE IS 
NEEDED? 
Related party relationships are a normal feature of commerce and business.  
There is a general presumption that transactions reflected in financial statements 
are consummated on an arm’s -length basis between independent parties. However, 
that presumption may not be valid when related party relationships exist because 
related parties may enter into transactions which unrelated parties would not enter 
into.  
 
© The Institute of Chartered Accountants of India
Page 2


 
 
 
4.68 
ADVANCED ACCOUNTING 
 
? 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD  18 RELATED PARTY 
DISCLOSURES 
 
After studying this unit, you will be able to comprehend the – 
? Need for disclosure of related party relationship; 
? How to identify the related party relationships; 
? Which parties are not treated as related party; 
? Exemption from Related Party Disclosure in certain situations; 
? Disclosure requirements under AS-18. 
 4.1  INTRODUCTION 
AS 18 prescribes the requirements for disclosure of related party relationship and 
transactions between the reporting enterprise and its related parties.  The 
requirements of the standard apply to the financial statements of each reporting 
enterprise as also to consolidated financial statements presented by a holding 
company. 
 4.2 RELATED PARTY ISSUE – WHY DISCLOSURE IS 
NEEDED? 
Related party relationships are a normal feature of commerce and business.  
There is a general presumption that transactions reflected in financial statements 
are consummated on an arm’s -length basis between independent parties. However, 
that presumption may not be valid when related party relationships exist because 
related parties may enter into transactions which unrelated parties would not enter 
into.  
 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
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Also, transactions between related parties may not be effected at the same terms 
and conditions as between unrelated parties. Sometimes, no price is charged in 
related party transactions, for example, free provision of management services and 
the extension of free credit on a debt.  
Also, sometimes the operating results and financial position of an enterprise may 
be affected by a related party relationship even if related party transactions do not 
occur. The mere existence of the relationship may be sufficient to affect the 
transactions of the reporting enterprise with other parties. For example, a 
subsidiary may terminate relations with a trading partner on acquisition by the 
holding company of a fellow subsidiary engaged in the same trade as the former 
partner. Alternatively, one party may refrain from acting because of the control or 
significant influence of another - for example, a subsidiary may be instructed by its 
holding company not to engage in research and development. 
Likewise, in certain cases transactions would not have taken place if the related party 
relationship had not existed. For example, a company that sold a large proportion 
of its production to its holding company at cost might not have found an alternative 
customer if the holding company had not purchased the goods. 
In view of the aforesaid, the resulting accounting measures may not represent what 
they usually would be expected to represent. Thus, a related party relationship 
could have an effect on the financial position and operating results of the reporting 
enterprise. 
 4.3 RELATED PARTY RELATIONSHIPS, AS 
CONTEMPLATED UNDER AS-18 
Related Party - As per AS-18, 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. 
It is worthwhile to note that AS-18 provides a definitive list of related party 
relationships to which AS-18 applies. Accordingly, AS 18 deals only with the 
following five types of related party relationships described in (a) to (e) below:  
© The Institute of Chartered Accountants of India
Page 3


 
 
 
4.68 
ADVANCED ACCOUNTING 
 
? 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD  18 RELATED PARTY 
DISCLOSURES 
 
After studying this unit, you will be able to comprehend the – 
? Need for disclosure of related party relationship; 
? How to identify the related party relationships; 
? Which parties are not treated as related party; 
? Exemption from Related Party Disclosure in certain situations; 
? Disclosure requirements under AS-18. 
 4.1  INTRODUCTION 
AS 18 prescribes the requirements for disclosure of related party relationship and 
transactions between the reporting enterprise and its related parties.  The 
requirements of the standard apply to the financial statements of each reporting 
enterprise as also to consolidated financial statements presented by a holding 
company. 
 4.2 RELATED PARTY ISSUE – WHY DISCLOSURE IS 
NEEDED? 
Related party relationships are a normal feature of commerce and business.  
There is a general presumption that transactions reflected in financial statements 
are consummated on an arm’s -length basis between independent parties. However, 
that presumption may not be valid when related party relationships exist because 
related parties may enter into transactions which unrelated parties would not enter 
into.  
 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.69 
 
Also, transactions between related parties may not be effected at the same terms 
and conditions as between unrelated parties. Sometimes, no price is charged in 
related party transactions, for example, free provision of management services and 
the extension of free credit on a debt.  
Also, sometimes the operating results and financial position of an enterprise may 
be affected by a related party relationship even if related party transactions do not 
occur. The mere existence of the relationship may be sufficient to affect the 
transactions of the reporting enterprise with other parties. For example, a 
subsidiary may terminate relations with a trading partner on acquisition by the 
holding company of a fellow subsidiary engaged in the same trade as the former 
partner. Alternatively, one party may refrain from acting because of the control or 
significant influence of another - for example, a subsidiary may be instructed by its 
holding company not to engage in research and development. 
Likewise, in certain cases transactions would not have taken place if the related party 
relationship had not existed. For example, a company that sold a large proportion 
of its production to its holding company at cost might not have found an alternative 
customer if the holding company had not purchased the goods. 
In view of the aforesaid, the resulting accounting measures may not represent what 
they usually would be expected to represent. Thus, a related party relationship 
could have an effect on the financial position and operating results of the reporting 
enterprise. 
 4.3 RELATED PARTY RELATIONSHIPS, AS 
CONTEMPLATED UNDER AS-18 
Related Party - As per AS-18, 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. 
It is worthwhile to note that AS-18 provides a definitive list of related party 
relationships to which AS-18 applies. Accordingly, AS 18 deals only with the 
following five types of related party relationships described in (a) to (e) below:  
© The Institute of Chartered Accountants of India
 
 
 
4.70 
ADVANCED ACCOUNTING 
 
(a) Enterprises that directly, or indirectly through one or more intermediaries, 
control, or are controlled by, or are under common control with, the reporting 
enterprise (this includes holding companies, subsidiaries and fellow 
subsidiaries). 
Note: This is the case when there is a parent-subsidiary relationship 
(including relationship among fellow subsidiaries), as illustrated later in 
this chapter. For meaning of the term control, refer to subsequent 
discussion under this chapter. 
(b) 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. 
(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) 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. 
 4.4 WHO ARE NOT DEEMED TO BE RELATED 
PARTIES UNDER AS-18? 
In the context of AS 18, the following are deemed not to be related parties: 
(a) Two companies are not related parties simply because they have a director in 
common (unless the director is able to affect the policies of both companies 
in their mutual dealings). Accordingly, if the common director is able to 
influence the policies of both the companies in their mutual dealings – 
then related party relationship exists. 
(b) A single customer, supplier, franchiser, distributor, or general agent with 
whom an enterprise transacts a significant volume of business merely by 
virtue of the resulting economic dependence; and 
© The Institute of Chartered Accountants of India
Page 4


 
 
 
4.68 
ADVANCED ACCOUNTING 
 
? 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD  18 RELATED PARTY 
DISCLOSURES 
 
After studying this unit, you will be able to comprehend the – 
? Need for disclosure of related party relationship; 
? How to identify the related party relationships; 
? Which parties are not treated as related party; 
? Exemption from Related Party Disclosure in certain situations; 
? Disclosure requirements under AS-18. 
 4.1  INTRODUCTION 
AS 18 prescribes the requirements for disclosure of related party relationship and 
transactions between the reporting enterprise and its related parties.  The 
requirements of the standard apply to the financial statements of each reporting 
enterprise as also to consolidated financial statements presented by a holding 
company. 
 4.2 RELATED PARTY ISSUE – WHY DISCLOSURE IS 
NEEDED? 
Related party relationships are a normal feature of commerce and business.  
There is a general presumption that transactions reflected in financial statements 
are consummated on an arm’s -length basis between independent parties. However, 
that presumption may not be valid when related party relationships exist because 
related parties may enter into transactions which unrelated parties would not enter 
into.  
 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.69 
 
Also, transactions between related parties may not be effected at the same terms 
and conditions as between unrelated parties. Sometimes, no price is charged in 
related party transactions, for example, free provision of management services and 
the extension of free credit on a debt.  
Also, sometimes the operating results and financial position of an enterprise may 
be affected by a related party relationship even if related party transactions do not 
occur. The mere existence of the relationship may be sufficient to affect the 
transactions of the reporting enterprise with other parties. For example, a 
subsidiary may terminate relations with a trading partner on acquisition by the 
holding company of a fellow subsidiary engaged in the same trade as the former 
partner. Alternatively, one party may refrain from acting because of the control or 
significant influence of another - for example, a subsidiary may be instructed by its 
holding company not to engage in research and development. 
Likewise, in certain cases transactions would not have taken place if the related party 
relationship had not existed. For example, a company that sold a large proportion 
of its production to its holding company at cost might not have found an alternative 
customer if the holding company had not purchased the goods. 
In view of the aforesaid, the resulting accounting measures may not represent what 
they usually would be expected to represent. Thus, a related party relationship 
could have an effect on the financial position and operating results of the reporting 
enterprise. 
 4.3 RELATED PARTY RELATIONSHIPS, AS 
CONTEMPLATED UNDER AS-18 
Related Party - As per AS-18, 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. 
It is worthwhile to note that AS-18 provides a definitive list of related party 
relationships to which AS-18 applies. Accordingly, AS 18 deals only with the 
following five types of related party relationships described in (a) to (e) below:  
© The Institute of Chartered Accountants of India
 
 
 
4.70 
ADVANCED ACCOUNTING 
 
(a) Enterprises that directly, or indirectly through one or more intermediaries, 
control, or are controlled by, or are under common control with, the reporting 
enterprise (this includes holding companies, subsidiaries and fellow 
subsidiaries). 
Note: This is the case when there is a parent-subsidiary relationship 
(including relationship among fellow subsidiaries), as illustrated later in 
this chapter. For meaning of the term control, refer to subsequent 
discussion under this chapter. 
(b) 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. 
(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) 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. 
 4.4 WHO ARE NOT DEEMED TO BE RELATED 
PARTIES UNDER AS-18? 
In the context of AS 18, the following are deemed not to be related parties: 
(a) Two companies are not related parties simply because they have a director in 
common (unless the director is able to affect the policies of both companies 
in their mutual dealings). Accordingly, if the common director is able to 
influence the policies of both the companies in their mutual dealings – 
then related party relationship exists. 
(b) A single customer, supplier, franchiser, distributor, or general agent with 
whom an enterprise transacts a significant volume of business merely by 
virtue of the resulting economic dependence; and 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
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(c) The parties listed below, in the course of their normal dealings with an 
enterprise by virtue only of those dealings (although they may circumscribe 
the freedom of action of the enterprise or participate in its decision-making 
process): 
(i) Providers of finance 
(ii) Trade unions 
(iii) Public utilities 
(iv) Government departments and government agencies including 
government sponsored bodies 
 4.5 EXEMPTION FROM RELATED PARTY 
DISCLOSURE IN CERTAIN SITUATIONS 
1. Conflict with the reporting enterprise’s duties of confidentia lity: Related 
party disclosure requirements as laid down in AS 18 do not apply in 
circumstances where providing such disclosures would conflict with the 
reporting enterprise’s duties of confidentiality as specifically required in 
terms of a statute or by any regulator or similar competent authority. 
 Put differently, in cases where a statute or a regulator or a similar competent 
authority governing an enterprise prohibit the enterprise to disclose certain 
information which is required to be disclosed as per this Standard, disclosure 
of such information is not warranted. For example, banks are obliged by law 
to maintain confidentiality in respect of their customers’ transactions and this 
Standard would not override the obligation to preserve the confidentiality of 
customers’ dealings. 
2. Consolidated financial statements: No disclosure is required in 
consolidated financial statements in respect of intra-group transactions -
since disclosure of transactions between members of a group is unnecessary 
in consolidated financial statements. This is mainly because consolidated 
financial statements present information about the holding and its 
subsidiaries as a single reporting enterprise. 
3. State-controlled enterprises: No disclosure is required in the financial 
statements of state-controlled enterprises as regards related party 
© The Institute of Chartered Accountants of India