Related Party Transaction as per AS-18

When a company gets started, it brings a package of lots of legal compliances along with it. Registration of company might be a few steps procedure, but once registered, it needs continuous compliances in some or the other form so the responsibility of entrepreneur is quite high in terms of governance to get it done from professional expertise. Companies Act, 2013 has mandated u/s 129 for every company to prepare its financial statements going simultaneous compliance with the accounting standards as mentioned in sec 133 of Companies Act, 2013. Related Party Transaction is a very vital concept in today’s globalized world where transparency is the basic need expected from every company.  Related Party Transaction as per AS-18 (Accounting Standard 18) is discussed corely in this blog.

---

Meaning of Related Party as per AS-18

AS-18 defines Related Party as “at any time during the year, one party has an ability to:

Control the other party, exercise significant influence over the other party in making financial and/or operating decisions.

Whereby control means:

1. Ownership, direct or indirect, of more than 50% of the voting power of an enterprise,
2. In case of company control of the composition of the board of directors

In case of any other enterprise – control of the composition of the corresponding governing body

3. Substantial interest in voting power and the power to direct the financial and/or operating policies of the enterprise

---

Who is relative as per AS-18

As per AS-18 a relative broadly includes-

1. Associate Companies
2. Subsidiaries
3. Fellow Subsidiary
4. Intermediary Companies
5. Controlled Companies
6. Holding Company
7. Key Managerial Personnel and there relatives
8. Individuals owning direct or indirect interest in Enterprise the voting power of the reporting enterprise or having significant influence over the reporting company or relatives of such individuals.

---

What is KMP as per AS-18

As per AS-18 KMP means Key Managerial Personnel which includes-

“those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise”

---

Related Party Transaction covered in AS-18

As per AS-18, Related Party Transaction includes:

1. Salary to Director
2. Advance against share capital given
3. Lease Rent on equipment received
4. Securities Deposit Receipt-Refunded
5. Unsecured Loan (taken/given/returned)
6. Loan & Advances
7. Share application money invested
8. Share Application money received
9. Shares Issued.

---

Is the scope of Related Party under AS-18 wider than under Companies Act, 2013

Yes. The scope of related party under AS-18 is much wider and broader than as under Companies Act, 2013.

As per Accounting Standard 18-’Related Party Disclosures’ issued by the ICAI, Related party means “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”

Related Party transaction means “a transfer of resources or obligations between related parties, regardless of whether or not a price is charged. The following are the related parties as per AS-18

1. Holding companies, subsidiaries and fellow subsidiaries
2. Associates and joint ventures
3. Individuals (incl. their relatives) – having voting power giving them control or significant influence
4. Key management personnel including their relatives
5. Enterprises where controlling individual or key managerial personnel has significant influence However, disclosure is mandatory for the following categories of companies.
6. Companies which are listed or are in process of listing
7. Banks, financial institutions and insurance companies
8. Enterprises having turnover > Rs. 50 cr.
9. Enterprises having borrowings > Rs. 10 cr.
10. Holding / subsidiary company of any of the above If any company does not fall in any of these categories, after having been applicable earlier, then it shall continue to apply unless it is not covered in any category for 2 consecutive years.

Further, Auditing and Assurance Standard 23- Related Parties impose duty on auditor to identify and disclose the related party transaction in the financial statements. If we make comparison between these two definitions, we will come to know that AS-18 is wider than Companies Act.

---

Disclosures under AS-18 for Related Party

The reporting enterprise should disclose the following:

1. The name of the transacting related party;
2. A description of the relationship between the parties;
3. A description of the nature of transactions;
4. Volume of the transactions either as an amount or a part thereof;
5. Any elements of the related party transactions which is necessary for an understanding of the financial statements;
6. Outstanding amount from related parties at the balance sheet date;
7. Provisions for doubtful debts due from related parties at the balance sheet date; and
8. Amounts written off or written back of debts due from or to related parties.

---