Accounting Standards (AS) 18, in the related party disclosure, one party can control the other party in making financial and operational decisions. According to AS 18, control means more than 50% of the voting power or the ownership of the company is directly or indirectly made by the party.
Accounting Standards ensure the monetary statements from different companies are comparable. All the entities follow the same rules and regulations, and the Accounting Standard makes it more credible to follow the monetary statements. When an entrepreneur starts a company, many legal compliances can come along. Registration of the company is the easiest part. Once it has been registered, there are many things a company must follow. Hence the responsibility of an entrepreneur is much higher when it comes to company compliance. As mentioned in the Companies Act 2013, every company has to prepare its statements related to finance and money which should go parallel with the account statements.
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The related party disclosure is issued by the Institute of Chartered Accountants of India (ICAI).
AS 18: Related Party Disclosure
According to Accounting Standard 18, at any given time of the year, one party can control another party and influence another party in making financial and operating decisions.
Here control means
- The control over the ownership of the company directly or indirectly is greater than 50% of the power of voting of the corporation.
- The control over the composition of the company's board of directors.
- Control over the makeover of the body which governs in the event of some other company.
- Notable interest in the voting and an ability to order and command the organisations operating and financial policies.
Related Party Coverage Under AS-18
According to the AS 18 under the related party relationship, the things covered are as below:
- Holding companies, sister companies and subsidiaries.
- Joint ventures of the reporting companies.
- Associates of the reporting companies.
- Investors who are joint ventures or associates in the reporting to the companies.
- Individuals who have voting power directly or indirectly. This provides them with an innumerable amount of power to control the company.
- The relatives of these individuals with key people who can manage things.
- Business with anyone interested in voting directly or indirectly will have a good impact.
Benefits of Related Party Disclosure According to As-18
- Statutory Requirements: Often, the regulations related to the company that governs often require a related Party transaction to reveal their financial statements.
- Indicating that transaction will not be too close: There's a misconception that transactions shown with the financial statement are at arm's length without any related party disclosure. That means that the transactions happening between two unrelated parties are not affected by any relationship. This is a myth.
- Keeping the right track of all the potential transactions: The company must acknowledge transactions between any of the related parties. In many cases, the transactions wouldn't have occurred if there was no relationship between the related party.
- Operating performance and financial positions: A related party connected can have a good or a bad impact on the company's financial situation and the operating systems. It can happen even if there is no transaction between the parties, and the connection between these two parties is enough to impact the third parties.
Disclosure Under Accounting Standard 18
Here are a few pieces of information that needs to be disclosed to the reporting companies
- The name of the related parties with whom the transactions have taken place.
- Relationship description between the two parties.
- What type of transaction has taken place between the two parties.
- The transaction volume can be expressed in dollars or the percentage of it with the total amount.
- You must understand the features of the related party transaction required for the monetary statements.
- There will be an undone amount in the balance sheet with the linked parties.
- There will be a provision in the balance sheet for the debts formed due to linked parties.
- Debts formed due to the connection of the parties have to be written off.
Below are the few cases where disclosure isn't required
- Firms which are subject to the secret statutory requirements.
- Intragroup transactions.
- The state-controlled companies' relationship with other parties of different state-controlled organisations.
Related Party Transactions Examples
Below are a few related party transaction examples of which an enterprise might make full disclosures.
- Receiving or rendering services.
- Arrangement in the agencies.
- Hiring or leasing purchasing arrangements.
- Transferring of the research and developments.
- Licensed agreements.
- Finance includes the equity contribution in the form of cash.
- Managing the contracts, which includes deputation of the employees in the enterprise.
- Guarantees and collaterals.
Firm X holds 60% of firm Y's voting power of firm Y. Firm Y owns 51% of the voting interest of firm Z. Firm X also holds 30% of voting interest in firm Z. Would firm X deem it to hold control over firm Z?
Firm X would have control over firm Z. According to AS 18, control over an entity can mean both, directly and indirectly more than 50% of the voting power of another enterprise. Now, in this case study, firm X has the majority of shares of firm Y. Hence firm X has direct control over firm Y. Now, firm X and firm Y combined have a majority of shares in firm Z. Hence firm X can have indirect control over firm Z via firm Y.
Also Read: What is Accounting Information?
Account Standard 18 vs Account Standard 24
- In AS 18, the term 'relatives' of an individual is used, whereas in AS 24, a close family member of a person is used. This is how a relationship between two parties is defined.
- When it comes to the state-owned businesses in AS 18, the business itself is controlled by the federal or the state government, whereas AS 24 covers the government enterprises. It says that a government-related entity is controlled, jointly controlled, or significantly influenced by the government.
- When speaking about AS 18, key management personnel covers an entity's key management personnel, whereas AS 24 covers and helps protect the parent's senior management personnel.
- AS 18 exempts the affiliated government entities from disclosing information but AS 24 mandates government-affiliated entities to disclose certain information.
- AS 18 doesn't cover businesses with post-employment benefits as related parties. Post-employment benefit plans for the benefits of workers of the entity or a related entity are covered in AS 24.
- As far as the existing AS 18 goes, it allows only the volume of transactions, either as to quantity or as an appropriate proportion, to be disclosed. In AS 24, the amount of the transaction must be disclosed.
In an enterprise, many legal things need to be taken care of. According to Accounting Standard 18 (AS 18), a related party disclosure means a party can influence the other party directly or indirectly in making financial or operating decisions. Here the party will have greater than 50% of the voting power of a company, and it will also have control of the board of directors if and when an event will occur. It can also have a dictating power if required.