AS-18: RELATED PARTY DISCLOSURES

CA TEJAS SUCHAK

Question 1
Adhiram Ltd has a Corporate Communications Department, which centralises the Public Relations
function for the whole group of Adhiram Ltd and its Subsidiaries. No charges are, however, levied by
Adhiram Ltd on its Subsidiaries and accordingly, these transactions are not given accounting
recognition. Would these constitute Related Party Transactions requiring disclosure under AS -18 in the
Separate Financial Statements of Adhiram Ltd?
Answer:
1. Principle: As per AS - 18, a Related Party Transaction is "a transfer of resources or obligations
between related parties, regardless of whether or not a price is charged".
2. Conclusion: In the given example, there is a transfer of resources from Adhiram Ltd to its
Subsidiaries even though no price is charged for the same. These transactions would require disclosure
under AS - 18 in the Separate Financial Statements of Adhiram Ltd.
Question 2
Bhanu Ltd is a 100% subsidiary of Agni Ltd. Which of the following are considered as Related Party
Transactions for the purpose of Consolidated Financial Statements?

Situation Whether Related Party Transaction or not, for CFS

Salary paid to Employees of • Salaries and Loans given to Employees are in the course of normal
Bhanu Ltd. dealings of business.

Loans given to Employees of Agni

Ltd.
• Also, Employees are not considered as Related Party for an Entity.

Inter-Company Sales between • Holding and Subsidiary Companies are Related Parties, since they
Agni Ltd and Bhanu Ltd. are said to be under common control for the purpose of
Consolidated Fin.Statements. However, no disclosure is required
for Inter-Company Sales between Holding and Subsidiary, in the
Consolidated Fin.Statements. [Para 7]

Loan given by Bhanu Ltd to • Since, Managing Director of Agni Ltd directly or indirectly owns an
Managing Director of Agni Ltd. interest in the voting power of the Reporting Enterprise that
gives him control or significant influence over its subsidiary
Bhanu Ltd, the loan given to him by Bhanu Ltd will be treated as
Related Party Transaction.

Transfer of Asset by Agni Ltd to • Since, Holding and Subsidiary Companies are Related Parties as
Bhanu Ltd. per Para 3(a), transfer of asset by Holding Company Agni Ltd to
its Subsidiary Bhanu Ltd will be considered as Related Party
Transaction.
 AS-18: RELATED PARTY DISCLOSURES
CA TEJAS SUCHAK
Question 3
Bhima Ltd sold to Arjun Ltd, goods having a Sale Value of ₹ 25 Lakhs during a Financial Year.
Mr.Strength, the Managing Director and Chief Executive of Bhima Ltd owns nearly 100% of the Capital
of Arjun Ltd. The Sales were made to Arjun Ltd at the normal Selling Price of Bhima Ltd. The Chief
Accountant of Bhima Ltd does not consider that these Sales should be treated any differently from any
other sale made by the Company despite being made to a Controlled Company, because the sales were
made at normal and, that too, at arms’ length prices. Comment.
Answer:
1. Principle - 1: Related Party Relationship covers the following relationships -
(a) Enterprises that control the Reporting Enterprise,
(b) Enterprises that are controlled by the Reporting Enterprise, or
(c) Enterprises that are under common control with the Reporting Enterprise (this includes Holding
Companies, Subsidiaries and fellow Subsidiaries),
2. Principle - 2: Further, AS - 18 is applicable irrespective of whether or not the transactions with
related parties are made at arm's length prices.
3. Analysis: Hence, in the given case, Bhima Ltd has Related Party Relationship with Arjun Ltd since both
the Companies under the common control of a single person (Mr.Strength).
4. Conclusion: Hence, Bhima Ltd should disclose the information required under AS - 18 in relation to its
Sales to Arjun Ltd during the entire Financial Year.
Question 4
A husband and wife are controlling 34% of voting power in Mathura Limited. They have a separate
Partnership Firm, which supplies the main Raw Material to the Company. The Management says that the
above transaction need not be disclosed. How will you deal with the above situation?
Answer:
1. Related Party Relationship: The definition of Related Party Relationship covers "Enterprises owned by
the Directors or Major Shareholders of the Reporting Enterprise."
2. Significant Influence: Significant Influence is presumed to exist, if an investing party holds 20% or
more of the voting power of the Enterprise (Such holding may be direct or indirect through
Intermediaries).
3. Disclosure: AS - 18 requires disclosure if there have been transactions between Related Parties,
irrespective of whether or not the transactions have been entered into at arm's length prices.
4. Conclusion: In the instant case, the individuals hold 34% of the voting power in the Company, and
hence have a significant influence. Disclosure is required as per AS - 18.
Question 5
A Firm of a Father and Son received ₹ 2 Lakhs towards job work done for Rama Ltd, during the year
ended 31st March. The total Job Work Charges paid by Rama Ltd during the year are over ₹ 50 Lakhs. The
 AS-18: RELATED PARTY DISCLOSURES
CA TEJAS SUCHAK
father is a Managing Director of Rama Ltd having substantial holding. The Managing Director told the
Auditor that since he is not involved in the activities of the Firm, and since the amount paid to it is
insignificant, there is no need to disclose the transaction. He further contended that such a payment
made in the last year was not disclosed. Is the M.D. right in his approach?
Answer:
1. Principles:
(a) 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
decisions.
(b) As per AS -18, Significant Influence is said to exist in case the investing party has 20% or more
voting power in the Enterprise.
2. Analysis and Conclusion: In the above case, the Managing Director of Rama Ltd is a Partner in the
Firm with his son, and the Firm has been paid ₹ 2 Lakhs as Job Work Charges. The Managing Director has
a substantial holding in the Firm. The Managing Director is also a Key Management Personnel of Rama
Ltd. Hence, there is a Related Party relationship & transaction, requiring disclosure under AS - 18.
Question 6
Vamana Ltd has two Non-Executive Directors in its Board. State whether AS -18 is applicable if - (1) A,
a Non-Executive Director is in a position to exercise significant influence by virtue of owning an
interest in the voting power in the Company. (2) B, a Non-Executive Director does not enjoy the
authority and responsibility for planning, directing and controlling the activities of the Company.
Answer:
1. Principle: AS - 18 applies to Non-Executive Director as under:

AS - 18 not applicable AS -18 applicable

(a) A Non-Executive Director of a Company should not be A Non-Executive Director would be

considered as Key Management Person under AS - 18 by virtue covered by AS - 18 if he is a Key
of his merely being a Director, unless he has the authority and Management Person, when -
responsibility for planning, directing and controlling the (a) he has the authority and
activities of the Reporting Enterprise. responsibility for planning, directing and
(b) AS - 18 should not be applied in respect of a Non- controlling the activities of the
Executive Director, even if he participates in the financial and Reporting Enterprise, or
/ or operating policy decision of the Enterprise. (Note: Mere (b) he is in a position to exercise control
participation is different from authority to plan / direct / or significant influence by virtue of
control) owning an interest in the voting power.

Question 7
 AS-18: RELATED PARTY DISCLOSURES
CA TEJAS SUCHAK
P Ltd owns 60% of the voting power of Q Ltd. Q Ltd in turn owns 70% of the voting interest in R Ltd.
Further, P Ltd also directly owns 15% of the voting interest in R Ltd. Would P Ltd be deemed to have
control over R Ltd or would it only be considered as exercising significant influence?
Answer:
1. Principle:
(a) If a Parent owns along with its Subsidiary more than one-half of the voting power in an enterprise,
that Enterprise will be considered as a Related Party of the Parent, by virtue of the ability to control.
(b) As per AS - 18, Control includes ownership, directly or indirectly, of more than one-half of the
voting power of another enterprise.
Control: P Ltd is a majority Shareholder (60%) in Q Ltd and it has control over it. Also, P Ltd and Q Ltd,
together are majority shareholders (15% + 70% = 85%) in R Ltd. Thus, P Ltd has indirect control over R
Ltd.
4. Conclusion:
(a) In the given case, P Ltd has the ability to control R Ltd, based on the holding of more than one-half
of the voting power.
(b) Hence, P Ltd has control over R Ltd and not just significant influence.
Question 8
Arun Ltd owns 60% of the voting power of Baskar Ltd, which in turn owns 60% voting interest in Chandru
Ltd. Karuna Ltd owns the remaining voting share in Chandru Ltd and is considered to exercise significant
influence over Chandru Ltd. During the reporting period, Karuna Ltd enters into transactions in the
ordinary course of business with Arun Ltd. Would Karuna Ltd be a Related Party of Arun Ltd?
Answer:
1. Analysis: Karuna Ltd is not related to Arun Ltd as it - (a) neither controls nor is controlled by Arun
Ltd, (b) does not exercise significant influence over Arun Ltd or is not so influenced by it.
2. Conclusion: Hence, Arun Ltd and Karuna Ltd are not considered as related party for the purpose of AS
- 18.
Question 9
Achyuta Ltd acquired 12% voting power in Govinda Ltd. Achyuta, being the single largest shareholder of
Govinda, appoints the Chairman and one other Member of the Board of Directors of Govinda Ltd (out of a
total of 12 Directors). These nominees of Achyuta Ltd are not Directors of Achyuta Ltd. By virtue of its
representation on the Board (through two nominees) of Govinda Ltd, Achyuta participates in the
financial and operating policy decisions of the enterprise taken at the Board Meetings. Would Achyuta
be considered as exercising control over Govinda Ltd?
Answer:
 AS-18: RELATED PARTY DISCLOSURES
CA TEJAS SUCHAK
1. Control: In this case, since the Shareholding is only 12%, Achyuta Ltd does not have the ability to
control Govinda Ltd. Also, there is no agreement or statute, which gives Achyuta Ltd, the power to direct
the policies of Govinda Ltd.
2. Significant Influence: As per AS - 18, when an enterprise owns less than 20% voting power in the
other enterprises there is no significant influence unless the contrary is proved.
3. Conclusion: In the above case, being the single largest shareholder, Achyuta Ltd participates in the
financial and operating policy decisions of Govinda Ltd. So, it is clearly demonstrated that Achyuta has
significant influence over Govinda Ltd. Therefore, Govinda Ltd is a Related Party of Achyuta Ltd, even if
20% voting power is not satisfied.
Question 10
A Ltd owns 30% of the Equity Capital of B Ltd. B Ltd in turn owns 35% of the Equity Capital of C Ltd,
and 40% of Equity Capital in D Ltd. Answer the following questions
(1) Is B Ltd a Related Party to A Ltd? (2) Is C Ltd a Related Party to A Ltd? (3) Are C Ltd and D Ltd are
Related Parties?
Answer:
1. Associates and Joint Ventures of the Reporting Enterprise are Related Parties. Since A Ltd holds more
than 20% of the voting power in B Ltd, by virtue of this, it has substantial interest and significant
influence in B Ltd. So, B Ltd is an Associate, and hence is Related Party to A Ltd.
2. An Associate of an Associate is not a Related Party. Only in the case of a Holding Company, a
Subsidiary of a Subsidiary (Sub-Subsidiary) also becomes a Related Party.
3. C Ltd and D Ltd are Co-Associates. Co-Subsidiaries become Related Parties because of common
control. In the case of Co-Associates, this common control is missing, and therefore they are not
Related Parties.