Accounting standard 18 deals with the requirements for the disclosure of the following:
- Related party relationships and the transactions made between a reporting enterprise, and
- The transactions made between a reporting enterprise and related parties
The requirements of AS 18 can apply to both the statements of each reporting enterprise as well as the consolidated financial statements made by a holding company
Related parties
According to accounting standard 18, a related party is defined as a point during any time of the year in which a party has the ability to control the other party or influence the other party to make a financial or operating decision.
Control is defined as:
The indirect or direct ownership of over 50% of a voting enterprise or power
The ownership aboard directors of a company
The control or ownership of the corresponding governing body
An interest in the voting power or power 2 influence an enterprise’s financial and/or operating policies
Who is covered?
Under related party relationships, the following are covered in AS 18:
- Subsidiaries, fellow subsidiaries and holding companies
- The reporting enterprise’s associates and joint ventures
- Investors Involved with respect to a reporting enterprise that is an associate or a joint venture
- Any person that owes a direct or indirect interest in a reporting enterprise’s voting power
- Management of an enterprise’s personnel and their relatives
- Any enterprise in which a key person who has a direct or indirect voting power or interest can exert influence
The importance of related party disclosures
Accounting standard 18 is important because it fulfill the following below:
- Statute requirement: Statutes that run an enterprise will require a disclosure of financial statements and related party transactions
- Not an ‘arm’s length’ price: A transaction must reflect that the price may not be an ‘arm’s length’ price. The presumption that a transaction on a financial statement is on an arm’s length basis prevails without related party disclosures.
- Affects the results and financial position: Related party disclosures affect the operating results as well as the financial status of an enterprise
- Transaction recording: The disclosure of related party transactions facilitates related party transactions
What should be disclosed in AS 18
- The transacting relating party’s name
- An explanation of the relationship between the parties
- An account of the nature of transactions
- The amount of the transactions as an amount or part of
Disclosure is not required under the following circumstances:
- Transactions that are intra-group
- Any enterprises which offer a statutory requirement of confidentiality
- Any of the related party relationships associating state-controlled enterprises with other state-controlled enterprises
Related party transaction examples
The list below includes examples of related party transactions showing what disclosures can be made by a reporting enterprise:
- The purchase of finished or unfinished sales of goods
- The purchase of sales of fixed assets
- Receiving or giving of services
- Arrangements with agencies
- Hire or lease arrangements
- Research and development transfer
- License agreements
- Finance (including equity and loan contributions)
- Collateral and guarantees, and
- Statute requirement: Statutes that run an enterprise will require a disclosure of financial statements and related party transactions
- Not an ‘arm’s length’ price: A transaction must reflect that the price may not be an ‘arm’s length’ price. The presumption that a transaction on a financial statement is on an arm’s length basis prevails without related party disclosures.
- Affects the results and financial position: Related party disclosures affect the operating results as well as the financial status of an enterprise
- Transaction recording: The disclosure of related party transactions facilitates related party transactions Deputation of employees managing contracts.
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