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AS 18: Party Disclosures | Company Vakil

Accounting standard 18 deals with the requirements for the disclosure of the following:

  1. Related party relationships and the transactions made between a reporting enterprise, and
  2. 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:

  1. Subsidiaries, fellow subsidiaries and holding companies
  2. The reporting enterprise’s associates and joint ventures
  3. Investors Involved with respect to a reporting enterprise that is an associate or a joint venture
  4. Any person that owes a direct or indirect interest in a reporting enterprise’s voting power
  5. Management of an enterprise’s personnel and their relatives
  6. 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:

  1. Statute requirement: Statutes that run an enterprise will require a disclosure of financial statements and related party transactions
  2. 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.
  3. Affects the results and financial position: Related party disclosures affect the operating results as well as the financial status of an enterprise
  4. Transaction recording: The disclosure of related party transactions facilitates related party transactions

What should be disclosed in AS 18

  1. The transacting relating party’s name
  2. An explanation of the relationship between the parties
  3. An account of the nature of transactions
  4. The amount of the transactions as an amount or part of

Disclosure is not required under the following circumstances:

  1. Transactions that are intra-group
  2. Any enterprises which offer a statutory requirement of confidentiality
  3. 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:

  1. The purchase of finished or unfinished sales of goods
  2. The purchase of sales of fixed assets
  3. Receiving or giving of services
  4. Arrangements with agencies
  5. Hire or lease arrangements
  6. Research and development transfer
  7. License agreements
  8. Finance (including equity and loan contributions)
  9. 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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