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Thread: 18 Accounting Standard 18 - Related Party Disclosures - AS 18

  1. #11
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 19 Interpretation of the term ‘intermediaries’ of Accounting Standard 18 - Related Party Disclosures - AS 18

    Accounting Standards Interpretation (ASI) 19


    Interpretation of the term ‘intermediaries’


    Accounting Standard (AS) 18, Related Party Disclosures


    [Pursuant to the issuance of this Accounting Standards Interpretation, General Clarification (GC)
    – 9/2002, issued in October 2002, stands withdrawn.]


    ISSUE


    1. The issue is how the term ‘intermediaries’ should be interpreted for the purposes of paragraphs 3 and 13 of AS 18.

    CONSENSUS

    2. For the purposes of paragraphs 3 and 13 of AS 18, the term ‘intermediaries’ should be confined to mean enterprises which are ‘subsidiaries’ as defined in AS 21, Consolidated Financial Statements.


    BASIS FOR CONCLUSIONS

    3. Paragraphs 3 and 13 of AS 18 state as under:

    “3. This Statement deals onlywith related party relationships described in (a) to (e) below:

    (a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries);


    “13. Significant influence may be exercised in several ways, for example, by representation on the board of directors, participation in the policy making process, material inter-company transactions,
    interchange of managerial personnel, or dependence on technical information. Significant influence may be gained by share ownership, statute or agreement. As regards share ownership, if an investing
    party holds, directly or indirectly through intermediaries, 20 per cent or more of the voting power of the enterprise, it is presumed that the investing party does have significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investing party holds, directly or indirectly through intermediaries, less than 20 per cent of the voting power of the enterprise, it is presumed that the investing party does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investing party does not necessarily preclude an investing party from having significant influence.”

    4. In the context of ‘control’ and exercise of ‘significant influence’, the meaning of the term ‘ intermediaries’ should be confined to mean only enterprises which are ‘subsidiaries’ within the meaning of AS 21, and extending it to cover ‘associate’ etc. would not be practicable.

  2. #12
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 21 Non-Executive Directors on the Board– whether related parties

    Accounting Standards Interpretation (ASI) 21


    Non-Executive Directors on the Board – whether related parties


    Accounting Standard (AS) 18, Related Party Disclosures

    [Pursuant to the issuance of this Accounting Standards Interpretation, General Clarification (GC)
    – 13/2002, issued in October 2002, stands withdrawn.]



    ISSUES

    1. The issue is as to whether a non-executive director on the Board of Directors of a company is a key management person.

    2. Another related issue is as to whether a non-executive director is covered by AS 18 in case he participates in the financial and/or operating policy decisions of an enterprise.


    CONSENSUS

    3. A non-executive director of a company should not be considered as a keymanagement person underAS 18 by virtue ofmerely his being a director unless he has the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.

  3. #13
    Accounting Standards
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    Default BASIS FOR CONCLUSIONS of Accounting Standard 18 - Related Party Disclosures - AS 18

    4. The requirements of AS 18 should not be applied in respect of a nonexecutive director even if he participates in the financial and/or operating policy decision of the enterprise, unless he falls in any of the categories in paragraph 3 of AS 18.



    5. AS 18 defines “key management personnel” as under:

    “Key management personnel - those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.”


    Paragraph 14 of AS 18 explains as under:

    “14. Key management personnel are those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. For example, in the case of a company, the managing director(s), whole time director(s), manager and any person in accordancewith whose directions or instructions the board of directors of the company is accustomed to act, are usually considered key management personnel.”


    AS 18 considers only such persons as keymanagement personnel who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. Therefore, merely being a director of a company is not sufficient for becoming key management person within the meaning of AS 18, unless that director has the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.

    6. AS 18 defines ‘related party’ and ‘significant influence’ as below: “Related party - 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.”

    “Significant influence - participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies.”


    A non-executive director, who participates in the financial and/or operating policy decisions of the enterprise,may qualify as a ‘related party’.However, paragraphs 2 and 3 of AS 18 dealing with the scope of AS 18 provide as below:

    “2. This Statement applies only to related party relationships described in paragraph 3.


    3. This Statement deals onlywith related party relationships described in (a) to (e) below:

    (a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries);


    (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture;


    (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives themcontrol or significant influence over the enterprise, and relatives of any such individual;

    (d) key management personnel and relatives of such personnel; and


    (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors ormajor shareholders of the reportingenterprise and enterprises that have a member of key management in common with the reporting enterprise.”


    In view of the above, a non-executive director, merely by virtue of his being a director and thereby participating in the financial and/or operating policy decisions of the enterprise, is not covered under any one of the above. Accordingly, AS 18 is not applicable to such a non-executive director.
    However, a non-executive director is covered by a related party relationship in case other requirements of the Standard are met. For instance, he is considered as a key management person as per paragraph 3 of this Interpretation or he is in a position to exercise control or significant influence by virtue of owning an interest in the voting power as per paragraph 3 (c) of AS 18.

  4. #14
    Accounting Standards
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    Default Accounting Standards Interpretation (ASI) 23 Remuneration paid to key management personnel – whether a related party transaction

    Accounting Standards Interpretation (ASI) 23


    Remuneration paid to key management personnel – whether a related party transaction


    Accounting Standard (AS) 18, Related Party Disclosures


    [Pursuant to the issuance of this Accounting Standards Interpretation, General Clarification (GC)
    – 15/2002, issued in October 2002, stands withdrawn.]


    ISSUES


    1. The issue is whether remuneration paid to key management personnel is a related party transaction. Another related issue is whether remuneration paid to non-executive directors on the Board of Directors is a related party transaction.


    CONSENSUS

    2. Remuneration paid to keymanagement personnel should be considered as a related party transaction requiring disclosures under AS 18. In case non-executive directors on the Board of Directors are not related parties (see Accounting Standards Interpretation 21), remuneration paid to them should not be considered a related party transaction.

    BASIS FOR CONCLUSIONS

    3. AS 18 defines “related party transaction” as under: “Related party transaction - a transfer of resources or obligations between related parties, regardless of whether or not a price is
    charged.”


    “24. The following are examples of the related party transactions in respect of which disclosures may be made by a reporting enterprise:

     purchases or sales of goods (finished or unfinished);
     purchases or sales of fixed assets;
     rendering or receiving of services;
     agency arrangements;
     leasing or hire purchase arrangements;
     transfer of research and development;
     licence agreements;
     finance (including loans and equity contributions in cash or in kind);
     guarantees and collaterals; and
     management contracts including for deputation of employees.”


    As per the definition of the related party transaction, the transaction should be between related parties to qualify as a related party transaction. Since key management personnel are related parties under AS 18, remuneration paid to keymanagementpersonnel is a related partytransaction
    requiring disclosures under AS 18. Further, in case non-executive directors on the Board of Directors are not related parties (see Accounting Standards Interpretation 21), remuneration paid to them is not considered a related party transaction.

  5. #15
    Accounting Standards
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    Default Clarification accounting standard (as) 18, related party disclosures of Accounting Standard 18 - Related Party Disclosures - AS 18

    CLARIFICATION

    ACCOUNTING STANDARD (AS) 18, RELATED PARTY DISCLOSURES

    This clarification has been issued by the Accounting Standards Board of the Institute of Chartered Accountants of India. The purpose of this clarification is to illustrate the application of paragraphs 23 and 26 of AS 18 to assist in clarifying their meaning.
    Paragraphs 23 and 26 of AS 18 provide as under:

    "23. If there have been transactions between related parties, during the existence of a related party relationship, 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 as an appropriate proportion;

    5. any other elements of the related party transactions necessary for an understanding of the financial statements;

    6. the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and

    7. amounts written off or written back in the period in respect of debts due from or to related parties.
    26. Items of a similar nature may be disclosed in aggregate by type of related party."
    The manner of disclosures required by paragraphs 23 and 26 of AS 18 is illustrated as below. It may be noted that the format given below is merely illustrative in nature and is not exhaustive.
    Holding CompanySubsidiariesFellow SubsidiariesAssociatesKey Management PersonnelRelatives of Key Management PersonnelTotal
    Purchases of goods
    Sale of goods
    Purchase of fixed assets
    Sale of fixed assets
    Rendering of services
    Receiving of services
    Agency arrangements
    Leasing or hire purchase arrangements
    Transfer of research and development
    Licence agreements
    Finance (including loans and equity contributions in cash or in kind)
    Guarantees and collaterals
    Management contracts including for deputation of employees
    Note :
    Names of related parties and description of relationship:
    1.Holding CompanyA Ltd.
    2.SubsidiariesB Ltd. and C (P) Ltd.
    3.Fellow SubsidiariesD Ltd. and Q Ltd.
    4.AssociatesX Ltd., Y Ltd. and Z (P) Ltd.
    5.Key Management PersonnelMr. Y and Mr. Z
    6.Relatives of Key Management PersonnelMrs. Y (wife of Mr. Y), Mr. F (father of Mr. Z)

  6. #16
    Accounting Standards
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    Default ASI 21 Non-Executive Directors on the Board– whether related parties clearly specifies

    ASI 21 Non-Executive Directors on the Board– whether related parties clearly specifies that a non-executive director even if he participates in the financial and/or operating policy decision of the enterprise should not be considered as a key management person UNLESS he is described in (a) to (e) below as mentioned in AS 18 para 3 :


    (a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries)


    (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture;


    (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives themcontrol or significant influence over the enterprise, and relatives of any such individual;


    (d) key management personnel and relatives of such personnel; and

    (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors ormajor shareholders of the reportingenterprise and enterprises that have a member of key management in common with the reporting enterprise.”

  7. #17
    Accounting Standards
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    Default Applicability of Accounting Standard 18 - Related Party Disclosures - AS 18

    Applicability of Accounting Standard (AS) 18, ‘Related Party Disclosures’

    A. Facts of the Case

    1. A company, registered under the provisions of the Companies Act, 1956, is promoted by the Government of Tamil Nadu. It is primarily engaged in the business of manufacture of newsprint, printing and writing paper using bagasse as a basic raw material. The Government of Tamil Nadu (GOTN) and Industrial Development Bank of India (IDBI) are the two major shareholders of the company holding 35.10% and 34.30% of the equity share capital of the company respectively. As per the querist, it is not a government company but is deemed to be a government company under section 619B of the Companies Act, 1956.

    2. The querist has stated that the Board consists of 12 directors out of which 3 directors are nominees of GOTN and 2 directors are nominees of IDBI. Besides, the Chairman and Managing Director is appointed by GOTN. Two working directors, viz., Director (Finance) and Director (Operations) are appointed by the company, and the others are independent non-executive directors appointed by the company. Other than GOTN and IDBI, no other body corporate or individual holds substantial voting power in the company.

    3. According to the querist, the company is having business dealings with some of the State-owned departments/agencies and banking relationship with IDBI Bank and IDBI Mutual Fund. During the course of audit for the accounting year ended March 31, 2002, the statutory auditors observed that as IDBI is holding substantial portion of the share capital of the company and its nominees are on the Board, it can exercise significant influence in making financial and operating decisions, and, therefore, insisted that the company has to comply with the disclosure requirements under Accounting Standard (AS) 18, ‘Related Party Disclosures’, issued by the Institute of Chartered Accountants of India, in respect of related party transactions.

    4. The company informed the auditors that AS 18 is not applicable to the company. The reasons put forth by the company as well as by the statutory auditors in support of their views are summarised below:

    Company’s views

    The reporting enterprises having transactions with government departments and government agencies including government sponsored bodies and other entities are covered under paragraph 4(c)(iv) of AS 18, and, therefore, are excluded from the definition of ‘related party’. Such entities are deemed not to be related parties. In other words, such exempted categories by virtue of their normal dealings with an enterprise can not be construed as related parties notwithstanding that the parties listed under paragraph 4(c)(iv) may circumscribe the freedom of action of the enterprise or participate in its decision making process.As far as IDBI is concerned, though it has voting power of more than 20%, it does not have power to direct the financial and operating policies of the company. Besides, IDBI also falls under the exempted category (paragraph 4(c)(iv) of AS 18) as it is a body constituted by the Central Government under a special Act of Parliament wherein 60% of its equity is held by the Central Government.Having regard to the above, no specific disclosure is required under AS 18 in relation to transactions with GOTN and IDBI.

    Statutory auditor’s views

    The statutory auditors are in agreement with the company regarding non- applicability of AS 18 with reference to transactions with GOTN departments and Government agencies. But they differ with the company regarding transactions with IDBI. They are of the view that though IDBI does not have a controlling stake in the company, it has voting power of more than 20% by virtue of which they can exercise significant influence in making financial and operating decisions. Though IDBI does not have the ability to control the financial and operating policies, they do participate in the decision making of such policies. Notwithstanding the above, IDBI cannot be brought under the exempted categories specified in paragraph 4(c)(iv) of AS 18 especially of ‘government departments and government agencies including government sponsored bodies’ since IDBI also has voting power of more than 20% of the company. Hence, IDBI does not fall under the exempted category listed in paragraph 4(c)(iv) of AS 18. As such, the statutory auditors advised the company to comply with AS 18.

    B . Query

    5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) Whether IDBI can be brought within the scope of ‘government departments and government agencies including government sponsored bodies’ (paragraph 4(c)(iv) of AS 18) and thereby treat IDBI as deemed not to be a ‘related party’.

    (b) Whether the company can be considered as ‘State-controlled enterprise’ (defined in AS 18), for the limited purpose of ascertaining the applicability of AS 18, in the light of the fact that IDBI (under the control of Central Government) and GOTN jointly hold 69% of the equity of the company and GOTN and IDBI appoint six directors including ‘Chairman and Managing Director’ of the company.

    D. Opinion

    On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 5 above:

    (a) IDBI is deemed not to be a related party by virtue of paragraphs 4(c)(i) and 4(c)(iv) of AS 18.

    (b) Yes, the company is a ‘State-controlled enterprise’ for the purposes of AS 18. Accordingly, the company would not be required to make any disclosures in its financial statements as regards related party relationships and transactions with IDBI.


    Opinion finalised by the Committee on 27.1.2004.

  8. #18
    Accounting Standards
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    Default Exposure Draft of Accounting Standard 18 - Related Party Disclosures - AS 18

    Exposure Draft
    Accounting Standard 18 (Revised 20XX)
    (Corresponding to IAS 24)

    Related Party Disclosures

    The following is the Exposure Draft of the Accounting Standard (AS) 18 (Revised 20XX), Related party Disclosures, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, for comments. The Board invites comments on any aspect of this Exposure Draft. The Board would particularly welcome answers to the question set out below. Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording.


    Comments should be submitted in writing to the Secretary, Accounting Standards Board, The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi – 110 002, so as to be received not later than May 25, 2010. Comments can also be sent by e-mail at edcommentsasb@icai.org or asb@icai.org.


    (This Exposure Draft of the revised Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles. This Exposure Draft of the revised Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards).

    Question : On the lines of the existing AS 18, the Exposure Draft of revised AS 18 includes brothers, sisters, father and mother as related parties, irrespective of their status of dependence on the individual (or vice versa). However, the same has not been included in IAS 24 as in the present environment, father, mother, brother, and sister may not influence, in all cases, the judgment of an individual and unless they are dependent. Do you agree with the view that the above relations should be included in the definition of related party. If not, then why?

  9. #19
    Accounting Standards
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    Default Objective of Accounting Standard 18 - Related Party Disclosures - AS 18

    Objective of Accounting Standard 18 - Related Party Disclosures - AS 18


    1 The objective of this Standard is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties.

  10. #20
    Accounting Standards
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    Default Scope of Accounting Standard 18 - Related Party Disclosures - AS 18

    Scope of Accounting Standard 18 - Related Party Disclosures - AS 18


    2 This Standard shall be applied in:

    (a) identifying related party relationships and transactions;

    (b) identifying outstanding balances, including commitments, between an entity and its related parties;

    (c) identifying the circumstances in which disclosure of the items in (a) and (b) is required; and

    (d) determining the disclosures to be made about those items.


    3 This Standard requires disclosure of related party relationships, transactions and outstanding balances, including commitments, in the consolidated and separate financial statements of a parent, venturer or investor presented in accordance with Accounting Standard (AS) 21 (Revised 20XX) Consolidated and Separate Financial Statements. This Standard also applies to individual financial statements.

    4 Related party transactions and outstanding balances with other entities in a group are disclosed in an entity’s financial statements. Intra-group related party transactions and outstanding balances are eliminated in the preparation of consolidated financial statements of the group.


    4A Related party disclosure requirements as laid down in this Standard do not apply in circumstances where providing such disclosures would conflict with the reporting entity’s duties of confidentiality as specifically required in terms of a statute or by any regulator or similar competent authority.

    4B In case a statute or a regulator or a similar competent authority governing an entity prohibit the entity to disclose certain information which is required to be disclosed as per this Standard, disclosure of such information is not warranted. For example, banks are obliged by law to maintain confidentiality in respect of their customers’ transactions and this Standard would not override the obligation to preserve the confidentiality of customers’ dealings.
    Last edited by Accounting Standards; 14-08-2010 at 11:19 AM.

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