Ind AS 24 prescribes accounting treatment for related parties. The objective of this Standard is to ensure that the entity has disclosed, in its financial statements, that their financial position and Profit and Loss have been affected by the existence of Related Party relationships. Also, the nature of transaction and relationship should be disclosed by the entity.
Considering the time constraint and for ease of understanding it is important to address only those issues which are imperative for the one’s understanding. To summarize the same following are the important points are to be taken into consideration while applying Ind AS 24.
Scope This Standard shall be applied:-
To identify related party relationships;
To identify related party transactions;
To identify opening and closing balances including the commitment between the entity with its related parties; and
To determine the disclosures of these transactions and understand the circumstances for these disclosures.
The above points shall be applied in the case of consolidated and separate financial statements of a holding, joint venture or investor presented in accordance with Ind AS 27 (Consolidated and Separate Financial Statements). This Standard also applies to individual financial statements.
This Standard shall not be applied:-
In case of Consolidated Financial Statements, Intra-group transactions and outstanding balances shall be eliminated from the entity’s Financial Statements.
Where related party’s disclosure requirements conflict with the entity’s responsibility of confidentiality or prohibition to disclose certain facts required by law, statute or any competent authority.
Definitions The meaning of the following terms used repetitively in the Standard are:-
A related party is a party which is related to the entity
Entity is referred as Reporting Entity in this standard.
An individual or relative of such individual is related to a reporting entity in case of:
control or common control over the reporting entity;
significant influence over the reporting entity; or
the key management personnel
An entity is a related party when any of these following conditions applies:
If an enterprise controls the reporting enterprise, controlled by reporting entity or under common control with the reporting entity.
If Reporting entity has an Associate company or Reporting entity is an Associate of another enterprise.
If Reporting entity has a Joint Venture or Reporting entity is a Joint Venture of another enterprise.
If the entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity.
If any individual has significant influence in company then such an individual shall also be considered as related party.
A related party transaction is an exchange of resources and services between a reporting entity and a related party, whether price of such resource and service is charged or not.
Common control is the relation between two reporting entities that are controlled by a common entity.
Key management personnel are those persons in a company who have three powers at any level: Planning, Directing & Controlling, without the relevance of Importance of designation (including a non-executive director).
Significant influence refers to the participation in the Operating, Investing and Financing activities of an entity but not to have control over them.
Government refers to local, national and international government and government agencies.
A government-related entity is an entity which controls, is controlled, in common control by a government.
In defining the relationship of each related party, the substance is given priority over the legal form of the relationship.
The following parties are not considered as Related parties under any case:-
common director or key managerial personnel between two entities.
two venture sharing joint control over a joint venture.
providers of finance,
trade unions,
government companies
single customer/buyer/agent/franchise
Purpose
Related Party Relationships is a routine feature of business and transactions. Many entities usually carry on their extended business through their subsidiaries, associates, joint ventures and investors because the entity has the ability to affect the operating, investing and financing activities through common control and significant influence.
Some transactions between related parties can affect the financial position and profit or loss of an entity. Transactions between the entity and its related party should be same as with the unrelated parties. The amount and the terms of any transaction should not be biased.
The financial position and profit or loss of an entity shall be affected by the mere existence of a related party relationship even if there are no related party transactions. A related party relationship alone can affect the transactions with unrelated parties due to common control (e.g. a subsidiary may terminate relations with their former trading partner on acquisition by the holding company of other subsidiary company engaged in trading business) and significant influence (e.g. a subsidiary may be restricted by the holding company to engage in any new line of business).
For the above reasons, the transactions, outstanding balances, commitment and the relationship of the related parties is taken into consideration to provide a true and fair view to the users of Financial statements, including risk assessment and internal controls in the entity.
Disclosure
Where there is control in Related party relationships, Related party Disclosures are mandatory even if Related party Transactions does not take place.
Where there is no control in Related party relationships, Related party Disclosures shall be made only when Related party Transactions takes place.
The contents of the Disclosure report shall be:-
Name of Related party;
Nature of Relationship;
Nature and Amount of transaction;
Bad debts from related party transactions; and
Any other points which can improve the presentation.
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