AS 18 establishes requirements for disclosing related party relationships and transactions between a reporting enterprise and its related parties. Transactions with related parties — a parent company, a subsidiary, key management personnel, and so on — may not be conducted on the same terms as transactions with independent parties, and even the mere existence of the relationship can affect the reporting enterprise. AS 18 does not change how transactions are accounted for; it requires that they, and the relationships behind them, be disclosed so users are aware of them.
Objective and scope
The objective is to establish requirements for disclosure of related party relationships and transactions between a reporting enterprise and its related parties. The standard requires disclosure; it does not deal with the measurement of related party transactions. It applies to the financial statements of each reporting enterprise and to consolidated financial statements. Certain relationships are outside its scope — for example, two enterprises simply because they have a common director, providers of finance in the ordinary course of business merely by virtue of that role, and government-related entities in certain respects — subject to the standard's specific provisions.
Who is a 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. AS 18 identifies the categories of related parties that this covers, which include:
Enterprises that directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the reporting enterprise (holding companies, subsidiaries, and fellow subsidiaries).
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 joint venture.
Individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence, and relatives of any such individual.
Key management personnel (KMP) — those persons who have the authority and responsibility for planning, directing, and controlling the activities of the reporting enterprise — and their relatives.
Enterprises over which any of the individuals or KMP above is able to exercise significant influence.
Control and significant influence
Control means ownership, directly or indirectly, of more than one-half of the voting power of an enterprise; or control of the composition of the board of directors (or governing body) so as to obtain economic benefits from its activities; or a substantial interest in voting power together with the power to direct the financial and operating policies. Significant influence means participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies. These concepts determine whether a relationship falls within the related party definition.
What must be disclosed
Where related party relationships involve control, AS 18 requires disclosure of the name of the related party and the nature of the relationship even where there have been no transactions between them — the existence of a controlling relationship is itself information users need. Where there have been transactions between related parties during the existence of the relationship, the reporting enterprise discloses: the name of the transacting related party; a description of the relationship; a description of the nature of the transactions; the volume of the transactions (either as an amount or as an appropriate proportion); and other elements of the transactions necessary for an understanding of the financial statements, including amounts or appropriate proportions of outstanding items and any amounts written off or written back in respect of debts due from or to related parties.
Items of a similar nature may be disclosed in aggregate, unless separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements.
Types of transactions
Examples of related party transactions that may need disclosure include purchases or sales of goods and of property and other assets; rendering or receiving of services; agency arrangements; leasing arrangements; transfers of research and development; licence agreements; finance (including loans and equity contributions); guarantees and collaterals; and management contracts including for deputation of employees. The disclosure requirements apply to all such transactions during the period in which a related party relationship existed.
A brief illustration
A company is 60% owned by a parent company and pays management fees to the parent, buys raw materials from a fellow subsidiary, and pays remuneration to its key management personnel. Under AS 18, it discloses the parent-subsidiary relationship (a control relationship) and the fellow-subsidiary relationship, describes the nature of each set of transactions (management fees, raw material purchases, KMP remuneration), and states the volume of each and any outstanding balances at the year-end. Even if, in some year, there were no transactions with the parent, the controlling relationship itself would still be disclosed. A reader can then see how much of the company's activity is with related parties rather than independent third parties, which is relevant to assessing the reliability and independence of its reported results.
How AS 18 compares with Ind AS 24
AS 18 corresponds to Ind AS 24, Related Party Disclosures, and the two share the same purpose and much of the same content — both require disclosure of related party relationships and transactions and both cover control, significant influence, and key management personnel. Ind AS 24 is somewhat broader in certain respects: its definition of related parties is more extensive (for example, in how it treats close family members and post-employment benefit plans), it specifically requires disclosure of key management personnel compensation broken down by category (short-term benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payment), and it provides a partial exemption with modified disclosures for government-related entities. So while the disclosure objective is the same, Ind AS 24 casts a slightly wider net and prescribes more granular KMP compensation disclosure.
Common pitfalls
Recurring issues include failing to disclose a controlling relationship where there were no transactions; overlooking related parties such as key management personnel and their relatives, or entities they significantly influence; aggregating dissimilar transactions in a way that obscures their effect; and omitting outstanding balances or amounts written off in respect of related parties.
Why this is cleaner on a unified system
Identifying and disclosing related party transactions requires being able to flag and total transactions with the relevant parties across the enterprise — far easier when all transactions are captured in one connected system where counterparties can be tagged consistently. When the ledger holds a single source of truth with related parties identified, extracting the volume of transactions and outstanding balances for disclosure is more straightforward than searching across separate tools and reconciling the results.
This article is a detailed educational summary of AS 18 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of AS 18 as issued by the ICAI before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.