11.

4 FINANCIAL REPORTING

Examples 1 & 2
1. On instruction of H Ltd. (Holding Co.), S Ltd., a steel manufacturing company is buying
billets from its follow subsidiary FS Ltd. though there are many other sellers offering better
prices & incentives. Opportunity to buy at better & reasonable price is at risk since other
steel manufacturer from the same industry can buy at a cheaper rate and can have better
selling position than S Ltd.
2. S Limited, a subsidiary of H Limited, in steel manufacturing used to purchase billets from
UR Limited. H Limited acquires 100% stake in FS Limited who also manufactures billets.
FS Limited is now a fellow subsidiary of S Limited. H Limited instructs S Limited to
purchase at least 50% billets from FS Limited at a 10% lower rate than from FS Limited.

1.2 OBJECTIVE
The objective of the Standard is to ensure that the financial statements of an entity contains
necessary disclosures with respect to:

(a) related party relationships;

(b) related party transactions;

(c) outstanding balances with related parties; and

(d) commitments with related parties.

The disclosures are necessary so that users’ attention could be drawn to the possibility that
financial statements may be affected by such related party relationships and other items as
mentioned above.

1.3 SCOPE
The Standard has to be applied in:

(c) identifying
(a) identifying related (b) identifying related outstanding balances
party relationships; party transactions; between an entity and
its related parties;

(e) identifying the

(d) identifying
circumstances in which (f) determining the
commitments between
disclosures of above disclosures to be made
an entity and its related
items is to be made; about the above items.
parties;
and

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 INDIAN ACCOUNTING STANDARD 24 11.13

1.5 DISCLOSURES
The disclosure requirements can be broadly classified into two categories.
(a) Category 1 requires disclosures of relationships even though there are no related party
transactions between the disclosed related parties.
(b) Category 2 requires disclosures of relationships and transactions only when there are
related party transactions.
1.5.1 Disclosure- Relationships between parent and subsidiaries
The following disclosures of relationships, if exist, must be made irrespective of the fact whether
there have been related party transactions by the entity:
• Under this an entity is required to disclose the name of its parent and, if different, the
ultimate controlling party. It may be noted that the ultimate controlling party may be a
person.
Example 21
S4 Limited (reporting entity) is a subsidiary of S3 Limited. S3 Limited is a subsidiary of
S2 Limited. S2 Limited is a subsidiary of S1 Limited. S1 Limited is a subsidiary of
H Limited. S4 Limited, S3 Limited, S2 Limited and S1 Limited must disclose the name and
relationship with S3 Limited, S2 Limited and S1 Limited respectively and with H Limited.
• If neither the entity’s parent nor the ultimate controlling party produces consolidated
financial statements available for public use, the name of the next most senior parent that
does so shall also be disclosed.
Examples 22 & 23
22. S4 Limited (reporting entity) is a subsidiary of S3 Limited. S3 Limited is a subsidiary of
S2 Limited. S2 Limited is a subsidiary of S1 Limited. S1 Limited is a subsidiary of
H Limited. Only S2 Limited and S1 Limited produces consolidated financial
statements for public use. S4 Limited must disclose the name and relationship with
S3 Limited, S2 Limited, S1 Limited and H Limited.
23. S4 Limited (reporting entity) is a subsidiary of S3 Limited. S3 Limited is a subsidiary of
S2 Limited. S2 Limited is a subsidiary of S1 Limited. S1 Limited is a subsidiary of
H Limited. S3 Limited, S2 Limited, S1 Limited and H Limited all produces
consolidated financial statements for public use. S4 Limited must disclose the name
and relationship with S3 Limited and H Limited.
• The disclosure of relationship between a parent and its subsidiary (reporting entity) is
important because the existence of control relationship may prevent the reporting entity

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 11.20 FINANCIAL REPORTING

S. Particulars Ind AS 24 AS 18
No.
9. Disclosure of Ind AS 24 requires “the amount of AS 18 gives an option to
‘Amount of the the transactions” need to be disclose the “Volume of
Transactions’ vs disclosed. the transactions either
‘Volume of the as an amount or as an
Transactions appropriate proportion”.
10. Government Ind AS 24 requires disclosures of AS 18 presently
Related Entities: certain information by the exempts the disclosure
government related entities. of such information.
11. Clarification of Ind AS 24 neither defines these AS 18 includes
Control, terms nor it includes such definition and
Substantial clarificatory text and allows clarificatory text,
Interest and respective standards to deal with primarily with regard to
Significant the same. control, substantial
Influence interest (including 20%
threshold), significant
influence (including 20%
threshold)

Note:It is strongly advised to draw the diagrams of related party relationships for the following
illustrations to test their understanding of the subject matter)
Illustration 1 : Associates and subsidiaries
Entity P Limited has a controlling interest in subsidiaries SA Limited and SB Limited and
SC Limited. SC Limited is a subsidiary of SB Limited. P Limited also has significant influence
over associates A1 Limited and A2 Limited. Subsidiary SC Limited has significant influence over
associate A3 Limited
Examine related party relationships of various entities.
Solution

Subsidiary Associates

SA SB A1 A2

Associate
SC A3

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 INDIAN ACCOUNTING STANDARD 24 11.21

• In Separate Financial Statements of P Limited, SA Limited, SB Limited, SC Limited,

A1 Limited, A2 Limited and A3 Limited are all related parties.
• In the Individual Financial Statements of SA Limited, P Limited, SB Limited, SC Limited,
A1 Limited, A2 Limited and A3 Limited are all related parties.
• In the Individual Financial Statements of SB Limited, P Limited, SA Limited, SC Limited,
A1 Limited, A2 Limited and A3 Limited are all related parties.
• In the Individual Financial Statements of SC Limited, P Limited, SA Limited, SB Limited,
A1 Limited, A2 Limited and A3 Limited are all related parties.
• In the Individual Financial Statements of associates A1 Limited, A2 Limited and A3 Limited;
P Limited, SA Limited, SB Limited and SC Limited are related parties.
• A1 Limited, A2 Limited and A3 Limited are not related to each other.
• For Parent’s consolidated financial statements, A1 Limited, A2 Limited and A3 Limited are
related to the Group
*****
Illustration 2 : Key management personnel
Mr. X has a 100% investment in A Limited. He is also a member of the key management
personnel (KMP) of C Limited. B Limited has a 100% investment in C Limited.
Required
(a) Examine related party relationships from the perspective of C Limited for A Limited.
(b) Examine related party relationships from the perspective of C Limited for A Limited if Mr. X
is a KMP of B Limited and not C Limited.
(c) Will the outcome in (a) & (b) would be different if Mr. X has joint control over A Limited.
(d) Will the outcome in (a) & (b) would be different if Mr. X has significant influence over
A Limited.
Solution
(a) A Limited is related to C Limited because Mr. X controls A Limited and is a member of KMP
of C Limited.

Mr. X
B Ltd
100% Key Management
personnel 100%
Investment
investment
A Ltd
C Ltd

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 11.26 FINANCIAL REPORTING

4. Mr. Atul is an independent director of a company X Ltd. He plays a vital role in the
Management of X Ltd. and contributes in major decision making process of the
organisation. X Ltd. pays sitting fee of ` 2,00,000 to him for every Board of Directors’
(BOD) meeting he attends. Throughout the year, X Ltd. had 5 such meetings which was
attended by Mr. Atul.
Similarly, a non-executive director, Mr. Naveen also attended 5 BOD meetings and charged
` 1,50,000 per meeting. The Accountant of X Ltd. believes that they being not the
employees of the organisation, their fee should not be disclosed as per related party
transaction in accordance with Ind AS 24.
Examine whether the sitting fee paid to independent director and non-executive director is
required to be disclosed in the financial statements prepared as per Ind AS?
5. Mr. X, is the financial controller of ABC Ltd., a listed entity which prepares consolidated
financial statements in accordance with Ind AS. Mr. X has recently produced the final draft
of the financial statements of ABC Ltd. for the year ended 31st March, 20X2 to the
managing director Mr. Y for approval. Mr. Y, who is not an accountant, had raised
following query from Mr. X after going through the draft financial statements:
One of the notes to the financial statements gives details of purchases made by
ABC Ltd. from PQR Ltd. during the period 20X1-20X2. Mr. Y owns 100% of the shares in
PQR Ltd. However, he feels that there is no requirement for any disclosure to be made in
ABC Ltd.’s financial statements since the transaction is carried out on normal commercial
terms and is totally insignificant to ABC Ltd., as it represents less than 1% of ABC Ltd.’s
purchases.
Provide answers to the query raised by the Managing Director Mr. Y as per Ind AS.
6. Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in
ABC Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited.
ABC Limited has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the
Key management personnel in PQR Limited. ·
(a) Determine the entity to whom exemption from disclosure of related party transactions is
to be given. Also examine the transactions and with whom such exemption applies.
(b) What are the disclosure requirements for the entity which has availed the exemption?
7. S Ltd., a wholly owned subsidiary of P Ltd is the sole distributor of electricity to consumers
in a specified geographical area. A manufacturing facility of P Ltd is located in the said
geographical area and, accordingly, P Ltd is also a consumer of electricity supplied by
S Ltd. The electricity tariffs for the geographical area are determined by an independent
rate-setting authority and are applicable to all consumers of S Ltd, including P Ltd. Whether
the above transaction is required to be disclosed as a related party transaction as per
Ind AS 24, Related Party Disclosures in the financial statements of S Ltd.?

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4. As per paragraph 9 of Ind AS 24, Related Party Disclosures, “Key management personnel
are those persons having authority and responsibility for planning, directing and controlling
the activities of the entity, directly or indirectly, including any director (whether executive or
otherwise) of that entity.”
Accordingly, key management personnel (KMP) includes any director of the entity who are
having authority and responsibility for planning, directing and controlling the activities of the
entity. Hence, independent director Mr. Atul and non-executive director Mr. Naveen are
covered under the definition of KMP in accordance with Ind AS.
Also as per paragraph 7 and 9 of Ind AS 19, ‘Employee Benefits’, an employee may
provide services to an entity on a full-time, part-time, permanent, casual or temporary
basis. For the purpose of the Standard, Employees include directors and other
management personnel. Independent directors are not employee of the company and this
para requires rewording.
Therefore, contention of the Accountant is wrong that they are not employees of X Ltd.
Paragraph 17 of Ind AS requires disclosure about employee benefits for key management
personnel. Therefore, an entity shall disclose key management personnel compensation in
total i.e. disclosure of directors’ fee of (` 10,00,000 + ` 7,50,000) ` 17,50,000 is to be
made as employees benefits (under various categories).
Since short-term employee benefits are expected to be settled wholly before twelve months
after the end of the annual reporting period in which the employees render the related
services, the sitting fee paid to directors will fall under it (as per Ind AS 19) and is required
to be disclosed in accordance with the paragraph 17 of Ind AS 24.
5. Ongoing through the queries raised by the Managing Director Mr. Y, the financial controller
Mr. X explained the notes and reasons for their disclosures as follows:
Related parties are generally characterised by the presence of control or influence between
the two parties.
Ind AS 24 ‘Related Party Disclosures’ identifies related parties as, inter alia, key
management personnel and companies controlled by key management personnel. On this
basis, PQR Ltd. is a related party of ABC Ltd.
The transaction is required to be disclosed in the financial statements of ABC Ltd. since
Mr. Y is Key Management personnel of ABC Ltd. Also at the same time, it owns 100%
shares of PQR Ltd. ie. he controls PQR Ltd. This implies that PQR Ltd. is a related party of
ABC Ltd.
Where transactions occur with related parties, Ind AS 24 requires that details of the
transactions are disclosed in Notes to the financial statements. This is required even if the
transactions are carried out on an arm’s length basis.

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 INDIAN ACCOUNTING STANDARD 24 11.29

Transactions with related parties are material by their nature, so the fact that the transaction
may be numerically insignificant to ABC Ltd. does not affect the need for disclosure.
6. (a) As per para 18 of Ind AS 24, ‘Related Party Disclosures’, if an entity had related party
transactions during the periods covered by the financial statements, it shall disclose
the nature of the related party relationship as well as information about those
transactions and outstanding balances, including commitments, necessary for users to
understand the potential effect of the relationship on the financial statements.
However, as per para 25 of the standard a reporting entity is exempt from the
disclosure requirements in relation to related party transactions and outstanding
balances, including commitments, with:
(i) a government that has control or joint control of, or significant influence over, the
reporting entity; and
(ii) another entity that is a related party because the same government has control
or joint control of, or significant influence over, both the reporting entity and the
other entity
According to the above paras, for Entity P’s financial statements, the exemption in
paragraph 25 applies to:
(i) transactions with Government Uttar Pradesh State Government; and
(ii) transactions with Entities PQR and ABC and Entities Q, A and B.
Similar exemptions are available to Entities PQR, ABC, Q, A and B, with the
transactions with UP State Government and other entities controlled directly or
indirectly by UP State Government. However, that exemption does not apply to
transactions with Mr. KM. Hence, the transactions with Mr. KM needs to be disclosed
under related party transactions.
(b) It shall disclose the following about the transactions and related outstanding balances
referred to in paragraph 25:
(a) the name of the government and the nature of its relationship with the reporting
entity (ie control, joint control or significant influence);
(b) the following information in sufficient detail to enable users of the entity’s
financial statements to understand the effect of related party transactions on its
financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant, a
qualitative or quantitative indication of their extent.
7. As per paragraph 9(b)(i) of Ind AS 24, each parent, subsidiary and fellow subsidiary in a

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‘group’ is related to the other members of the group. Thus, in the case under discussion,
P Ltd is a related party of S Ltd from the perspective of financial statements of S Ltd.
Paragraph 11 of Ind AS 24 states as follows:
“In the context of this Standard, the following are not related parties:

(a) two entities simply because they have a director or other member of management
personnel in common or because a member of key management personnel of one
entity has significant influence over the other entity.
(b) two joint venturers simply because they share joint control of a joint venture.
(c) (i) providers of finance,(ii) trade unions, (iii) public utilities, and (iv) departments and
agencies of a government that does not control, jointly control or significantly
influence the reporting entity, simply by virtue of their normal dealings with an entity
(even though they may affect the freedom of action of an entity or participate in its
decision-making process).
(d) a customer, supplier, franchisor, distributor or general agent with whom an entity
transacts a significant volume of business, simply by virtue of the resulting economic
dependence.”
Being engaged in distribution of electricity, S Ltd is a public utility. Had the only relationship
between S Ltd and P Ltd been that of a supplier and a consumer of electricity, P Ltd would
not have been regarded as a related party of S Ltd. However, as per the facts of the given
case, this is not the only relationship between S Ltd and P Ltd. Apart from being a supplier
of electricity to P Ltd., S Ltd is also a subsidiary of P Ltd; this is a relationship that is
covered within the related party relationships to which the disclosure requirements of the
standard apply. In view of the above, the supply of electricity by S Ltd to P Ltd is a related
party transaction that attracts the disclosure requirements contained in paragraph 18 and
other relevant requirements of the standard. This is notwithstanding the fact that P Ltd is
charged the electricity tariffs determined by an independent rate-setting authority (i.e., the
terms of supply to P Ltd are at par with those applicable to other consumers)
Ind AS 24 does not exempt an entity from disclosing related party transactions merely
because they have been carried out on an arm’s length basis.

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