What Is AS 18?
Accounting Standard 18 (AS 18), titled "Related Party Disclosures," was issued by the ICAI and requires disclosure of related party relationships and transactions between a reporting enterprise and its related parties. The standard recognises that related party transactions may not be conducted on the same terms as transactions between unrelated parties, and that the financial position and profitability of an enterprise may be affected by the existence of related parties.
Scope
AS 18 applies to the reporting of related party relationships and transactions between a reporting enterprise and its related parties. It applies to every enterprise that prepares and presents financial statements under the applicable accounting standards. The standard also applies to financial statements of each individual enterprise in a group.
Key Definitions
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.
Related Party Relationships
| Type of Relationship | Examples |
|---|---|
| Holding-Subsidiary | Parent company and its subsidiaries (direct or indirect control) |
| Fellow Subsidiaries | Subsidiaries of the same parent |
| Associates | Entity over which the investor has significant influence (typically 20%+ voting power) |
| Joint Ventures | Venturers in a joint venture arrangement |
| Key Management Personnel | MD, CEO, CFO, whole-time directors, company secretary and other persons with authority and responsibility for planning, directing and controlling the enterprise |
| Relatives of KMP | Spouse, children, dependants of key management personnel |
| Entities Controlled/Influenced by KMP or Their Relatives | Enterprises over which KMP or their relatives exercise control or significant influence |
Control
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 corresponding governing body) in the case of a company, or a substantial interest in voting power and the power to direct the financial and/or operating policies of the enterprise.
Significant Influence
Significant influence is participation in the financial and/or operating policy decisions of an enterprise but not control of those policies. Significant influence may be exercised through representation on the board, participation in policy-making, material inter-company transactions, interchange of managerial personnel, or dependence on technical information. Ownership of 20% or more of voting power is presumed to give significant influence (unless rebutted).
Types of Related Party Transactions
The following are examples of transactions that must be disclosed when they occur with related parties:
- Purchases or sales of goods (finished or unfinished)
- Purchases or sales of fixed assets and other assets
- Rendering or receiving of services
- Agency arrangements
- Leasing or hire purchase arrangements
- Transfer of research and development
- Licence agreements
- Finance (including loans, equity contributions in cash or kind)
- Guarantees and collaterals
- Management contracts (including deputation of employees)
Parties NOT Considered Related
The following are not considered related parties under AS 18:
- Two enterprises simply because they have a director or key manager in common (unless the director exercises significant influence)
- Providers of finance, trade unions, public utilities and government departments in the course of their normal dealings
- A single customer, supplier, franchisor, distributor or general agent with whom the enterprise transacts a significant volume of business merely by virtue of the resulting economic dependence
Disclosure Requirements
If there have been transactions between related parties, the reporting enterprise should disclose:
- The name of the related party and the nature of the related party relationship
- The nature of each type of transaction
- The volume of transactions — either as an amount or as an appropriate proportion
- Any other elements of the transaction that are necessary for understanding the financial statements
Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for understanding the effects of related party transactions.
The name of the related party and the nature of the relationship should be disclosed irrespective of whether or not there have been transactions between the related parties.
Related Party Disclosure under Companies Act 2013
Section 188 of the Companies Act, 2013 imposes additional requirements on related party transactions, including prior approval by the Board of Directors and, in certain cases, by shareholders through a special resolution. Non-compliance attracts penalties. The disclosure requirements under AS 18 complement the statutory requirements under the Companies Act.
Practical Example
Company ABC Ltd. has the following related party transactions during FY 2025-26:
- Purchased goods worth Rs 50 lakh from XYZ Ltd. (subsidiary)
- Paid rent of Rs 12 lakh to Mr. A (Managing Director) for use of his personal property
- Provided a loan of Rs 1 crore to PQR Ltd. (associate company) at 8% interest
- Paid managerial remuneration of Rs 60 lakh to the Managing Director
All these transactions must be disclosed in the notes to accounts with the name of the related party, nature of relationship, nature of transaction, and amount.
Conclusion
AS 18 is critical for ensuring transparency about relationships and transactions that can significantly influence an enterprise's financial position and performance. The standard helps users identify potential conflicts of interest and assess whether transactions were conducted at arm's length. Combined with the requirements of the Companies Act 2013, it forms a comprehensive framework for related party governance.
At TaxClue, our team of qualified CAs and Company Secretaries assists businesses with related party identification, transaction documentation, and compliance with AS 18 and the Companies Act 2013. Contact us for expert assistance.