The Hindu Business Line : 18 is about relationships

THERE is a general presumption that transactions reflected in financial statements are conducted on arm's length basis. However, the same may not be true in cases where related party relationships exist. This might be either on account of the fact that related parties may enter into transactions which unrelated parties do not enter into or that the terms and conditions that exist between related parties might be quite different from those that exist between unrelated parties.

At times, it is even possible that the mere existence of the relationship itself is enough for transactions with other parties to get affected. Hence, it is not a precondition that transaction should exist between related parties for disclosure, mere relationship itself is enough for application of this accounting standard. Thus, in order that transparency is brought into the financial statements, this Standard was framed.

Here are a few objective-type questions on AS 18:

1) The Accounting Standard is mandatory to: a) all enterprises; b) enterprises whose equity or debt securities are listed on a recognised stock exchange in India, and is in the process of listing as evidenced by BOD resolution; c) all commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs 50 crore; d) both (b) and (c).

2) The objective of this statement is to establish requirements for disclosure of: a) related party relationships; b) transactions between a reporting enterprise and its related parties; c) both (a) and (b); d) neither (a) or (b)

3) Which of the following is a related party relationship to which the standard applies? a) enterprises that directly or indirectly control the reporting enterprise; b) enterprises that directly or indirectly are controlled by the reporting enterprise; c) enterprises that directly or indirectly are under common control with the reporting enterprise; d) all the above

4) Related party disclosures is applicable from: a) the quarter beginning April 1, 2001; b) the accounting period commencing on or after April 1, 2001; c) the half-year beginning April 1, 2001; d) the quarter ending March 31, 2001.

5) Which of the following, in respect of joint ventures and associates, constitutes related party relation for the purpose of the standard? a) associates and joint ventures of the reporting enterprise; b) the investing party or venturer in respect of which the reporting enterprise is an associate or joint venture; c) both (a) and (b); d) co-venturers and co-associates along with (a) and (b).

6) Who among the following is a related party according to the standard?

a) two companies who have a director in common; b) enterprises owned by directors or major shareholders of the reporting enterprise; c) a supplier with whom an enterprise transacts a significant volume of business; d) none of the above.

7) The related party disclosures are not required to be made: a) where providing such disclosures would conflict with the reporting enterprise's duties of confidentiality as specifically required by any statute; b) in respect of intra group transactions; c) in the financial statements of state controlled enterprises as regards transactions with other state-controlled enterprises; d) all the above.

8) Parties are considered to be related: a) if throughout the reporting period one party has the ability to control the other party in making financial and/or operating decisions; b) if at any time during the reporting period, one party has the ability to control the other party or exercise significant influence in making financial and/or operating decisions; c) if throughout the reporting period one party has the ability to control the other party in making financial decisions; d) none of the above.

9) A related party transaction is said to occur when: a) there is a transfer of resources between related parties when price is charged; b) there is a transfer of obligations between related parties when price is charged; c) both (a) and (b); d) there is a transfer of resources or obligations between related parties regardless of whether price is charged

10) Control is: a) ownership, directly or indirectly, of more than half the voting power; b) control in the composition of the board of directors or of the corresponding governing body; c) a substantial interest in the voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise; d) all the above.

Answer check

1(d): The council at its 224th meeting held on March 8-10, 2002, decided to make AS 18 applicable to only those mentioned above.

2(c) The objective of this statement is to establish requirements for disclosure of both related party relationships and transactions between a reporting enterprise and its related parties.

3(d) According to para 3(a), this statement deals with relationships with enterprises that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the reporting enterprise.

4(b) According to the Statement, this Standard comes into effect in respect of accounting periods commencing on or after April 1, 2001.

5(c) According to para 3(b) of the Standard, 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 constitute related party relationships.

6(b) According to para 3(e) of the Standard, enterprises owned by directors or major shareholders of the reporting enterprise are deemed to be related parties on account of their ability to exercise significant influence over both the enterprises.

7(d) According to paras 5, 7 and 9 of the Standard, related party disclosures are not required to be made in the points described in points (a), (b) and (c).

8(b) As per definition provided in para 10.

9(d) As per definition provided in para 10, related party transactions includes transfer of both resources as well as obligations, between related parties, whether or not a price is charged.

10(d) As per definition provided in para 10.

(To be concluded)

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