Ind AS 24

Ind AS 24: Demystifying Related Party Disclosures

Ind AS 24, “Related Party Disclosures,” is an Indian Accounting Standard that prescribes the requirements for entities to disclose comprehensive information about related party relationships and transactions in their financial statements. The primary objective of this standard is to ensure that an entity’s financial statements provide the necessary transparency for users to understand the potential impact of related party relationships and transactions on the entity’s financial position, performance, and cash flows.

The Genesis and Purpose of Related Party Reporting

Ind AS 24 is one of the Indian Accounting Standards converged with the International Financial Reporting Standards (IFRS), specifically derived from IAS 24, “Related Party Disclosures.” The journey towards adopting Ind AS in India commenced with the Ministry of Corporate Affairs (MCA) notifying the Companies (Indian Accounting Standards) Rules, 2015, making Ind AS applicable to a phased manner for various classes of companies.

The core purpose behind such a standard is rooted in the recognition that related party transactions, by their very nature, carry a higher risk of being conducted on terms that differ from those between unrelated parties (i.e., not at “arm’s length”). Such deviations can significantly influence an entity’s financial results and position, potentially misleading investors, creditors, and other stakeholders. By mandating explicit disclosures, Ind AS 24 aims to:

• Enhance transparency and accountability in financial reporting.
• Provide users of financial statements with crucial information to assess the risks and opportunities associated with related party dealings.
• Allow stakeholders to evaluate the potential for conflicts of interest and their impact on the entity’s financial health.
• Support good corporate governance practices by bringing related party transactions into public view.

Unpacking the Core Principles of Ind AS 24

Ind AS 24 outlines specific requirements regarding the identification of related parties and the subsequent disclosure of transactions with them. Key concepts and disclosure requirements include:

• Defining “Related Party”: A related party is a person or entity that is related to the entity preparing its financial statements (the reporting entity). This broad definition encompasses:
  • A person or a close member of that person’s family who has control or joint control over the reporting entity, has significant influence over the reporting entity, or is a member of the key management personnel (KMP) of the reporting entity or of a parent of the reporting entity.
  • An entity that is a parent, subsidiary, fellow subsidiary, associate, or joint venture of the reporting entity.
  • An entity that is controlled or jointly controlled by a person identified in the first point.
  • An entity for which the reporting entity is a post-employment benefit plan.
  • An entity that is controlled or jointly controlled by a person identified as KMP or a close family member of that person.
• Identifying “Related Party Transactions”: A related party transaction is a transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged. Examples include sales or purchases of goods/services, leases, loans, guarantees, provision of management services, transfer of research and development, and settlement of liabilities.
• Disclosure Requirements: For identified related party relationships and transactions, the standard mandates disclosures that include:
  • The nature of the related party relationship (e.g., parent, subsidiary, KMP).
  • Information about the transactions, such as the type of transaction, volume of transactions, terms and conditions (including whether secured and the nature of consideration), and outstanding balances at the end of the reporting period.
  • Details of any provisions for doubtful debts related to these outstanding balances, and the expense recognised in the period for bad or doubtful debts due from related parties.
  • The amount of compensation paid to key management personnel, broken down into short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payment benefits.
  • The name of the reporting entity’s parent and, if different, the ultimate controlling party.

Why Transparency in Related Party Dealings Matters

Understanding and complying with Ind AS 24 is paramount for businesses operating under the Ind AS framework. Its importance stems from several critical aspects:

• Enhanced Investor Confidence: Transparent disclosures assure investors that management is acting in the best interest of all shareholders, not just a select few with related interests. This trust is vital for capital attraction and market stability.
• Informed Decision-Making: Stakeholders, including shareholders, creditors, and analysts, rely on these disclosures to form a comprehensive view of the company’s financial health and operational integrity, aiding them in making informed economic decisions.
• Mitigating Conflicts of Interest: By bringing related party transactions into the light, Ind AS 24 acts as a deterrent against transactions that might otherwise be biased or disadvantageous to the reporting entity, thereby safeguarding minority shareholder interests.
• Regulatory Compliance and Risk Management: Non-compliance can lead to severe penalties, reputational damage, and adverse audit opinions. Adhering to Ind AS 24 is a critical component of a robust risk management framework and good corporate governance.
• Fair Valuation and Arm’s Length Principle: The disclosures allow scrutiny into whether related party transactions are conducted on an arm’s length basis, which is crucial for fair valuation of assets and liabilities and for tax compliance (e.g., transfer pricing).

Everyday Scenarios for Related Party Disclosures

Ind AS 24 finds widespread application across various common business activities and structures:

• Intra-Group Transactions: Sales or purchases of goods/services between a parent company and its subsidiaries, or among fellow subsidiaries.
• Loans and Guarantees: Financial assistance provided by a parent to a subsidiary, or guarantees given by one group entity for another’s borrowings. Similarly, loans to or from directors/key management personnel.
• Management and Service Fees: Charges for centralized services (e.g., IT, HR, legal) provided by a parent or service entity to other group entities.
• Property Transactions: Acquisition or disposal of assets (e.g., land, buildings) between entities under common control or involving KMP.
• Joint Ventures and Associates: Transactions with entities where the reporting entity has joint control or significant influence.
• Director and Executive Remuneration: Detailed breakdown of compensation paid to key management personnel, including salaries, bonuses, stock options, and other benefits.
• Employee Benefit Plans: Transactions between the reporting entity and its post-employment benefit plans.

Bridging to Related Financial Concepts

Understanding Ind AS 24 is often interconnected with several other financial and regulatory concepts:

• IAS 24 (International Accounting Standard 24): Ind AS 24 is converged with and largely mirrors IAS 24, reflecting global best practices in related party disclosures.
• IFRS (International Financial Reporting Standards): The broader framework from which Ind AS draws its principles.
• Key Management Personnel (KMP): A critical term whose definition influences who is considered a related party. KMP 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.
• Arm’s Length Principle: The concept that transactions between related parties should be conducted at prices and conditions that would be acceptable if the parties were unrelated. This principle is fundamental to assessing the fairness of related party dealings.
• Corporate Governance: Ind AS 24 is a vital tool for strong corporate governance, ensuring ethical conduct and accountability.
• Consolidated Financial Statements: While related party transactions are eliminated during consolidation, the disclosures under Ind AS 24 are still required for the separate financial statements of individual entities, and group-wide disclosures are crucial for the consolidated statements.
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: For listed entities in India, these regulations impose additional, often stricter, requirements for identification, approval, and disclosure of ‘material’ related party transactions, complementing Ind AS 24.

Recent Developments and Ongoing Focus

While Ind AS 24 itself has not seen frequent major amendments recently, the regulatory environment surrounding related party transactions is dynamic and evolving. The key developments and areas of ongoing focus include:

• Increased Regulatory Scrutiny: Post several high-profile corporate governance issues, regulatory bodies like SEBI and the MCA have intensified their focus on related party transactions. This has led to more stringent approval processes and a demand for greater granularity in disclosures.
• Interaction with SEBI LODR: For listed companies, the interplay between Ind AS 24 and SEBI LODR Regulations is crucial. Recent amendments to LODR have, for instance, expanded the definition of ‘related party’, lowered thresholds for ‘material’ related party transactions, and introduced stricter approval mechanisms (e.g., prior shareholder approval for certain transactions).
• Emphasis on Substance over Form: Auditors and regulators increasingly look beyond the legal form of transactions to their economic substance, ensuring that complex related party arrangements are appropriately identified and disclosed.
• Digital Reporting: The move towards digital financial reporting (e.g., XBRL) for companies means that related party disclosures need to be accurately tagged, facilitating easier analysis and comparison by stakeholders.

Who Needs to Understand Ind AS 24 Across the Enterprise?

The implications of Ind AS 24 extend far beyond the finance department, affecting multiple functions within an organization:

• Finance & Accounting Department: Directly responsible for identifying, tracking, measuring, and disclosing related party relationships and transactions in the financial statements.
• Legal & Compliance Department: Ensures all related party transactions comply with relevant company laws, corporate governance codes, and specific regulations (like SEBI LODR for listed companies).
• Internal Audit Function: Reviews the effectiveness of controls related to identifying, approving, and disclosing related party transactions.
• Board of Directors & Audit Committee: Crucial for oversight and approval of significant related party transactions, ensuring they are in the company’s best interest.
• Secretarial Department: Especially for listed companies, responsible for managing board approvals, shareholder approvals, and making necessary filings with regulatory bodies.
• Tax Department: Involved in assessing transfer pricing implications for cross-border or even domestic related party transactions to ensure compliance with tax laws.
• Senior Management (CFO, CEO): Ultimately accountable for the accuracy and completeness of financial statements, including related party disclosures.

The Evolving Landscape of Related Party Reporting

The future of related party reporting is likely to be shaped by several ongoing trends:

• Continued Tightening of Regulations: Expect further strengthening of regulatory frameworks, especially for listed entities, driven by global efforts to enhance corporate governance and investor protection.
• Increased Granularity and Specificity: There may be a push for more detailed and specific disclosures, particularly for complex group structures or novel types of related party transactions.
• Technological Integration: Advanced analytics, AI, and blockchain technology could play a greater role in identifying, tracking, and validating related party transactions, improving efficiency and accuracy.
• ESG Reporting Nexus: As Environmental, Social, and Governance (ESG) reporting gains prominence, related party disclosures might become more integrated into the governance pillar of ESG, with a focus on ethical dealings and transparency.
• Harmonization and Global Convergence: Continued efforts towards greater convergence with international standards and best practices, aiming for more consistent and comparable disclosures across jurisdictions.
• Focus on Behavioral Aspects: Beyond mere disclosure, there will likely be increased scrutiny on the processes, controls, and behavioral aspects that govern how related party transactions are initiated, approved, and monitored within an organization.