12 An enterprise is considered to have a substantial interest in another enterprise if that enterprise owns, directly
or indirectly, 20 per cent or more interest in the voting power of the other enterprise. Similarly, an individual is
considered to have a substantial interest in an enterprise, if that individual owns, directly or indirectly, 20 per
cent or more interest in the voting power of the enterprise.
13 Significant influence may be exercised in several ways, for example, by representation on the board of directors,
participation in the policy making process, material inter-company transactions, interchange of managerial
personnel, or dependence on technical information. Significant influence may be gained by share ownership, statute
or agreement. As regards share ownership, if an investing party holds, directly or indirectly through
intermediaries, 20 per cent or more of the voting power of the enterprise, it is presumed that the investing party
does have significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the
investing party holds, directly or indirectly through intermediaries, less than 20 per cent of the voting power of
the enterprise, it is presumed that the investing party does not have significant influence, unless such influence
can be clearly demonstrated. A substantial or majority ownership by another investing party does not necessarily
preclude an investing party from having significant influence.
An intermediary means a subsidiary as defined in AS 21, Consolidated Financial Statements .
14 Key management personnel are those persons who have the authority and responsibility for planning, directing and
controlling the activities of the reporting enterprise. For example, in the case of a company, the managing
director(s), whole time director(s), manager and any person in accordance with whose directions or instructions the
board of directors of the company is accustomed to act, are usually considered key management personnel.
A non-executive director of a company is not considered as a key management person under this Standard by virtue of
merely his being a director unless he has the authority and responsibility for planning, directing and controlling
the activities of the reporting enterprise. The requirements of this Standard are not applied in respect of a
non-executive director even enterprise, unless he falls in any of the categories in paragraph 3 of this Standard.
15 Related party relationships are a normal feature of commerce and business. For example, enterprises frequently
carry on separate parts of their activities through subsidiaries or associates and acquire interests in other
enterprises - for investment purposes or for trading reasons - that are of sufficient proportions for the investing
enterprise to be able to control or exercise significant influence on
the financial and/or operating decisions of its investee.
16 Without related party disclosures, there is a general presumption that transactions reflected in financial
statements are consummated on an arm’s- length basis between independent parties. However, that presumption
may not be valid when related party relationships exist because related parties may enter into transactions which
unrelated parties would not enter into. Also, transactions between related parties may not be effected at the same
terms and conditions as between unrelated parties. Sometimes, no price is charged in related party transactions, for
example, free provision of management services and the extension of free credit on a debt. In view of the aforesaid,
the resulting accounting measures may not represent what they usually would be expected to represent. Thus, a
related party relationship could have an effect on the financial position and operating results of the reporting
17 The operating results and financial position of an enterprise may be affected by a related party relationship even
if related party transactions do not occur. The mere existence of the relationship may be sufficient to affect the
transactions of the reporting enterprise with other parties. For example, a subsidiary may terminate relations with
a trading partner on acquisition by the holding company of a fellow subsidiary engaged in the same trade as the
former partner. Alternatively, one party may refrain from acting because of the control or significant influence of
another - for example, a subsidiary may be instructed by its holding company not to engage in research and
18 Because there is an inherent difficulty for management to determine the effect of influences which do not lead to
transactions, disclosure of such effects is not required by this Standard.
19 Sometimes, transactions would not have taken place if the related party relationship had not existed. For example,
a company that sold a large proportion of its production to its holding company at cost might not have found an
alternative customer if the holding company had not purchased the goods.
20 The statutes governing an enterprise often require disclosure in financial statements of transactions with certain
categories of related parties. In particular, attention is focussed on transactions with the directors or similar
key management personnel of an enterprise, especially their remuneration and borrowings, because of the fiduciary
nature of their relationship with the enterprise.
21. Name of the related party and nature of the related party relationship where control exists should
be disclosed irrespective of whether or not there have been transactions between the related parties.
22 Where the reporting enterprise controls, or is controlled by, another party, this information is relevant to the
users of financial statements irrespective of whether or not transactions have taken place with that party. This is
because the existence of control relationship may prevent the reporting enterprise from being independent in making
its financial and/or operating decisions. The disclosure of the name of the related party and the nature of the
related party relationship where control exists may sometimes be at least as relevant in appraising an
enterprise’s prospects as are the operating results and the financial position presented in its financial
statements. Such a related party may establish the enterprise’s credit standing, determine the source and
price of its raw materials, and determine to whom and at what price the product is sold.
23 If there have been transactions between related parties, during the
existence of a related party relationship, the reporting enterprise should disclose the following:
(i)the name of the transacting related party;
(ii)a description of the relationship between the parties;
(iii)a description of the nature of transactions;
(iv)volume of the transactions either as an amount or as an appropriate proportion;
(v)any other elements of the related party transactions necessary for an understanding of the financial
(vi)the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance
sheet date and provisions for doubtful debts due from such parties at that date; and
(vii)amounts written off or written back in the period in respect of debts due from or to related parties.
24 The following are examples of the related party transactions in respect of which disclosures may be made by a
