Related party disclosures under AS 18 are not a note-to-accounts exercise that begins at year-end. The difficult part is identifying the full related-party universe before transactions are tested. Obvious relationships such as a holding company or subsidiary are only part of the picture; AS 18 also covers associates, joint ventures, certain influential shareholders, key management personnel, specified relatives and enterprises over which relevant persons can exercise significant influence.
This guide is for entities applying Accounting Standard (AS) 18 rather than Ind AS 24. ICAI's official AS 18 text contains the definitions and disclosure requirements, and the ICAI AS 18 publication page provides a dedicated professional reference. Entity-specific applicability and exemptions should be checked before finalising financial statements.
Step 1: Build the related-party universe
AS 18 treats parties as related when, at any time during the reporting period, one party can control the other or exercise significant influence over the other in making financial or operating decisions. The main categories include:
- holding companies, subsidiaries, fellow subsidiaries and other common-control relationships;
- associates and joint ventures;
- individuals whose voting interest gives control or significant influence, and specified relatives;
- key management personnel and specified relatives; and
- enterprises over which relevant influential individuals or key management personnel can exercise significant influence.
The phrase at any time during the reporting period matters. A party can be related for only part of the year, so the year-end process should review ownership changes, board and management changes, associate and joint-venture records, and declarations from relevant persons.
Step 2: Do not treat every important commercial party as related
Economic importance alone does not create a related-party relationship. AS 18 says two companies are not related merely because they share a director, unless that director can affect the policies of both companies in their mutual dealings. A major customer, supplier, franchiser, distributor or general agent is also not related merely because the enterprise is economically dependent on it.
Providers of finance, trade unions, public utilities and government departments are likewise not related parties merely because of their normal dealings with the enterprise. This keeps the related-party register focused on control and influence rather than commercial importance alone.
Step 3: Identify key management personnel correctly
Key management personnel are persons with authority and responsibility for planning, directing and controlling the reporting enterprise. In a company this commonly includes managing directors, whole-time directors, managers and persons whose directions or instructions the board is accustomed to follow.
A non-executive director is not key management personnel merely because of being a director. AS 18 requires the relevant authority and responsibility, or another relationship that independently falls within the standard. The classification should therefore follow the person's actual role, not just the title.
Step 4: Capture transactions even when no price is charged
A related party transaction is a transfer of resources or obligations between related parties, regardless of whether a price is charged. The review should therefore cover more than ordinary purchases and sales. Relevant items can include services, fixed-asset transfers, leases, loans, equity contributions, guarantees, collateral, licence arrangements, agency arrangements, research and development transfers, and management contracts.
Finance teams should reconcile the related-party register to general-ledger accounts, loan schedules, fixed-asset movements, expense reimbursements, guarantees, board minutes and legal agreements. Zero-consideration or unusual-term arrangements should not be missed simply because no normal invoice exists.
Step 5: Know what must be disclosed
Where a control relationship exists, AS 18 requires disclosure of the related party's name and the nature of the relationship even if there were no transactions during the period.
Where transactions occurred during the existence of a related-party relationship, disclosures include the transacting party's name, description of the relationship, nature and volume of transactions, other information needed to understand the financial statements, relevant outstanding balances and provisions for doubtful debts, and amounts written off or written back in respect of related-party debts.
A transaction may therefore require disclosure even if it was fully settled before year-end. Closing balances alone are not a complete source for the related-party note.
Step 6: Aggregate carefully and separate material transactions
AS 18 allows similar items to be aggregated by type of related party when doing so does not obscure significant transactions. Unlike transactions should not be combined merely to shorten the note, and a material transaction with an individual related party should not be hidden inside an aggregate amount.
For the standard's materiality explanation, a transaction exceeding 10% of total related-party transactions of the same type is ordinarily considered material, subject to the facts and circumstances. A smaller transaction can still be material because of its nature. Transactions outside the normal course of business are ordinarily considered material subject to the facts of the case.
Worked example
Assume Alpha Ltd purchases goods worth ₹8 crore from its holding company, receives management services of ₹40 lakh from the same party, and sells an old machine to a director-controlled entity for ₹25 lakh on unusual terms. At year-end, some purchase and service balances remain outstanding.
Alpha should not present one undifferentiated figure for all three activities. Purchases, management services and the fixed-asset sale are different transaction types. The unusual asset sale should also be assessed separately for materiality by nature, even if its amount is small compared with total purchases. The closing balances must be reconciled separately from the transaction totals for the period.
Important exceptions
AS 18 contains specific exceptions. In consolidated financial statements, intra-group transactions need not be disclosed because the group is presented as a single reporting enterprise. The standard also does not override confidentiality specifically required by statute, a regulator or similar competent authority. It further provides a specific exemption for state-controlled enterprises regarding relationships and transactions with other state-controlled enterprises.
Year-end AS 18 checklist
- Update the ownership and legal-entity chart for all changes during the reporting period.
- Refresh declarations from directors, key management personnel and relevant influential shareholders.
- Map related parties to customer, vendor, employee, loan and general-ledger masters.
- Search for zero-value and non-routine transfers, guarantees and asset movements.
- Reconcile transaction totals and closing balances to the books.
- Separate unlike transaction types and identify material individual transactions.
- Assess materiality by both size and nature.
- Check whether a control relationship requires disclosure even without transactions.
- Document any exemption or confidentiality restriction relied upon.
Common mistakes
- Preparing the note from closing balances only.
- Missing parties that became related or ceased to be related during the year.
- Assuming every non-executive director is automatically key management personnel.
- Treating a major supplier or lender as related merely because the entity depends on it.
- Ignoring transactions where no consideration was charged.
- Aggregating unlike transactions or hiding a material individual transaction.
Practical takeaway
AS 18 compliance works best as a population-and-reconciliation process. Identify every relationship that can create control or significant influence, capture transactions for the period, reconcile them to the books, separate different transaction types, assess materiality by size and nature, and remember that control relationships can require disclosure even when no transaction occurred. A maintained related-party register is far more reliable than reconstructing the note only after the accounts are closed.
