An AS 18 review starts with people and relationships, not with the closing ledger. A party may be related for only part of the year, a transaction may have no price, and a control relationship may need disclosure even when no transaction occurred. The practical job is to build the right population first and then reconcile it to the books.
This guide is for entities applying Accounting Standard (AS) 18. An entity following Ind AS should use the separate Ind AS 24 guide. The current ICAI AS 18 text contains the definitions, disclosure rules and illustrative format. It also notes that AS 18 is not mandatory for specified Level III and Level IV non-company entities, so confirm the reporting framework before preparing the note.
Use the correct test for the correct purpose
| Question | Rule to check | Practical result |
|---|---|---|
| Is the party related for financial reporting? | AS 18: control, significant influence, KMP, specified relatives and connected enterprises | Decides the related-party population and accounting disclosure |
| Does a company transaction need approval? | Companies Act, including section 188 and applicable rules | A separate legal test; see the section 188 approval guide |
| What should the auditor test? | SA 550 and the audit plan | Identification, completeness, authorisation and disclosure procedures; see the SA 550 checklist |
These tests overlap but are not interchangeable. A transaction can require accounting disclosure even when a Companies Act approval exemption applies. Equally, a company-law label does not replace the AS 18 relationship analysis.
Build the related-party population
AS 18 covers five broad groups: enterprises under direct or indirect control or common control; associates and joint ventures; individuals whose voting interest gives control or significant influence and their specified relatives; key management personnel (KMP) and their specified relatives; and enterprises over which those influential individuals or KMP can exercise significant influence.
| Fact | AS 18 starting point | Evidence to retain |
|---|---|---|
| Parent, subsidiary or fellow subsidiary | Related through control or common control | Group chart, share register and constitutional documents |
| Investor holds 20% or more voting power | Significant influence is presumed unless clearly disproved | Holding calculation, board representation and policy rights |
| Investor holds less than 20% | No significant influence is presumed, but facts can rebut the presumption | Agreements, policy participation, managerial interchange and technical dependence |
| Managing or whole-time director with planning and control authority | Usually KMP | Appointment terms, delegation matrix and board minutes |
| Non-executive director | Not KMP merely because of the title | Actual authority and responsibility; test other relationship categories separately |
| Major supplier or lender | Not related merely because of economic dependence or normal financing dealings | Relationship analysis showing whether control or significant influence exists |
The standard’s definition of relative is specific: spouse, son, daughter, brother, sister, father or mother who may be expected to influence, or be influenced by, the individual in dealings with the reporting enterprise. Do not silently substitute a different list from company law or Ind AS 24.
Review changes throughout the reporting period. If a director became KMP on 1 October, the relationship did not need to exist on 31 March to matter. Record the start and end date of every relationship so transactions can be tested for the period in which the relationship existed.
Capture transactions, including those with no invoice
A related-party transaction is a transfer of resources or obligations, whether or not a price is charged. Search beyond sales and purchases. AS 18 examples include asset transfers, services, agency arrangements, leases, research and development transfers, licences, loans, equity contributions, guarantees, collateral and management contracts.
Reconcile the related-party register to customer and vendor masters, employee and reimbursement accounts, loan schedules, fixed-asset movements, guarantees, board minutes and legal agreements. Free management support, an interest-free advance or a guarantee with no fee can still be a transaction.
Decide what the note must disclose
| Situation | Minimum AS 18 response |
|---|---|
| A control relationship exists but there were no transactions | Disclose the related party’s name and the nature of the relationship |
| Transactions occurred while the relationship existed | Disclose the party, relationship, transaction nature and volume, relevant outstanding items, doubtful-debt provisions and amounts written off or written back |
| A major asset moved on unusual terms | Add information needed to understand the financial statements, including the unusual commercial terms where material |
| The transaction was settled before year-end | Do not omit it; period transaction volume is separate from the closing balance |
Control relationships and transaction disclosures are therefore two different checks. A nil closing balance does not mean a nil disclosure.
Apply aggregation and materiality without hiding the story
Similar items may be aggregated by type of related party, but unlike transactions should stay separate. Purchases of goods should not be combined with purchases of fixed assets. A material transaction with one party should not disappear inside a group total.
Worked example: Alpha Ltd buys goods from three related parties. Same-type related-party purchases total ₹5 crore. One purchase from Beta Ltd is ₹60 lakh.
- ₹60 lakh ÷ ₹5 crore = 12%.
- Because it exceeds 10% of the total related-party purchases of the same type, it is ordinarily material under AS 18’s explanation.
- Show it separately instead of hiding it in an aggregate purchase figure, unless the facts clearly support another conclusion.
Now assume Alpha also sells a machine to a director-controlled entity for ₹10 lakh on unusual terms. Do not compare that sale with purchases. It is a different transaction type and may be material because of its nature even if the amount is small.
Know the limited exceptions
No disclosure is required in consolidated financial statements for intra-group transactions eliminated within the group. AS 18 also does not override confidentiality specifically required by statute, a regulator or a similar competent authority. It contains a specific exemption for relationships and transactions between state-controlled enterprises.
Document the exact exception relied on. A general preference for confidentiality is not enough.
Close the year-end file
- Update the ownership and entity chart for every change during the year.
- Obtain current declarations from KMP and relevant influential shareholders.
- Record relationship start and end dates.
- Map each party to customer, vendor, employee, loan and asset records.
- Search board minutes and agreements for guarantees, free services and unusual terms.
- Reconcile transaction volumes separately from closing balances.
- Group only similar transactions by the correct related-party type.
- Calculate the 10% same-type indicator and assess materiality by nature as well as size.
- Disclose control relationships even where transaction volume is nil.
- Cross-check company-law approvals separately; listed entities should also apply the relevant SEBI framework.
A reliable AS 18 note should let a reviewer move from each disclosed figure back to the relationship register, the relevant period, the ledger entry and the supporting approval or agreement. If that trail is missing, reconstructing the note from year-end balances alone is unlikely to be complete.
