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Presentation Path. Need for regulationWho is a related party ? Related Party TransactionsIndian GAAP
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1. ASSOCHAM Seminar on “US GAAP, IFRS & Indian GAAP : A Comparison”
Related Party Transactions
Abhijit Sen
Chief Financial Officer
Citibank, N.A.
2. Presentation Path Need for regulation
Who is a related party ?
Related Party Transactions
Indian GAAP – AS 18
Transfer Pricing Rules
US GAAP – FAS 57
Regulation W and Section 23A and 23B
International Accounting Standard – IAS 24
Comparative analysis
3. Need for Regulation Conglomerates carry on their various business / investment activities through subsidiaries or associates and acquire interests in other enterprises. This results into multiple legal vehicles and overlapping activities. It also leads to complex business needs and structures
Arm’s length of transactions and pricing may be at risk resulting into incorrect representation of financial position and operating results :
The presumption that transactions in financial statements are done on an arm’s length basis between independent parties may not be valid.
Related party may enter into transactions which unrelated parties would not enter into
Transactions between related parties may not be effected at the same terms and conditions as between unrelated parties.
Due to the above, financials may fail to reflect the correct picture while comparing with previous periods and with other enterprises
Other issues, viz. revenue leakage for tax authorities, fiduciary nature of relationship with the enterprise, eg. directors,etc.
4. Who is a Related Party ? “Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions ”
5. Related Party Transactions Funded transactions
Intercompany lending and borrowing
Non-fund based transactions
Fee income for services rendered
Sharing common resources
Space sharing
Management time for common directors,etc.
Common use of other infrastructure
Other transactions
Purchase / Sale of goods
Leasing of premises
6. Indian GAAP – AS 18 Applicability
Companies which are listed or are in process of listing
Banks, financial institutions and insurance companies
Enterprises having turnover > Rs. 50 cr.
Enterprises having borrowings > Rs. 10 cr.
Holding / subsidiary company of any of the above
Related Parties
Holding companies, subsidiaries and fellow subsidiaries
Associates and joint ventures
Individuals (incl. their relatives) – having voting power giving them control or significant influence
Key management personnel incl.their relatives
Enterprises where controlling individual or key managerial personnel has significant influence
7. Indian GAAP – AS 18…contd. Disclosure requirements
Related parties
Name and nature of relationship irrespective of whether or not there have been transactions between them
Related party transactions
Name of the party and description of the relationship
Volume of transactions
Outstanding balances on balance sheet date
Amounts written off / written back
8. Indian GAAP – AS 18…contd. Other Key Points
Not applicable where confidentiality of data is required as per regulations – eg. banks
Following are deemed not to be related parties ;
Two companies simply because they have a director in common (unless the director is able to affect the policies of both companies in their mutual dealings)
Single customer, supplier,franchiser, distributor or general agent with whom significant volume of business is transacted
Normal dealings with providers of finance, trade unions, public utilities and government departments
9. Transfer Pricing Rules Covered under Direct Taxes
Exhaustive transfer pricing rules introduced in 2001
Deals with computation of income arising from international transactions between associated enterprises
Discretionary powers to Assessing Officer - if he believes that less profits have accrued due to international transactions, he can proceed to determine profits using the transfer pricing rules.
Transfer Pricing Methods
Comparable uncontrolled price method
Resale price method
Cost plus method
Profit split method
Transactional net margin method
10. AS 18 and Transfer Pricing
11. US GAAP - FAS 57 Pronounced by FASB
Related Party exhaustively covered also in Statement on Auditing Standard 6 (SAS 6) under US Regulations.
Related Parties
Parent company and its subsidiaries
Subsidiaries of a common parent
An enterprise and trusts for the benefit of employees like pension, etc.
Principal owners, management, or members of their immediate families
Affiliates
12. US GAAP - FAS 57 Disclosure requirements
Related parties and transactions :
Nature of relationship
Description of the transaction
Value of transactions
Effects of change in method of establishing the terms from that used in the preceding period
Outstanding items as at balance sheet date
13. Regulation W and Sec. 23 A/B (Revised provisions under implementation)
Regulation W of the Federal Reserve Board implements, interprets and applies the statutory provisions of Section 23 A and 23 B of the Federal Reserve Act.
Section 23 A and B are intended to prevent the abuse of a bank’s resource in transactions with its affiliates
These guidelines are intended to cover US Law requirements applicable for all US registered entities
Applicability – between bank chain entities and other affiliates under non-bank chain
14. Regulation W and Sec. 23 A/B Section 23 A
US Banks and their subsidiaries are restricted by Section 23 A from engaging in loans, purchases of assets, and other specified transactions with or involving their affiliates unless limits in the amount of exposure to any one affiliate or all affiliates in the aggregate are observed
15. Regulation W - Inter-company Transactions
16. Sec. 23 A Transactions glimpse
17. Sec. 23 B Transactions glimpse
18. Regulation W Requirement
19. International AS – IAS 24 Related Parties
Directly or indirectly controls, has interest or has joint control over the entity
Associates of the entity
Joint ventures
Key management personnel of entity or its parent
Close family member of any of the above
Entities controlled, jointly controlled or significantly influenced / voting power by any of the key management personnel or their close family members
Entities having post employment benefit plans for the benefits of employees of the entity, or of any of its related parties
20. International AS – IAS 24..contd. Disclosures in financial statements
Nature of relationship even if there were no transactions between those related parties
Name of the entities
Compensation of key management personnel categorised into short-term benefits, post-employment benefits, long-term benefits,termination benefits, equity compensation benefits
Transactions between related parties
Outstanding balances
Provisions for doubtful debts in respect of related parties
21. Comparative Analysis
22. Legal Books vs. Management Books
23. Thank you