Thou Shalt Not Conceal Thy Gains and Losses from Thy Related Parties
Sourav Mitra -
Tuesday, January 08, 2008 12:11 PM
In the context of business, Related Parties are business entities with relationships of control or influence between them. One entity is able to control or influence the business decisions and therefore the activities and financial results of another entity. This phenomenon is widely prevalent in the business world and obtains from ownership of adequate portions of the voting power, ability to control the composition of the board of directors or governing body, or power derived from a statute or agreement. Sometimes these relationships are gainful and for the common good, enhancing specializations, efficiencies and profitability. Sometimes they may be misused for undue and unfair advantages like circumventing laws and siphoning funds.
So disclosures in respect of related parties must be made by certain specified categories of business enterprises in their financial statements. In India, following trends abroad, Related Party Disclosures are goverened by Accounting Standard 18 and comprise of disclosures in respect of Related Party Relationships and Related Party Transactions. This is in addition to the disclosure requirements of our Corporate laws.
The objective of Accounting Standard 18 is to make the financial statements more transparent and disclose the scope of financial impact on reporting enterprises of related parties (which have the power to control or influence the financial and / or operating policies and therefore the financial results of their related parties) by defining, and specifying what needs to be disclosed in financial statements about:
(a) Relationships with related parties
(b) Transactions with related parties and
(c) Outstanding balances with related parties.
Such disclosures would better enable users of financial statements to understand and evaluate the impact of related party relationships and transactions of the financial statements and assess the risks and opportunities facing the entity.
Click here and have a look at pages 122 to 127 of the financial statements of Reliance Industries Ltd which perhaps complies with the disclosure requirements perfectly.
There are overwhelming details of relationships and transactions.
But is this adequate?
Aren't we left guessing about the gains and losses inherent in these, if any?
Disclosures would be infinitely more meaningful if the value of transactions, and the gains and losses, if any, arising from each related party were highlighted perhaps by realm of transaction: income, expenditure, asset, and liability.
If the income tax authorities can do it for example under the Transfer Pricing Rules and under section 40A of the Income Tax Act, accountants can take it to much higher levels.
No?