ICAI Related Party Transaction Disclosure Guidance: Key Updates for CA Foundation Students


Understanding Related Party Transactions: ICAI's Latest Guidance

The Institute of Chartered Accountants of India (ICAI) recently released updated guidance on related party transaction (RPT) disclosures to help companies comply with Indian Accounting Standards (Ind AS). This update is crucial for CA Foundation students because RPT questions frequently appear in the Accounting and Financial Reporting paper, and understanding this topic strengthens your foundation for advanced auditing concepts.

What Are Related Party Transactions?

A related party transaction occurs when a company conducts business with parties that have a special relationship with it. These parties may include:

• Directors and their relatives
• Key management personnel (KMP)
• Entities where the company has significant influence
• Promoters and their group companies
• Joint ventures and associates

Under Ind AS 24 (Related Party Disclosures), companies must disclose all material RPTs to ensure transparency and protect shareholder interests.

ICAI's Recent Guidance: Key Points

1. Enhanced Disclosure Requirements

ICAI has clarified that companies must disclose:

• Nature of the relationship with the related party
• Details of transactions conducted during the period (sales, purchases, loans, services)
• Outstanding balances at the year-end
• Pricing methodology used (at arm's length or otherwise)
• Terms and conditions of the transaction

2. Identifying Related Parties in Groups

In consolidated financial statements, companies must identify related parties across all subsidiaries, associates, and joint ventures. ICAI has emphasized that intercompany transactions must be eliminated in consolidated accounts but disclosed separately for transparency.

3. Fair Value and Arm's Length Price Testing

The guidance reinforces that RPTs should be conducted at 'arm's length' prices—meaning prices a company would offer to unrelated third parties. Companies may need to conduct fair value assessments and maintain documentation to justify transfer pricing.

4. Materiality Threshold

ICAI clarifies that even seemingly small RPTs must be disclosed if they are material in context. Materiality depends on the nature of the transaction, not just rupee value.

Why This Matters for CA Foundation Students

Understanding RPT disclosures helps you in multiple ways:

• Exam Preparation: Accounting standards questions often test your knowledge of Ind AS 24. You must know what transactions require disclosure and the format of disclosure notes.
• Practical Knowledge: As a future CA, you'll audit company financial statements and verify RPT compliance. This guidance shows you what auditors look for.
• Corporate Governance: RPT disclosures are part of corporate governance frameworks that protect minority shareholders from related party abuse.

Key Concepts to Remember for Your Exam

• Ind AS 24 governs related party disclosure (not just Indian GAAP—Ind AS applies to listed companies and large companies).
• Related parties must be identified based on definitions in the standard, not just obvious connections.
• Disclosure is mandatory even if no transactions occurred during the year, if balances exist.
• Consolidation adjustments eliminate intercompany transactions but disclosure notes must show what was eliminated and why.
• Management relationships (remuneration, loans, benefits) are particularly scrutinized by auditors.

Common Exam Scenarios You Should Know

Scenario 1: A company provided a unsecured loan to its director at 5% interest (below market rate of 10%). This must be disclosed as an RPT even though it appears to benefit the director.

Scenario 2: A parent company purchased inventory from its subsidiary at cost+10% markup. In consolidated accounts, this sale is eliminated, but disclosure notes must show the nature and amount of the intercompany transaction.

Action Points for Your Study Plan

• Review Ind AS 24 definition of 'related party' carefully—it's broader than you might think.
• Practice disclosure note formats from past exam papers.
• Understand the difference between identification, measurement, and disclosure of RPTs.
• Study consolidated accounts examples where RPT eliminations are shown.

Exam-Style Practice Questions

MCQ 1: Definition of Related Party

Which of the following is NOT considered a related party under Ind AS 24?

• A) A company in which the entity has 20% ownership
• B) A supplier who sells 15% of the entity's annual purchases
• C) The Managing Director's spouse
• D) A joint venture entity

Answer: B) A supplier who sells 15% of the entity's annual purchases. Relatedness is based on control or influence (ownership), not transaction volume.

MCQ 2: Disclosure Requirement

Alpha Ltd. provided an interest-free loan to its promoter. The loan amount is ₹2 lakh against annual revenue of ₹500 crores. Should this be disclosed as an RPT?

• A) No, because the amount is immaterial (0.04% of revenue)
• B) Yes, because the borrower is a promoter (related party)
• C) Only if the balance is outstanding at year-end
• D) Only if it exceeds 5% of revenue

Answer: B) Yes, because the borrower is a promoter (related party). Materiality in RPT disclosure is qualitative, not just quantitative. A promoter loan is inherently material regardless of size.

MCQ 3: Consolidated Statements

In consolidated financial statements, intercompany transactions between parent and subsidiary are:

• A) Disclosed in consolidated P&L as a separate line item
• B) Completely hidden with no disclosure at all
• C) Eliminated from consolidated accounts but disclosed in notes to show nature and amount
• D) Shown at arm's length prices without elimination

Answer: C) Eliminated from consolidated accounts but disclosed in notes to show nature and amount. This ensures consolidated figures reflect only external transactions while maintaining transparency about group dynamics.