ASSOCHAM

1
ASSOCHAM

• Seminar on US GAAP, IFRS Indian GAAP A
  Comparison
• Related Party Transactions
• Sunil Kothare
• Vice President
• 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
• Arms 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 arms 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
• Inter-company 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

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Indian GAAP AS 18

• Applicability
• Companies which are listed or are in process of
  listing
• Banks, financial institutions and insurance
  companies
• Enterprises having turnover gt Rs. 50 cr.
• Enterprises having borrowings gt 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

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Indian GAAP AS 18contd.

• 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 18contd.

• Other Key Points
• Not applicable where confidentiality of data is
  required as per regulations e.g. 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

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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 to
  determine arms length price 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
• Any other method to be notified

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 banks 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 B Section 23 B is designed to
ensure that transactions between banks and their
affiliates are on an arms length basis and at
fair market value.

• 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
funds, services, assets, etc.
funds, services, assets, etc.
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Sec. 23 A Transactions glimpse
17
Sec. 23 B Transactions glimpse
18
Regulation W Requirement
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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
ASSOCHAM

• Seminar on US GAAP, IFRS Indian GAAP A
  Comparison
• Related Party Transactions
• Sunil Kothare
• Vice President
• Citibank, N.A.