Understanding Ind AS 24: The Framework

Ind AS 24 is not just another standard to memorize. It sits at the intersection of accounting substance and legal form—and that's where examiners love to test you.

The standard requires disclosure of related party transactions (RPTs) to give users of financial statements a true picture of whether transactions occurred on an arm's length basis and whether related parties had significant influence over decisions. But identifying who is a related party is trickier than it sounds.

What Makes Someone a Related Party?

Direct Relationships

These are usually straightforward:

  • Key Management Personnel (KMP): Directors, CFO, CEO, Company Secretary—anyone with authority and responsibility for planning, directing and controlling activities.
  • Close family members of KMP: Spouse, children, parents, siblings. But here's the catch: you must assess whether they're genuinely independent or act on KMP's instructions.
  • Entities controlled by KMP or their families: A company owned by a director's spouse counts, even if the director holds no formal position.
  • Associates and joint ventures: Any investee company where you hold significant influence (typically 20%+ voting power or board representation).

The Grey Zone: Substance Over Form

This is where examiners set traps. Consider these real scenarios:

Scenario 1: A director's brother-in-law becomes a key supplier. The brother-in-law holds no directorship. Is this an RPT?

Yes—if the brother-in-law is a close family member and there's evidence the director has authority to influence the transaction. If the brother-in-law supplies at market rates and selection was purely on merit, you may argue there's no material relationship, but disclosure is still safer.

Scenario 2: A company employs the spouse of an independent director at a premium salary. The spouse is highly qualified.

Technically an RPT, requiring disclosure. But if the appointment followed a proper recruitment process and the salary is benchmarked against industry standards, you disclose it factually without implying impropriety.

Control: The Core Assessment

Control is the linchpin of Ind AS 24. A party is a related party if one can control or jointly control the other, or exercise significant influence.

What "Control" Means Here

Control is not limited to legal ownership. It includes:

  • Power over decisions (board composition, voting agreements, contractual arrangements).
  • Power over financial and operating policies even without shareholding (de facto control).
  • Contractual rights that determine governance (management contracts, franchise agreements).

Assessing Significant Influence

Significant influence typically arises when:

  • You hold 20% or more of voting rights.
  • You have board representation.
  • You participate in policy-making decisions.
  • You have material transactions with the entity.
  • You provide essential technical or managerial assistance.

But here's the examiner's favourite trap: If you hold exactly 19.5% voting power and no board seat, but supply 60% of raw materials and the entity cannot operate without you, do you have significant influence?

The answer is yes. Percentage ownership is a starting point, not a ceiling. Substance determines significance.

Transactions vs. Relationships

Ind AS 24 requires disclosure of both:

  1. The relationship itself (e.g., X is a director).
  2. Transactions during the period (e.g., the company paid X's company Rs 50 lakhs for consulting services).

Many students miss this distinction. Even if no transaction occurred, if a related party exists, you must disclose the relationship and state that no transaction took place.

What Must Be Disclosed for Each Transaction

  • Nature of relationship.
  • Nature and amount of the transaction.
  • Amount outstanding (receivables or payables).
  • Terms and conditions (were they at arm's length?).
  • Any guarantees or collateral.
  • Bad debts written off or accruals made.

Common Exam Traps

Trap 1: Post-Period Changes

A director resigns on 31 March, just before year-end. Transactions with their company in February were at preferential rates. These are still RPTs because the relationship existed when the transaction occurred, not necessarily at year-end. Always trace the relationship back to the transaction date.

Trap 2: Aggregation vs. Individual Disclosure

If you have 15 RPTs of similar nature (e.g., purchases from 10 suppliers who are all directors' relatives), you may aggregate only for summarization. But material transactions should still be identified individually. The question is: would a user of the financial statements be misled by lumping them together?

Trap 3: Equity-Settled Compensation

If a director receives share options, the fair value of those options is a transaction to be disclosed separately in the notes. The grant, vesting, and exercise each have measurement and disclosure implications.

Trap 4: The "Arm's Length" Loophole Trap

Just because a transaction is at market rates does not exempt it from disclosure. RPT disclosure is mandatory, not conditional on whether the price was fair. The fairness is additional information you may disclose, but it doesn't replace the identification requirement.

Practical Identification Checklist

Before finalizing your working papers, ask:

  • ✓ Have I listed all directors, KMPs, and their close family members?
  • ✓ Have I identified all entities controlled, jointly controlled, or significantly influenced by the company or its KMPs?
  • ✓ Have I traced all purchases, sales, loans, guarantees, leases, and service arrangements to these parties?
  • ✓ Have I checked the year-end shareholding pattern for 20%+ stakeholders?
  • ✓ Have I verified board minutes for any hidden relationships or transactions approved but not yet recorded?
  • ✓ Have I cross-checked director disclosures from the secretarial audit?

FAQs

Q: If a director bought shares in the company during the year, is this an RPT requiring disclosure?

A: Yes. The purchase itself is a transaction with a related party. Disclose the date, quantity, price and any terms that differ from public issue (if applicable). If the purchase was part of an open market transaction at market rates with no special terms, you still disclose it but may note this context.

Q: Our company paid rent to a property owned by a director's trust. The trust's trustee is a professional, not the director. Is this an RPT?

A: Most likely yes. Even though the trustee is independent, the director (or their family) is the beneficiary, giving them an economic interest. The substance is that the director has a beneficial interest in the lease outflow. Disclosure is required.

Q: How do I handle dormant entities controlled by KMPs with no transactions?

A: If the relationship exists, disclose it. In a note, state: "Entity XYZ is owned by [KMP name]. No transactions occurred during the year." This fulfills the disclosure requirement while noting absence of activity.

Wrapping Up

Ind AS 24 tests not just your rule-reading ability, but your judgment and ability to see through legal structures to economic substance. Examiners are looking for students who can identify grey zones, ask the right questions, and err on the side of disclosure.

The stakes are high: under-disclosure can lead to financial statement misstatement and regulatory action. Over-disclosure is always safer—you're helping users, not harming them.

Master the substance-over-form principle, practice with real holding company and group scenarios, and you'll navigate even the trickiest exam questions.

Ready to sharpen your skills? Access our free day-by-day study planner at https://caparveensharma.com/free-planner?src=article, and explore detailed case scenarios on our platform at https://caparveensharma.com (courses section). Build confidence through repetition and real-world application.