Wednesday, 16 September 2015

FRRB's observation on Non-Compliance in relation to AS-18


The non-compliance's found by Financial Reporting Review Board (FRRB) on review of 
general-purpose financial statements 
of certain enterprises is regularly published in the ICAI Journal. January 2013 edition of  the journal has the compilation of FRRB's compilation of discrepancies so found with respect to 
Related Party Disclosure given by AS18. 
The results of my efforts to summarize the 
Financial Reporting Review is this post all about.

 
FRRB found that, while complying with the disclosure requirements of AS18 as the enterprises were stating that there are no material transactions with related parties during the reporting period or they were on arm's length basis and they do not provide any disclosures, which is a wrong practice. Para 23 of AS18 requires the reporting enterprise to make the 7 disclosures if the control exist and there arises the transactions between the reporting enterprise and the related party. However if there are no transactions between the reporting enterprises and the related party then para 21 of AS18 places a requirement  to disclose the name of the related party and the nature of such relationship with the reporting enterprise to ensure right impact on the user of the instrument.
 
 
The whole motto of the standard is for better understanding of the instrument and to uphold the concept materiality and not to obscure the importance of significant transactions. As per Para 27 of AS18 items of a similar nature may be disclosed in aggregate by type of related party, but this shouldn't be deceiving the materiality.  Explanation to para 27 such transactions are to be disclosed with respect to that related party if that party alone constitutes 10% or more of that type of related party transactions.
 
Para 10.8 r/w para 14 regards Key Management Personnel (KMP) as related parties as they have "authority and responsibility in planning, directing and controlling the financing and operational activities of reporting enterprise". It is been noticed on the review that the remuneration paid to such personnel has not been disclosed as per requirements of para 23 of AS18. This is with respect to Whole time & Part time director, but not with respect to Non-Executive director i.e, in the limelight of Accounting Standard Interpretation 21 (ASI 21) 
 
Nomenclature of the accounting heads in disclosure was not specific as it was in financials i.e, if there is a sale of consultancy services to a related party the same is disclosed under the name sale of services. The head being not specific , it so confined to be difficult to the user of financial.
 
Requirements of para 21 of AS 18 is not complied with i.e, not disclosing the nature of related party relationship & only disclosing the name and nature of relationship of those related parties with whom the reporting enterprise has entered transactions with , wherein the disclosure requirement is applicable whether or not transactions take place.
 
Follow the link to view the Financial Reporting Review article on FRRB's report on AS18 from ICAI Journal

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