Related Party Disclosures AS 18: 8 Items Companies Miss

Related parties: AS 18 checklist — SignReady guide

In this guide · 9 sections

Who is a related party — two definitions, two purposes
What AS 18 requires you to disclose
Non-company entities: the 2024 MSME exemption
Eight items small company accounts often leave out
Schedule III and section 188 — what sits outside the note
CARO clause 3(xiii) and Rule 11(e)
What the auditor does — SA 550 in a small audit
FAQs
Sources

Key points

AS 18, as notified in the Companies (Accounting Standards) Rules, 2021, applies to every company following AS — there is no relaxation for Small and Medium-sized Companies, and a small company that is outside CARO still has to give the AS 18 note.
Two definitions run side by side: AS 18 decides what goes in the related party note; section 2(76) of the Companies Act decides section 188 approvals, CARO 3(iii)(f) and the Schedule III table of loans repayable on demand.
Where control exists — a holding company or a subsidiary — the name and relationship must be disclosed even if there were no transactions (AS 18 para 21).
For transactions, AS 18 para 23 asks for the party, the relationship, the nature and volume, outstanding balances, provisions for doubtful debts, and amounts written off or back. Aggregation by type is allowed, but not in a way that hides a material transaction with one party.
Non-company entities: from accounting periods beginning on or after 1 April 2024, ICAI exempts MSMEs with turnover up to ₹50 crore and borrowings up to ₹10 crore (and not a holding or subsidiary of a larger MSME) from AS 18 entirely — larger entities still apply it.

Try SignReady: FinalCheck the notes before signing — totals, cross-references and TB agreement.

In a small company, many significant counterparties are related to someone: the directors lend money, the director's wife owns the premises, the director's brother runs the distributor. The related party note is where all of this is supposed to surface — yet it is often copied from last year. This guide sets out what AS 18 requires, how it differs from the Companies Act definition, what Schedule III, CARO and Rule 11(e) add, and eight items that small company accounts often leave out.

AS 18 (Related Party Disclosures) is notified for companies in the Companies (Accounting Standards) Rules, 2021, which apply to accounting periods beginning on or after 1 April 2021. Its definition is built on control and significant influence: parties are related if, at any time during the reporting period, one can control the other or exercise significant influence over its financial and/or operating decisions. Paragraph 3 then limits the standard to five relationships:

enterprises that control, are controlled by, or are under common control with the reporting enterprise — holding companies, subsidiaries and fellow subsidiaries;
associates and joint ventures, and the investor or venturer in respect of which the company is an associate or joint venture;
individuals whose voting interest gives them control or significant influence, and their relatives;
key management personnel (KMP) and their relatives;
enterprises over which any such individual or KMP can exercise significant influence — including enterprises owned by directors or major shareholders, and enterprises with a member of key management in common.

Control means more than half the voting power, control of the composition of the board, or a substantial interest in voting power (20% or more) plus the power to direct policies by statute or agreement. Significant influence is presumed at 20% or more of voting power. KMP are those with authority and responsibility for planning, directing and controlling the enterprise — usually the managing director, whole-time directors and manager. A non-executive director is not KMP merely by being a director. An AS 18 relative is a spouse, son, daughter, brother, sister, father or mother who may be expected to influence, or be influenced by, the individual in dealings with the enterprise.

The Companies Act uses a different, list-based definition in section 2(76): a director or KMP or their relative; a firm in which a director, manager or relative is a partner; a private company in which a director, manager or relative is a member or director; holding, subsidiary and associate companies; and certain others. "Relative" under section 2(77) and Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014 is also wider — it includes members of a HUF, son's wife and daughter's husband, and step-relations.

Purpose	Definition that applies
Related party note in the financial statements	AS 18
Board and shareholder approval of contracts (section 188)	Section 2(76)
Schedule III table: loans to promoters, directors, KMP and related parties repayable on demand or without terms	Companies Act (the table says so)
CARO 2020 clause 3(iii)(f) — loans to promoters and related parties	Sections 2(69) and 2(76)

In practice, it is simplest to maintain one master list with two columns — "AS 18" and "2(76)" — and tick each party against each.

What AS 18 requires you to disclose

Where control exists (paragraph 21): the name of the related party and the nature of the relationship, whether or not there were transactions.
Where there were transactions (paragraph 23): (i) the name of the transacting party; (ii) the relationship; (iii) the nature of the transactions; (iv) their volume, as an amount or appropriate proportion; (v) any other elements needed to understand the statements — for example, an asset transferred at a price materially different from normal commercial terms; (vi) outstanding balances at the balance sheet date and provisions for doubtful debts due from related parties; and (vii) amounts written off or written back in the year.
Aggregation (paragraphs 26–27): items of a similar nature may be shown in aggregate by type of related party, but not so as to obscure significant transactions — purchases of goods are not combined with purchases of fixed assets, and a material transaction with one party is not buried in an aggregate. The Explanation to paragraph 27 treats a transaction above 10% of total related party transactions of the same type as ordinarily material, and transactions outside the normal course of business as ordinarily material by nature.

Paragraph 24's examples include finance, guarantees and collaterals, leasing, and deputation of employees — and a transaction counts even if no price is charged.

No SMC relaxation. The 2021 Rules exempt Small and Medium-sized Companies from AS 17 entirely and relax certain requirements of AS 15, AS 19, AS 20, AS 28 and AS 29 — but give no relaxation in AS 18. A small company (paid-up capital up to ₹10 crore and turnover up to ₹100 crore from 1 December 2025) is outside CARO, but its accounts still need the full AS 18 note.

Non-company entities: the 2024 MSME exemption

For partnership firms, LLPs following AS, trusts and other non-company entities, ICAI's announcement on the revised classification (effective for accounting periods beginning on or after 1 April 2024) replaces the old Level I–IV scheme with two categories: MSMEs (unlisted, not a bank, FI or insurer, turnover up to ₹250 crore, borrowings up to ₹50 crore, and not a holding or subsidiary of a non-MSME) and Large entities.

Large entities apply AS 18 in full.
AS 18 does not apply at all to an MSME whose turnover (excluding other income) in the immediately preceding year did not exceed ₹50 crore, whose borrowings did not exceed ₹10 crore at any time in that year, and which is not a holding or subsidiary of an MSME outside these limits.
Larger MSMEs apply AS 18.
An MSME that avails any exemption must say in a note that it is an MSME and has complied with the Accounting Standards as applicable to an MSME.

Catch the notes that do not tie

SignReady's FinalCheck reads the finished statements in Excel and flags arithmetic and cross-reference differences and notes that do not total to the face — so differences between the notes and the face are flagged before the partner reviews the file.

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Eight items small company accounts often leave out

These are practice observations, not statistics. Several match the non-compliances that ICAI's Financial Reporting Review Board has published on AS 18.

1. The holding company or subsidiary with no transactions

The note lists only parties the company traded with. Paragraph 21 requires control relationships to be disclosed regardless — including a dormant subsidiary. If the note calls another entity a "fellow subsidiary", the holding company must be named too.

2. Managerial remuneration to the MD or whole-time directors

Directors' remuneration appears in the employee benefits note but not in the related party note. ICAI's Review Board has taken the view that remuneration to the managing director and whole-time directors, as KMP, should be reported under paragraph 23. Non-executive directors' sitting fees are not, unless the director is otherwise a related party.

3. Relatives and their businesses

Rent to a director's spouse or purchases from a brother's proprietorship are easy to miss because the ledger name gives no hint. Ask each director and KMP for a list of relatives and their business interests, and search the ledgers for those names.

4. Outstanding balances, provisions and write-offs

The note gives volumes but not closing balances, or balances but not volumes. Paragraph 23(vi) and (vii) also require provisions for doubtful debts from related parties and amounts written off or back — including a director's loan account written back.

5. Transactions with no price

Interest-free unsecured loans from directors, free use of a director's premises, and personal guarantees given by directors for the company's bank borrowings are related party transactions even when no money changes hands. Paragraph 24 lists guarantees and collaterals among the examples.

6. Aggregation that hides a material party

"Purchases from enterprises with common KMP: ₹4.2 crore" is acceptable as a type-wise total only if no single party is material within it. Where one party accounts for most of the figure, show it separately.

7. Headings that do not match the statements

The note says "services" while the Statement of Profit and Loss shows rent and commission, or its loan balance differs from the loans note. Use the same line items as the statements, and tie every balance to the ledgers and the notes.

8. Last year's column

Comparatives are copied from last year's note without checking whether a party has ceased to be related, or become related during the year. A party is related if the relationship existed at any time during the period, and transactions are disclosed for the period of the relationship.

Schedule III and section 188 — what sits outside the note

Schedule III (Division I) asks for related party information in other places too, and these are reviewed along with the AS 18 note:

loans and advances to related parties, with details, in the loans and advances notes; borrowings from related parties shown separately; and the aggregate of loans guaranteed by directors or others;
debts and loans due by directors or other officers, or by firms or private companies in which a director is a partner, director or member, stated separately;
the table of loans or advances in the nature of loans to promoters, directors, KMP and related parties that are repayable on demand or without terms of repayment;
promoters' shareholding and changes in it, and the table of title deeds not held in the company's name, which shows whether the holder is a promoter, director, their relative or employee;
for companies covered by section 135, CSR-related party transactions such as contributions to a trust controlled by the company.

Section 188 applies to all classes of companies, private companies included — though for a private company, holding, subsidiary, associate and fellow subsidiary companies are excluded from 2(76) for section 188 purposes (G.S.R. 464(E), 5 June 2015). Transactions in the ordinary course of business and on an arm's length basis do not need Board or shareholder approval under it — but the company should be able to show why a transaction meets both tests. Entries in the register of contracts under section 189 (Form MBP-4), based on directors' disclosures of interest in Form MBP-1, are the usual starting point for the 2(76) list.

CARO clause 3(xiii) and Rule 11(e)

Where CARO 2020 applies, clause 3(xiii) asks whether all related party transactions comply with sections 177 and 188, where applicable, and whether the details are disclosed in the financial statements as the applicable accounting standards require. ICAI's Guidance Note on CARO 2020 suggests that non-compliance with the AS 18 disclosure requirements may also be reported under this clause. An incomplete related party note therefore affects both the statements and the CARO report.

ICAI's Implementation Guide on Rule 11(e) and 11(f) notes that funds routed through intermediaries are more likely to involve related parties, and that a modification under Rule 11(e) should be considered for its effect on the related party disclosures and on CARO clause 3(xiii).

What the auditor does — SA 550 in a small audit

Ask management for the identity of related parties, changes from last year, the nature of each relationship and the transactions during the year (paragraph 13).
Stay alert for undisclosed related parties when reading bank and third-party confirmations and minutes of Board and shareholder meetings (paragraph 15).
Treat significant related party transactions outside the normal course of business as significant risks; inspect the agreements and check authorisation (paragraphs 18 and 23).
Evaluate whether relationships and transactions are properly accounted for and disclosed (paragraph 25), and obtain written representations that all related parties and transactions have been disclosed (paragraph 26).
Document the names of identified related parties and the nature of the relationships (paragraph 28).

A one-page working paper is usually enough: the master list (AS 18 and 2(76) columns), a ledger-wise summary of transactions and closing balances tied to the trial balance, the section 188 position for each contract, and a reference to the representation letter. Then compare the note against it line by line.

Try SignReady: CARO 3(xiii), review points and client queries closed before the Partner signs off.

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Schedule III guideNotes and additional disclosures

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Frequently asked questions

Does AS 18 apply to a small company?

Yes. The Companies (Accounting Standards) Rules, 2021 give Small and Medium-sized Companies relaxations in some standards, but none in AS 18. A small company is outside CARO 2020, but its financial statements still need the AS 18 related party note.

Is the director's remuneration a related party transaction?

Remuneration to key management personnel such as the managing director and whole-time directors is reported in the related party note — ICAI's Financial Reporting Review Board has taken this view under AS 18. A non-executive director is not KMP merely by being a director.

Which definition of related party applies — AS 18 or section 2(76)?

For the related party note in the financial statements, AS 18. For section 188 approvals, CARO 2020 clause 3(iii)(f) and the Schedule III table of loans repayable on demand, the Companies Act definition. The two lists overlap but are not the same, so keep both.

Does a partnership firm have to give related party disclosures?

Under ICAI's 2024 announcement for non-company entities (accounting periods beginning on or after 1 April 2024), AS 18 does not apply to an MSME with turnover up to ₹50 crore and borrowings up to ₹10 crore in the preceding year, provided it is not a holding or subsidiary of a larger MSME. Larger MSMEs and Large entities apply AS 18.

Do personal guarantees by directors need to be disclosed?

AS 18 lists guarantees and collaterals among the examples of related party transactions, and a related party transaction can exist even if no price is charged. Schedule III also requires the aggregate of loans guaranteed by directors or others to be disclosed under borrowings.

Sources

Related parties, CARO and the report in one file

In SignReady, the draft statements, FinalCheck, the CARO working paper (including clause 3(xiii)), review points and client queries sit in one finalisation — and the Partner signs off only when the open items are cleared or carried with a condition. First 3 finalisations free.