Parties are considered to be related when one party can control or exercise significant influence over the operating and financial policies of the other party. Significant influence is participation in policies but not control over policies. Significant influence may be gained by share ownership or by agreement.
Examples of relation parties are:
(a) Parent and subsidiaries
(d) Pension funds.
(e) Common key management
(f) Substantial shareholder
(g) Members of the close family of any individual falling under
parties mentioned in (a) to (f) above
Close members of an individual are those family members who may be expected to influence the entity. These include spouse, children and other dependents.
Mr. X is CEO in a Limited company and his wife is CEO in B Ltd. So A Ltd and B Ltd. are related parties.
(h) Partnerships, companies, trusts and other entities in which an. individual or member of the close family in (a) to (f) above ha a controlling interest.
(i) Entities under common control. Common control is deemed exist when both parties are subject to control from Boards having controlling nucleus of directors in common.
Entities under common control are deemed to be related parties because the controlling entity could cause them to enter or not to enter in transactions with each other or arrange special terms of a transaction. Thus for either of the controlled parties, there is possibility that the relationship could have a material effect on their financial statements.
J) Special purpose entities are formed for a specific objective. For example Company A needs funds for working capital, for say three years. Company A forms a special purpose entity, Company B. Company A transfers certain assets to Company B. The arrangement provides that Company A will have a right to use those assets. Company B issues three-year loan notes and hands over the proceeds to Company A.
After three years, title to assets is transferred back and Company pays the funds to Company B. The loan notes are redeemed with such proceeds.
Related party transactions represent the transfer of resources or obligations, or the performance of services by, or for a related party irrespective of whether a price is charged.