us gaap, ifrs and indian gaap comparison

8/6/2019 US GAAP, IfRS and Indian GAAP Comparison

1/23

ASSOCHAMSeminar on US GAAP, IFRS &

Indian GAAP : A Comparison

Related Party Transactions

Abhijit SenChief Financial Officer

Citibank, N.A.


2/23

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 23BInternational Accounting Standard IAS 24

Comparative analysis


3/23

Need for RegulationConglomerates carry on their various business / investment activities

through subsidiaries or associates and acquire interests in otherenterprises. 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.


4/23

Who is a Related Party ?

Parties are considered to be related ifat any time during the reporting periodone party has the ability to control the

other party or exercise significantinfluence over the other party inmaking financial and/or operating

decisions


5/23

Rel ted rt r s cti s

Funded transactionsIntercompany 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 infrastructureOther transactions

Purchase / Sale of goods

Leasing of premises


6/23

Indian GAAP AS 18Applicability

Companies which are listed or are in process of listing

Banks, financial institutions and insurance companies

Enterprises having turnover > Rs. 50 cr.

Enterprises having borrowings > 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 powergiving them control or significant influence

Key management personnel incl.their relatives

Enterprises where controlling individual or key managerial

personnel has significant influence


7/23

Indian GAAP AS 18contd.

Disclosure requirements

Related parties

Name and nature of relationship irrespective of

whether or not there have been transactions betweenthem

Related party transactions

Name of the party and description of the relationshipVolume of transactions

Outstanding balances on balance sheet date

Amounts written off / written back


8/23

Indian GAAP AS 18contd.

Other Key PointsNot applicable where confidentiality of data isrequired as per regulations eg. banks

Following are deemed not to be related parties ;

Two companies simply because they have a directorin common (unless the director is able to affect thepolicies of both companies in their mutual dealings)

Single customer, supplier,franchiser, distributor orgeneral agent with whom significant volume ofbusiness is transacted

Normal dealings with providers of finance, tradeunions, public utilities and government departments


9/23

Transfer Pricing RulesCovered under Direct Taxes

Exhaustive transfer pricing rules introduced in 2001

Deals with computation of income arising from internationaltransactions between associated enterprises

Discretionary powers to Assessing Officer - if he believes that

less profits have accrued due to international transactions, hecan proceed to determine profits using the transfer pricingrules.

Transfer Pricing Methods

Comparable uncontrolled price methodResale price method

Cost plus method

Profit split method

Transactional net margin method


10/23

AS 18 and Transfer Pricing

AS 18 Transfer PricingFor significant influence to exist,

20% shareholding is necessary

26% shareholding for applicability

of transfer pricing

Parties do not become relatedmerely because one is 100%

dependent on the other

These dependent parties will beassociated parties for the purpose

of transfer pricing

Focuses on disclosure for correct

representation of financial

statements

Focuses on correct calculation of

profits to determine the actual tax

payable on them

Applicable for all related parties

whether situated locally or abroad

Applicable only for international

transactions. Local associates

covered under S.40A(2)(b) of

Income Tax Act.


11/23

US GAAP - FAS 57

Pronounced by FASB

Related Party exhaustively covered also inStatement on Auditing Standard 6 (SAS 6)under US Regulations.

Related PartiesParent company and its subsidiaries

Subsidiaries of a common parent

An enterprise and trusts for the benefit of employeeslike pension, etc.

Principal owners, management, or members of theirimmediate families

Affiliates


12/23

US GAAP - FAS 57

Disclosure requirements

Related parties and transactions :

Nature of relationshipDescription 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


13/23

RegulationW 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


14/23

RegulationW and Sec. 23 A/B

Section 23 A

US Banks and their

subsidiaries are restricted by

Section 23 A from engagingin loans, purchases of assets,

and other specified

transactions with or

involving their affiliatesunless limits in the amount

of exposure to any one

affiliate or all affiliates in

the aggregate are observed

Section 23 B

Section 23 B is designed toensure that transactions

between banks and their

affiliates are on an armslength basis and at fairmarket value.


15/23

RegulationW - Inter-company Transactions

23A/B Affiliates23A/B Affiliates

(also known as Corporate-chain)

and any legal vehicle that is not a

Bank-Chain Entity, which is 25

percent or more owned or

otherwise controlled, directly or

indirectly, by Bank related group

Bank Chain EntitiesBank Chain Entities

any subsidiary that is a U.S.Bank

and any legal vehicle 25 percent

or more owned or otherwise

controlled, directly or indirectly

by a U.S. bank


16/23

Sec. 23 A Transactions glimpseCovered

transactions

Extension of credit

Purchasing and investing in securities

Purchasing assets

Acceptance of security as collateral for credit to third party

Issuance/Confirmation of LC and Guarantee

Cross affiliate netting arrangements

Prohi itions Purchase of lo uality assetsnsafe and unsound transactions

nsecured credit extensions

Exemptions Transaction et een sister anksCorresp. anking deposits as ongoing orking alance

Credit extensions secured y cash/govt.securities

Intra-day extensions of credit

Purchasing certain marketa le / municipal securities


17/23

Sec. 23 B Transactions glimpse

Coveredtransactions

All S.23A covered transactionsSale of security/other asset (incl.repurchase agreements)

Payment of money or furnishing a service

Fees paid to affiliate to act as agent, broker,etc.

Third party transaction where affiliate is interested

Third party transaction where benefit is transferred to

the affiliate

Derivative transactions

Intra-day credit extensions

Prohibitions Purchasing securities/assets as a fiduciary unlesspermitted by trust instrument, etc.

Restricted Underwriting Purchase


18/23

RegulationW Requirement

QUANTITATIVE LIMITS

Covered Transactions between a Bank Chain Entity and

a 23A/B Affiliate, unless exempt

COLLATERAL REQUIREMENTS

Credit Transactions whereby a

Bank Chain Entity extends credit

to a 23A/B Affiliate, unless exempt

MARKET TERMS

All transactions of a Bank Chain Entity with a 23A/B

Affiliate (including transactions subject to the Attribution

Rule and the Special Situations), unless exempt.


19/23

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


20/23

International AS IAS 24..contd.

Disclosures in financial statementsNature of relationship even if there were notransactions between those related parties

Name of the entities

Compensation of key management personnelcategorised into short-term benefits, post-employment benefits, long-term benefits,terminationbenefits, equity compensation benefits

Transactions between related partiesOutstanding balances

Provisions for doubtful debts in respect of relatedparties


21/23

Comparative Analysis

IAS US GAAP Indian GAAPDisclose name of related

party and nature of

relationship and types of

transactions. For control

relationships givedisclosures regardless of

whether transactions

occur

Some exemptionsavailable for separate

financial statements of

subsidiaries

Similar to IAS

Exemptions are

narrower than

under IAS

Similar to IAS except

for following additional

disclosures:

Volume of transactions

Amounts written off /

written back in respect

of debts due from related

parties


22/23

Legal Books vs. Management Books

Legal Books Management Books

Focus on legal entity setup and

financials based on accounting

policies and practices which could be

across business lines and products

Focus on business lines and

profitability based on business

segments which could be across

multiple legal entities

Physical Billing and Service Level

Agreements signed off for recovery

of charges

Allocation of costs on a mutually

agreed basis is done across business

functions to reflect correct segment

profits

Legal books reflect transactions with

external parties

Management books reflect internal

funds transfer pricing system and cost

plus margin system used for inter-

department flow of funds / goods


23/23

Thank you

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