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Chief Financial Officer
Citibank, N.A.
 
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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 23B
International Accounting Standard ± IAS 24
Comparative analysis
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Conglomerates carry on their various business / investment activities
through subsidiaries or associates and acquire interests in other
enterprises. This results into multiple legal vehicles and overlapping
activities. It also leads to complex business needs and structures
Arm¶s 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
arm¶s 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.
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Funded transactions
Intercompany 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 infrastructure
Other transactions
Purchase / Sale of goods
Leasing of premises
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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
 

Holding companies, subsidiaries and fellow subsidiaries
Associates and joint ventures
Individuals (incl. their relatives) ± having voting power
giving them control or significant influence
Key management personnel incl.their relatives
Enterprises where controlling individual or key managerial
personnel has significant influence
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Related parties
Name and nature of relationship irrespective of
whether or not there have been transactions between
them
Related party transactions
Name of the party and description of the relationship
Volume of transactions
Outstanding balances on balance sheet date
Amounts written off / written back
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Not applicable where confidentiality of data is
required as per regulations ± eg. banks
Following are deemed not to be related parties ;
Two companies simply because they have a director
in common (unless the director is able to affect the
policies of both companies in their mutual dealings)
Single customer, supplier,franchiser, distributor or
general agent with whom significant volume of
business is transacted
Normal dealings with providers of finance, trade
unions, public utilities and government departments
 
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Covered under Direct Taxes
Exhaustive transfer pricing rules introduced in 2001
Deals with computation of income arising from international
transactions between associated enterprises
Discretionary powers to Assessing Officer - if he believes that
less profits have accrued due to international transactions, he
can proceed to determine profits using the transfer pricing
rules.

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Comparable uncontrolled price method
Resale price method
Cost plus method
Profit split method
Transactional net margin method
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For significant influence to exist, 26% shareholding for applicability
20% shareholding is necessary of transfer pricing

Parties do not become related These dependent parties will be

merely because one is 100%
dependent on the other
Focuses on disclosure for correct
representation of financial
statements
Applicable for all related parties
whether situated locally or abroad
associated parties for the purpose
of transfer pricing
Focuses on correct calculation of
profits to determine the actual tax
payable on them
Applicable only for international
transactions. Local associates
covered under S.40A(2)(b) of
Income Tax Act.
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Pronounced by FASB
Related Party exhaustively covered also in
Statement on Auditing Standard 6 (SAS 6)
under US Regulations.
Related Parties
Parent company and its subsidiaries
Subsidiaries of a common parent
An enterprise and trusts for the benefit of employees
like pension, etc.
Principal owners, management, or members of their
immediate families
Affiliates
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Related parties and transactions :

Nature of relationship
Description 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
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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 bank¶s 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
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OS Banks and their Section 23 B is designed to

ensure that transactions
subsidiaries are restricted by between banks and their
Section 23 A from engaging affiliates are on an arm¶s
in loans, purchases of assets, length basis and at fair
and other specified market value.
transactions with or
involving their affiliates
unless limits in the amount
of exposure to any one
affiliate or all affiliates in
the aggregate are observed
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Covered Extension of credit
transactions 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 assets

nsafe and unsound transactions
nsecured credit extensions

Exemptions Transaction et een ³sister´ anks

Corresp. anking deposits as ongoing orking alance
Credit extensions secured y cash/govt.securities
Intra-day extensions of credit
Purchasing certain marketa le / municipal securities
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Covered All S.23A covered transactions
transactions Sale 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 unless

permitted by trust instrument, etc.
Restricted Underwriting Purchase
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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

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Disclosures in financial statements
Nature of relationship even if there were no
transactions between those related parties
Name of the entities
Compensation of key management personnel
categorised into short-term benefits, post-
employment benefits, long-term benefits,termination
benefits, equity compensation benefits
Transactions between related parties
Outstanding balances
Provisions for doubtful debts in respect of related
parties
 
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Disclose name of related Similar to IAS Similar to IAS except
party and nature of for following additional
relationship and types of disclosures:
transactions. For control Volume of transactions
relationships give Amounts written off /
disclosures regardless of written back in respect
whether transactions of debts due from related
occur parties
Some exemptions
available for separate Exemptions are
financial statements of narrower than
subsidiaries under IAS
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Focus on legal entity setup and
financials based on accounting
policies and practices which could be
across business lines and products
Physical Billing and Service Level
Agreements signed off for recovery
of charges
Legal books reflect transactions with
external parties
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Focus on business lines and
profitability based on business
segments which could be across
multiple legal entities
Allocation of costs on a mutually
agreed basis is done across business
functions to reflect correct segment
profits
Management books reflect internal
funds transfer pricing system and cost
plus margin system used for inter-
department flow of funds / goods
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