Chapter 4: Presentation & Disclosure Based Standards - Test 3: answer key

Question 1 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. Sterling Garments Ltd., a listed textile and apparel manufacturer, is finalising its financial statements for the year ended 31 March 2026. The company has the following selected balance-sheet figures (₹ crore): equity share capital 120, reserves 85, long-term borrowings 70, trade payables 22, trade receivables 35, inventories 48 and cash and bank balances 14. Total assets amount to ₹297 crore. Northstar Holdings Ltd. acquired 64% of Sterling's voting equity shares on 1 April 2025 and has the power to appoint a majority of its Board. Northstar Holdings also owns 80% of Northstar Footwear Ltd., which regularly supplies specialised components to Sterling. Sterling itself holds 23% voting rights in Meridian Fibres Ltd. and has a representative on Meridian's Board who participates in its financial and operating policy decisions. Sterling also entered into a contractual arrangement with StitchTech Ltd. on 1 July 2025 under which both parties jointly control a new fabric-processing venture and share its operating returns. Mr. Rohan Mehta is Sterling's Managing Director and receives annual remuneration of ₹72 lakh. His wife, Mrs. Mehta, owns 75% of StudioOne Designs Pvt. Ltd., which has independently controlled design operations. During the year, StudioOne provided design and research services to Sterling without charging any fee. The estimated commercial value of these services was ₹18 lakh. Sterling sold finished garments worth ₹4.80 crore to Northstar Footwear and purchased raw materials worth ₹2.10 crore from Meridian Fibres. At year-end, ₹90 lakh remained receivable from Northstar Footwear, against which Sterling maintained a doubtful-debt provision of ₹9 lakh. A separate debt of ₹4 lakh due from Northstar Footwear was written off during the year. No transactions took place with Northstar Holdings, although its control over Sterling continued throughout the reporting period. The finance controller proposes disclosing only transactions involving cash consideration and omitting transactions with entities where no separate consideration was charged.

Considering the shareholding structure and contractual arrangements, which combination correctly identifies the enterprise-related parties of Sterling Garments Ltd., excluding individuals and entities related through individuals?

1. Northstar Footwear Ltd. and Meridian Fibres Ltd., because only operating subsidiaries and associates qualify.
2. Northstar Holdings Ltd. and Meridian Fibres Ltd., because fellow subsidiaries and joint ventures are excluded.
3. Northstar Holdings Ltd., Northstar Footwear Ltd., Meridian Fibres Ltd. and StitchTech Ltd. (correct answer)
4. Northstar Holdings Ltd. alone, because only entities holding majority voting rights qualify.

Answer: C — Northstar Holdings Ltd., Northstar Footwear Ltd., Meridian Fibres Ltd. and StitchTech Ltd.

Explanation. Northstar Holdings is Sterling's holding company because it owns more than half of its voting power and controls its Board. Northstar Footwear is a fellow subsidiary because both companies are controlled by Northstar Holdings. Meridian is an associate because Sterling holds 23% voting rights and participates in policy decisions. StitchTech is a joint venture because contractual joint control exists. AS 18 paragraph 3 includes all these relationships, irrespective of whether majority ownership exists in every case.

Where it goes wrong. Assuming that only holding companies and majority-owned subsidiaries qualify as related parties.

Authority. AS 18 paras 3(a) and 3(b); AS 18 paras 10.5, 10.6 and 10.7

Question 2 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

What is the correct AS 18 treatment of StudioOne Designs Pvt. Ltd. and the design services received without consideration?

1. Mrs. Mehta and StudioOne are related parties, and the free design services constitute a related party transaction. (correct answer)
2. Only Mrs. Mehta is a related party, because an entity owned by a relative is automatically excluded.
3. StudioOne is not related because the services were supplied without a contractual payment obligation.
4. StudioOne becomes related only when Sterling pays consideration for the services received.

Answer: A — Mrs. Mehta and StudioOne are related parties, and the free design services constitute a related party transaction.

Explanation. Mr. Rohan is KMP because he is the Managing Director. His wife is a relative under AS 18 paragraph 10.9. Since she controls StudioOne, the enterprise is related under paragraph 3(e). The free design services represent a transfer of resources between related parties. Paragraph 10.2 expressly includes transactions regardless of whether a price is charged. Therefore, the estimated commercial value of ₹18 lakh is relevant to understanding the transaction. The absence of an invoice does not eliminate disclosure.

Where it goes wrong. Assuming that a free transfer of services or resources cannot constitute a related party transaction.

Authority. AS 18 paras 3(d) and 3(e); AS 18 paras 10.2, 10.8 and 10.9

Question 3 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Northstar Holdings Ltd. has exercised control over Sterling throughout the year but has not entered into any transaction with it. Which disclosure treatment is appropriate?

1. No disclosure is necessary because no financial transaction occurred between the two companies.
2. Only Northstar's percentage shareholding should be disclosed if the holding company requests it.
3. Disclosure is required only when a transaction with the holding company creates an outstanding balance.
4. Disclose Northstar's name and the nature of the control relationship even though no transaction occurred. (correct answer)

Answer: D — Disclose Northstar's name and the nature of the control relationship even though no transaction occurred.

Explanation. AS 18 paragraphs 21 and 22 require disclosure of the name of the related party and the nature of the relationship where control exists, irrespective of whether transactions occurred. Northstar's 64% voting interest and ability to appoint a majority of the Board establish control. Therefore, Sterling must disclose the holding-company relationship even without purchases, sales, loans or outstanding balances. The principal trap is confusing mandatory relationship disclosure with transaction-based disclosure.

Where it goes wrong. Omitting disclosure of a controlling holding company merely because there were no transactions during the year.

Authority. AS 18 paras 21 and 22

Question 4 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Which disclosure package correctly addresses the sales to Northstar Footwear Ltd. and the related outstanding receivable at 31 March 2026?

1. Disclose only net receivables of ₹81 lakh because the sales and amounts written off are already reflected in profit.
2. Disclose sales of ₹4.80 crore, gross outstanding receivables of ₹90 lakh, doubtful-debt provision of ₹9 lakh and write-off of ₹4 lakh. (correct answer)
3. Disclose sales of ₹4.80 crore and the ₹90 lakh receivable, but omit doubtful-debt provisions and write-offs.
4. Disclose only the ₹9 lakh provision and ₹4 lakh write-off because closing receivables are not transaction information.

Answer: B — Disclose sales of ₹4.80 crore, gross outstanding receivables of ₹90 lakh, doubtful-debt provision of ₹9 lakh and write-off of ₹4 lakh.

Explanation. AS 18 paragraph 23 requires disclosure of transaction volume, outstanding related-party balances, provisions for doubtful debts and amounts written off or written back during the period. Accordingly, sales of ₹4.80 crore, gross receivables of ₹90 lakh, provision of ₹9 lakh and write-off of ₹4 lakh must be disclosed. The provision is separately identified rather than netted against the receivable for disclosure purposes. The trap is reporting only the net carrying amount of ₹81 lakh.

Where it goes wrong. Netting doubtful-debt provisions against related-party receivables and omitting write-offs from disclosures.

Authority. AS 18 para 23(iv); AS 18 para 23(vi); AS 18 para 23(vii)

Question 5 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. Vardhan Chemicals Ltd. manufactures specialty chemicals and industrial packaging materials. It is preparing its annual financial statements for the year ended 31 March 2026. Selected balance-sheet figures (₹ crore) are: share capital 80, reserves 65, long-term borrowings 60, trade payables 25, trade receivables 22, inventories 38 and cash and bank balances 12. The total assets of the company are ₹240 crore. MegaRetail Ltd. purchases approximately 45% of Vardhan's annual production, while ChemSource Ltd. supplies approximately 51% of its annual raw-material requirements. Neither company has any shareholding, management representation or contractual control rights in Vardhan. Union National Bank has granted Vardhan a term loan of ₹30 crore at prevailing commercial interest rates. The bank has no equity holding or special rights in Vardhan. On 1 July 2025, Prism Capital Ltd. acquired 23% of Vardhan's voting equity shares. It also obtained the right to nominate one director and participates in important financial and operating policy decisions. Prism subsequently advanced a loan of ₹18 crore to Vardhan, on which interest of ₹1.40 crore was paid during the year. Rapid Logistics Ltd. provides transportation services to Vardhan. Both companies have Mr. Ajay as a common non-executive director. However, Mr. Ajay has no authority to influence the financial or operating policies of either company in their mutual dealings. Freight charges paid to Rapid Logistics during the year amounted to ₹90 lakh. The company also purchases electricity from CityPower Utility Ltd. and has entered into an ordinary collective employment agreement with its registered workers' union. The Managing Director's brother controls 80% of Apex Packaging Pvt. Ltd. Vardhan purchased packaging materials worth ₹2.40 crore from Apex during the year at the same prices charged to independent customers. It also provided Apex with a corporate guarantee of ₹5 crore. The directors contend that transactions at normal commercial prices need not be disclosed under AS 18.

Which statement correctly identifies the related-party status of Union National Bank and Prism Capital Ltd. in relation to Vardhan Chemicals Ltd.?

1. Prism Capital is related because it exercises significant influence, whereas Union National Bank is only a normal finance provider. (correct answer)
2. Both banks are related because the mere provision of substantial finance establishes significant influence.
3. Union National Bank is related because it provides long-term finance, whereas Prism Capital is an ordinary shareholder.
4. Neither institution is related because both lending arrangements were entered into at prevailing market interest rates.

Answer: A — Prism Capital is related because it exercises significant influence, whereas Union National Bank is only a normal finance provider.

Explanation. Union National Bank acts only as a provider of finance in normal commercial dealings and does not have any other related-party relationship. It therefore falls under paragraph 4(c). Prism Capital owns 23% of Vardhan's voting rights, has Board representation and participates in policy decisions. Paragraph 20 presumes significant influence when voting power is at least 20%, unless rebutted. The finance-provider exclusion cannot protect Prism because it has an independent significant-influence relationship.

Where it goes wrong. Applying the finance-provider exclusion even when the lender independently exercises significant influence.

Authority. AS 18 paras 3(c) and 4(c); AS 18 para 10.4; AS 18 para 20

Question 6 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

MegaRetail Ltd. purchases 45% of Vardhan's production, while ChemSource Ltd. supplies 51% of its raw materials. Neither company holds shares or exercises management influence. What is the appropriate conclusion?

1. Both are related because the level of commercial dependence exceeds one-third of the enterprise's annual business.
2. Only MegaRetail is related because dependence created by sales is treated differently from dependence on suppliers.
3. Neither is related merely because of economic dependence arising from significant customer or supplier volumes. (correct answer)
4. Only ChemSource is related because a supplier controlling more than half of procurement has commercial influence.

Answer: C — Neither is related merely because of economic dependence arising from significant customer or supplier volumes.

Explanation. AS 18 paragraph 4(b) specifically excludes a single customer or supplier with whom the enterprise transacts a significant volume of business merely because economic dependence results. MegaRetail and ChemSource have no other relationship involving control or significant influence. Their commercial importance does not independently establish related-party status. The percentages of sales and procurement therefore do not change the conclusion. The trap is equating commercial dependence with control or significant influence.

Where it goes wrong. Treating a major customer or supplier as a related party merely because it represents a significant share of business.

Authority. AS 18 para 4(b)

Question 7 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Considering the common director, electricity supplier and workers' union, which conclusion is correct under AS 18?

1. Rapid Logistics is related because a common director exists, but the utility and union are excluded.
2. Rapid Logistics is not related because the director cannot influence mutual policies; the utility and union are also excluded. (correct answer)
3. Rapid Logistics and CityPower are related because commercial services affect operational decisions, but the union is excluded.
4. Rapid Logistics and the workers' union are related because both participate in arrangements affecting business operations.

Answer: B — Rapid Logistics is not related because the director cannot influence mutual policies; the utility and union are also excluded.

Explanation. A common director does not automatically establish a related-party relationship. Under paragraph 4(a), the exception applies where the common director cannot affect the policies of both companies in their mutual dealings. Public utilities and trade unions are also excluded in the course of their normal dealings under paragraph 4(c). Rapid Logistics, CityPower and the workers' union therefore do not qualify on the facts provided. The trap is assuming that common directorship or commercial participation automatically constitutes control.

Where it goes wrong. Treating common directorship, public utility services or ordinary trade-union dealings as sufficient evidence of a related-party relationship.

Authority. AS 18 para 4(a); AS 18 para 4(c)(ii) and 4(c)(iii)

Question 8 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

What is the appropriate disclosure treatment for packaging purchases of ₹2.40 crore from Apex Packaging Pvt. Ltd. and the corporate guarantee of ₹5 crore, considering that both companies used normal commercial terms?

1. Disclose neither transaction because normal commercial pricing removes the related-party character of the dealings.
2. Disclose only the corporate guarantee because purchase of goods at normal prices is an ordinary business transaction.
3. Disclose only the packaging purchases because guarantees are not transfers of resources between related parties.
4. Disclose both transactions because a relationship and transaction exist irrespective of whether normal prices are charged. (correct answer)

Answer: D — Disclose both transactions because a relationship and transaction exist irrespective of whether normal prices are charged.

Explanation. The Managing Director's brother is a relative of KMP, and an enterprise controlled by that relative is a related party under paragraphs 3(d) and 3(e). Packaging purchases are transfers of goods, while the corporate guarantee is a financial obligation. Paragraph 10.2 does not require a non-market price or consideration for a transaction to exist. Both transactions are therefore disclosable. Normal commercial terms do not create an exemption under AS 18.

Where it goes wrong. Assuming that arm's-length pricing exempts transactions between parties that are otherwise related.

Authority. AS 18 paras 3(d) and 3(e); AS 18 paras 10.2 and 23; AS 18 para 24

Question 9 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. Bharat Grid Engineering Ltd. is a Central Government-controlled public sector enterprise manufacturing power transmission equipment. The Central Government directly owns 70% of its voting equity capital. The company prepares its financial statements for the year ended 31 March 2026. Selected balance-sheet figures (₹ crore) are: equity share capital 100, reserves 75, long-term borrowings 110, trade payables 38, trade receivables 64, inventories 42 and cash and bank balances 26. The balance-sheet total is ₹455 crore. National Rail Components Ltd. is controlled by a State Government, while Eastern Grid Utilities Ltd. is controlled by the Central Government. Both companies are independently managed state-controlled enterprises. During FY 2025-26, Bharat Grid purchased machinery components worth ₹6.40 crore from National Rail and sold transformers worth ₹2.10 crore to Eastern Grid. Mr. Desai, Bharat Grid's Chief Financial Officer, is a key management person responsible for financial planning and control. His daughter owns 80% of Kavya Analytics Pvt. Ltd. and exercises control over its business operations. During the year, Bharat Grid obtained consultancy services worth ₹1.20 crore from Kavya Analytics. It also received a software licence without charge, whose estimated commercial value was ₹30 lakh. On 1 December 2025, Bharat Grid sold a land parcel to Kavya Analytics for ₹2.40 crore, although the prevailing commercial valuation was ₹3.10 crore. At 31 March 2026, ₹75 lakh remained receivable from Kavya Analytics. A provision for doubtful debts of ₹10 lakh was maintained against the balance, and a separate amount of ₹5 lakh due from this entity had been written off during the year. The finance director proposes exempting all transactions of Bharat Grid from related party disclosure because it is a Government-controlled company. The statutory auditors disagree and require the treatment of transactions with state-controlled enterprises and privately controlled KMP-related entities to be examined separately.

How should Bharat Grid Engineering Ltd. treat its purchases from National Rail Components Ltd. and sales to Eastern Grid Utilities Ltd. under AS 18?

1. Disclose both transactions because all Government-owned companies automatically form ordinary related parties.
2. Disclose purchases only because the State Government-controlled entity is outside Central Government control.
3. No disclosure is required for the relationships and transactions because both counterparties are state-controlled enterprises. (correct answer)
4. Disclose sales only because Government-controlled suppliers receive a preferential exemption.

Answer: C — No disclosure is required for the relationships and transactions because both counterparties are state-controlled enterprises.

Explanation. Bharat Grid is state-controlled because the Central Government owns 70% of its voting equity. AS 18 paragraph 10.13 defines a state-controlled enterprise as one controlled by the Central Government and/or any State Government. National Rail and Eastern Grid also fall within that definition. Paragraph 9 exempts related-party relationship and transaction disclosures between state-controlled enterprises. The exemption applies to both purchases and sales, not only to government-supplier transactions.

Where it goes wrong. Assuming the state-controlled exemption applies only to enterprises under the same Government.

Authority. AS 18 paras 9 and 10.13

Question 10 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Does the state-controlled enterprise exemption extend to consultancy services and the software licence received from Kavya Analytics Pvt. Ltd.?

1. No, because Kavya Analytics is privately controlled by a KMP's relative and is not another state-controlled enterprise. (correct answer)
2. Yes, because every transaction entered into by a Central Government-controlled company is exempt.
3. Yes, because the consultancy contract is an ordinary commercial arrangement supported by professional services.
4. No, but only because the software licence was provided without any consideration.

Answer: A — No, because Kavya Analytics is privately controlled by a KMP's relative and is not another state-controlled enterprise.

Explanation. The CFO is KMP, and his daughter is a relative under paragraph 10.9. Her control over Kavya Analytics establishes a related-party relationship under paragraphs 3(d) and 3(e). The state-controlled exemption in paragraph 9 applies specifically to relationships and transactions with other state-controlled enterprises. Kavya Analytics is privately controlled and does not qualify. Consequently, consultancy services and software licence arrangements remain subject to disclosure. The trap is extending a limited exemption to all transactions of a Government-controlled company.

Where it goes wrong. Interpreting the state-controlled enterprise exemption as a blanket exemption for all related-party dealings.

Authority. AS 18 paras 3(d), 3(e), 9 and 10.9

Question 11 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Which package correctly describes the disclosures required for the transactions with Kavya Analytics Pvt. Ltd.?

1. Disclose consultancy fees and land proceeds only, because the software licence involved no payment.
2. Disclose the related-party name, relationship, transaction nature and volume, outstanding receivable of ₹75 lakh, provision of ₹10 lakh and write-off of ₹5 lakh. (correct answer)
3. Disclose only the net receivable of ₹65 lakh and total consultancy fees, because write-offs are reflected in profit.
4. Disclose the amount of the software licence alone because the remaining dealings involve commercial consideration.

Answer: B — Disclose the related-party name, relationship, transaction nature and volume, outstanding receivable of ₹75 lakh, provision of ₹10 lakh and write-off of ₹5 lakh.

Explanation. AS 18 paragraph 23 requires the related party's name, relationship, nature and volume of transactions, outstanding balances, doubtful-debt provisions and amounts written off or written back. Hence the receivable of ₹75 lakh, provision of ₹10 lakh and write-off of ₹5 lakh must be separately disclosed. The consultancy and land-sale transactions must also be described, while the free software licence remains a transaction under paragraph 10.2. Reporting only a net receivable of ₹65 lakh would omit required information.

Where it goes wrong. Disclosing only the net carrying amount instead of the gross outstanding item, provision and write-off separately.

Authority. AS 18 paras 10.2 and 23(i)-(vii); AS 18 para 24

Question 12 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

The land parcel was sold to Kavya Analytics for ₹2.40 crore, compared with its prevailing commercial valuation of ₹3.10 crore. Which additional disclosure is appropriate?

1. No additional information is needed because the land sale is already included in the transaction volume.
2. Replace the transaction value in the disclosure with ₹3.10 crore because that is the commercial valuation.
3. Disclose only the valuation difference of ₹70 lakh without describing the transaction or relationship.
4. Indicate that the transfer took place at an amount materially different from normal commercial terms. (correct answer)

Answer: D — Indicate that the transfer took place at an amount materially different from normal commercial terms.

Explanation. The difference between commercial valuation and actual consideration is ₹3.10 crore − ₹2.40 crore = ₹70 lakh. AS 18 paragraph 25 identifies the transfer of a major asset at an amount materially different from normal commercial terms as an example of additional information required for understanding a related-party transaction. Bharat Grid should disclose the actual transaction and explain the material difference. It should not substitute valuation for the amount actually transacted. The trap is assuming the transaction volume alone communicates its economic significance.

Where it goes wrong. Omitting commercially significant pricing differences or replacing actual consideration with an estimated market value.

Authority. AS 18 para 23(v); AS 18 para 25

Question 13 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. Apex Industries Ltd. is the reporting enterprise. Summit Holdings Ltd. owns 70% of Apex's voting equity. Apex owns 55% of Ridge Ltd., while Summit Holdings directly owns 60% of Summit Components Ltd. Which combination represents related parties of Apex under AS 18?

Apex Industries Ltd. is the reporting enterprise. Summit Holdings Ltd. owns 70% of Apex's voting equity. Apex owns 55% of Ridge Ltd., while Summit Holdings directly owns 60% of Summit Components Ltd. Which combination represents related parties of Apex under AS 18?

1. Only Summit Holdings Ltd. and Ridge Ltd., because the holding company's other subsidiaries are unrelated.
2. Summit Holdings Ltd. and Summit Components Ltd., because a fellow subsidiary is excluded from the relationship list.
3. Summit Holdings Ltd., Ridge Ltd. and Summit Components Ltd., as parent, subsidiary and fellow subsidiary. (correct answer)
4. Ridge Ltd. and Summit Components Ltd. only, because Apex need not disclose its controlling shareholder.

Answer: C — Summit Holdings Ltd., Ridge Ltd. and Summit Components Ltd., as parent, subsidiary and fellow subsidiary.

Explanation. Summit Holdings is Apex's holding company because it owns 70% of its voting power. Ridge is Apex's subsidiary because Apex owns 55%. Summit Components is also a related party because it is a fellow subsidiary of Apex: both are controlled by Summit Holdings. Paragraph 3(a) includes holding companies, subsidiaries and fellow subsidiaries. The trap is assuming that a reporting enterprise is related only to entities in which it directly holds shares.

Where it goes wrong. Overlooking fellow-subsidiary relationships arising through a common holding company.

Authority. AS 18 para 3(a); AS 18 paras 10.10, 10.11 and 10.12

Question 14 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. Pioneer Technologies Ltd. owns 19% of the voting equity in Delta Systems Ltd. It also appoints one representative to Delta's Board and actively participates in decisions concerning pricing, production capacity and operating policies. Which conclusion is appropriate?

Pioneer Technologies Ltd. owns 19% of the voting equity in Delta Systems Ltd. It also appoints one representative to Delta's Board and actively participates in decisions concerning pricing, production capacity and operating policies. Which conclusion is appropriate?

1. Delta is an associate because significant influence can be established by actual participation even below 20% ownership. (correct answer)
2. Delta cannot be an associate because ownership must exceed 25% irrespective of other circumstances.
3. Delta is a subsidiary because any Board representation establishes control under AS 18.
4. Delta is unrelated because an ownership interest below 20% conclusively rules out significant influence.

Answer: A — Delta is an associate because significant influence can be established by actual participation even below 20% ownership.

Explanation. Holding less than 20% voting power normally creates a presumption that significant influence does not exist. However, AS 18 paragraph 20 permits this presumption to be rebutted when influence is clearly demonstrated. Pioneer has Board representation and participates in financial and operating policy decisions. Under paragraph 10.4, this constitutes significant influence without control. Delta therefore qualifies as an associate under paragraph 10.5. The trap is treating 20% as an absolute minimum rather than a rebuttable presumption.

Where it goes wrong. Treating the 20% significant-influence presumption as an inflexible ownership threshold.

Authority. AS 18 paras 10.4 and 10.5; AS 18 para 20

Question 15 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. Kestrel Engineering Ltd. and Orion Manufacturing Ltd. enter into a contractual arrangement to operate a manufacturing facility. Both parties must jointly approve financial and operating policies, although Kestrel holds only 35% of the facility's voting interest. Which conclusion is correct under AS 18?

Kestrel Engineering Ltd. and Orion Manufacturing Ltd. enter into a contractual arrangement to operate a manufacturing facility. Both parties must jointly approve financial and operating policies, although Kestrel holds only 35% of the facility's voting interest. Which conclusion is correct under AS 18?

1. Orion is not related because Kestrel's voting interest is below the significant-influence threshold.
2. Orion is related only if Kestrel increases its voting interest to more than half of the facility's capital.
3. The facility is automatically a subsidiary because the parties collectively control the majority of votes.
4. The contractual joint-control arrangement establishes a joint venture relationship independently of a majority shareholding. (correct answer)

Answer: D — The contractual joint-control arrangement establishes a joint venture relationship independently of a majority shareholding.

Explanation. AS 18 paragraph 10.6 defines a joint venture as a contractual arrangement under which two or more parties undertake an economic activity subject to joint control. While the joint venture entity itself is a related party of each co-venturer under paragraph 3(b), paragraph 4(b) clarifies that two venturers are not related parties to each other simply because they share joint control over a joint venture. The contractual agreement establishes a joint venture relationship independently of a majority shareholding.

Where it goes wrong. Assuming that joint venture status requires majority ownership or a specific voting percentage.

Authority. AS 18 paras 3(b), 10.6 and 10.7

Question 16 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. Alpha Ltd. holds 28% voting rights in Beta Ltd., giving it significant influence. Beta Ltd. holds 32% voting rights in Gamma Ltd., which consequently becomes Beta's associate. Alpha has no direct investment, management representation or policy participation in Gamma. Which conclusion is correct?

Alpha Ltd. holds 28% voting rights in Beta Ltd., giving it significant influence. Beta Ltd. holds 32% voting rights in Gamma Ltd., which consequently becomes Beta's associate. Alpha has no direct investment, management representation or policy participation in Gamma. Which conclusion is correct?

1. Gamma is related to Alpha because every associate in the chain is automatically a related party.
2. Gamma is not related to Alpha merely because it is an associate of Alpha's associate. (correct answer)
3. Gamma is a subsidiary of Alpha because two associate relationships create indirect control.
4. Gamma is related to Alpha because the combined voting interests exceed 50% when added together.

Answer: B — Gamma is not related to Alpha merely because it is an associate of Alpha's associate.

Explanation. Beta is Alpha's associate because Alpha exercises significant influence through its 28% voting interest. Gamma is Beta's associate because Beta holds 32%. However, AS 18 does not automatically extend the related-party relationship to an associate of an associate. Alpha has no direct investment or other significant influence over Gamma. Therefore, Gamma is not related to Alpha on the facts given. The trap is combining separate associate holdings to create an unsupported indirect control relationship.

Where it goes wrong. Treating an associate of an associate as automatically related to the original investing enterprise.

Authority. AS 18 paras 3(b), 10.4 and 10.5

Question 17 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. Mr. Arun owns 26% of the voting equity of Zenith Components Ltd. His spouse, adult son and maternal cousin are involved in various commercial arrangements with the company. Which individuals are related parties under AS 18 on the stated facts?

Mr. Arun owns 26% of the voting equity of Zenith Components Ltd. His spouse, adult son and maternal cousin are involved in various commercial arrangements with the company. Which individuals are related parties under AS 18 on the stated facts?

1. Only Mr. Arun, because ownership-related relationships do not extend to family members.
2. Mr. Arun and his cousin, because all blood relatives are covered by the definition.
3. Mr. Arun, his spouse and his son, because these individuals fall within the prescribed relative definition. (correct answer)
4. Only the spouse and son, because an individual shareholder is not a related party.

Answer: C — Mr. Arun, his spouse and his son, because these individuals fall within the prescribed relative definition.

Explanation. Mr. Arun holds 26% voting power, exceeding the 20% threshold for substantial interest and creating a presumption of significant influence under AS 18 paragraph 3(c). Paragraph 10.9 defines relatives of an individual as spouse, son, daughter, brother, sister, father, and mother who may be expected to influence or be influenced by the individual. Hence, Mr. Arun, his spouse, and his son are related parties. A maternal cousin is not included in the prescribed definition of relative under AS 18.

Where it goes wrong. Extending the AS 18 definition of relatives to cousins or other family members not listed in the Standard.

Authority. AS 18 paras 3(c) and 10.9; AS 18 para 12; AS 18 para 20

Question 18 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. A company pays annual remuneration of ₹18 lakh to a non-executive director who attends Board meetings but has no responsibility for planning, directing or controlling enterprise activities. The director has no shareholding or other relationship mentioned in AS 18. What is the correct treatment?

A company pays annual remuneration of ₹18 lakh to a non-executive director who attends Board meetings but has no responsibility for planning, directing or controlling enterprise activities. The director has no shareholding or other relationship mentioned in AS 18. What is the correct treatment?

1. The director is not automatically KMP, and the remuneration need not be disclosed as an AS 18 related-party transaction. (correct answer)
2. The director is automatically KMP because every member of the Board exercises significant influence over the company.
3. The director is a related party because remuneration itself establishes an independent financial relationship.
4. The director is KMP because attendance at Board meetings constitutes responsibility for operational control.

Answer: A — The director is not automatically KMP, and the remuneration need not be disclosed as an AS 18 related-party transaction.

Explanation. KMP are persons having authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. AS 18 paragraph 14 specifically clarifies that a non-executive director is not KMP merely because of being a director. Here, the director has no such responsibility or other related-party relationship. Consequently, remuneration paid to this individual does not automatically become a related-party transaction under AS 18. The trap is assuming that every Board member is KMP.

Where it goes wrong. Automatically classifying every non-executive director as key management personnel.

Authority. AS 18 paras 10.8 and 14

Question 19 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. A bank provides a ₹40 crore working-capital facility to a manufacturing company. It also owns 24% of the company's voting equity, has a Board nominee and participates in strategic policy decisions. Which conclusion most appropriately reflects AS 18?

A bank provides a ₹40 crore working-capital facility to a manufacturing company. It also owns 24% of the company's voting equity, has a Board nominee and participates in strategic policy decisions. Which conclusion most appropriately reflects AS 18?

1. The bank is excluded because all providers of finance remain outside AS 18 regardless of other relationships.
2. The bank becomes related only if its loan interest rate differs from prevailing commercial interest rates.
3. The bank is not related because its lending arrangement is legally separate from its equity investment.
4. The bank is a related party because significant influence exists independently of its ordinary lending activities. (correct answer)

Answer: D — The bank is a related party because significant influence exists independently of its ordinary lending activities.

Explanation. Ordinary providers of finance are excluded by paragraph 4(c)(i) when their relationship arises merely through normal dealings. However, the bank also owns 24% voting rights and participates in strategic decisions through Board representation. Paragraph 20 presumes significant influence at 20% or more voting power, subject to contrary evidence. The independent equity and governance relationship therefore makes the bank a related party. The loan itself is also a disclosable transaction under paragraph 24.

Where it goes wrong. Applying the provider-of-finance exclusion without examining separate shareholding and significant-influence rights.

Authority. AS 18 paras 3(c), 4(c)(i), 10.4 and 20

Question 20 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. Pioneer Ltd. held 25% voting rights in Vertex Ltd. until 30 September 2025, making Vertex its associate. On 1 October 2025, Pioneer sold its entire investment and ceased to exercise significant influence. During FY 2025-26, Pioneer sold goods worth ₹4.20 crore to Vertex during April-September and ₹6.80 crore during October-March under ordinary customer arrangements. What amount should be disclosed as related-party sales?

Pioneer Ltd. held 25% voting rights in Vertex Ltd. until 30 September 2025, making Vertex its associate. On 1 October 2025, Pioneer sold its entire investment and ceased to exercise significant influence. During FY 2025-26, Pioneer sold goods worth ₹4.20 crore to Vertex during April-September and ₹6.80 crore during October-March under ordinary customer arrangements. What amount should be disclosed as related-party sales?

1. ₹11 crore, because Vertex was related at the beginning of the financial year.
2. ₹4.20 crore, because only transactions during the period of related-party relationship are disclosed. (correct answer)
3. ₹6.80 crore, because ordinary customer transactions after the relationship ceases are still included.
4. Nil, because the relationship did not exist at the balance-sheet date.

Answer: B — ₹4.20 crore, because only transactions during the period of related-party relationship are disclosed.

Explanation. AS 18 paragraph 10.1 recognises a relationship if control or significant influence exists at any time during the reporting period. However, paragraph 23 requires disclosure of transactions only during the existence of that relationship. Pioneer and Vertex were related until 30 September 2025. Therefore, only April-September sales of ₹4.20 crore qualify. Subsequent sales of ₹6.80 crore occurred after the relationship ceased. The trap is disclosing the entire annual turnover or considering only year-end status.

Where it goes wrong. Including transactions completed after the related-party relationship ceased to exist.

Authority. AS 18 paras 10.1, 10.5 and 23

Question 21 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. During the year, Arvind Industries Ltd. entered into transactions with an associate company. It sold goods worth ₹8.00 crore and rendered services worth ₹1.20 crore. At the reporting date, the gross receivable was ₹2.40 crore, with a provision for doubtful debts of ₹30 lakh. During the year, ₹12 lakh was written off and ₹5 lakh previously written off was written back. Which disclosure is appropriate?

During the year, Arvind Industries Ltd. entered into transactions with an associate company. It sold goods worth ₹8.00 crore and rendered services worth ₹1.20 crore. At the reporting date, the gross receivable was ₹2.40 crore, with a provision for doubtful debts of ₹30 lakh. During the year, ₹12 lakh was written off and ₹5 lakh previously written off was written back. Which disclosure is appropriate?

1. Disclose only sales of ₹8 crore and closing receivables of ₹2.10 crore after reducing the doubtful-debt provision.
2. Disclose the gross receivable of ₹2.40 crore but exclude write-offs and written-back amounts as non-cash items.
3. Disclose sales and services of ₹9.20 crore, gross receivable of ₹2.40 crore, provision of ₹30 lakh, write-off of ₹12 lakh and write-back of ₹5 lakh. (correct answer)
4. Disclose only the ₹30 lakh provision and ₹17 lakh net debt adjustment, without identifying the associate.

Answer: C — Disclose sales and services of ₹9.20 crore, gross receivable of ₹2.40 crore, provision of ₹30 lakh, write-off of ₹12 lakh and write-back of ₹5 lakh.

Explanation. Total transaction volume is ₹8.00 crore + ₹1.20 crore = ₹9.20 crore. The required disclosures include the name and relationship of the associate, transaction nature and volume, gross outstanding receivables of ₹2.40 crore, doubtful-debt provision of ₹30 lakh, write-off of ₹12 lakh and write-back of ₹5 lakh. These items must be separately identified. The trap is reducing the receivable by the provision or netting write-offs against written-back amounts.

Where it goes wrong. Netted presentation of related-party debt balances, doubtful-debt provisions and write-off movements.

Authority. AS 18 para 23(i)-(vii)

Question 22 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. A diversified enterprise has the following transactions with its subsidiaries during the financial year: purchases of raw materials ₹12 crore, sales of finished goods ₹8 crore, purchase of machinery ₹4 crore and rendering of technical services ₹2 crore. Management proposes presenting all transactions in one aggregate figure because the counterparties belong to the same related-party category. Which treatment is correct?

A diversified enterprise has the following transactions with its subsidiaries during the financial year: purchases of raw materials ₹12 crore, sales of finished goods ₹8 crore, purchase of machinery ₹4 crore and rendering of technical services ₹2 crore. Management proposes presenting all transactions in one aggregate figure because the counterparties belong to the same related-party category. Which treatment is correct?

1. Similar transactions may be aggregated by type of related party, but different transaction categories and material individual dealings must remain separately understandable. (correct answer)
2. All transactions must be aggregated into one figure because each transaction involves subsidiaries of the same holding company.
3. Every invoice must be separately disclosed because AS 18 completely prohibits aggregation of related-party transactions.
4. Only the largest transaction must be disclosed because smaller amounts are automatically immaterial under AS 18.

Answer: A — Similar transactions may be aggregated by type of related party, but different transaction categories and material individual dealings must remain separately understandable.

Explanation. AS 18 permits aggregation of similar transactions by type of related-party relationship. However, aggregation must not obscure significant dealings or reduce the understanding of the financial statements. Purchases and sales of goods should not be aggregated with purchases or sales of fixed assets, and material transactions with individual parties should not be hidden within aggregated totals. Accordingly, raw-material purchases, finished-goods sales, machinery purchases and services should remain distinguishable.

Where it goes wrong. Combining goods purchases, goods sales, fixed assets and services into one aggregate related-party figure.

Authority. AS 18 paras 26 and 27

Question 23 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · medium

Scenario. The State Government owns 24% of the voting equity of Delta Power Ltd. and has contractual authority to appoint a majority of its directors without the concurrence of any other shareholder. Which statement correctly describes its status under AS 18?

The State Government owns 24% of the voting equity of Delta Power Ltd. and has contractual authority to appoint a majority of its directors without the concurrence of any other shareholder. Which statement correctly describes its status under AS 18?

1. Delta is not state-controlled because Government shareholding must exceed 50% in every case.
2. Delta is state-controlled only if its shares are listed and the Government directly owns a majority of its equity.
3. Delta is state-controlled only if all its directors are Government nominees and no private shareholder exists.
4. Delta is state-controlled because the State Government controls its Board composition under the contractual arrangement. (correct answer)

Answer: D — Delta is state-controlled because the State Government controls its Board composition under the contractual arrangement.

Explanation. AS 18 paragraph 10.13 defines a state-controlled enterprise by reference to control of the Central Government and/or State Governments. Control can arise from the ability to appoint or remove all or a majority of directors without another person's concurrence, as explained by paragraph 11. Therefore, the 24% ownership does not prevent state-controlled status. The Government's contractual Board appointment rights establish control despite minority voting ownership.

Where it goes wrong. Confusing the definition of state-controlled enterprise with a requirement of majority Government shareholding.

Authority. AS 18 paras 10.3 and 10.13; AS 18 para 11

Question 24 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. A company has a single electricity supplier accounting for 75% of its power purchases, a trade union representing most employees, a bank providing normal working-capital finance and another company sharing a director who can influence the financial and operating policies of both companies in their mutual dealings. Which party is a related party under AS 18?

A company has a single electricity supplier accounting for 75% of its power purchases, a trade union representing most employees, a bank providing normal working-capital finance and another company sharing a director who can influence the financial and operating policies of both companies in their mutual dealings. Which party is a related party under AS 18?

1. The electricity supplier, because its share of annual purchases establishes economic dependence.
2. The company having the common director, because the director can influence the policies of both companies. (correct answer)
3. The trade union, because it represents the majority of employees in the reporting enterprise.
4. The bank, because providing significant working-capital finance establishes control over the borrower.

Answer: B — The company having the common director, because the director can influence the policies of both companies.

Explanation. The electricity supplier's significant business volume alone creates no related-party relationship under paragraph 4(b). Ordinary trade-union dealings and finance-provider dealings are excluded by paragraph 4(c). However, paragraph 4(a) makes an important distinction: companies with a common director are not automatically excluded if the director can affect policies of both in their mutual dealings. The facts establish that influence, making the other company a related party. The trap is applying the common-director exclusion without examining its qualification.

Where it goes wrong. Applying the common-director exclusion even when the director can influence both companies' mutual policies.

Authority. AS 18 para 4(a)-(c)

Question 25 · 2 marks · Chapter 4: Presentation & Disclosure Based Standards · hard

Scenario. A reporting enterprise enters into a contract with an associate company containing a confidentiality clause prohibiting disclosure of their commercial transactions. The restriction arises solely from the private contract; no statute, regulator or competent authority requires secrecy. Can the reporting enterprise omit the related-party disclosures?

A reporting enterprise enters into a contract with an associate company containing a confidentiality clause prohibiting disclosure of their commercial transactions. The restriction arises solely from the private contract; no statute, regulator or competent authority requires secrecy. Can the reporting enterprise omit the related-party disclosures?

1. Yes, because a confidentiality clause signed by both parties automatically overrides AS 18 disclosure requirements.
2. Yes, because the associate company has contractual authority to prevent disclosure of its transactions.
3. No, because contractual confidentiality alone does not satisfy the statutory or regulatory confidentiality exemption. (correct answer)
4. No, but only the outstanding balances must be disclosed, while transaction volumes remain confidential.

Answer: C — No, because contractual confidentiality alone does not satisfy the statutory or regulatory confidentiality exemption.

Explanation. AS 18 paragraphs 5 and 6 provide an exemption only where disclosure would conflict with confidentiality duties specifically required by a statute, regulator or similar competent authority. A private commercial contract does not independently create this exemption. Therefore, the enterprise must disclose the relationship and transactions in accordance with paragraph 23, including transaction volumes and outstanding items. The trap is assuming that contractual secrecy has the same legal status as statutory confidentiality.

Where it goes wrong. Treating a private confidentiality agreement as a statutory or regulatory exemption from AS 18.

Authority. AS 18 paras 5 and 6; AS 18 para 23