ASSOCHAM

1. ASSOCHAM Seminar on �US GAAP, IFRS & Indian GAAP : A Comparison� Related Party Transactions Abhijit Sen Chief Financial Officer Citibank, N.A.

2. 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 23B International Accounting Standard � IAS 24 Comparative analysis

3. Need for Regulation 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.

4. Who is a Related Party ? �Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions �

5. Related Party Transactions 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

6. Indian GAAP � AS 18 Applicability 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 power giving them control or significant influence Key management personnel incl.their relatives Enterprises where controlling individual or key managerial personnel has significant influence

7. Indian GAAP � AS 18�contd. Disclosure requirements 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

8. Indian GAAP � AS 18�contd. Other Key Points 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

9. Transfer Pricing Rules 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. Transfer Pricing Methods Comparable uncontrolled price method Resale price method Cost plus method Profit split method Transactional net margin method

10. AS 18 and Transfer Pricing

11. US GAAP - FAS 57 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

12. US GAAP - FAS 57 Disclosure requirements 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

13. Regulation W 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 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

14. Regulation W and Sec. 23 A/B Section 23 A US Banks and their subsidiaries are restricted by Section 23 A from engaging in loans, purchases of assets, and other specified 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

15. Regulation W - Inter-company Transactions

16. Sec. 23 A Transactions glimpse

17. Sec. 23 B Transactions glimpse

18. Regulation W Requirement

19. 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. International AS � IAS 24..contd. 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

21. Comparative Analysis

22. Legal Books vs. Management Books

23. Thank you