Imagine Rajesh is the MD of Rajesh & Co. Pvt. Ltd. He also owns 60% of another company, Sunrise Traders. If Rajesh & Co. buys goods from Sunrise Traders — even at market price — that transaction must be disclosed in the financial statements. Why? Because readers of the accounts need to know that the buyer and seller aren't strangers. That's the entire purpose of AS 18 — Related Party Disclosures: to shine a light on relationships that could influence transactions, so financial statements don't mislead.
Who counts as a Related Party? AS 18 identifies two types of relationships: control and significant influence. Control means one party can govern the financial and operating policies of another (think holding-subsidiary). Significant influence means the power to participate in policy decisions but not control them — typically ownership of 20% or more voting power. The standard then lists specific categories: (1) enterprises that control or are controlled by the reporting enterprise — so parent, subsidiary, and fellow subsidiaries; (2) associates (significant influence relationship); (3) joint ventures; (4) Key Management Personnel (KMP) — directors, MD, whole-time directors, and managers as defined under the Companies Act; (5) relatives of KMP — spouse, children, parents, siblings; and (6) enterprises over which KMP or their relatives exercise significant influence — this catches the classic exam scenario where the MD's wife owns a supplier company.
Now, what needs to be disclosed? First, control relationships must always be disclosed even if there are zero transactions between them — this is a common exam twist. Second, for actual transactions, you must disclose: the nature of the relationship, the nature and amount of the transaction, outstanding balances, and any provisions for doubtful debts. One big relief: transactions between group companies in consolidated financial statements are eliminated anyway, so AS 18 disclosures in CFS focus only on associates, JVs, and KMP. Level IV enterprises (non-corporate, turnover below ₹1 crore) are fully exempt from AS 18. For exam purposes, assume the entity is covered unless told otherwise.