## SA 550: Related Party Transactions

### Definition

The definition of a Related Party is taken from the applicable Financial Reporting Framework (FRF) — e.g., Ind AS 24 (Related Party Disclosures).

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### When the FRF Does Not Clearly Define Related Parties

The auditor considers the following relationships:

#### Type 1 — Control / Significant Influence Relationships

Relationship	Explanation
Reporting entity has significant influence over another entity	Reporting entity → → → Other entity
A person/entity controls the reporting entity	Parent → Reporting entity

#### Type 2 — Common Control or Ownership

Two entities are related if they are:

Commonly controlled by a third entity (sister companies)
Have a common key management personnel (KMP) member
Owned by close family members (e.g., husband and wife each own a company)

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### Important Exception: Government-Owned Entities

In India, entities owned by the Government (Central/State) are generally NOT treated as related parties of each other, unless there is specific additional relationship.

> Why? The government owns thousands of entities (PSUs). Treating all of them as mutually related would make disclosures impractical and meaningless.

Example:

ONGC and Coal India Ltd. are both government-owned → They are NOT related parties of each other solely on the basis of common government ownership.

Worked example

### Example 1

Common Control (Sister Companies): Reliance Industries Ltd. owns both Reliance Retail Ltd. and Reliance Jio Infocomm Ltd. Since both are controlled by the same parent, they are related parties of each other. Any transactions between them must be disclosed.

### Example 2

Common KMP: Mr. Sharma is a Director on the Board of both ABC Ltd. and XYZ Ltd. Even if there is no ownership overlap, both companies are related parties due to the common KMP, and transactions between them require disclosure.

### Example 3

Government Entity Exception: Bank of Baroda and NTPC Ltd. are both government-owned PSUs. A loan from Bank of Baroda to NTPC would NOT automatically require related party disclosure under Ind AS 24, because both are state-controlled entities and the standard grants this exemption.

⚠️ Common exam mistakes

Applying the related party definition mechanically from the FRF without considering the spirit of the definition when the FRF is silent or ambiguous.
Forgetting the government-owned entity exception — treating all PSUs as related parties of each other leads to over-disclosure that the standard explicitly avoids.
Ignoring close family member relationships — if a director's spouse owns a supplier company, that supplier is a related party even without any formal ownership link to the reporting entity.
Confusing 'significant influence' (20%+ voting rights — related party) with 'minority interest' (less than 20% — typically not a related party) without assessing actual influence.

Bare-Act text Paragraphs 3–6 (Objectives and Definitions) · SA 550 — Related Parties · click to expand

The auditor shall understand the entity's related party relationships and transactions sufficient to be able to: (a) recognise fraud risk factors, if any, arising from related party relationships and transactions; (b) conclude, based on the audit evidence obtained, whether the financial statements, insofar as they are affected by those relationships and transactions, achieve fair presentation (for fair presentation frameworks).

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SA 550 — Related Party Transactions: Definition and Identification

Worked example

⚠️ Common exam mistakes