Disclosures under Ind AS — Practice

Question 1

Identify whether each of the following is a related party of Company X under Ind AS 24, and justify each

Accepted Answer

A

Question 2

A parent company has a wholly owned subsidiary, but no transactions of any kind occurred between the two companies during the year. Explain whether any related party disclosure is still required, and why.

Accepted Answer

Yes, disclosure is still required. Ind AS 24 requires disclosure of the relationship between a parent and its subsidiaries irrespective of whether any transactions have taken place between them during the period, because the existence of control itself, separate from any specific transaction, is considered relevant information for users of the subsidiary's (and, in consolidated statements, the parent's) financial statements — control affects an entity's operating policies and may influence the parties with which the entity transacts, even in a period with no direct intercompany transactions. This is a deliberately broader disclosure trigger than the one applying to most other related party categories, where disclosure is generally driven by actual transactions or outstanding balances having occurred, precisely because a control relationship carries an ongoing potential to affect the entity's affairs regardless of whether that potential is exercised through a specific transaction in any given period.

Question 3

Explain what Ind AS 24 requires to be disclosed regarding key management personnel compensation, and why this is disclosed in total and by category rather than simply as one aggregate figure.

Accepted Answer

Ind AS 24 requires disclosure of key management personnel compensation both in total and broken down into specific categories — short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payment. Disclosing the breakdown by category, rather than only a single aggregate total, matters because these categories carry different implications for a user's understanding of the entity's governance and future cash commitments: short-term benefits reflect current period cost, post-employment and other long-term benefits reflect deferred obligations extending well beyond the current period, termination benefits may signal one-off severance costs not indicative of ongoing compensation levels, and share-based payment reflects equity dilution rather than cash cost; presenting only a combined aggregate figure would obscure these materially different characteristics and prevent users from assessing, for instance, how much of total KMP compensation represents an ongoing cash cost versus a longer-term or non-cash commitment.

Question 4

Two companies operate in the same industry with essentially identical product lines and geographic footprint, but Company A's CODM reviews internal performance reports organised by product line, while Company B's CODM reviews internal performance reports organised by geographic region. Explain why these two companies could legitimately report entirely different segment structures under Ind AS 108, despite operating essentially identical underlying businesses.

Accepted Answer

Ind AS 108 adopts the management approach, requiring segment information to be based on the internal organisational and reporting structure actually used by the entity's own chief operating decision maker to allocate resources and assess performance, rather than an externally imposed, standardised segmentation scheme applied uniformly across all entities in an industry. Since Company A's CODM genuinely reviews and manages the business along product lines, its reportable operating segments should reflect that product-line structure; since Company B's CODM genuinely reviews and manages the business along geographic regions, its reportable operating segments should instead reflect that geographic structure, even though the two companies' underlying businesses are essentially identical. This divergence is not a flaw or inconsistency in either company's application of the standard — it is the deliberate, intended consequence of Ind AS 108's premise that segment information is most decision-useful to external users when it mirrors precisely how each entity's own management actually views, organises and runs the business internally, rather than being forced into an artificial, externally standardised segmentation that might not reflect either company's actual internal decision-making structure.

Question 5

An entity has five operating segments with the following external revenues: Segment A ₹40 lakh, Segment B ₹120 lakh, Segment C ₹15 lakh, Segment D ₹18 lakh, Segment E ₹7 lakh, giving combined external revenue of ₹200 lakh. Identify which segments are reportable based on the revenue threshold alone, and explain what further step Ind AS 108 requires before finalising the reportable segment list.

Accepted Answer

The 10% revenue threshold requires each segment's revenue to be compared against ₹200 lakh (10% of which is ₹20 lakh): Segment A (₹40 lakh) exceeds ₹20 lakh and is reportable; Segment B (₹120 lakh) exceeds ₹20 lakh and is reportable; Segment C (₹15 lakh) does not exceed ₹20 lakh and, on the revenue test alone, is not reportable; Segment D (₹18 lakh) does not exceed ₹20 lakh and, on the revenue test alone, is not reportable; Segment E (₹7 lakh) does not exceed ₹20 lakh and is not reportable. However, Ind AS 108 requires two further steps before the reportable segment list is finalised: first, each segment should still be separately checked against the profit/loss and assets thresholds, not the revenue threshold alone, since a segment failing the revenue test could still qualify as reportable by satisfying either of the other two 10% thresholds; second, the 75% overall test must be applied — the combined external revenue of reportable segments identified so far (A + B = ₹160 lakh) must be checked against 75% of total entity revenue (75% × ₹200 lakh = ₹150 lakh); since ₹160 lakh already exceeds ₹150 lakh, the 75% test is satisfied here without needing to add further segments, but had it not been satisfied, additional segments (such as D at ₹18 lakh, the next largest) would need to be designated reportable, even though they fail all three individual 10% thresholds, purely to bring the reportable segments' combined revenue up to at least 75% of the entity total.

Question 6

An entity determines that its entire business constitutes a single operating segment. Explain what Ind AS 108 still requires this entity to disclose, despite having no multi-segment breakdown to present.

Accepted Answer

Even where an entity has only one reportable operating segment, Ind AS 108 still requires certain entity-wide disclosures, which apply regardless of the entity's segment structure: revenues from external customers for each group of similar products and services (unless the necessary information is not available and the cost to develop it would be excessive); revenues from external customers attributed to the entity's country of domicile and, individually if material, to each foreign country, together with a similar split of non-current assets by geographical location; and information about the extent of the entity's reliance on any major customer, disclosing the fact and the amount of revenue from any single external customer that amounts to 10% or more of the entity's total revenue, without necessarily needing to disclose that customer's identity. These entity-wide disclosures exist because, even where internal management does not organise the business into multiple distinct operating segments, users still benefit from understanding the entity's product, geographic and customer concentration risk, information that a single-segment structure would otherwise leave entirely undisclosed.

Question 7

Company X holds a 40% interest in a joint venture, JV Ltd, jointly controlled with another unrelated venturer. During the year, Company X sells goods to JV Ltd at normal commercial terms. Explain whether this transaction requires related party disclosure, and whether the fact that terms were at arm's length changes this requirement.

Accepted Answer

Yes, disclosure is required. Ind AS 24 explicitly identifies a joint venture in which the entity is a venturer as a related party, so JV Ltd is a related party of Company X regardless of the specific terms on which any transaction between them occurs. The fact that the sale to JV Ltd was conducted at normal commercial, arm's-length terms does not remove the disclosure requirement; Ind AS 24's purpose is to make the relationship and the transaction visible to users so that users themselves can assess whether the terms were genuinely at arm's length, and disclosure is required for related party transactions regardless of whether the terms were, in the entity's own assessment, actually fair or commercial — an entity is not permitted to withhold disclosure on the basis that it believes the terms were fair, since that self-assessment is precisely the judgement users are meant to be able to form independently once the relationship and transaction details are disclosed.

Question 8

A state government holds a controlling interest in Company Y. Company Y regularly transacts with several other government-controlled entities and with government departments in the ordinary course of business, at standard market terms available to any customer. Explain the disclosure exemption Ind AS 24 provides for government-related entities, and its rationale.

Accepted Answer

Ind AS 24 provides a partial exemption for entities that are related to each other solely because they are both controlled, jointly controlled, or significantly influenced by the same government: such entities are exempt from the detailed transaction-by-transaction disclosure requirements that would otherwise apply, and instead need only disclose the name of the government and the nature of its relationship with the entity, together with sufficient qualitative and quantitative information to enable users to understand the effect of related party transactions with other government-related entities, without necessarily disclosing every individual transaction and balance in the same granular detail Ind AS 24 would otherwise require for a typical related party. The rationale is practical: where government control is broad and diffuse across many, often unrelated, state-owned entities and departments, requiring the full, detailed disclosure regime that applies to a typical related party relationship (such as a parent-subsidiary) for every single government-controlled counterparty would impose a disproportionate compliance burden without proportionate benefit to users, given that transactions with government-related entities conducted at standard, publicly available terms carry a materially lower risk of the kind of non-arm's-length dealing Ind AS 24 is fundamentally concerned with.

Question 9

An entity has four operating segments with the following reported profit or loss: Segment W profit ₹30 lakh, Segment X profit ₹50 lakh, Segment Y loss (₹20 lakh), Segment Z loss (₹15 lakh). Determine which segments satisfy the profit or loss reportability threshold.

Accepted Answer

The profit or loss threshold requires comparing the absolute amount of each segment's reported profit or loss against 10% of the greater, in absolute amount, of the combined profit of all profit-making segments or the combined loss of all loss-making segments. Combined profit of profit-making segments (W + X) = ₹30 lakh + ₹50 lakh = ₹80 lakh. Combined loss of loss-making segments (Y + Z) = ₹20 lakh + ₹15 lakh = ₹35 lakh. The greater of these two, in absolute amount, is ₹80 lakh, so the threshold is 10% × ₹80 lakh = ₹8 lakh. Comparing each segment's own absolute profit or loss against this ₹8 lakh threshold: Segment W (₹30 lakh) exceeds ₹8 lakh, reportable; Segment X (₹50 lakh) exceeds ₹8 lakh, reportable; Segment Y (₹20 lakh loss, absolute amount ₹20 lakh) exceeds ₹8 lakh, reportable; Segment Z (₹15 lakh loss, absolute amount ₹15 lakh) exceeds ₹8 lakh, reportable. All four segments are reportable under this specific threshold, illustrating that the comparison base is the larger of the two combined totals (profit-side or loss-side), not the entity's overall net profit or loss, which in this case would be ₹80 lakh − ₹35 lakh = ₹45 lakh, a materially different and smaller figure than the ₹80 lakh actually used as the comparison base.

Question 10

An entity has two operating segments, each individually below every 10% threshold, that have similar economic characteristics, similar products and services, similar production processes, similar customer types, and similar distribution methods. Explain whether Ind AS 108 permits these two segments to be combined for reportability assessment, and the reasoning.

Accepted Answer

Ind AS 108 permits two or more operating segments to be aggregated into a single reportable segment if the segments have similar economic characteristics and are similar in each of several specified respects, including the nature of products and services, the nature of the production process, the type or class of customer, the methods used to distribute products or provide services, and the nature of the regulatory environment, and if aggregating them is consistent with the core principle of the standard, which is to provide information that helps users evaluate the nature and financial effects of the business activities the entity engages in. Where the two segments genuinely share similar economic characteristics and are similar across substantially all of these specified respects, as described here, aggregation is permitted, and the combined segment can then be assessed against the 10% quantitative thresholds as a single reportable unit rather than as two separate segments each individually falling below the thresholds; this aggregation criterion exists precisely to avoid the opposite failure mode from the 75% test — preventing a business from being fragmented into an excessive number of trivially small segments that individually fail every threshold and would otherwise escape reportable status entirely, even though, combined, they represent a genuinely significant and similar part of the business.

Question 11

A company grants an interest-free loan to a key management personnel member, on terms significantly more favourable than it would offer to an unrelated employee or third party. Explain what Ind AS 24 requires to be disclosed in respect of this loan, and why disclosure matters even though this is a fairly small individual transaction relative to the company's overall size.

Accepted Answer

Ind AS 24 requires disclosure of the nature of the related party relationship along with information about the transaction and outstanding balance, including its terms and conditions, necessary for users to understand the potential effect of the relationship on the financial statements; an interest-free loan to a KMP member, being materially more favourable than terms available to an unrelated party, would need to be disclosed with sufficient detail, including its outstanding balance and terms, for users to understand that preferential treatment has occurred. Disclosure matters even for a transaction that is small relative to the company's overall size because Ind AS 24's concern is not primarily about the transaction's financial materiality to the entity as a whole, but about transparency regarding governance and the fairness of dealings between the entity and those who control or significantly influence it; a small but clearly preferential loan to a KMP member is exactly the kind of information that reveals something about the entity's governance practices and the fairness of its dealings with insiders, information that would remain entirely invisible to users of the financial statements without this specific disclosure, regardless of how immaterial the loan's rupee amount might be relative to the company's balance sheet as a whole.

Question 12

Explain why Ind AS 108 defines the chief operating decision maker (CODM) as a function rather than a specific job title, and why this matters for correctly identifying operating segments in an entity with an unconventional governance structure.

Accepted Answer

Ind AS 108 defines the CODM as a function — the person or group of persons that allocates resources to, and assesses the performance of, the operating segments of an entity — rather than by a specific title such as 'chief executive officer,' because entities organise their governance and internal decision-making structures in genuinely different ways, and in some entities this resource-allocation and performance-assessment function may be performed by a committee, an executive board, or a group of executives collectively, rather than by a single named individual holding a specific title. This functional definition matters for correctly identifying operating segments because if an entity mistakenly assumes the CODM must be a single named executive and looks only at that individual's own personal review of information, it might overlook that the genuine resource-allocation and performance-assessment decisions are actually made collectively by a broader group reviewing a different, more granular set of internal reports; correctly identifying who or what group actually performs the CODM function, based on substance rather than title, is essential to correctly identifying which internal reports and which organisational breakdown genuinely drive the entity's segment structure under the management approach.

Question 13

An entity is domiciled in India but derives 45% of its revenue from customers in a single foreign country, with the remainder spread across many other countries none individually material. Explain what Ind AS 108's entity-wide geographic disclosure requires in this specific situation.

Accepted Answer

Ind AS 108 requires an entity to disclose revenues from external customers attributed to its country of domicile, and revenues from external customers attributed to all foreign countries in total; if revenue from customers in an individual foreign country is material, that amount must be separately disclosed rather than being buried within the combined 'all foreign countries' total. Here, since 45% of revenue is derived from customers in a single foreign country, a clearly material amount, that country's revenue must be separately disclosed rather than aggregated anonymously with the many other, individually immaterial countries; the remaining revenue from all the other, individually immaterial foreign countries may continue to be disclosed as a combined total, without needing individual country-by-country breakdown for each of those smaller markets, since Ind AS 108's materiality-driven disclosure only requires separate identification of individually material foreign countries, not an exhaustive country-by-country breakdown regardless of materiality.

Question 14

A company sells goods to its subsidiary at a price significantly below the price it charges unrelated customers for identical goods. Explain why Ind AS 24 does not require any adjustment to the recognised revenue for this transaction, despite the non-arm's-length pricing.

Accepted Answer

Ind AS 24 is a disclosure standard; it does not prescribe any specific pricing basis for related party transactions, nor does it require an entity to adjust its recognised revenue, expense, or any other amount to reflect what an arm's-length price would have been had the transaction occurred with an unrelated party. The transaction is recognised at its actual transaction price under whichever recognition standard governs it (typically Ind AS 115 for revenue), exactly as it would be for any other transaction, and Ind AS 24's role is limited entirely to ensuring the relationship and the terms of the transaction, including the fact that pricing differed materially from arm's-length terms, are disclosed to users, who can then form their own judgement about the transaction's implications; this is a deliberate design choice, since prescribing a hypothetical arm's-length adjustment would require the standard to define and estimate what that arm's-length price should have been, a task fraught with its own estimation difficulty, whereas requiring transparent disclosure of the actual terms lets users apply their own judgement to the actual, disclosed facts.

Question 15

Explain why a post-employment benefit plan established for the benefit of an entity's employees is treated as a related party of that entity under Ind AS 24.

Accepted Answer

A post-employment benefit plan, such as a provident fund or gratuity trust set up for the benefit of an entity's own employees, is specifically identified by Ind AS 24 as a related party of the entity itself, since the entity establishes, funds, and often exercises significant influence over the governance of such a plan, and transactions between the entity and the plan, such as contributions made or assets transferred, are precisely the kind of dealing where the ordinary arm's-length assumption cannot automatically be relied upon; disclosure ensures users can see the nature and scale of the entity's dealings with a fund it has itself established and substantially controls or influences, rather than these transactions passing unnoticed as if they were dealings with a genuinely independent, unrelated counterparty.

Practice — Disclosures under Ind AS

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