Related Party Disclosures in Banks: AS 18, Ind AS 24 and Audit Checks (CAAP)

Related party disclosures in banks protect shareholders and regulators from hidden conflicts of interest. A bank deals daily with promoters, directors, and group companies. Some of these dealings need special disclosure. This guide explains how CAAP candidates identify related parties under AS 18 and Ind AS 24. It also covers key managerial personnel exposures, Section 20 of the Banking Regulation Act, and Companies Act section 188. You will learn what auditors verify in notes to accounts. Exam questions test both definitions and practical audit checks. Read this before your next CAAP mock test.

🔍 Identifying Related Parties Under AS 18 and Ind AS 24

AS 18 defines a related party as one that can control or significantly influence another party's decisions. In a bank, this covers the parent company, subsidiaries, and associates. It also covers key management personnel and their relatives. Ind AS 24 uses a similar test but widens the net. It adds joint ventures of the reporting entity and post-employment benefit plans for employees.

Both standards ask you to look past legal form and check actual control. A shareholding above a threshold is one test. Common directors or shared key management is another. Your chapter on definitions lists these tests in full. Read it alongside the accounting framework in Accounting: An Introduction before attempting related party questions.

Banks check several categories: promoter group entities, group companies with common directors, entities where a director holds substantial interest, and entities managed by the same key management personnel. Miss one category and your disclosure note understates the true related party universe. For the broader rule book, see our guide on accounting standards applicable to banks.

💡 Exam Tip: Ind AS 24 is broader than AS 18 on joint ventures. Remember this contrast for objective questions.

👤 Key Managerial Personnel and Director-Linked Exposures

Key managerial personnel, or KMP, include the managing director, whole-time directors, and other officers with authority to plan and direct bank activities. Their relatives also count as related parties. A bank must track any exposure, loan, or transaction linked to these individuals.

Director-linked exposures need extra care. A loan to a director's firm looks like an ordinary advance. But if a director holds a substantial interest, it becomes a related party exposure. Auditors trace shareholding patterns and directorship records to catch these links. The banking operations and accounting functions chapter explains how such exposures flow through the ledger.

Remuneration, perquisites, and post-employment benefits paid to KMP also need disclosure under both standards. Many candidates forget that relatives of KMP form a separate disclosure category. A relative includes the spouse, children, and dependent family members under the applicable definition.

⚠️ Common Mistake: Candidates disclose director loans but skip loans to firms where a director merely holds substantial interest. Both need disclosure.

⚖️ Section 20 of the Banking Regulation Act and Companies Act Section 188

Section 20 of the Banking Regulation Act, 1949 restricts a bank from granting loans against its own shares. It also restricts loans and advances to its own directors and to firms or companies in which directors are interested. This provision protects depositors from insider lending.

The rule does not ban every director-linked transaction outright. It sets out specific restrictions that a bank must follow before sanctioning such credit. Auditors check board minutes and sanction notes to confirm compliance with Section 20, as reinforced by RBI's supervisory framework, before the loan appears in the books.

Separately, Companies Act 2013 section 188 governs related party transactions for companies, including banking companies incorporated under the Act. It requires board approval, and in some cases shareholder approval, for contracts with related parties. Arm's length transactions in the ordinary course of business get limited relief.

Together, Section 20 and section 188 form the legal backbone behind the accounting disclosures in AS 18 and Ind AS 24. The accounting standards tell you what to disclose. These two laws tell you what is permitted in the first place.

📌 Remember: Section 20 targets director-linked lending. Section 188 targets the approval process for related party contracts generally.

📝 Disclosure in Notes to Accounts

Notes to accounts must name each related party and describe the nature of the relationship. They must list the type of transaction, such as loans, deposits, or fee income. The note must also show the amount of the transaction and any amount outstanding at year end.

Banks disclose transactions even when no amount is outstanding at the balance sheet date, as long as a transaction happened during the year. The classification of income and expenditure chapter helps you map these transactions to the correct account heads. Related party deposits also connect to checks covered in our note on audit of deposit accounts in banks.

A common exam trap involves aggregation. Standards permit disclosure of similar transactions in aggregate, unless a single transaction is significant enough to need separate disclosure. Candidates must judge materiality, not just copy a template note.

Where a bank is a subsidiary of a listed parent, the parent's related party note may need cross-reference. Auditors check that both sets of notes reconcile before the accounts are finalised.

🕵️ Audit Verification Steps and the AS 18 vs Ind AS 24 Comparison

An auditor starts by obtaining a list of related parties from bank management. This list must include directors, KMP, their relatives, and group entities. The auditor cross-checks this list against shareholding records, board resolutions, and related loan sanctions.

Next, the auditor scans the general ledger for transactions with the named related parties. This includes loans, deposits, investments, and fee-based income. Any transaction outside normal banking terms needs closer scrutiny and separate disclosure. Candidates who also study statement analysis can see the related concept of funds flow statement analysis for how fund movements get traced.

The auditor also verifies compliance with Section 20 restrictions before signing off on director-linked credit. Board minutes should show proper sanction and disclosure of interest by the concerned director under the Companies Act section 188 process.

The table below contrasts the core disclosure requirements of AS 18 and Ind AS 24.

Candidates should remember that Ind AS 24 generally aligns with the global IFRS approach. AS 18 remains the older, narrower Indian standard still referenced in legacy audit questions.

✅ Conclusion: Master Related Party Disclosures for CAAP

Related party disclosures in banks sit at the intersection of accounting standards, company law, and banking law. AS 18 and Ind AS 24 tell you what to disclose. Section 20 and Companies Act section 188 tell you what is permitted and how it gets approved.

CAAP exams test both the definition of a related party and the audit steps to verify disclosure completeness. Revisit the bank audit and various types of audits chapter to connect this topic with your broader audit framework. Auditors preparing verification checklists should also compare notes with verification of advances in bank audit.

Browse more topics on our CAAP tag hub. Practice with real exam-style questions to lock in these concepts. Attempt a free mock test today and check your understanding of related party rules before exam day.

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