Salary to Director’s relative

Is Salary paid to Director’s relative a related party transaction?

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Salary paid to the director’s relative as a full-time employee is related party transaction?

Yes, salary paid to the relative of the Director or a related party who is employed as a full-time employee is considered a related party transaction (RPT). Even if the related party is employed full-time, the transaction (salary payment) must be disclosed in the financial statements as per Ind AS 24 or AS 18, as the case may be. involves financial transactions between the company and a related party.

Why It Is a Related Party Transaction?

1. Definition of Related Party:
Under Ind AS 24 and AS 18, a related party includes:

  • Key management personnel (directors, officers).
  • Close family members of key management personnel (KMP).
  • Individuals who have control or significant influence over the entity.

2. Nature of the Transaction:

Even if the related party is employed as a full-time employee, salary payments are considered financial transactions between the company and a related party, and therefore, fall under the scope of related party disclosures.

Disclosure Requirements:

Related Party Transactions (RPTs) must be disclosed either in the audit report (when necessary) or typically within the Notes to Accounts of the financial statements, in line with the requirements of Indian Accounting Standard (Ind AS) 24 or Accounting Standard (AS) 18 as the case may be. Below is guidance on where and how to disclose related party transactions:

  • Nature of Relationship: The company must disclose the relationship (e.g., “Director”, “Close family member of a director”, or “Key management personnel”).
  • Nature of Transaction: The salary paid should be categorized as a related party transaction in the financial statements.
  • Compensation: The total compensation, including salary, bonuses, post-employment benefits, etc., must be disclosed.

Example of Related Party Disclosure

In the Notes to Accounts

The primary disclosure of related party transactions should be made in the Notes to the Financial Statements under a dedicated heading, usually titled “Related Party Transactions” or “Disclosure of Related Party Transactions as per Ind AS 24 or AS 18.”

1. Related Party:
   - Mr. AMIT ANAND (Full-time employee and close family member of Director Mr. SUMIT ANAND).

2. Nature of Transaction:
   - Salary paid to Mr. ABC: ₹1,200,000 for the year ended [date].

3. Compensation Details:
   - Short-term benefits: ₹1,000,000
   - Bonus/incentives: ₹1,000,000
   - Post-employment benefits: ₹200,000

Therefore, salary payments to a related party employed as a full-time employee are related party transactions and need to be disclosed in accordance with applicable accounting standards.

Regulatory Compliance and Approval

The auditor ensures that:

  • RPTs are disclosed as per Ind AS 24/ AS 18.
  • Proper approvals from Board of Directors or shareholders are obtained, where applicable (as per Section 188 of the Companies Act, 2013).

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