What are Related Party Transactions?
A related party transaction is a transfer of resources, services or obligations between a company and a party that has significant influence or control over it — such as a parent company, key management, or a close family member of an executive. Because these deals aren't always struck at arm's length, accounting standards require special disclosure.
Related party transactions are transfers of resources, services, or obligations between an entity and parties connected to it (e.g., parent companies, subsidiaries, directors, or their close family), which must be disclosed under IAS 24 regardless of whether a price was charged.
- •Counterparty has control or significant influence
- •Terms may not reflect market prices
- •Requires disclosure under IAS 24 / ASC 850
- •Risk of self-dealing or bias
- •Example: loan from a director to the company
- •Independent, unrelated counterparties
- •Priced at fair market value
- •No special related-party disclosure needed
- •Negotiated purely on commercial terms
- •Example: purchase from an unrelated supplier
Step-by-step worked examples
A CEO's spouse owns a supply company that sells raw materials to the CEO's employer at above-market prices. Is disclosure required?
The spouse is a close family member of key management personnel — a related party under IAS 24. The transaction (sale of raw materials) involves that related party, regardless of price. Disclosure is required: nature of the relationship, transaction amount, and outstanding balances.
A parent company provides an interest-free loan of $1,000,000 to its wholly-owned subsidiary. How should this be treated?
The parent-subsidiary relationship is a classic related party relationship. Even though no interest is charged (not arm's length), the transaction must still be disclosed. Disclosure includes the loan amount, terms (interest-free), and relationship (parent/subsidiary).
A company purchases office supplies from an unrelated, publicly listed vendor at standard market prices. Is this a related party transaction?
The vendor has no ownership, control, or family connection to the company or its management. The transaction is priced at fair market value through normal competitive terms. This is NOT a related party transaction — no special disclosure is required.
Flashcards
Quick quiz
Q1.Which of the following is a related party under IAS 24?
Q2.Related party transactions must be disclosed:
Q3.Which US GAAP standard addresses related party disclosures?
Q4.An arm's-length transaction is best described as one:
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Common mistakes
Believing disclosure is only needed when related party terms are unfavorable. — Correct: IAS 24 requires disclosure of related party transactions even when priced at fair value — the relationship itself matters.
Assuming only direct ownership creates a related party. — Correct: Significant influence, joint control, key management, and close family members also qualify.
Thinking related party transactions are illegal. — Correct: They are legal and common (e.g., intercompany loans); the issue is transparency, not legality.
Omitting related party balances outstanding at year-end. — Correct: IAS 24 requires disclosure of both the transactions during the period and any outstanding balances at year-end.
FAQ
What are related party transactions?
Transactions between an entity and parties connected to it through control, influence or close family ties, requiring disclosure under IAS 24.
What is the related party transactions disclosure formula?
There's no formula — disclosure requires listing the nature of the relationship, transaction types, amounts, and outstanding balances.
What are examples of related party transactions?
Loans between a parent and subsidiary, sales to a director's family business, or compensation paid to key management personnel.
How to identify a related party transaction?
Check whether the counterparty has control, joint control, or significant influence over the entity, or is a close family member of someone who does.