How related-party transactions are identified and disclosed

Related-party transactions involve the transfer of resources, services, or obligations between an entity and its affiliates, owners, management, or their close family members.

Because these relationships can influence decision-making and carry risks of conflicts of interest, fraud, or earnings manipulation, identifying, measuring, and transparently disclosing related-party transactions is fundamental to high-quality financial reporting and effective corporate governance.

Proper accounting for related-party transactions reveals not only economic substance, but also the integrity of management and the robustness of internal controls in the eyes of investors, auditors, and regulators.

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Related-party transactions encompass a broad spectrum of relationships and arrangements.

A related party is defined by both IFRS (IAS 24) and US GAAP (ASC 850) as a person or entity that has the ability to control or significantly influence the other’s financial or operating policies, or is subject to common control or influence.

This includes parent companies, subsidiaries, joint ventures, associates, key management personnel (such as executives and board members), and close family members of these individuals.

It also extends to entities controlled or significantly influenced by any of these parties—forming a complex network of potential relationships.

Transactions can range from routine business dealings (such as sales, purchases, and leases) to more sensitive or material arrangements (such as loans, guarantees, asset transfers, service agreements, or compensation packages).

The diversity and subtlety of related-party connections require companies to go beyond the legal form and examine the economic substance of every relationship and transaction, regardless of whether it is conducted on market terms.

Group structures with multiple subsidiaries or cross-holdings, especially in multinational or family-controlled businesses, further increase the complexity and risk of unrecognized related-party transactions.

Comprehensive mapping and continuous monitoring of relationships—using both legal registers and operational reporting lines—are therefore essential for identifying all relevant parties and capturing the full scope of related-party dealings.

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Identification of related-party transactions demands robust internal controls and organizational awareness.

Detecting related-party transactions is not merely a compliance exercise; it requires systematic processes, strong culture, and the active engagement of management and those charged with governance.

Internal controls should encompass procedures for initial onboarding and periodic updates to related-party registers, proactive questioning of unusual or high-value transactions, and clear escalation protocols for unresolved or ambiguous cases.

Employees at all levels should be trained to recognize potential related-party situations, and reporting mechanisms should allow confidential or anonymous alerts in cases where conflicts of interest or non-arm’s-length arrangements are suspected.

Auditors play a critical role in evaluating the sufficiency of internal controls, performing inquiries of management, reviewing board and shareholder minutes, and conducting targeted transaction testing, particularly where past violations or governance weaknesses have been identified.

Technological tools—such as automated matching of master data, network analysis of directorships, and AI-driven flagging of anomalous transactions—can support human judgment but cannot substitute for a culture of transparency and accountability.

Only with rigorous processes and a proactive mindset can companies ensure that all related-party transactions are accurately identified, appropriately authorized, and subject to the scrutiny required by internal policy and external standards.

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Measurement and recognition focus on economic substance and comparability.

Related-party transactions should be measured and recognized in accordance with general accounting principles, meaning that the amount recognized must reflect the actual transfer of resources and obligations rather than any artificial or nominal pricing set by the parties involved.

Where transactions are not conducted at arm’s length, companies may need to adjust values to reflect fair market conditions, particularly for material transactions or those that significantly affect reported income, assets, or liabilities.

Examples include sales of inventory or fixed assets at below-market prices, loans or advances with non-standard interest rates, forgiveness of debt, and transfers of intellectual property or intangible assets between group entities.

Such arrangements can be used to shift profits, avoid taxes, or conceal risks, making their accurate measurement critical for financial statement users.

Transfer pricing regulations for multinational groups add a further layer of complexity, requiring extensive documentation and often subjecting intra-group transactions to regulatory audit and challenge.

Clear policies, management oversight, and external benchmarking are vital to ensure that the economic substance of related-party transactions is fairly represented, not just in the company’s own interests, but also to meet investor expectations and regulatory requirements.

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Disclosure requirements are detailed, demanding, and essential for transparency.

IFRS and US GAAP both require extensive disclosure of related-party transactions, regardless of whether they are material or conducted on standard terms.

Required disclosures include the nature of the relationship, descriptions of the transactions, amounts involved, outstanding balances at period end (including terms, conditions, and guarantees), and any provisions for doubtful debts related to those balances.

The rationale for entering into related-party transactions should also be disclosed, especially if they are not conducted at arm’s length, involve unusual or complex arrangements, or are recurring in nature.

Disclosures should include aggregate totals by transaction type and, for individually significant transactions or parties, detailed line items and explanations.

Regulators and auditors often focus on the adequacy and clarity of these disclosures, as omissions or vague language can indicate a higher risk of misstatement, intentional concealment, or governance failures.

Well-structured disclosures help external users evaluate the risk of preferential treatment, potential conflicts of interest, and the degree to which management’s decisions are influenced by personal relationships rather than the best interests of the business.

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Sample Related-Party Disclosure Table

Related Party	Nature of Relationship	Transaction Type	Amount in Period (€)	Balance at Year-End (€)	Terms/Conditions	Arm’s Length?
Parent Company	Ultimate parent	Management fee	120,000	10,000 (payable)	Standard terms	Yes
Subsidiary A	100% owned	Sale of goods	450,000	60,000 (receivable)	90 days	Yes
Director	Key management	Loan advanced	100,000	80,000 (receivable)	0% interest	No
JV Partner	50% owned JV	Consulting services	75,000	5,000 (payable)	Market rate	Yes

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This table format provides a clear summary of the magnitude, type, and fairness of key related-party transactions during the reporting period.

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Oversight and governance mitigate risks inherent in related-party dealings.

Boards of directors, audit committees, and independent directors have an explicit responsibility to oversee related-party transactions, ensuring they are entered into for legitimate business reasons, properly approved, and transparently disclosed.

Best practice includes establishing formal policies for identifying and approving related-party transactions, requiring independent board or shareholder approval for material or non-standard deals, and conducting periodic reviews of all ongoing arrangements.

Internal audit should test both the design and effectiveness of controls over related-party identification, authorization, and disclosure, reporting any weaknesses or breaches to the board and, where appropriate, to regulators.

External auditors are expected to apply professional skepticism, corroborate management’s representations, and test the completeness of both the related-party register and the disclosures provided in the financial statements.

Enhanced governance not only reduces the risk of financial misstatement and regulatory sanction, but also demonstrates to investors and other stakeholders that the company operates with integrity and prioritizes accountability over expediency or favoritism.

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Related-party transaction accounting links transparency, trust, and stakeholder confidence.

Rigorous identification, accurate measurement, and comprehensive disclosure of related-party transactions are vital to preserving the integrity of financial statements and the reputation of the reporting entity.

Companies that go beyond minimal compliance to embrace best practices in governance and transparency strengthen their relationships with investors, lenders, customers, and regulators.

When well managed, related-party transactions can facilitate efficiency, innovation, and business growth.

When poorly managed or concealed, they threaten not just reported results but also long-term value, corporate reputation, and market access.

In a global business environment, the discipline of related-party transaction accounting stands as a powerful safeguard of fairness, integrity, and sustainable success.

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