Related Party Transactions

Related Party Transactions Financial Reporting Related Parties Asset Transfer Liability Transfer Service Performance Annual Accounts International Accounting Standard 24 (IAS 24) Financial Reporting Standard 102 (FRS 102)
Related Party Transactions involve the transfer of assets, liabilities, or the performance of services between related parties, requiring specific disclosures and governance to ensure transparency and fairness.
On this page

Definition

Related Party Transactions refer to financial agreements or arrangements made between two parties who have a pre-existing relationship. This can include the transfer of assets, liabilities, or the provision of services. These transactions must be disclosed to ensure transparency and avoid potential conflicts of interest.

Under the Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102 Section 33), companies are required to disclose specific information about related party transactions in their annual accounts. For listed companies, compliance with International Accounting Standard 24 (IAS 24) Related Party Disclosures is mandatory.

Examples

  1. Intragroup Loans: A parent company providing a loan to its subsidiary.
  2. Asset Sales: A corporation selling property to a member of its executive team below market value.
  3. Service Agreements: A company hiring a consulting firm owned by its CEO for professional services.
  4. Purchase of Goods: A business purchasing raw materials from a company that shares a common board member.
  5. Lease Agreements: Leasing office space from a company owned by the relatives of a board member.

Frequently Asked Questions (FAQs)

Related Parties include:

  • Entities with common control or significant influence.
  • Key management personnel.
  • Close family members of key management personnel.
  • Entities in which a controlling entity holds a significant interest.

Disclosure ensures:

  • Transparency in financial reporting.
  • Detection and deterrence of conflicts of interest.
  • Assurance of fairness and propriety in dealings.
  • Compliance with regulatory requirements.

Identification involves:

  • Reviewing the organization’s management and ownership structure.
  • Inspecting internal records for transactions with entities/persons that qualify as related parties.
  • Implementing disclosure policies and employee training programs.

Are there any exceptions to disclosure requirements?

Yes, exclusions include:

  • Transactions between government-related entities.
  • Transactions at standard commercial terms within a group as defined by regulations.
  • Transactions considered immaterial to financial statements.

Non-disclosure can result in:

  • Regulatory fines.
  • Legal consequences.
  • Loss of stakeholder trust.
  • Reputational damage.

Financial Reporting Standard (FRS) 102

FRS 102: A financial reporting standard applicable in the UK and Republic of Ireland, providing guidelines for financial disclosure, including related party transactions.

International Accounting Standard (IAS) 24

IAS 24: A standard issued by the International Accounting Standards Board (IASB) prescribing the disclosures necessary to highlight the nature, value, and impact of related party transactions.

Annual Accounts

Annual Accounts: The yearly financial reports that include various statements such as the balance sheet, income statement, and notes, which must disclose related party transactions.

Online References

  1. International Accounting Standards Board (IASB) - IAS 24
  2. Financial Reporting Council (FRC) - FRS 102

Suggested Books for Further Studies

  1. “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott.
  2. “Accounting Principles: A Business Perspective” by Hermanson, Edwards, and Maher.
  3. “International Financial Reporting Standards (IFRS) Workbook and Guide” by Abbas Ali Mirza.
  4. “Financial Reporting and Analysis” by Charles H. Gibson.
### Do related party transactions always have to be disclosed when preparing annual accounts? - [x] Yes, unless they fall under specific exceptions. - [ ] No, they never need to be disclosed. - [ ] Only if they involve significant sums of money. - [ ] Only if they are requested by auditors. > **Explanation:** Related party transactions must be disclosed unless they meet specific exceptions outlined in the relevant accounting standards. ### Which accounting standard covers related party disclosures for listed companies? - [x] International Accounting Standard (IAS) 24 - [ ] Financial Reporting Standard (FRS) 102 - [ ] Generally Accepted Accounting Principles (GAAP) - [ ] International Financial Reporting Standard (IFRS) 9 > **Explanation:** IAS 24 is the standard that specifically covers related party transactions for listed companies. ### Under FRS 102, in which section are related party transactions required to be disclosed? - [ ] Section 12 - [ ] Section 45 - [x] Section 33 - [ ] Section 18 > **Explanation:** FRS 102 Section 33 requires disclosure of related party transactions. ### Which of the following parties would most likely be considered a "related party"? - [ ] An independent contractor - [ ] A third-party supplier - [x] Subsidiary company - [ ] A random customer > **Explanation:** Subsidiary companies are typically considered related parties due to common control. ### How does non-disclosure of related party transactions impact a company? - [x] Regulatory fines and loss of stakeholder trust - [ ] Increased audit ratings - [ ] Higher valuation in the stock market - [ ] Enhances financial privacy > **Explanation:** Non-disclosure can lead to regulatory fines, potential legal consequences, and loss of stakeholder trust, damaging the company's reputation. ### What kind of relationship typically validates a transaction as a "related party transaction"? - [ ] Any transaction with significant financial value - [x] Transactions involving persons or entities with prior relationships or common control - [ ] Transactions conducted in the same industry - [ ] Transactions that are infrequent or rare > **Explanation:** Related party transactions involve persons or entities with pre-existing relationships or common control. ### In the context of related party transactions, what does “significant influence” imply? - [ ] Financial dependency - [ ] Contractual agreements - [x] Power to participate in financial and operating policy decisions - [ ] Ownership of a minority shareholding > **Explanation:** Significant influence involves the power to participate in the financial and operating policy decisions of the entity. ### Why is it crucial to maintain transparency on related party transactions? - [ ] To avoid extra audit fees - [ ] To increase market share - [x] To ensure fairness and avoid conflicts of interest - [ ] To streamline corporate operations > **Explanation:** Transparency helps ensure fairness, detect conflicts of interest, and maintain stakeholder trust in financial reporting. ### When are transactions between government-related entities typically required to be disclosed as related parties? - [ ] Always - [ ] Only if it affects profit margins - [x] Rarely, as these transactions are often exempt from mandatory disclosure - [ ] Only if requested by shareholders > **Explanation:** Generally, transactions between government-related entities are exempt from mandatory disclosure requirements. ### Key management personnel can be considered related parties. True or False? - [x] True - [ ] False > **Explanation:** Key management personnel are considered related parties due to their significant role and influence over the entity.

Thank you for using this educational resource on related party transactions, offering both theoretical knowledge and practical exercises to enhance your understanding. Keep refining your financial expertise!

Tuesday, August 6, 2024
Relationship Banking
Related Party Transaction
Accountants' Report January 1, 1
Arm's Length January 1, 1
Close Family January 1, 1
Geographic Segment January 1, 1
Information Inductance January 1, 1
Summary Financial Statement January 1, 1

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.