Related-Party Transaction

Related-Party Transactions

Related-party transactions are accounting entries involving parties related to the reporting company, such as subsidiaries, joint ventures, or key management personnel. These transactions are required to be disclosed in the company’s financial statements to ensure transparency and consistency.

Types of Related-Party Transactions:

• Subsidiaries: Controlled companies that are treated as part of the reporting company’s own operations.
• Joint Ventures: Partnerships where the reporting company has control over a specific asset or operation.
• Key Management Personnel: Employees with significant influence over the company’s financial decisions.
• Other Related Parties: Companies or individuals with close relationships to the reporting company, such as suppliers, customers, or distributors.

Accounting Treatment:

• Arm’s Length Transactions: Transactions between related parties are treated at arm’s length, as if they were conducted with unrelated parties.
• Disclosure Requirements: Related-party transactions are disclosed in the notes to the financial statements, including the name of the related party, the type of transaction, and the amount involved.
• Elimination of Intra-Group Transactions: Transactions between subsidiaries or joint ventures are eliminated in consolidation.

Disclosure Requirements:

The following information about related-party transactions is required to be disclosed:

• The name of each related party.
• The relationship between each related party to the reporting company.
• The type of transaction with each related party.
• The amounts involved in each transaction.
• The cost of goods sold to related parties, if any.
• The amount paid to or received from related parties for services, if any.

Example:

A company with a subsidiary has a loan agreement of $100,000. This transaction would be disclosed in the notes to the financial statements as a related-party loan.

Additional Considerations:

• Related-party transactions can be complex and involve a wide range of factors.
• It is important to ensure that related-party transactions are treated appropriately and disclosed fully.
• Companies should have clear policies and procedures for identifying and managing related-party transactions.