What Is the Critical of Related Party Transactions?

These are the transactions between related parties and associates (as defined under the law). It is a critical area and regulators exert great emphasis on strict regulation and adequate disclosure of such transactions. Reporting frameworks across the world require disclosure of transactions carried out with related parties during the period under review.

Identification of related parties:

Related party in relation to a company is an entity which has the ability to control the company or exercise significant influence over the company in making financial and operating decisions or vice versa and includes the following, namely:

  1. entities that directly or indirectly through one or more intermediaries control, or are controlled by, or are under common control with, the reporting company including holding companies, subsidiaries, and fellow subsidiaries;
  2. associates(an entity over which the investing company has significant influence);
  3. individuals owning, directly or indirectly, an interest in the voting power of the reporting company that gives them significant influence over the company, and close members of the family of any such individual;
  4. key management personnel, that is, persons having authority and responsibility for planning, directing, and controlling the activities of the reporting company including directors and officers of such company and close members of the families of such individuals;
  5. entities in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in clause (c) or (d) or over which such person is able to exercise significant influence including entities owned by directors or major shareholders of the reporting company and entities that have key management personnel in common with the reporting company;
  6. entities in which one or more of the directors or members of the governing board are appointed by the reporting company or vice versa;
  7. where one or more of the directors or members of the governing board of the entity as well as the reporting company are appointed by the same person or persons
  8. entities whose process of manufacture or business is wholly dependent on the use of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing, or specification relating to any patent, invention, model, design, secret formula or process, of which the reporting company is the owner or in respect of which the company has exclusive rights or vice versa;
  9. where more than half of the raw materials and consumables required in the process of manufacture carried out by an entity are supplied by the reporting company, or by persons specified by the company, or vice versa, and the prices and other conditions relating to the supply are influenced by the entity or the company; and
  10. where goods or articles manufactured or processed by an entity are sold or transferred to the reporting company or to persons specified by the company, or vice versa, and the prices and other conditions relating thereto are influenced by the entity or the company

Related party disclosures:

Related party disclosures are provided in order to enable users of financial statements to understand the volume and extent of related party transactions and the company’s reliance on its related party and vice versa.

If a related party is involved in the company’s investments, loans, advances, trade debts, trade creditors, or any asset or liability the amount needs to be disclosed separately. Similarly, all transactions entered during the year also need to be disclosed separately. Below are some examples of related party disclosures:

Disclosure of related party transactions

One thought on “What Is the Critical of Related Party Transactions?”

  1. Great article, very useful !!

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