Related-party transaction

In business, a related-party transaction is a transaction which takes place between two parties who hold a pre-existing connection prior to the transaction. An example is how a dominant shareholder may benefit from making one of their companies trade with another at advantageous prices. Related party transactions can be a reason for a Type II agency relationship (conflicts among controlling and non-controlling shareholders), as they are not necessarily in the best interest of minority shareholders.

In commercial law, special regulations may apply restricting related-party transactions, such as Part 2E of Australia's Corporations Act 2001, which requires companies to seek approval from their members for such a transaction to take place.

International Financial Reporting Standard IAS 24 requires companies to disclose related-party transactions in their financial statements.

International Financial Reporting Standards

Under International Financial Reporting Standards, disclosure of related-party relationships and transactions is governed by IAS 24 Related Party Disclosures. The standard does not prescribe how such transactions are measured, but requires entities to disclose information necessary to draw attention to the possibility that their financial position and profit or loss may have been affected by related parties. It is organised as follows (paragraph numbers refer to the current version of IAS 24, as revised in 2009 and including later amendments):

Structure of IAS 24 Related Party Disclosures
Part Content Paragraphs
General Objective 1
Scope 2–4
Purpose of related party disclosures 5–8
Definitions (related party, related party transaction, close members of the family, key management personnel, government-related entity) 9–12
Disclosures Relationships between parents and subsidiaries 13–16
Key management personnel compensation, and related party transactions and outstanding balances 17–24
Government-related entities (partial exemption) 25–27
Effective date and transition 28 ff.
Withdrawal of IAS 24 (2003) 29

Academies (England)

In England, there are restrictions and notification requirements in place regarding related-party transactions entered into by Academy Trusts. An online reporting process for declaring or seeking approval is in place. Academies must seek approval from the Education and Skills Funding Agency (ESFA) before they undertake any related-party transactions valued over £20,000. A review of related-party transactions for the 2012–2013 academic year identified 1,350 related party transactions involving 976 trusts. The vast majority of these were compliant with relevant guidance protecting public funds (the Academies Accounts Direction), but transactions at 17 trusts were found to be irregular or improper.

References

  1. 1 2 Hillier, David; Ross, Stephen; Westerfield, Randolph; Jaffe, Jeffrey; Jordan, Bradford (2013). Corporate Finance (2nd European ed.). Berkshire: McGraw-Hill Education. pp. 34–35. ISBN 9780077139148.
  2. ↑ Corporations Act 2001 (Cth), Part 2E
  3. ↑ "Related Party Disclosures (IAS 24)". IFRScommunity.com. 26 February 2020. Retrieved 2020-08-07.
  4. 1 2 "IAS 24 Related Party Disclosures". IFRS Foundation. Retrieved 10 November 2026.
  5. ↑ Education and Skills Funding Agency, Declare or seek approval for related-party transactions: summary guidance, updated 26 September 2019, accessed 27 December 2020
  6. ↑ Education and Skills Funding Agency, Academy trust financial returns, accessed 27 December 2020
  7. ↑ Education and Skills Funding Agency, ESFA introduces new arrangements for related party transactions, updated 4 April 2019, accessed 31 July 2022
  8. ↑ Education and Skills Funding Agency, Academies Accounts Direction, accessed 31 July 2022
  9. ↑ Education Funding Agency, Review of related-party transactions in academies, November 2014, accessed 31 July 2022