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A related-party transaction is a transfer or arrangement between an organization and a person or entity connected to it through control, significant influence, key management, family relationships, or group affiliation. The connection can affect the deal even when the price looks ordinary. That is why the important questions are not only “How much was paid?” but also who benefited, how the terms were set, who reviewed the conflict, and what the arrangement commits the organization to do.
Related-party status does not prove wrongdoing. It identifies a situation in which normal market checks may be weaker and users of financial statements may need more context. Disclosure rules, approval duties, thresholds, and timing vary by jurisdiction and reporting framework, so an SEC registrant, an IFRS-reporting group, and a private company cannot automatically apply the same test.
What makes a transaction related-party?
The relationship is the defining feature. A transaction can involve cash, goods, services, loans, guarantees, leases, asset transfers, management arrangements, or an obligation to do something later. Under IAS 24, a transaction is a transfer of resources, services, or obligations regardless of whether a price is charged.
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Potential related parties include a parent, subsidiary, fellow subsidiary, associate, or joint venture in the circumstances specified by the applicable standard. They can also include directors, executives and other key management personnel, people who control or significantly influence the entity, and specified close family members. A company owned by a director or an executive may therefore be relevant even when the company, rather than the individual, signs the contract.
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Why an ordinary-looking deal can still matter
Relationships can influence access to opportunities, timing, negotiation leverage, credit, guarantees, or the decision to proceed at all. A lease may be priced near a market rate but still create a governance issue if the vendor is controlled by a director. A service can be provided without an invoice and still be a transfer that must be considered. The absence of a cash payment does not by itself remove the relationship from analysis.
Related-party status is not a finding of misconduct
Groups often buy from subsidiaries, executives may receive compensation approved under a normal plan, and a company may use a specialist supplier connected to a founder. Those arrangements can be legitimate. The risk is that the relationship may weaken independent bargaining or provide a benefit unavailable to other investors. The review should therefore test purpose, terms, conflicts, approval, continuing commitments, and disclosure rather than assume either impropriety or fairness.
Why disclosure exists
The IFRS Foundation states the purpose of IAS 24 this way: “The objective of IAS 24 is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties.”
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SEC disclosure for U.S. registrants
For a registrant subject to the general Securities and Exchange Commission Item 404(a) test, disclosure generally covers transactions since the beginning of the last fiscal year, or currently proposed transactions, involving the registrant when the amount exceeds $120,000 and a related person has or will have a direct or indirect material interest. The rule contains definitions, exceptions, and filer-specific provisions; the dollar figure is not a substitute for reading the current rule and the registrant’s filing instructions.
The $120,000 figure is reflected in SEC material and staff interpretations dating from 2006 and earlier. Because rules and instructions can change, a company should verify the current Item 404 text before filing. Smaller reporting companies have a specific Item 404(d) treatment, so filer status matters.
Policy disclosure under Item 404(b)(1)
Item 404(b)(1) also calls for disclosure of the policies and procedures used to review, approve, or ratify transactions of the type that would be reportable under paragraph (a). That policy disclosure can be required even when no reportable transaction occurred during the period.
Why classification requires judgment
SEC staff interpretations illustrate that close family relationships may fall within the related-person definition and that compensation paid to a director’s child can be reportable in some circumstances. The staff has also cautioned that a lease from a director-owned company is not automatically exempt because management solicited proposals and selected the vendor after an analysis. A qualifying competitive-bid exception requires more than an informal comparison.
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IFRS IAS 24 disclosure
IAS 24 is a financial-statement disclosure standard, not an SEC proxy-statement threshold and not a universal approval code. When a related-party transaction occurs, an IFRS reporter generally explains the relationship and provides information about transactions, outstanding balances, and commitments needed to understand their potential effect. IAS 24 also requires key-management compensation to be disclosed in total and by category.
Its framing is deliberately broad. The analysis covers transfers of resources, services, or obligations whether or not a price is charged, and it can apply to relationships within a corporate group as well as to individuals. A company should map the relationship first, then identify the transactions, balances, guarantees, and commitments that flow from it.
How international requirements differ
There is no single worldwide rule for timing, materiality, approval, or shareholder involvement. The OECD Corporate Governance Factbook 2025 reports that, among its surveyed jurisdictions, 90% (47 jurisdictions) used IAS 24 or a similar local standard for periodic disclosure in 2024. The same survey reports immediate disclosure of material related-party transactions in 94% of jurisdictions and board-approval requirements for significant or non-routine transactions in 87%.
These are survey findings for the jurisdictions covered by the Factbook, not universal legal requirements for every company. Local company law, securities regulation, stock-exchange rules, accounting standards, and a company’s constitutional documents can produce different outcomes. A cross-border group should identify the rule for each entity and transaction rather than export one country’s threshold to another.
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Disclosure versus approval: two different questions
Disclosure asks what investors, creditors, or other financial-statement users must be told. Approval asks who may authorize the arrangement and what conflict safeguards are needed before it proceeds. A transaction may require internal approval even when it falls below a public-disclosure threshold, and a disclosure obligation does not automatically tell you which committee or shareholder must approve it.
The comparison points that determine the applicable rule
| Comparison point | Questions to answer |
|---|---|
| Framework and jurisdiction | Is the entity reporting under SEC rules, IFRS, another accounting standard, company law, or an exchange rule? |
| Entity or filer category | Is it a general SEC registrant, a smaller reporting company, a private company, a listed subsidiary, or another category with special treatment? |
| Related-person definition | Does the rule cover control, significant influence, key management, family, group entities, or another connection? |
| Threshold and materiality | Is there a stated amount, a qualitative materiality test, or both? Are exceptions available? |
| Timing | Is disclosure periodic, immediate, proposed-transaction reporting, or required when a balance or commitment remains outstanding? |
| Required content | Must the filing describe the parties, purpose, amount, terms, pricing method, balances, guarantees, or commitments? |
| Approval authority | Does an audit committee, independent directors, the board, or shareholders have a role? |
What a useful disclosure should explain
Materiality is not a reason to provide only a number. A reader needs enough context to understand the economic substance and the continuing exposure.
- Identify the parties and relationship. State the legal entities or individuals involved and explain the control, influence, management, family, or group connection.
- Describe the transaction and business purpose. Explain what was purchased, sold, borrowed, leased, guaranteed, or promised, and why the company entered the arrangement.
- Give amounts and continuing obligations. Include the transaction amount, outstanding balance, payment terms, maturity, guarantees, commitments, and other information required by the applicable framework.
- Explain how terms were set. Describe the pricing method, comparable bids, independent valuation, negotiated process, or other evidence. Do not label terms “arm’s length” or “fair” without explaining the basis.
- Describe review and conflict handling. Identify the committee or directors who reviewed the matter, who recused themselves, and how disinterested reviewers reached their decision.
- Connect the arrangement to financial and business risk. Explain effects on profit, assets, liabilities, liquidity, independence, concentration of suppliers or customers, and future commitments.
The SEC Financial Reporting Manual notes that, where material, MD&A may need to supplement Item 404 with the business purpose, parties, pricing method, fairness assessment, and ongoing contractual or other commitments. It also cautions that a related-party transaction should not be presumed to occur on arm’s-length terms simply because the contract appears commercial.
A sound review and approval process
The following controls are practical governance measures. Exact duties depend on the jurisdiction, entity type, governing documents, and applicable filing rules.
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- Maintain a relationship register. Keep current information on directors, officers, key management, controlling owners, close family relationships where relevant, group entities, associates, and joint ventures.
- Require early certification. Ask directors, officers, employees involved in procurement, and transaction beneficiaries to disclose potential conflicts before negotiations or commitments begin.
- Screen the proposed arrangement. Compare the parties and transaction against the applicable related-person definition, thresholds, exceptions, and proposed-transaction rules. Include non-cash transfers and commitments.
- Route it to disinterested reviewers. A conflicted director or executive should not control the approval. Send the matter to the designated audit committee, independent directors, board, or other authorized body.
- Document alternatives and economics. Record the business purpose, alternatives considered, bids or valuation work, proposed price, payment terms, guarantees, the related person’s interest, and the expected benefit to the company.
- Record the decision. Minutes should identify participants, recusals, questions asked, evidence reviewed, conditions imposed, and the approval or rejection.
- Monitor after approval. Track renewals, amendments, balances, guarantees, milestones, covenants, and cumulative amounts so a series of smaller arrangements is not viewed in isolation.
- Reassess reporting. Update financial-statement notes, SEC disclosures, MD&A, or other reports when amounts, relationships, terms, or materiality change.
Factors a committee may weigh
A public-company policy filed with the SEC illustrates factors an audit committee may consider: the benefit to the company; commercial reasonableness; transaction value and materiality to both the company and the related person; the nature and extent of the related person’s interest; possible effects on director independence; and actual or apparent conflicts. That policy is an example, not a universal legal checklist.
Common risks and warning signs
Terms that lack independent market checks
Pricing, credit, rent, service levels, collateral, and termination rights may be more favorable to one side than an unrelated customer or supplier would receive. Missing bids, valuations, or documented alternatives make the conclusion harder to test.
Benefits hidden in group complexity
Layered ownership, special-purpose entities, nominee arrangements, and cross-holdings can obscure who controls a counterparty. OECD guidance warns that complex group structures can make related-party activity less visible and recommends disclosure of relationships and the nature, value, and number of transactions.
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Threshold avoidance by splitting transactions
Several contracts with the same related party may be economically one arrangement. Splitting them to remain below a threshold can defeat the purpose of disclosure and create a control failure. Review cumulative and connected transactions, not only individual purchase orders.
Continuing commitments and guarantees
A transaction that looks small in the current period may expose the company to years of lease payments, a loan balance, a guarantee, renewal rights, or termination costs. Outstanding balances and commitments can be as important as the initial amount.
Incomplete records
If the company cannot show who negotiated, who approved, what alternatives existed, or why the terms benefit the company, later disclosure and audit work become more difficult. Missing documentation is itself a governance warning sign.
Practical questions for investors and directors
- Who is the counterparty, and exactly how is that person or entity connected to the company?
- What would the company have done if the related party were unavailable?
- Are there independent bids, valuations, or comparable contracts?
- Who benefited, who negotiated, and who approved?
- Were any directors or executives recused?
- What balances, guarantees, renewals, or commitments remain?
- Could a series of transactions be connected even if each item is below a stated threshold?
- Does the filing explain the relationship and pricing method, or merely report a dollar amount?
Bottom line for applying the rules
Start with the relationship, not the invoice. Then identify every transfer, service, obligation, balance, guarantee, and commitment; determine the governing framework and filer category; apply its definitions, thresholds, exceptions, and timing; and document independent review. For investors, the most informative disclosure explains the parties, purpose, economics, approval, conflicts, and continuing exposure. For boards and finance teams, reliable registers, early certifications, disinterested approval, cumulative monitoring, and clear records are the safeguards that make the resulting disclosure credible.
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