Related-Party Disclosure

Transactions with related parties may not be carried out on the same terms as transactions with independent parties. A company might, for example, rent offices from its chief executive's family company or sell goods to a business owned by a major shareholder. Disclosure lets readers judge whether such dealings may have affected the accounts.

Accounting standards require companies to disclose the nature of related-party relationships, the amounts of transactions, outstanding balances and any guarantees. Pay for key management, such as directors, is usually disclosed too. IFRS sets out these rules in IAS 24, and US GAAP has similar requirements.

For example, a company's notes might state that it paid 150,000 in rent during the year to a property company owned by one of its directors, with no balance outstanding at year-end.

Investors and auditors pay close attention to related-party disclosures, because undisclosed related-party dealings have been a feature of several accounting scandals. Stock exchange rules may also require independent approval of large related-party transactions.