A related-party transaction is a transfer or arrangement between a company and a person or organization connected to it through control, significant influence, key management, family ties, or group affiliation. The connection can affect the deal even when the price looks ordinary, so investors and directors need to examine the relationship, purpose, terms, approval, and disclosure—not just the amount paid.
Disclosure and approval rules depend on the jurisdiction, reporting framework, and type of entity. U.S. public-company reporting under SEC Item 404, financial-statement reporting under IFRS IAS 24, U.S. GAAP presentation, and national corporate-law requirements are related but separate regimes. No single dollar threshold or approval procedure applies everywhere.
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What is a related-party transaction?
A related-party transaction occurs when an entity transfers resources, services, or obligations to, from, or for the benefit of a party connected to it. The connection may arise from ownership, control, significant influence, management responsibility, family relationships, or membership in the same corporate group.
IAS 24 uses a deliberately broad concept. A transaction can qualify whether or not a price is charged. That means a free service, a guarantee, an asset transfer, a management arrangement, or a commitment may be relevant even when no cash changes hands. A transaction can also be related-party activity when it is part of the company’s normal business; “ordinary course” does not erase the relationship or the need to consider disclosure.
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Relationships that commonly create related-party status
- A parent, subsidiary, or fellow subsidiary of the reporting entity.
- An associate or joint venture in circumstances covered by the applicable reporting framework.
- A person who controls the company, has significant influence over it, or is a member of its key management personnel.
- A close family member of a person with control, significant influence, or key management responsibility, when the applicable rule includes that relationship.
- An entity controlled or significantly influenced by one of those people, or in which such a person has a material interest.
- A company, trust, partnership, or other vehicle whose ownership or governance links it to the reporting entity.
Examples beyond a simple insider payment
- A company leases office space from a director-owned property company.
- A parent provides a loan, guarantee, staff, software, or shared-service arrangement to a subsidiary.
- An executive’s family member receives compensation from the company under circumstances covered by the governing rule.
- A controlled entity sells inventory, intellectual property, equipment, or services to another group entity.
- A controlling shareholder receives a personal guarantee, a favorable repayment arrangement, or a company-funded obligation.
- A company assumes a continuing commitment for a related party even though the commitment has not yet been drawn.
The key question is not only “Who received the money?” It is “Could the relationship have affected access, timing, bargaining power, price, risk allocation, or the decision to enter the arrangement?”
Why related-party transactions deserve attention
A related-party transaction is not automatically improper. Groups often share employees, financing, technology, property, and procurement for legitimate operational reasons. An executive may also have a genuine business reason to sell an asset or provide a service to the company.
The risk is that the relationship can weaken the independent market checks that normally shape a deal. A controlling person may obtain a benefit unavailable to other shareholders, or a company may accept terms it would reject from an unrelated vendor. Investors may then struggle to determine whether reported revenue, expenses, assets, liabilities, or cash flows reflect independent commercial conditions.
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Weak controls create additional problems. If ownership structures are complex, a company may fail to recognize that two entities are connected. If a transaction is split into several smaller contracts, each part may appear below an internal or legal threshold even though the arrangement is economically one deal. Incomplete documentation can also make it impossible to reconstruct who proposed the transaction, what alternatives were considered, or why the terms were accepted.
What the relationship can affect
- Price: the amount charged, paid, forgiven, or deferred may not reflect competitive conditions.
- Timing: a transaction may be accelerated, delayed, or renewed to benefit a related party.
- Risk: guarantees, indemnities, collateral, termination rights, and credit terms may shift risk to the company.
- Performance reporting: sales, purchases, loans, or asset transfers can affect profit, debt, margins, and liquidity.
- Governance: conflicted directors or officers may influence approval or receive information unavailable to other decision-makers.
- Continuing obligations: leases, service contracts, commitments, and outstanding balances can remain material after the initial transaction.
How the principal disclosure frameworks differ
Before deciding whether a transaction must be disclosed, identify the governing jurisdiction, the entity’s filer category, the accounting framework, the reporting document, and the applicable definition of “related person” or “related party.” A threshold in one regime does not replace the analysis required by another.
U.S. SEC Item 404 for registrants
For a registrant subject to the general SEC Item 404(a) test, disclosure generally covers a transaction since the beginning of the last fiscal year, or a currently proposed transaction, involving the registrant when the amount exceeds $120,000 and a related person has or will have a direct or indirect material interest. The figure is associated with the SEC statement and staff interpretations cited for this topic; that statement dates from 2006, and several interpretations are older. Companies must verify the current Item 404 text, exceptions, definitions, and filing-specific instructions before relying on the amount.
The threshold is not a stand-alone safe harbor. The rule contains exceptions and filer-specific provisions, and the analysis depends on whether the related person’s interest is material and whether the person falls within the applicable definition. Smaller reporting companies have specific Item 404(d) treatment, so their requirements should be checked separately rather than assumed to match the general test.
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Item 404(b)(1) also requires disclosure of policies and procedures for reviewing, approving, or ratifying transactions of the type that would be reportable under paragraph (a), even if the company reports no such transaction for the period. A company therefore needs a functioning policy, not merely a list of transactions that crossed a dollar amount.
Judgment under SEC interpretations
SEC staff interpretations show why classification requires facts and judgment. Close family relationships may fall within the related-person definition, and compensation paid to a director’s child can be reportable in some circumstances. Conversely, a transaction is not automatically exempt merely because the company solicited proposals. The staff has cautioned that leasing equipment from a director-owned company is not necessarily outside the rule simply because the company compared vendors; a qualifying competitive-bid process requires more than an informal comparison.
These examples are illustrations, not a substitute for the current rule. A registrant should involve securities counsel and its reporting team when the relationship, materiality, or exception is uncertain.
IFRS IAS 24
IAS 24 has a financial-statement disclosure objective rather than the same proxy-statement threshold used by SEC Item 404. The IFRS Foundation describes the objective this way:
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Where a transaction occurred, IAS 24 disclosures explain the relationship and provide information about transactions, outstanding balances, and commitments needed to understand their potential effect. The standard’s relationship categories can include parents, subsidiaries, fellow subsidiaries, associates, and joint ventures in specified circumstances. Its framing also covers transfers of services and obligations and transactions for which no price is charged.
IAS 24 requires disclosure of key management personnel compensation in total and by category. That requirement should not be mistaken for an SEC Item 404 test or a universal board-approval rule. IAS 24 tells financial-statement users about relationships and effects; it does not by itself prescribe every company’s internal approval route.
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U.S. GAAP and other U.S. requirements
U.S. GAAP contains related-party presentation and disclosure guidance, including ASC 850, but the accounting analysis is separate from SEC proxy-statement requirements. A public company may need to satisfy both its accounting disclosures and Item 404, while a private company may face accounting, lender, tax, corporate-law, or contractual requirements without being an SEC registrant. The applicable standard, entity type, and financial-statement basis must be identified before conclusions are drawn.
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International variation
Corporate-law and securities rules differ substantially across jurisdictions. The OECD Corporate Governance Factbook 2025 reports the following findings from its surveyed jurisdictions, using 2024 jurisdiction data where stated:
| Survey finding | What it means | Qualification |
|---|---|---|
| 90% (47 jurisdictions) used IAS 24 or a similar local standard for periodic disclosure in 2024 | Periodic financial-reporting practice is often based on IAS 24 or a local analogue. | OECD Corporate Governance Factbook 2025 survey result; not a rule for every country or company. |
| 94% required immediate disclosure of material related-party transactions | Many surveyed systems require prompt disclosure when a transaction is material. | OECD 2025 Factbook finding based on surveyed jurisdictions and reported 2024 data; timing and definitions vary. |
| 87% applied board-approval requirements for significant or non-routine related-party transactions | Board involvement is common for major or unusual transactions. | OECD 2025 Factbook survey statistic, not a universal approval obligation. |
Some jurisdictions also require shareholder approval, independent-director review, immediate market announcements, or additional disclosures. The comparison must therefore cover more than a dollar threshold: definitions, exceptions, materiality, timing, approval authority, and required content all matter.
What informative disclosure should explain
Disclosure should let a reader understand both the transaction and the influence created by the relationship. A bare line showing an amount owed may be technically incomplete if it does not explain why the arrangement exists or how its terms were determined.
| Disclosure question | Information to provide where material or required |
|---|---|
| Who are the parties? | Names or clear descriptions of the company, related person or entity, ownership or management connection, and any relevant family or group relationship. |
| What happened? | The asset, service, loan, guarantee, lease, compensation, commitment, or other arrangement, including its start date and duration. |
| Why did the company enter it? | The business purpose, expected benefit, operational need, and alternatives considered. |
| How large is it? | Transaction amount, outstanding balance, amounts paid or received, commitments, guarantees, and relevant maximum exposure. |
| How were terms set? | Pricing method, repayment terms, interest, collateral, termination rights, and any comparison with unrelated transactions or bids. |
| Who reviewed it? | Committee or board involved, conflicted individuals excluded, approvals obtained, and the reasoning recorded. |
| What is the continuing effect? | Impact on financial statements, liquidity, risk, independence, future obligations, and renewal or termination conditions. |
The SEC Financial Reporting Manual indicates that, when material, MD&A may need to supplement Item 404 with the arrangement’s 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 be at arm’s length merely because the company uses that label. Competitive-market conditions may not exist.
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Terms should be called “fair,” “market,” or “arm’s length” only when the company can explain the evidence and method supporting that conclusion. Evidence might include independent valuations, multiple comparable bids, market-rate data, an independent committee’s analysis, or a documented explanation of why no reliable comparison exists.
How a sound review and approval process works
The exact procedure depends on the entity and jurisdiction, but the following sequence gives finance, legal, directors, and employees a practical control framework.
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- Identify the relationship early. Maintain current ownership, control, significant-influence, key-management, and family-relationship information. Require directors, officers, and relevant employees to disclose changes promptly.
- Capture the proposed arrangement. Record the parties, transaction type, amount, timing, duration, commitments, guarantees, and the person who benefits. Include non-cash transfers and arrangements with no stated price.
- Check the governing rules. Determine whether SEC Item 404, IAS 24, U.S. GAAP, exchange rules, corporate law, a lender covenant, or another requirement applies. Confirm filer status, reporting period, exceptions, and materiality tests.
- Separate conflicted decision-makers. The related person and any director, officer, or employee with a conflicting interest should disclose the conflict and avoid influencing the disinterested review, subject to the entity’s governing documents and law.
- Test the business purpose and alternatives. Ask why the company needs the arrangement, whether an unrelated supplier or financing source was considered, and whether the same objective could be achieved on better or less risky terms.
- Analyze economics and fairness. Compare price, service levels, credit, security, warranties, termination rights, and exposure with available market evidence. If no comparable market exists, document the method used and its limitations.
- Obtain the required approval. Route the matter to the audit committee, independent directors, full board, shareholders, or another authority specified by the applicable rule or policy. Approval should occur before signing whenever practicable.
- Document the decision. Keep the relationship disclosure, alternatives, valuation or bid evidence, conflict recusal, questions asked, approval vote, conditions, and reasons for the decision in the minutes or transaction file.
- Disclose accurately. Coordinate legal, finance, accounting, investor-relations, and filing teams so that the same facts appear consistently in financial statements, proxy materials, periodic reports, and market announcements where required.
- Monitor after approval. Track payments, balances, covenants, renewals, amendments, guarantees, changes in ownership, and continuing commitments. Reassess when the relationship or economics changes rather than treating approval as permanent.
What a related-party transaction policy should include
A policy should be usable before a transaction is signed, not just a definition copied into a filing. At minimum, it should address:
- Scope and definitions: related party, related person, close family member, control, significant influence, key management, transaction, commitment, and materiality.
- Covered arrangements: sales, purchases, services, leases, loans, guarantees, compensation, asset transfers, charitable contributions, employment arrangements, and no-charge or non-cash transfers.
- Identification duties: annual questionnaires, onboarding disclosures, event-driven updates, ownership records, and procedures for employees to report a suspected conflict.
- Submission requirements: the information a proposal must contain, including purpose, terms, alternatives, beneficiary, amount, duration, and expected accounting treatment.
- Review authority: who screens transactions, when an audit committee or independent directors must act, and when board or shareholder approval is needed.
- Recusal rules: how conflicted directors, officers, and employees leave the discussion and vote, while preserving enough information for a valid decision.
- Emergency and discovered transactions: escalation, interim controls, ratification limits, and corrective disclosure when an arrangement was not submitted in advance.
- Documentation and retention: required minutes, analyses, bids, valuations, approvals, amendments, and retention periods.
- Ongoing monitoring: owners for tracking balances, commitments, renewals, guarantees, and changes in related-party status.
- Reporting coordination: a timetable and responsibility matrix linking the policy to financial statements, SEC filings, proxy disclosures, and local reporting.
A public-company policy described in an SEC filing illustrates factors an audit committee may weigh: benefit to the company, commercial reasonableness, transaction value and materiality to both the company and related person, the nature and extent of the related person’s interest, possible effects on director independence, and actual or apparent conflicts. Those factors are a useful example, not a universal legal checklist.
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Terms that are unusually favorable to the related party
Warning signs include below-market sales, above-market purchases, interest-free or unsecured loans, unusually long payment periods, automatic renewals, broad guarantees, or termination rights that protect only one side. A favorable term is not proof of misconduct, but it requires a clear business explanation and supporting evidence.
Conflicted approval
Risk rises when the beneficiary sets the price, controls the information presented to the board, participates in the vote, or appoints the reviewer. Minutes should show who disclosed the conflict, who recused themselves, and which disinterested decision-makers approved the arrangement.
Fragmented or rapidly changing arrangements
Several contracts with the same related party may be one economic arrangement. Splitting purchases, renewals, or payments to avoid a threshold can undermine both governance and disclosure. OECD guidance specifically warns against structuring transactions to evade thresholds.
Complex ownership and hidden connections
Layered subsidiaries, nominee owners, trusts, joint ventures, and family-controlled entities can make relationships hard to detect. Companies need reliable ownership data, declarations from insiders, and reconciliation between procurement, accounts payable, treasury, legal, and corporate-secretarial records.
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Calling a deal “arm’s length,” “market rate,” or “commercially reasonable” does not establish the conclusion. Readers should look for the comparison set, valuation method, bid process, assumptions, and explanation of any difference from unrelated transactions.
How investors and directors can evaluate a disclosed transaction
Use the following questions when reading a filing, annual report, board paper, or committee package:
- Can you identify every party and the exact relationship?
- Is the stated business purpose specific enough to explain why this counterparty was chosen?
- Does the amount include outstanding balances, guarantees, commitments, and renewals, or only cash paid during the period?
- Are pricing, interest, security, payment, and termination terms described?
- Is there evidence of bids, valuation, benchmarking, or another fairness analysis?
- Were conflicted people excluded from review and voting?
- Does the arrangement create continuing exposure or dependence on the related party?
- Could several transactions be parts of one arrangement?
- Are the accounting disclosure, SEC disclosure, and governance approvals consistent?
- What would change if the related party were replaced by an unrelated counterparty?
An unexplained relationship, missing commitment, vague fairness statement, or unexplained deviation from market terms does not by itself prove wrongdoing. It does indicate that the company’s disclosure and control process deserves closer examination.
Do I have to disclose a related-party transaction?
There is no universal yes-or-no test. Start with the entity’s jurisdiction and status, then apply the relevant reporting framework and document the result.
- SEC registrant: check current Item 404 definitions, the general $120,000 test where applicable, material-interest analysis, exceptions, filer category, and policy-disclosure requirements. Do not rely on the historical threshold without verifying current instructions.
- IFRS reporter: apply IAS 24 to identify related parties and disclose relationships, transactions, balances, commitments, and key-management compensation as required. IAS 24 is not an SEC proxy threshold.
- U.S. GAAP reporter: evaluate ASC 850 and other applicable accounting guidance separately from securities-law disclosure.
- Other jurisdiction or private entity: check local company law, listing rules, securities regulations, financial-reporting standards, financing agreements, and constitutional documents. OECD survey percentages describe broad practice, not the law applicable to a particular company.
When classification or materiality is uncertain, obtain advice from qualified securities, corporate, and accounting professionals in the relevant jurisdiction. The cost of early review is generally lower than correcting a filing, renegotiating an undisclosed commitment, or repairing investor confidence after a conflict becomes public.
Who approves related-party transactions?
Approval authority is determined by law, listing rules, the company’s charter, and its policy. Common approaches require a disinterested audit committee or independent directors to review the transaction, with escalation to the full board or shareholders for significant, non-routine, or especially conflicted matters. Some jurisdictions require immediate disclosure or shareholder approval even when a company’s internal policy would otherwise permit committee approval.
The related person should not be the sole approver. A sound record identifies the independent reviewers, the information they considered, any recusal, the vote or consent, conditions imposed, and the monitoring plan. Approval does not eliminate disclosure duties and does not make unfavorable terms fair retroactively.
Quick Recap
Practical takeaways
- Related-party status is based on relationships and influence, not only on family members or direct insider payments.
- Under IAS 24, a transfer of services, resources, or obligations can qualify even when no price is charged.
- SEC Item 404 and IAS 24 serve different purposes; do not collapse them into one threshold.
- Useful disclosure explains the parties, purpose, amount, terms, pricing method, fairness analysis, approvals, and continuing commitments.
- Related-party activity is not automatically abusive, but weak market checks and conflicted decisions increase risk.
- Reliable relationship data, disinterested review, documented reasoning, and post-approval monitoring are the core safeguards.
- Complex group structures and split transactions can hide exposure, so controls must look across the entire relationship and arrangement.
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