Related-party transactions are easy to miss because they do not always look like ordinary purchases or sales. A parent company may provide finance staff without charging a subsidiary. A director’s family business may supply equipment. A group entity may guarantee another company’s borrowing, or an owner may allow the business to use property at no cost. These arrangements can affect financial statements, governance and investor understanding even when no cash changes hands.
For financial controllers, the central challenge is not simply preparing a year-end related-party note. It is maintaining a reliable process to identify relationships, capture transactions throughout the year, assess the correct accounting treatment, obtain independent approval and support disclosures. The definitions and accounting consequences differ between US GAAP, IFRS and Canadian ASPE, so one global spreadsheet should not be treated as a substitute for framework-specific analysis.
1. Build a complete related-party register
Start with a controlled register of related persons and entities. Include parent companies, subsidiaries, entities under common control, associates and joint ventures, principal owners, directors, executive management and relevant family or controlled entities as required by the reporting framework. The register should explain why each party is considered related, the effective dates of the relationship and the reporting entities affected.
Do not rely on the legal-entity chart alone. A company owned by a director’s close family member, a management company providing key management personnel services, or an entity significantly influenced by an owner may require analysis even if it does not appear in the formal consolidation structure. IFRS Foundation’s IAS 24 overview emphasizes the substance of relationships and includes people, close family members and entities such as parents, subsidiaries, associates and joint ventures.
2. Obtain annual declarations—and refresh them when circumstances change
Ask directors, officers, key management personnel and other relevant individuals to complete a periodic related-party and conflict-of-interest declaration. The form should request the information needed by the applicable accounting and governance policies, not simply ask whether the individual has a conflict. Include changes in ownership, directorships, family relationships, outside business interests, loans, guarantees and entities controlled or significantly influenced by the individual.
Annual certifications are a baseline, not a complete control. Require updates when a director joins, an executive changes role, an acquisition closes, a new joint venture is formed or a known relationship changes. Have the corporate secretary or governance function maintain the official director and ownership records, while finance reconciles that information to its reporting register.
3. Search for transactions beyond the accounts payable ledger
A related-party population will be incomplete if finance searches only supplier invoices. Build detection procedures across procurement, accounts payable, accounts receivable, treasury, payroll, legal, tax, fixed assets, leases, sales, corporate cards and the consolidation system.
Look for purchases and sales, management fees, shared-service allocations, rent, loans, guarantees, asset transfers, leases, expense reimbursements, commitments and services provided without charge. A transaction can be relevant even when the accounting system records no amount. Under US GAAP, ASC 850 requires disclosure of material related-party transactions and includes transactions to which no or nominal amounts were ascribed. IAS 24 similarly defines a transaction as a transfer of resources, services or obligations regardless of whether a price is charged.
4. Separate relationship identification from transaction approval
Being a related party does not automatically mean a transaction is prohibited. It does mean that the organization should understand the relationship, evaluate the business purpose and apply the required approval and disclosure controls. A transaction proposed by an executive with an interest in the counterparty should not be approved solely by that executive or by someone who reports directly to them without independent review.
Establish approval routes based on transaction type, value, risk and the company’s governance documents. Require conflicted individuals to disclose the interest and recuse themselves where appropriate. Retain evidence of the independent decision, including board or committee minutes where required. For public companies, SEC Regulation S-K Item 404 also requires disclosure of policies and procedures for review, approval or ratification of reportable related-person transactions.
5. Document the commercial rationale and terms
For each material arrangement, retain the contract, business purpose, scope of goods or services, pricing method, payment terms, duration, renewal clauses, guarantees and approval evidence. If the arrangement is described as being on terms equivalent to those available from unrelated parties, keep support such as comparable bids, independent quotations or a documented benchmarking analysis.
Do not assume that a related-party transaction is at arm’s length merely because the invoice uses a market-looking rate. Under ASC 850, related-party transactions cannot be presumed to have been carried out on an arm’s-length basis; a representation that terms are equivalent to arm’s-length terms should not be made unless it can be substantiated. This is a useful discipline even for private companies that are not subject to SEC reporting.
6. Apply the correct measurement rules under the reporting framework
US GAAP Topic 850 is primarily a disclosure topic; it does not provide a universal measurement model for every related-party transaction. The controller must identify the relevant guidance for the underlying item—such as leases, debt, compensation, business combinations or asset transfers—and apply that guidance. FASB identifies the Accounting Standards Codification as the single official source of authoritative nongovernmental US GAAP.
IAS 24 is also principally a disclosure standard. Recognition and measurement are determined by the IFRS Standard applicable to the transaction. The IFRS Foundation’s IAS 24 summary explains the disclosure objective and the information about relationships, transactions, outstanding balances and commitments that users need.
Canadian private enterprises applying ASPE have specific measurement guidance in Section 3840 for related-party transactions, particularly transfers of non-financial items. Depending on the circumstances, an item may be measured at the carrying amount or exchange amount. Financial instruments require consideration of Section 3856. BDO Canada’s Section 3840 summary, updated July 2026, outlines the scope, definitions and measurement considerations. Do not import the US GAAP or IFRS treatment into an ASPE set of statements without analyzing the Canadian requirements.
7. Reconcile related-party balances and transactions by counterparty
Maintain a counterparty-level schedule of activity and balances. Reconcile sales, purchases, service charges, loans, interest, dividends, leases, receivables, payables and commitments to the general ledger and the counterparty’s records where available. Investigate differences in timing, foreign currency, disputed invoices, unmatched cash, accrued charges and manual journals.
For group entities, reconcile both sides of material balances before consolidation. A mismatch may indicate an omitted invoice, incorrect partner code, inconsistent cut-off or an agreement that was never documented. Keep a clear bridge from the related-party schedule to the financial statement note so that amounts can be traced in both directions.
8. Distinguish consolidated reporting from separate financial statements
Some transactions between entities within a consolidated group are eliminated in the consolidated financial statements. That does not mean they can be ignored in every reporting package. Separate financial statements, statutory accounts, lender reporting and local regulatory filings may have their own presentation and disclosure requirements.
Under US GAAP, ASC 850 does not require disclosure in consolidated or combined statements of transactions eliminated in preparing those statements. IAS 24, however, also requires disclosure of parent-subsidiary relationships, including the name of the parent and, if different, the ultimate controlling party, even where there have been no transactions. Maintain the group relationship data separately from the transaction ledger so that both relationship disclosures and transaction disclosures can be assessed.
9. Add a distinct SEC disclosure review for registrants
For SEC registrants, financial-statement disclosures under US GAAP are not the only consideration. Regulation S-K Item 404 has a separate related-person transaction disclosure requirement. As of November 2, 2026, the eCFR text provides a general threshold for transactions in which the amount involved exceeds $120,000 and a related person has or will have a direct or indirect material interest. Smaller reporting companies apply the lesser of $120,000 or one percent of average total assets for the last two completed fiscal years. Item 404 also addresses the required description of the related person, the nature and amount of the interest, and the registrant’s review, approval or ratification policies.
These SEC thresholds are not a substitute for the materiality assessment under ASC 850, and they do not apply to every private company. Maintain a separate SEC reporting checklist and confirm the current rule text for the filing period. The live eCFR text of Regulation S-K Item 404 is the appropriate reference for registrants.
10. Embed the process in ERP, close and disclosure controls
In SAP S/4HANA or another ERP, use controlled business-partner and entity master data to support identification, intercompany coding and reporting. Where the system does not have a dedicated related-party attribute, maintain a governed mapping that connects approved counterparty IDs to the related-party register. Restrict who can create or change the mapping and retain an audit trail.
At each close, run exception reports for transactions with registered counterparties, review new or changed vendors and customers linked to owners or management, inspect manual journals and reconcile related-party balances. Feed the results into a disclosure workpaper that records the relationship category, transaction type, period amount, closing balance, commitments, accounting treatment and reviewer sign-off. A spreadsheet can support the process, but it should have controlled access, version history and documented review.
Controller’s related-party control checklist
- Current register of related persons, entities, relationship basis and effective dates.
- Periodic declarations from directors, officers and other relevant personnel.
- Trigger-based updates for new appointments, ownership changes and reorganizations.
- Searches across AP, AR, payroll, treasury, legal, leases, procurement and manual journals.
- Independent review and approval, with conflicts and recusals documented.
- Contracts, commercial rationale, pricing evidence and commitment records.
- Framework-specific recognition, measurement and disclosure analysis.
- Counterparty-level reconciliation of transactions and outstanding balances.
- Separate assessment for consolidated, separate and SEC reporting requirements.
- ERP mapping controls, exception reporting and a reviewed disclosure workpaper.
Conclusion
A strong related-party process is built throughout the year, not reconstructed when the audit team asks for a list. Controllers should connect governance declarations, entity master data, transaction monitoring, independent approvals, accounting analysis and disclosure preparation. That discipline helps prevent omitted transactions, unsupported arm’s-length claims and late financial-statement adjustments—while giving management and auditors a clearer view of how relationships may affect reported results.
Disclaimer: This article is for general informational purposes only and is not accounting, legal or securities-law advice. Apply the authoritative requirements relevant to the reporting entity, jurisdiction and reporting period, and obtain qualified advice for specific transactions.
