Related party disclosures under the microscope
- Floyd Paguio
- 2 days ago
- 3 min read
IN today’s business environment, trust is becoming as important as profit. Investors, lenders, regulators and even employees want to know not just how much a company earns, but how it earns it. One accounting area now receiving renewed attention is related party disclosures — a topic governed by IAS 24.
Related party transactions are not illegal. In fact, they are common, especially in family-owned businesses, conglomerates and growing groups of companies. Problems arise when these relationships are not clearly disclosed, or when transactions appear to favor insiders at the expense of the company or its stakeholders.
Under IAS 24, a related party includes people or entities that have control, joint control or significant influence over the company. This may include owners and major shareholders, directors and key management personnel, close family members of these individuals, parent companies, subsidiaries and fellow subsidiaries, and companies controlled by the same individuals
In simple terms, if a person or company can influence decisions, pricing or policies, they are likely a related party.
There are three main reasons why related party disclosures are under the microscope today.
First, business structures are becoming more complex. Many companies operate through multiple entities — one for operations, another for property, another for services and sometimes another for management fees. These structures are legal, but they create many transactions between related entities that must be disclosed properly.
Second, regulators are more alert. Regulatory bodies are paying closer attention to transactions that may shift profits, hide losses or move cash within a group. Weak related party disclosures are often seen as a red flag for governance issues.
Third, public trust is fragile. In an age of social media and rapid information sharing, any perception of unfair dealings — such as excessive management fees or interest-free loans to owners — can quickly damage a company’s reputation.
What must be disclosed? IAS 24 focuses on transparency, not judgment. The standard does not say whether a related party transaction is good or bad. Instead, it asks companies to clearly explain these transactions so users of financial statements can make informed decisions.
Key disclosures include the nature of the relationship, the amount of transactions during the period, outstanding balances at year-end, terms and conditions, including whether transactions are at market rates and guarantees or commitments with related parties
For example, if a company rents office space from a shareholder, the financial statements should clearly state this fact, including rental amounts and unpaid balances.
In practice, several issues often arise. One common issue is management entities. Owners may set up a separate company to charge management or consulting fees. While this may be allowed, regulators often question whether the fees are reasonable and whether they are fully disclosed.
Another area is family involvement. Transactions with spouses, children or siblings are sometimes overlooked because they feel “personal” rather than “business-related.” Under IAS 24, these relationships must still be disclosed.
Loans are another sensitive area. Interest-free or low-interest loans to directors or owners can raise serious concerns if not properly disclosed, even if the amounts are eventually repaid.
Related party disclosures help users answer important questions: Are transactions fair and reasonable? Is management acting in the best interest of the company? Are profits sustainable, or are they affected by insider dealings?
When disclosures are weak, users may assume the worst — even when transactions are legitimate. Good disclosure, on the other hand, builds confidence. It tells investors and lenders that management has nothing to hide and understands its responsibility to be transparent.
Related party disclosure is not just an accounting task. It starts with awareness at the board and management level. Companies should maintain updated lists of related parties and ensure transactions are reviewed and approved properly.
As businesses prepare for tighter regulatory scrutiny and higher expectations from stakeholders, related party transparency is no longer optional — it is essential.
In the end, IAS 24 reminds us of a simple truth: financial statements are not just about numbers; they are about relationships and trust. And in today’s environment, trust may be a company’s most valuable asset.
-------------------------------------------------------------------------------------------------------------------------
Floyd C. Paguio is the chairman of Paguio, Dumayas & Associates, CPAs, the Philippine member firm of PrimeGlobal International. He has served as a member of the national board of Acpapp and trustee of the Acpapp Foundation, and is currently chairman for media affairs.
Comments