Introduction
Related Party Transactions (RPT) play a crucial role in financial reporting and corporate governance. These transactions, involving exchanges between entities with shared ownership or significant influence, can significantly impact financial statements. Ensuring compliance and adhering to regulatory requirements and transparency of numbers is essential to uphold stakeholder trust.
What Are Related Party Transactions?
A Related Party Transaction refers to a deal or arrangement between two parties with a pre-existing relationship. These would be
- Parent companies and subsidiaries
- Entities under common control
- Key management personnel and their close family members
- Shareholders with significant influence
Examples of RPTs include inter-company loans, sales or purchases of goods, asset transfers, leases, and management service agreements. Detailed disclosure is required, including the nature of the relationship, transaction details, and financial impact
Why Are RPTs Important?
RPTs can affect financial performance, asset valuations, and profitability. Transparent disclosure ensures stakeholders are aware of potential biases or conflicts.
Properly managing RPTs helps prevent fraudulent activities, such as earnings manipulation or asset diversion, which could harm shareholders and investors.
Disclosures enable safeguarding the company against reputational and financial damage.
Compliance and Regulatory Requirements
- International Financial Reporting Standards (IFRS)
IND AS 24, IFRS 24 mandates disclosure of RPTs, focusing on:- Nature and amount of transactions
- Relationships between related parties
- Commitments and outstanding balances
- Securities Regulations
Public companies must comply with SEC regulations requiring comprehensive disclosures of material RPTs in filings and proxy statements. Implement strong internal control systems to identify, track, and report RPTs accurately
Best Practices for Managing RPT Compliance
- Establish Policies and Procedures: Develop and enforce structured guidelines for identifying, recording, and approving RPTs to ensure regulatory compliance.
- Independent Review Committees: Utilize audit or independent committees to objectively evaluate and approve significant transactions, mitigating risks of bias.
- Documentation and Reporting: Maintain comprehensive and accurate records of RPTs, including contractual agreements, valuations, and approvals, to support transparency and audits.
- Periodic Audits: Conduct regular internal and external audits to verify compliance, identify discrepancies, and enhance accountability.
- Training and Awareness: Provide ongoing training programs for employees and management to ensure required information is maintained and provided in timely manner.
Call to Action: If you are a CFO or auditor seeking to optimize compliance processes for Related Party Transactions, consider leveraging advanced accounting software or advanced financial reporting tools. Watch out this space for more details on this RPT module planned to be rolled out very soon.
Contact us today to discuss your specific requirement and data points availability which can be used for preparing this RPT disclosure.
