Related party footnote disclosure is easy to overlook but is quite significant in proper financial reporting and a requirement of GAAP if applicable. A related party footnote is needed to disclose certain common control relationships and corresponding transactions recorded in the financials that are related to one party having the leverage to influence the policies of the other party. Understanding who is considered a related party and the related party transactions will help in alleviating missed opportunities in this footnote disclosure.
Related parties can include (but are not limited to):
- The party is a member of an entity and/or its principal owners, management or members of their immediate families
- Afﬁliates of the entity
- Direct or indirect common control with the entity or has significant or joint control over the entity
- An entity and trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of the entity’s management
- The party is a joint venture in which the entity is a venture partner
Related party transactions can include (but are not limited to):
- Sales, purchases and transfers of real and personal property
- Services received or furnished, such as accounting, management, engineering and legal services
- Use of property and equipment by lease or otherwise
- Borrowings, lending and guarantees
- Maintenance of compensating bank balances for the benefit of a related party
- Intra-entity billings based on allocations of common costs
- Filings of consolidated tax returns
Once related party transaction(s) have been identified a footnote disclosure should be included in the financials for all material transactions. This disclosure is valuable information for the user to understand any differences when comparing results of the entity’s operations and financial position with those of prior periods. The disclosure should include details of the related party transaction such as: amounts, dates, effects to the financials, and any other pertinent information.
When deciding how to address related party disclosures or if it is even needed don’t hesitate to bring your Henry+Horne accountant into the conversation.