This disclosure is easy to overlook but it’s important for proper financial reporting. A related party footnote disclosure is needed when transactions are recorded in the financials between the preparer and related parties. Understanding whom and what is considered a related party will help alleviate missed opportunities in disclosing related party transactions. Per ASC 850 some, potential related parties are identified as:
- Board members
- Afﬁliates of the entity
- Subsidiaries of a common parent
- 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
- An entity and its principal owners, management or members of their immediate families
- Other parties with whom the entity may deal if one party controls or can signiﬁcantly inﬂuence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
- Other parties who can signiﬁcantly inﬂuence the management or operating policies of the transacting parties or who have an ownership interest in one of the transacting parties and can signiﬁcantly inﬂuence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Once related party transaction(s) have been identified, a footnote disclosure should be addressed in the financials on all material transactions. This disclosure is valuable information for the user in comparing results of 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’s even needed don’t hesitate to bring your accountant into the conversation.