The term related-party transaction is used to describe an arrangement between two entities that had a special relationship and subsequently conducted business together. Related-party transactions are typically associated with service agreements between a parent company and subsidiaries.
Generally Accepted Accounting Principles require companies to disclose transactions that occur between related parties. Specific guidance can be found in FASB Statement of Financial Accounting Standards No. 57 - Related Party Disclosures. Publicly-traded companies are required by federal laws under the jurisdiction of the Securities and Exchange Commission (SEC) to disclose certain operating and financial information on an ongoing basis. As part of its Form 10-K filing, companies must disclose material transactions that occur between:
Parent companies and subsidiaries
Subsidiaries sharing the same parent company
Affiliates
An enterprise and trusts managed by the enterprise that benefit employees (pension plans, profit-sharing agreements)
Companies and its principal owners or members of their immediate family
The types of transactions that are subject to disclosure include those that occur during the normal course of business such as:
Allocations of shared services costs (human resources, accounting, finance, legal)
Sales, purchases or leasing of property or equipment
Compensating bank balances
Loans and other guarantees
Consolidated tax returns
Finally, the disclosures must include the following types of information:
A description of the relationship as well as the transactions exchanged between the two parties
Transactions that have an ascribed value as well as those that do not have a nominal value
The dollar value of the transactions in the current accounting period, including any amounts due each party
Management's Discussion and Analysis, Critical Accounting Estimates, Liquidity and Capital Resources, variable interest entities, financing receivables, asset retirement obligation, mine safety disclosures
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