Who Counts as a Related Party
Related party transactions disclosure starts with the population, and that population is set by ASC 850-10-20 rather than by any dollar threshold. The standard enumerates categories. It does not apply a materiality floor to who qualifies.
Who counts as a related party, under ASC 850 in the FASB Codification, breaks into these groups:
- Affiliates. Any party that controls, is controlled by, or is under common control with the entity, directly or through intermediaries. This is the clause that captures brother-sister LLCs held by the same owner even when neither one owns the other.
- Equity method investees, absent an election of the fair value option.
- Trusts for the benefit of employees, including pension and profit-sharing trusts under the trusteeship of management.
- Principal owners and their immediate families. A principal owner is an owner of record or known beneficial owner of more than 10 percent of the voting interests.
- Management and their immediate families. Management means those with authority to establish policies and make decisions, which reaches officers and board members.
- Parties that control or can significantly influence the operating policies of a transacting party, to the point that one party might be prevented from fully pursuing its own separate interests.
That last category is a behavioral test, not an ownership test. PwC’s Viewpoint guidance on the scope of Topic 850 treats identification as its own analytical step for that reason. A counterparty can be a related party at zero percent ownership.
Immediate family is deliberately left open. There’s no enumerated list of relatives, so the line gets drawn with judgment, and the judgment needs to be written down. Your auditor will ask how you drew it.
Mapping the definition to a real group
Abstract categories don’t help much on close day. The related party transactions examples below are the ones that recur in a mid-market group built around an owner, an operating company, and a few ancillary entities.
| The arrangement | Why it’s in scope |
|---|---|
| The owner’s other LLCs that trade with the operating company | Affiliates under common control |
| The building the owner leases to the company through a real estate LLC | Common control plus a principal owner |
| A spouse on payroll above a market rate for the role | Immediate family of a principal owner |
| A vendor company controlled by the owner’s sibling | Immediate family who can influence a principal owner |
| An entity a board member controls that sells to the company | Management plus significant influence |
| A minority investment carried on the equity method | Equity method investee |
| The 401(k) or profit-sharing trust | Trust for the benefit of employees |
A company on an IPO or sale path picks up a stricter definition on top of ASC 850. Item 404 of Regulation S-K reaches transactions above $120,000 in which a related person had a direct or indirect material interest, and Regulation S-X sets the ownership trigger at 5 percent of a class of voting securities rather than ASC 850’s 10 percent. Private companies aren’t subject to those rules, but they get measured against them in financial due diligence. Build the register at the lower threshold from the start.
Which Transactions Have to Be Disclosed
ASC 850-10-50-1 requires disclosure of material related party transactions, with two carve-outs: ordinary-course compensation and expense allowances, and transactions eliminated in consolidation.
Read both carve-outs narrowly. The compensation carve-out covers ordinary-course compensation, expense allowances, and similar items. It doesn’t cover an above-market or below-market arrangement dressed as compensation, and it doesn’t cover anything outside the ordinary course. A spouse on payroll at three times the market rate for the role isn’t an ordinary-course compensation arrangement.
ASC 850-10-05-4 supplies the standard’s own list of transaction types that ordinarily require disclosure:
- Sales, purchases, and transfers of real and personal property
- Services received or furnished, including accounting, management, engineering, and legal services
- Use of property and equipment by lease or otherwise
- Borrowings, lendings, 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
Transactions with no accounting entry
ASC 850-10-50-1(b) requires a description of the transactions including those to which no amounts or nominal amounts were ascribed. ASC 850 related party disclosures are triggered by the relationship, not by the size of the entry. Nothing has to hit the ledger for the obligation to attach.
The arrangements that fall into that gap are predictable:
- A parent or affiliate provides accounting, HR, IT, or legal services to another group entity without charge. No expense was recorded, and the arrangement is still disclosable.
- The owner’s real estate LLC charges rent below market, or charges nothing at all.
- An affiliate guarantees the company’s bank debt or pledges collateral. No liability is recognized in the borrower’s statements, and ASC 460 guarantee disclosures apply alongside ASC 850.
- The owner funds a working capital shortfall with no note and no stated rate. Both the transaction and the period-end balance are disclosable.
- Common overhead is allocated across brother-sister entities on a spreadsheet with no written agreement.
None of these throw a variance during month-end close, which is exactly why they get missed until an auditor goes looking.
Consolidated statements versus separate entity statements
The exemption for eliminated transactions is narrow. It covers transactions that are eliminated, and only in the statements where the elimination happens. Everything else survives.
Transactions with equity method investees stay disclosable in consolidated statements, because they aren’t eliminated. So do transactions with commonly controlled entities outside the consolidation boundary, meaning the owner’s real estate LLC, the sibling’s vendor company, and any affiliate held personally. So do transactions with owners, management, and immediate family, who are never eliminated because they aren’t entities being consolidated.
In separate financial statements of a single entity, everything is back on the table. There’s no consolidation to eliminate anything in. The moment a lender asks for standalone statements on one borrowing entity, or a professional corporation and its management services organization each need their own audited statements, the disclosure population expands sharply.
So build the register at the entity level. The consolidated footnote is a subset of the entity-level population, not the reverse.
What the Footnote Has to Say
ASC 850-10-50-1 sets out four required elements, and the one most often dropped is the terms and manner of settlement on period-end balances.
- The nature of the relationship. Not “a related party.” Common ownership, common management, a family relationship, an equity method investment. Name the basis.
- A description of the transactions for each period an income statement is presented, including transactions to which no amounts or nominal amounts were ascribed, plus whatever else a reader needs to understand the effect on the financial statements.
- The dollar amounts for each period presented, and the effect of any change in the method of establishing the terms from the prior period. A two-year comparative income statement means two years of amounts, and a repricing between those years is itself a disclosable fact.
- Amounts due to and from related parties at each balance sheet date, with the terms and manner of settlement where they aren’t otherwise apparent. A payable with no stated maturity, no stated rate, and no repayment history needs that stated plainly.
Two presentation requirements sit just outside the footnote. ASC 850-10-50-2 requires notes and accounts receivable from officers, employees, or affiliated entities to be shown separately rather than folded into a general receivables caption. A receivable from the owner buried in trade AR is a presentation error, not only a disclosure gap. ASC 850-10-50-3 requires the related party’s name where the name is necessary to understand the relationship.
ASC 850-10-50-6 adds an obligation that has nothing to do with transactions. Where the reporting entity and one or more others are under common ownership or management control, and that control could produce results significantly different from what autonomous entities would have reached, the nature of the control relationship is disclosed even though no transactions occurred. A dormant sister entity sharing a management team is a disclosure item.
The arm’s-length sentence you probably can’t support
ASC 850-10-50-5 is short and routinely breached. Related party transactions cannot be presumed to be carried out on an arm’s-length basis, because the conditions of competitive, free-market dealing may not exist. And a representation about a related party transaction must not imply terms equivalent to arm’s length unless that representation can be substantiated.
PwC’s related party disclosure guidance states the practical rule plainly. Disclose that a transaction was at arm’s length only when you can substantiate it. Substantiation means comparable market evidence. A broker opinion or market rent study for a related party lease. A written service agreement with a defined scope and a benchmarked or cost-based rate for a management fee. A note with a maturity and a stated rate benchmarked to market, or at minimum to the applicable federal rate, for owner debt.
The stock sentence about terms no less favorable than those obtainable from unrelated third parties appears in a great many private company footnotes with nothing behind it. Either commission the evidence or delete the sentence. The second option is free.
How Auditors Test Related Party Activity
Related party audit procedures under AU-C 550 run from inquiry through written representation, and the assertion under stress is completeness.
AU-C 550 was substantially strengthened by SAS No. 135, which aligned the AICPA requirements with the PCAOB’s related party standard and sharpened the work on previously unidentified or undisclosed related parties. Those amendments apply to audits of financial statements for periods ending on or after December 15, 2021. Here is what they look like in fieldwork.
- Inquiry of management. The auditor asks in writing for the identity of the entity’s related parties, including changes from the prior period, the nature of each relationship, and whether transactions occurred along with their type and purpose.
- Understanding the controls. The auditor has to understand the controls management established to identify, account for, and disclose related party relationships, and to authorize significant transactions with related parties and outside the normal course of business. A group with no register and no approval protocol has no control to describe. Assessed risk goes up, and sample sizes go up with it.
- Inquiry of those charged with governance. Conducted separately from management. Where the owner is also the board, the auditor looks for a substitute source of independent corroboration.
- Reading the record. Minutes of shareholder and board meetings, loan and lease agreements, bank and legal confirmations, conflict-of-interest statements, tax filings, and the general ledger itself.
- Searching the ledger. Vendor and customer masters get scanned for names and addresses matching owners, officers, family members, and affiliates. Manual, non-standard, and period-end journal entries get tested. Undisclosed related parties turn up in the vendor master far more often than in the footnote draft.
The fraud framing is what makes this work feel intrusive. Significant related party transactions outside the normal course of business give rise to significant risks under AU-C 550, and where management appears to have intentionally withheld a related party, the fraud requirements in AU-C 240 engage and the reliability of management’s other representations comes back into question. PCAOB AS 2410 requires the auditor to communicate an arm’s-length statement in the financial statements directly to the audit committee.
For the broader first-audit sequence, work through audit preparation as its own exercise. What’s specific to related parties is that the evidence has to exist before fieldwork. A market rent study commissioned in March doesn’t substantiate a rate that was set four years ago.
Common Pitfalls
These are the recurring failures in private and mid-market related party reporting, roughly in the order they surface during a first audit.
- Nothing is tracked until the auditor asks. The population gets assembled during fieldwork from memory, which guarantees it’s incomplete. Memory misses the influence-based categories first, because they aren’t tied to an ownership percentage. When the auditor finds an entity in the vendor master that isn’t on the list, the engagement turns from a disclosure conversation into a completeness and skepticism conversation.
- Owner draws and personal expenses are never characterized. A rolling due-to-owner or due-from-owner balance with no note, no rate, no maturity, and no repayment pattern fails ASC 850-10-50-1(d). If the receivable side sits inside trade AR, it fails ASC 850-10-50-2 as well. The tax treatment has to be decided rather than deferred, because IRC 7872 recharacterizes a below-market corporation-shareholder loan as bearing interest at the applicable federal rate.
- Rent or management fees with no written agreement. A recurring payment between commonly owned entities, supported by nothing but a memorized amount, can’t be described in a footnote because there are no terms to describe. IRC 482 also lets the IRS allocate income and deductions among commonly controlled parties, and absent written intercompany agreements the Service can impute terms consistent with economic substance. Papering the arrangement costs less than defending an imputed one.
- Arm’s-length language with no support. Inherited from a prior-year template, owned by nobody, substantiated by nothing. It converts a routine footnote into a benchmarking exercise the company has to fund.
- The relationship is disclosed but the period-end balance isn’t. A footnote naming the owner’s real estate LLC and giving an annual rent figure has satisfied two of the four required elements. The amount accrued and unpaid at year end, with terms and manner of settlement, is a separate requirement.
- The control relationship with no transactions is omitted. ASC 850-10-50-6 is the least-observed paragraph in Topic 850. No transactions, still a disclosure.
- The consolidated footnote is treated as the whole answer. Because intercompany activity is eliminated and exempt in the consolidated statements, preparers conclude the population is small. It’s small in those statements only.
Each of these turns into a negotiating point once a buyer’s team starts work. A quality of earnings analysis normalizes related party economics, and due diligence is a bad time to be reconstructing terms from memory. Below-market rent from an owner-owned building overstates EBITDA and gets adjusted toward market. Above-market management fees and owner compensation get added back. Related party receivables get scrubbed out of the working capital target, because the buyer won’t fund them.
How Indinero Approaches Related Party Reporting
Related party reporting isn’t a drafting exercise at year end. It’s a data structure that has to live in the books all year, and that’s where indinero builds it.
A maintained related party register, kept at the entity level. Every counterparty is identified against the ASC 850-10-20 categories. Every recurring arrangement is logged with the relationship basis, the entities involved, the transaction type mapped to the ASC 850-10-05-4 list, the pricing basis, the governing agreement, and the period-end balance. Because the register is maintained per legal entity rather than only at the consolidated level, standalone statements for one borrowing entity don’t mean starting over.
The register is wired to the ledger. Related party counterparties are flagged in the vendor and customer masters and tagged in the chart of accounts, so activity accumulates by counterparty as transactions post. That’s the difference between producing a footnote from the system and reconstructing one from memory in March. It’s also the specific control an auditor asks management to describe under AU-C 550, and having one to describe lowers assessed risk.
Written agreements for every recurring arrangement. Leases, shared services agreements, notes payable to owners, and cost allocation arrangements each get a document with a defined scope, a stated price or allocation method, payment terms, a term, and a settlement mechanism. That document is what makes the description and the settlement terms writable. It’s also what keeps IRC 482 and IRC 7872 from being decided by an examiner instead of by you.
A documented pricing basis, decided before the transaction. Each priced arrangement gets a written pricing memo at inception, carrying the comparable data or the allocation methodology behind it. That memo determines whether an arm’s-length representation is available at all. Where the evidence supports it, the substantiated representation goes in. Where it doesn’t, the footnote gives the relationship, the transaction, the amounts, and the terms, and stops. Saying less accurately is stronger than saying more without support.
Indinero’s accounting team is CPA-led, and multi-entity work sits in the same engagement as your bookkeeping, tax, and CFO advisory. One team owns the entity structure, the consolidation, and the tax position, so the register behind the ASC 850 footnote is the same register behind the IRC 482 analysis and the same one a buyer’s diligence team gets on day one. Continuous operations since 2009, SOC 2 compliant (2026).
Monthly GAAP close, financial statement preparation, multi-entity consolidation, and audit support all run through indinero’s accounting services. If the register doesn’t exist yet, or an auditor already flagged the one you have, that’s a conversation worth having before fieldwork starts.
Frequently asked questions
These are the questions that come up most often once a company starts assembling the register, usually in the weeks before a first audit or a diligence request. The answers point back to the ASC 850 and AU-C 550 references that govern each one.
Do related party transactions still need disclosure if they are eliminated in consolidation?
Transactions eliminated in consolidation aren’t disclosed as related party transactions in the consolidated statements, but they’re fully disclosable in separate entity financial statements. The ASC 850-10-50-1 carve-out is narrow. It covers only the statements where the elimination actually happens. Transactions with equity method investees, commonly controlled entities outside the consolidation boundary, owners, and management survive it entirely. The moment a lender asks for standalone statements on one borrowing entity, the population expands, so build the register at the entity level.
Can we state that a related party transaction was at arm’s length?
You can call a related party transaction arm’s length only when you can substantiate it, because ASC 850-10-50-5 prohibits unsupported representations. Substantiation means comparable market evidence. A market rent study for a related party lease, a benchmarked or cost-based rate in a written service agreement for a management fee, or a stated rate tied to the applicable federal rate for owner debt. Without that evidence, delete the sentence. The relationship, the amounts, and the settlement terms still get disclosed.
Is a loan from an owner to the company a related party transaction?
A loan from an owner to the company is a related party transaction under ASC 850, and the period-end balance requires disclosure too. Borrowings and lendings sit on the ASC 850-10-05-4 list, and a principal owner is anyone holding more than 10 percent of the voting interests. ASC 850-10-50-1(d) wants the terms and manner of settlement, so the note needs a maturity and a stated rate. IRC 7872 also recharacterizes a below-market shareholder loan at the applicable federal rate.
Are related party disclosures required in reviewed or compiled statements?
Reviewed financial statements prepared under GAAP require the full ASC 850 related party disclosures, because a review follows the applicable financial reporting framework. Compilations follow the same framework. The narrow exception is a compilation that omits substantially all disclosures, and that omission has to be stated in the accountant’s report. Anything short of that leaves ASC 850 fully in play. Audit procedures under AU-C 550 apply only to audits, but the disclosure requirement itself doesn’t move with the service level.
Does a management fee between commonly owned entities have to be disclosed?
Yes, a management fee between commonly owned entities is a disclosable related party transaction, since services furnished sit on the ASC 850-10-05-4 list. The only carve-out that could reach it is elimination, and elimination applies only in the statements where it happens. Between brother-sister entities outside that boundary, or in either entity’s separate statements, the fee stays disclosable. The footnote needs the ownership basis, the amounts per period, and the year-end balance. Without a written agreement setting scope and rate, there are no terms to describe.
What documentation should we keep for each related party arrangement?
Keep a written agreement, a documented pricing basis, and a register entry identifying the relationship for every recurring related party arrangement. The agreement states scope, price or allocation method, payment terms, and settlement mechanism, which is what makes the ASC 850-10-50-1 description writable. A pricing memo written at inception carries the comparable data behind the rate and decides whether an arm’s-length representation is available. Indinero maintains that register at the entity level and tags related party counterparties in the ledger, so the evidence exists before fieldwork.
How do related party balances come up in due diligence?
Buyers and lenders pull related party balances to normalize earnings and to find undocumented obligations that survive the deal. A quality of earnings analysis adjusts below-market rent from an owner-owned building back toward market, because that rent overstates EBITDA. Above-market management fees and owner compensation get added back. Related party receivables get scrubbed out of the working capital target, since the buyer won’t fund them. Every undocumented arrangement becomes a negotiating point, which is why the register belongs in the books all year.
