Plain definition
A related-party transaction is a transfer of resources, services, or obligations between a reporting entity and a related person or entity, whether or not a price is charged. A related party can include an entity controlled by a director, a parent, a subsidiary, or another party defined by the reporting framework.
The relationship is a normal feature of business. The question is whether it could affect the terms, the decision, or users’ understanding of the financial statements. The applicable reporting framework determines identification and disclosure requirements.
Illustrative example
Suppose a director’s company offers to lease a warehouse to the business. The director declares the relationship before discussions begin. Management obtains comparable market quotations, records why the site is suitable, and asks the people authorized under the company’s own governance arrangements to decide without relying on the interested director’s judgment.
Finance records the relationship and the lease terms, then checks the applicable reporting framework before the year-end accounts are issued. The result may be a sound commercial arrangement, but it remains visible to those who need to assess it.
This is an illustrative governance approach, not a universal legal approval rule. Disclosure, approval, and recusal requirements depend on the entity, jurisdiction, contracts, and reporting framework.
Why it matters
Treating every related deal as misconduct can cause management to hide ordinary relationships. Treating every disclosed deal as harmless can allow favorable terms or weak challenge to pass unnoticed.
The useful question is whether the relationship changed the decision, the price, the risk, or the disclosure needed for a fair view.
Practical consequence
Maintain a current register of directors, key managers, owners, and connected entities. Ask for updates before material contracts, financing, purchases, or leases are approved.
For each identified deal, keep the relationship, terms, decision evidence, required approvals, and reporting conclusion together. Revisit the register during the financial close.