Gathering related party disclosures from the client
How a preparer identifies related parties and their transactions in an owner-managed company, gathers the facts from the client and writes the note.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
In an owner-managed company, almost everyone who matters is a related party. The director owns the company, the director's spouse keeps the books, the director's brother supplies the delivery vehicles, and the building belongs to the family trust. Dealings between them are normal and often perfectly fair. They still have to be disclosed, because readers cannot judge the figures without knowing about them.
The difficulty is that the ledger labels none of this. This article covers who counts as a related party in a small business, where the transactions hide, how to ask the client in a structured way and how to write the note.
Who counts as a related party in a small business
The definition has two halves.
People. A person, or a close member of that person's family, is related to the reporting entity if they control or jointly control it, have significant influence over it, or are key management personnel of it or of its parent. Close family typically includes a spouse or domestic partner, children and dependants.
Entities. An entity is related if it is in the same group, is an associate or joint venture of the reporting entity or a member of its group, is controlled or jointly controlled by a related person, or is one over which such a person has significant influence or in which they are key management. Post-employment benefit plans for employees are related too.
In practice, for an owner-managed company, start with the directors and shareholders, their families and every business or trust any of them controls. The IFRS Foundation's summary of IAS 24 explains the disclosures needed so readers can see how related parties and transactions with them may have affected an entity's results and position; IFRS for SMEs has a corresponding section with the same aim.
Transactions the ledger will not label for you
Related-party transactions hide in ordinary accounts:
- Rent paid to a property company or trust the director owns.
- Purchases from a family member's business.
- Salaries paid to family members who work in the business.
- Loans to or from directors and shareholders, including the director's loan account.
- Management fees charged between group companies.
- Assets sold to or bought from a director, such as a vehicle at year end.
- Sureties the directors have signed for the company's bank facilities.
- Things provided free, such as premises a director's company lets the client use at no charge.
A useful technique is to read the supplier and customer lists with the client and ask, name by name, whether anyone there is connected to the owners or their families.
Asking the client through a structured request
Ask in writing every year, even when nothing has changed. In Achekam, staff can create, send and track requests to clients for documents, answers and confirmations in one RFI console. The client opens the request from a personal e-mailed link without an Achekam account, and the firm can also require a one-time code sent to the client's e-mail. On the request page the client can upload files and answer questions, and what they send is filed in that client's vault folder.
A related-party request typically asks for:
- the names of all directors and shareholders, and of close family members involved in the business;
- other businesses, trusts or entities any of them controls or influences;
- transactions during the year with any of those people or entities, with amounts;
- balances owed at year end, their terms, and any security or sureties;
- remuneration and benefits paid to directors and other key management.
Staff can accept or reject each item the client sends and return the request saying what is still missing, so a half-answer does not quietly become the disclosure. Combining these questions with the others the notes need is covered in a year-end questionnaire for note disclosures.
Starting from the firm's own client group records
The firm often knows more than it realises. Staff can see clients grouped under their parent group in Achekam, with each group's entities and engagement counts, and can create a group and add entities to it. If the firm also acts for the director's property company or family trust, the client group is a ready-made starting list of connected entities.
It is only a starting list. It shows the entities the firm acts for, not those it does not, and it says nothing about individuals and their families. Use it to prompt the client's answers, never to replace them. Setting groups up is covered in client groups and entities.
Writing the note: relationships, transactions and balances
The note normally covers:
- The parent and the ultimate controlling party, named even when there were no transactions.
- Key management personnel compensation in total.
- For each category of related party with transactions: the nature of the relationship, the amount of the transactions, outstanding balances and their terms, including whether they are secured, any allowance for doubtful amounts and any expense recognised for bad or doubtful debts.
Achekam's notes take their figures from the mapped trial balance, and facts the trial balance does not hold are left as "[to be completed]"; relationships and terms are a prime example. Where AI is set up, narrative wording in the draft is labelled "AI draft - review before issue", and the reviewer should check every name, relationship and amount against the client's answers.
Do not describe transactions as being on terms equivalent to those in an arm's length transaction unless that can be substantiated. Where the statements are audited, the auditor has separate work to do under ISA 550, covered in related parties in an audit.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
