A company controlled by the business owner offers goods on convenient terms. The transaction may genuinely be useful, but an invoice and verbal approval are not enough to explain it in reporting. A relationship does not automatically prohibit a purchase or establish that its terms are fair. Separate evaluation of the deal from identification of the relationship and relevant disclosures.
IAS 24 focuses on how related parties, their transactions, balances and commitments may affect financial statements. A transaction includes transfers of resources, services or obligations even without a charge. Free storage provided by a related party may therefore warrant assessment despite the absence of a priced purchase invoice.
Who knows that the supplier is related?
Do not rely on a buyer's memory or similar company names. Maintain a relationship register supported by relevant ownership, control, influence and management information. Apply the accounting definition rather than reducing relatedness to family connections or trading names. Record when relationships start or end where that affects the transactions identified.
Accounting may not discover the relationship from a supplier statement, although an owner or administrator knows it exists. Periodic declarations, event-driven updates and a clear reporting route to the financial statement preparer can help. These are suggested organisational controls, not substitutes for applying the standard's definition to the facts.
Identical prices do not establish identical terms
Assume two offers for 1,000 units at SAR 50 each. The related supplier requires advance payment, while an independent supplier offers 60-day credit and includes delivery. Comparing the SAR 50,000 totals alone conceals differences in funding, service and execution risk.
Compare specifications, quality, warranty, delivery, returns, credit and quantity rather than only unit price. A statement that terms are equivalent to an arm's-length transaction needs supporting evidence. It should not become boilerplate inserted into every file simply because both parties signed a contract.
The relationship might genuinely provide flexibility, such as fulfilling an urgent order. Document the benefit specifically: required timing, alternative offers, selection reasons and approval. “Better for the business” is not a substitute for an explanation understandable to someone outside the decision.
Closing balances are not transaction volumes
In an educational example, a business buys SAR 1 million of goods from its related supplier and pays SAR 950,000 before year end. The balance report shows only SAR 50,000, while period purchases total SAR 1 million. Extracting balances alone can obscure a significant part of the relationship.
Collect movements, balances, terms, guarantees and relevant commitments according to applicable disclosure requirements. Examine payments made on another party's behalf and later discounts or waivers rather than focusing only on ordinary purchase invoices. A zero closing balance does not necessarily mean there were no transactions requiring assessment.
A file another reviewer can follow
- Evidence of the relationship, its scope and the period it existed.
- Contracts, purchase orders, receipts, invoices and approval support.
- Comparisons of terms where relied upon, identifying aspects that are not directly comparable.
- Reconciled transaction totals, balances, payments and outstanding commitments.
This information supports disclosure and review but does not independently settle tax treatment or specific legal conflict-of-interest requirements. Each has a scope requiring appropriate specialist assessment. Related-party disclosure also does not automatically change inventory measurement: the transaction's accounting still needs assessment under the relevant standards.
Gathering information when the supplier is created and the purchase approved reduces dependence on late closing questions whose answers are difficult to substantiate. The goal is not to condemn a transaction because of a relationship. It is to make its reasons, terms and effects visible so that readers do not see an apparently ordinary figure without context that could change their understanding.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
