Related party exposure: map balances beyond reported sales
Related-party sales are only one part of related-party exposure. A company can have modest related-party revenue but substantial loans, guarantees, deposits or unsettled balances with connected entities. Build a relationship-and-exposure map that shows who owes what, how it is secured and what cash has actually moved.
Define the relationship before the amount
IAS 24 addresses related-party disclosures for IFRS financial statements. Its accounting definition should not be substituted for Hong Kong connected transaction rules or US SEC related-person disclosure rules. Those regimes have different purposes, scopes and exemptions. State the reporting framework used by the company before assigning labels.
Record the relationship at the time of each transaction: parent, subsidiary, associate, joint venture, key management or an entity linked through another relevant relationship. A counterparty’s familiar name is not sufficient evidence of its status. Equally, no sale price is needed for a transfer of resources, services or obligations to be relevant.
Hypothetical funding network
Suppose an industrial group reports related-party sales of 20 million, only 2% of revenue. Its notes also show a 90 loan to an associate, 35 of receivables from a controlling shareholder’s entity and a 50 guarantee for a joint venture. The headline sales percentage misses the material funding relationships.
Do not simply report 175 as a recognized balance-sheet liability. The 125 of loans and receivables are assets exposed to collection risk; the 50 guarantee is a contingent or separately accounted-for obligation depending on its terms and applicable rules. Present funded exposure and maximum contractual guarantee exposure in distinct columns.
Assume the associate repays 10 but receives a new 15 advance. Closing loan exposure rises by 5 even though management highlights the repayment. The research question becomes whether funding is being reduced on a net basis, and whether interest receipts are cash or additional receivables. These are hypothetical figures, not an allegation about any issuer.
Copyable exposure map
Use one row per counterparty and instrument. Include relationship evidence, transaction type, opening balance, additions, cash settlements, noncash settlements, closing balance, interest rate, maturity, collateral and allowance. Add guarantees and commitments in a separate panel with expiry and beneficiary.
For each settlement, identify the actual payer. A receivable cleared through a transfer of property or a new loan from another related entity has different implications from external cash collection. If the disclosure only says settled, retain the uncertainty about the settlement method instead of assuming cash.
Test commercial substance
Compare terms with disclosed third-party transactions only where the goods, credit risk and duration are comparable. A zero-interest loan may be intentional support rather than ordinary trading credit. A statement that terms are arm’s length is management’s assertion unless independent evidence substantiates it.
Watch for repeated extensions, rising overdue balances, new guarantees and settlements immediately followed by fresh advances. Check whether an entity ceased to be related during the year: disappearing from the related-party table does not necessarily mean its debt was repaid. Public notes may aggregate counterparties, preventing a complete network reconstruction; show the aggregation boundary.
FAQ
Are related-party transactions automatically improper?
No. Groups transact legitimately with affiliates and joint ventures. The analytical issue is whether terms, approvals, settlement and exposure are transparent. A relationship is a reason to inspect evidence, not a conclusion about misconduct.
Can the guarantee be added to the loan balance?
Only in a clearly labeled scenario that avoids overlapping obligations. The guarantee might support the same debt already included elsewhere. Trace the borrower and instrument so that a worst-case exposure calculation does not count one obligation twice.