Related Party Transactions: What Needs Disclosing and Why It Matters
Many SME owners are surprised to learn that a loan from a director, a rental arrangement with a family member's property, or a transaction between two companies under common ownership all fall under the umbrella of "related party transactions" — and come with specific disclosure obligations in your financial statements. Here's what counts, what needs to be disclosed, and why it matters more than it might seem.
What Counts as a Related Party
A related party is broadly any person or entity connected to your company in a way that could influence, or appear to influence, its business decisions. Common examples for SMEs include:
- Directors and key management personnel of the company
- Close family members of directors or key management (spouses, children, and others who might be expected to influence or be influenced by that person)
- Shareholders with significant influence or control over the company
- Other companies under common control — for example, a sister company owned by the same shareholders, or a parent/subsidiary relationship
- Entities that your company's key management personnel control or significantly influence — note that simply sharing a director with another company doesn't, by itself, make the two companies related parties
The test isn't about whether a transaction was unfair — it's about the relationship itself creating a situation where the terms might not have been negotiated at arm's length, the way they would be with an unrelated third party.
Common Examples in SME Businesses
- A director extends a personal loan to the company, or the company lends money to a director
- The company rents office or warehouse space from a property owned by a director or their family member
- Two companies owned by the same shareholders buy and sell goods or services from each other
- A company pays consulting or management fees to an entity controlled by one of its own directors
None of these are inherently problematic. They're extremely common, especially in owner-managed businesses and business groups. The issue arises when they aren't properly identified, documented, and disclosed.
What Needs to Be Disclosed
Financial statements generally need to disclose the following for related party relationships and transactions:
- The identity of your company's parent and ultimate controlling party, if any — required even where there have been no transactions between them
- The nature of the relationship (e.g. director, close family member, common control)
- The nature and amount of the transactions
- Outstanding balances at year-end, including terms and conditions, whether they're secured, the nature of consideration to be provided in settlement, and any guarantees given or received (e.g. a director personally guaranteeing a company bank loan)
- Any provisions for doubtful debts related to outstanding balances with related parties
- Total compensation paid to key management personnel (which includes directors) — this disclosure is required in all cases, not just when transactions look unusual
Materiality still shapes how much detail goes into the notes — for instance, similar transactions can often be grouped together rather than itemised individually — but it doesn't exempt a company from disclosure altogether. In particular, identifying your company's parent and controlling party is required regardless of whether any transactions took place between them during the year.
Why This Matters Beyond Compliance
Proper disclosure exists to give anyone reading your financial statements — a bank assessing a loan application, an investor, a co-shareholder, or an auditor — a clear and honest picture of who your company is really transacting with, and whether those transactions were on normal commercial terms. Undisclosed or poorly documented related party transactions can raise red flags during due diligence, financing applications, or an audit, even when the underlying transaction itself was entirely legitimate.
There's also a practical angle worth watching: related party transactions, particularly cross-border ones between group entities, can attract additional scrutiny from IRAS around whether pricing reflects an arm's length basis. If your business has related entities overseas (a common setup for Adpeco clients with BVI, Hong Kong, Malaysia, or China operations), it's worth having a conversation about transfer pricing documentation separately from routine bookkeeping disclosure.
A Simple Habit That Helps
Keep a running log of related party relationships and transactions as they happen, rather than trying to reconstruct them at year-end. A quick note — who, what, how much, on what terms — at the time of each transaction saves considerable time when your accountant prepares your financial statements, and reduces the risk of something being missed.
Not sure whether a transaction needs to be disclosed?
Get in touch with our team — it's worth checking before it becomes a year-end surprise.