Related party transactions and disclosures

Funded startups routinely transact with founders, controlling shareholders, and other group entities (loans, recharges, shared services, off-market pricing), and IAS 24 requires these relationships and transactions to be disclosed even when priced at arm's length, because the mere existence of the relationship is decision-useful information for investors and lenders assessing potential influence over the business. Undisclosed related party balances or omitted key management compensation are among the most common findings in audits and IPO/fundraising due diligence, often triggering restatement or delayed closings.

Have all related parties been systematically identified, including founders, controlling shareholders, key management, and other group entities? Are there founder or shareholder loans, intercompany recharges, or shared services priced off-market, and has the off-market element been separately assessed under IFRS 9? Is key management compensation (including any equity awards) fully captured and disclosed by category as required?

1. Identify all related parties systematically: entities and individuals with control, joint control, or significant influence over the reporting entity (founders, controlling shareholders, parent/subsidiary/fellow subsidiaries); key management personnel (those with authority and responsibility for planning, directing and controlling the entity's activities, including non-executive directors); and close family members of the above, plus entities controlled or significantly influenced by any of them.
2. Maintain a complete related party register updated for changes in shareholding, board composition, and corporate structure, since IAS 24 requires disclosure regardless of transaction pricing.
3. For each identified related party, capture all transactions during the period (loans, recharges, shared services, sales/purchases, guarantees) and outstanding balances at period end, not only transactions above an arbitrary internal materiality threshold.
4. Note that IAS 24 is a disclosure standard with no separate recognition or measurement rules of its own; however, terms of a related party transaction (e.g., an off-market interest rate) may need to be assessed under other standards (e.g., IFRS 9 for financial instruments) to determine appropriate initial measurement.
5. Specifically identify key management personnel compensation by category (short-term benefits, post-employment benefits, share-based payments, termination benefits) as a mandatory disclosure regardless of whether transactions with them individually are otherwise disclosed.

Where a related party transaction is priced at market terms, measure and account for it under the applicable standard exactly as any other transaction would be measured. Where terms are off-market (e.g., an interest-free or below-market-rate loan from a founder or shareholder), assess under IFRS 9 whether the instrument's fair value on initial recognition differs from the transaction price; if it does, recognize the instrument at fair value initially, with the difference between fair value and the amount advanced/received typically treated as a capital contribution (if from a shareholder in its capacity as owner) or, in rarer cases, as a distribution, depending on the substance, and unwind the resulting discount as interest income or expense over the loan term.

Disclose: the nature of each related party relationship (not just the transactions); the amount of transactions during the period by category (sales, purchases, loans advanced/received, guarantees, management fees); outstanding balances at period end, their terms and conditions (including whether secured and the nature of consideration to be provided in settlement), and any provisions for doubtful debts related to those balances; key management personnel compensation in total and by category (short-term, post-employment, share-based payment, termination benefits); any commitments with related parties.

• Omitting founder loans, informal expense recharges, or shared-service arrangements between group entities on the assumption that only formal, contractual transactions count
• applying an arbitrary internal materiality threshold and disclosing only transactions above it, when IAS 24 requires disclosure of the relationship and transactions regardless of size
• failing to identify related parties based on significant influence or de facto control (e.g., a large minority shareholder with board veto rights) and focusing only on legal majority ownership
• omitting key management compensation entirely or netting it into a single unexplained figure instead of disclosing by category
• not reassessing the related party population as the shareholder base and board evolve through funding rounds.