ASC 850: Disclosing Related-Party Transactions Correctly

Related parties include the obvious cases, majority owners, officers, and their immediate family, but also less obvious ones: an entity where a company officer or major owner has significant influence, an equity-method investee, and sometimes an entity that merely shares common ownership or management with your company even without a direct ownership stake in each other. The definition is broader than most finance teams initially assume, which is exactly why a transaction can slip through without anyone flagging it as related-party at all.

A common misconception is that a related-party transaction is only a problem if it's priced favorably compared to what an unrelated party would pay. That's not the disclosure trigger. The trigger is simply that the transaction happened between related parties, regardless of pricing. You can lease office space from a founder's LLC at a rate that's perfectly reasonable and still owe a disclosure describing the relationship, the nature of the transaction, and the dollar amounts involved.

A proper ASC 850 disclosure identifies the nature of the relationship, describes the transactions themselves including dollar amounts for each period presented, and states the amounts due to or from related parties as of each balance sheet date, along with the terms and manner of settlement if not otherwise apparent. A vague, generic sentence acknowledging that related-party transactions exist somewhere in the business, without the specifics, doesn't satisfy the standard and is a common finding in a first audit.

A complete ASC 850 note covers these items:

• The nature of the relationship between your company and the related party involved.
• A description of the transactions, including dollar amounts for each period presented.
• The amounts due to or from related parties as of each balance sheet date.
• The terms and manner of settlement, when they aren't obvious from the transaction itself.

Beyond the accounting disclosure itself, a related-party transaction generally deserves board or audit committee awareness and, ideally, approval from directors independent of the relationship, separate from whether the transaction is properly disclosed in the financials. Disclosure tells the reader what happened; independent approval is what actually protects the company from a conflict-of-interest problem in the first place. Treat these as two separate steps, not one, since a well-disclosed but never-approved related-party deal still leaves a governance gap.

This matters even more once outside investors or a board with independent directors are involved, since they're the ones who actually need to weigh in on whether a related-party deal serves the company's interests rather than a founder's personal one.

Waiting until year-end close to ask whether any related-party transactions happened during the year is how they get missed. Build a standing question into your intake process for any new vendor, lease, or contract: is any owner, officer, or their immediate family connected to this counterparty in any way. Catching the relationship at the time the deal is set up, rather than reconstructing it during the audit, is both easier and gives you the chance to route it through independent approval while the deal is still being negotiated, not after it's already signed.

Say a founder's spouse owns a marketing agency, and the company starts paying that agency for services without anyone in finance connecting the ownership dots, since the invoices simply look like any other vendor bill. A year later, the auditor asks a routine question about your largest marketing vendor and discovers the relationship the company itself never flagged. At that point you're not just adding a disclosure; you're explaining to the auditor why a related-party relationship went unidentified for a full year, which raises harder questions about what else in your controls might have missed something similar.