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In business, a related-party transaction refers to a transaction where parties on both sides have a common interest or relationship. Publicly traded entities are required to report these transactions in their quarterly and annual public filings. In addition, accounting standards require them to be disclosed in the financial statements. The Financial Accounting Standards Board considers related-party transactions to include transactions between:
(a) A parent company and its subsidiaries
(b) Subsidiaries of a common parent
(c) An enterprise and trusts for the benefit of employees, such as pension and profit sharing trusts that are managed by or under the trusteeship of the enterprise's management
(d) An enterprise and its principal owners, management, or members of their immediate families
occur often in the normal course of business. Still, they are scrutinized because, by their nature, the parties to the transaction are not at arms-length, and may not push for the best bargain, which may be a detriment to the corporation’s profits.
Related-party transaction is also a term used by the Internal Revenue Service (IRS). The IRS has very elaborate rules to determine if parties are related. But, if the parties are related under the rules, the IRS will look at their transactions to determine if a true arms-length bargain was struck. If not, the IRS will disallow any tax benefits that were claimed from the transaction. The types of transactions particularly scrutinized are property sales between related parties and deductible payments made between related parties.