business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...

, a related party transaction is a transaction which takes place between two parties who hold a pre-existing connection prior to the transaction. An example is how a dominant

shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...

may benefit from making one of their companies trade with another at advantageous prices. Related party transactions can be a reason for a Type II agency relationship (conflicts among controlling and non-controlling shareholders), as they are not necessarily in the best interest of minority shareholders. In

commercial law Commercial law, also known as mercantile law or trade law, is the body of law that applies to the rights, relations, and conduct of persons and business engaged in commerce, merchandising, trade, and sales. It is often considered to be a branc ...

, special regulations may apply restricting related party transactions, such as Part 2E of

Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...

Corporations Act 2001 The ''Corporations Act 2001'' (Cth) is an Act of the Parliament of Australia, which sets out the laws dealing with business entities in the Commonwealth of Australia. The company is the Act's primary focus, but other entities, such as partners ...

, which requires

companies A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...

to seek approval from their

members Member may refer to: * Military jury, referred to as "Members" in military jargon * Element (mathematics), an object that belongs to a mathematical set * In object-oriented programming, a member of a class ** Field (computer science), entries in ...

for such a transaction to take place.

International Financial Reporting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...

IAS 24 requires companies to disclose related party transactions in their financial statements.

Academies (England)

England England is a country that is part of the United Kingdom. It shares land borders with Wales to its west and Scotland to its north. The Irish Sea lies northwest and the Celtic Sea to the southwest. It is separated from continental Europe b ...

, there are restrictions and notification requirements in place regarding related party transactions entered into by Academy Trusts. An online reporting process for declaring or seeking approval is in place. Academies must seek approval from the

Education and Skills Funding Agency The Education and Skills Funding Agency (ESFA) is an executive agency of the government of the United Kingdom, sponsored by the Department for Education. The ESFA was formed on 1 April 2017 following the merger of the Education Funding Agency an ...

(ESFA) before they undertake any related party transactions valued over £20,000. A review of related party transactions for the 2012-2013 academic year identified 1,350 related party transactions involving 976 trusts. The vast majority of these were compliant with relevant guidance protecting public funds (the Academies Accounts Direction), but transactions at 17 trusts were found to be irregular or improper.Education Funding Agency
Review of related party transactions in academies, November 2014
accessed 31 July 2022

References

Business terms Legal terminology {{Law-term-stub