What are 'related party transactions'?

Related party transactions refer to dealings between two parties who have a pre-existing relationship, which may include family members, business associates, or institutions under common ownership. These transactions often require special disclosures in financial statements due to the potential for conflicts of interest and the risk that the transaction terms may not reflect market conditions.

The requirement for special disclosures is crucial as these transactions can significantly affect the financial position and performance of an entity. For instance, they could lead to the imparting of benefits or preferential terms to the related parties involved, which may not be available to unrelated parties. Regulatory frameworks, such as International Financial Reporting Standards (IFRS), mandate this disclosure to ensure transparency and provide users of financial statements with relevant information regarding the nature of these transactions.

In contrast, transactions with independent organizations do not fall under the same level of scrutiny, and hence would not require the same disclosure. Transactions that lead to losses or those involving foreign exchange do not define related party transactions specifically; instead, they may represent a subset of transactions that could occur in various contexts but are not exclusively related to the relationships between the parties involved.