ASC 850, Related Party Disclosures, is a disclosure standard. It does not say how to account for a transaction with a related party. Other topics do that. It says what the notes must tell users so they can judge whether results and financial position were shaped by a relationship. For the audit procedures that test completeness and disclosure, see AU-C 550 and related party transactions: audit and disclosure. This page covers the accounting standard itself, so a preparer or reviewer can build the note and the supporting list.
What does ASC 850 apply to?
ASC 850-10-15-2 says the guidance applies to all entities. The topic applies to separate or combined financial statements of a parent, a subsidiary, a corporate joint venture and a 50-percent-or-less owned investee. It also applies to consolidated statements when transactions are with related parties outside the consolidated group. Intra-entity transactions that are eliminated in consolidated or combined statements are not disclosed in those statements.
The requirements are incremental. A sale to a related-party customer needs the revenue disclosures under ASC 606 and the related-party disclosures under ASC 850. SEC registrants have additional requirements in Regulation S-X and Regulation S-K Item 404. This page covers the baseline for all entities.
Who is a related party?
The Master Glossary definition covers:
- affiliates of the entity
- entities whose equity securities would be accounted for by the equity method absent the fair value option
- trusts for the benefit of employees, such as pension and profit-sharing trusts managed by or under the trusteeship of management
- principal owners of the entity and members of their immediate families
- management of the entity and members of their immediate families
- other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
- other parties that can significantly influence the management or operating policies of the transacting parties, or that own an interest in one transacting party and can significantly influence the other, to the same extent
The assessment is made from the standpoint of the reporting entity. Principal owners are owners of record or known beneficial owners of more than 10 percent of the voting interests, as the glossary defines them. Entities owned by management or family members commonly fall under the "other parties" prongs, so a related party list should include them.
What transactions are in scope?
ASC 850-10-05-4 lists common examples: sales, purchases and transfers of property; services such as accounting, management, engineering and legal; use of property and equipment by lease; borrowings, lendings and guarantees; compensating bank balances for a related party's benefit; intra-entity billings allocating common costs; and consolidated tax return filings. Paragraph 05-5 adds that a transaction is a related party transaction even if it is not given accounting recognition. An entity that receives services from a related party without charge, and records nothing, still has a transaction to disclose.
What must the notes say?
ASC 850-10-50-1 requires disclosure of material related party transactions, other than compensation arrangements, expense allowances and similar items in the ordinary course of business. The disclosures include:
- the nature of the relationships involved
- a description of the transactions, including those with no amounts or nominal amounts, for each period for which an income statement is presented, and other information needed to understand their effects
- the dollar amounts of transactions for each income statement period, and the effects of any change in the method of establishing terms from the prior period
- amounts due from or to related parties at each balance sheet date and, if not otherwise apparent, the terms and manner of settlement
- the information required by paragraph 740-10-50-17 (for entities that are part of a group filing a consolidated tax return)
Notes or accounts receivable from officers, employees or affiliated entities must be shown separately and not under a general heading such as accounts receivable (50-2). Similar transactions can be aggregated by type of related party, and where the relationship is so pervasive that describing it is enough, the name need not be given unless necessary to understand the relationship (50-3).
Control relationships
ASC 850-10-50-6 separately requires disclosure of the nature of a control relationship when the reporting entity and one or more other entities are under common ownership or management control, and that control could produce operating results or financial position significantly different from those that would result if the entities were autonomous. This disclosure is required even when there are no transactions between the entities. A business owner who controls two companies that serve the same customers, where the owner can shift volume between them, is the classic example.
The arm's length statement
Under ASC 850-10-50-5, related party transactions cannot be presumed to have been carried out on an arm's length basis, because competitive, free-market conditions may not exist. If representations about related party transactions are made, they must not imply that the transactions were completed on terms equivalent to arm's length transactions unless the representation can be substantiated. ASC 850 does not require such a statement. A note that says "on terms no less favorable than those available from unrelated parties" invites an audit procedure the client may not be able to satisfy, so many firms ask management to delete it unless there is support.
Worked illustration
Illustrative numbers. A company leases its warehouse from an LLC owned by its majority shareholder. Rent is $10,000 per month, or $120,000 for the year. At year end $20,000 of December and November rent is unpaid, payable within 30 days. Sales to a company owned by the shareholder's spouse total $85,000 for the year, all at standard price list, with $9,000 due at year end.
A note could read: "The Company leases its warehouse from an entity owned by its majority shareholder under a lease expiring in 20XX. Rent expense was $120,000 for the year ended December 31, 20X6 (20X5: $120,000). Accounts payable at year end include $20,000 due to the lessor, payable within 30 days. During 20X6 the Company sold goods totaling $85,000 to an entity owned by the spouse of the majority shareholder, and accounts receivable at year end include $9,000 from that entity." The prior-year comparatives follow the same pattern. The lease also falls under ASC 842, so it is disclosed there too. The $20,000 is two months at $10,000 each, so the arithmetic ties to the rent schedule.
How to build the related party list
- Start with the equity records, officer and director lists, and prior-year workpapers.
- Send a related party questionnaire to owners, officers and directors every year.
- Scan the general ledger for accounts named for owners, officers or affiliates, loans receivable, and unusual round-dollar payments.
- Reconcile the list to the loan agreements, leases, guarantees and legal confirmations.
- Compare each transaction against the note and confirm the dollar amounts and balances.
Common problems
Practice observations, not requirements:
- The disclosure covers the lease but not the related-party customer or vendor.
- Balances are given but not amounts of transactions, or the reverse.
- Related-party receivables are combined with trade receivables on the balance sheet, against 850-10-50-2.
- "Arm's length" language remains in the note after the audit with no supporting evidence.
- Officer loans are called "advances" in the ledger and missed in the scan.
- Free services by an owner are not considered.
FAQ
Does ASC 850 tell me how to measure a related party transaction?
No. It addresses disclosure. Measurement follows the relevant topic, such as ASC 842 for a lease or ASC 606 for revenue.
Are compensation arrangements disclosed?
Compensation arrangements and expense allowances in the ordinary course of business are excluded from the 850-10-50-1 disclosure. Other topics, such as stock compensation, have their own requirements.
Do I disclose transactions between consolidated subsidiaries?
Not in the consolidated statements, because they are eliminated. They are disclosed in separate statements of the subsidiary.
Does ASC 850 require disclosure of the related party's name?
Only if necessary to understand the relationship. Many small-company notes use descriptions like "an entity owned by the majority shareholder".
Sources
- FASB Accounting Standards Codification Topic 850, Related Party Disclosures, paragraphs 850-10-05-1 to 05-5, 10-1, 15-2 to 15-4, 50-1 to 50-6, and the Master Glossary definitions, as reproduced in KPMG, Financial statement presentation handbook (2026), chapter 8: https://asc.fasb.org
- AICPA, AU-C Section 550, Related Parties (audit procedures; see the AU-C 550 page in this library)
Related
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