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A Growing Focus on Related Party Transactions

CPAs & Business Consultants

Taylor Diener
Taylor Diener, CPA CPAs & Business Consultants

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While the requirements governing related party transactions are nothing new, lately there has been an increased focus on the proper documentation, disclosure, and audit procedures required for these types of items.

Governmental Accounting Standards Board (GASB) Statement No. 62, paragraphs 54 through 57, provide guidance on the disclosure requirements for transactions that occur between related parties. As defined by GASB 62, paragraph 57, a related party is one that either:

  • Can significantly influence the management or operating policies of the transacting parties, or
  • Has an ownership interest in one of the transacting parties and can significantly influence the other to the extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests

A related party can be:

  • A school district’s related organizations, joint ventures and jointly governed organizations
  • Elected and appointed officials of the school district
  • The school district’s management
  • Members of the immediate families of elected or appointed officials of the school district and its management
  • Other parties which the school district may deal with if one party can significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its own separate interests

Common examples of related party transactions include:

  • Sales, purchases, transfers, or leases of real estate, buildings, and equipment
  • Services received (i.e., accounting, management, engineering, construction, and legal services)
  • Borrowing and lending agreements

Interactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. For example, a school district may receive services from a related party without charge and not record receipt of the services.

These reporting requirements are not meant to discourage school districts from participating in related party transactions, but to promote transparency for the users of the financial statements. The school district’s footnotes should include enough details to adequately describe the situation. This includes the nature of the related party relationship, information regarding the transaction that occurred (including terms and conditions), the amount of the transaction, any outstanding balances and/or commitments, and provisions for doubtful accounts related to the outstanding balances (if applicable).

As a result of this growing focus, auditors are required to gain an increased understanding of these types of relationships. This may involve additional inquiry of management and/or board members to ensure that they are aware of related parties that may exist. Board member listings provided to the auditors should include the companies that the board members work for to also aid in this analysis. If related party transactions are identified, additional testing may need to be performed.

For more information about related party transactions and how to stay in compliance, contact Yeo & Yeo’s Education Services Group.

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