Identifying related-party disclosure requirements

Relationships are complicated

Determining disclosure requirements for a bank’s related-party transactions can be challenging. Any or all of U.S. GAAP, Securities and Exchange Commission (SEC) rules and regulations, and the Federal Reserve’s Regulation O might apply to a single transaction. Furthermore, each uses a different definition of related party, adding to the complexity. While a private financial institution might need to evaluate only GAAP, a public financial institution must evaluate GAAP and SEC rules and regulations (for example, Regulation S-X and Regulation S-K) to determine appropriate financial statement disclosures. All banks also must evaluate Regulation O to disclose related-party loans in call reports, but because Regulation O applies only to loans, a bank’s call report disclosures are just a starting point for financial statement disclosures. Clearly, navigating required disclosures for related-party transactions is complex.

Related parties – overview

Accounting Standards Codification (ASC) Topic 850, “Related Party Disclosures,” does not directly address the accounting for related-party transactions, though other areas of GAAP provide accounting guidance for specific related-party transactions. Similarly, certain SEC rules and regulations include related-party disclosure requirements. Regulation O puts guardrails around loans made to insiders of a financial institution and requires certain quarterly call report disclosures. This is how the different standards and rules address related-party-transaction reporting:

GAAP	SEC rules and regulations	Regulation O
Topic 850 addresses disclosure of related-party transactions inside the financial statements.	The SEC requires related-party disclosures incremental to GAAP both inside and outside the financial statements.	Limits and other stipulations are placed around loans to insiders of a financial institution, and related-party loan disclosures are required in call reports. A loan to an insider also would need to be evaluated for financial statement disclosure under Topic 850 and SEC rules and regulations.

Understanding the definition used within each standard or rule is crucial to reaching the correct disclosure conclusion.

GAAP

Source: ASC 850-10-20*

Related parties include [bolded terms are defined in the ASC master glossary]: Affiliates of the entity Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity Trusts for the benefit of employees, such as pension and profit-sharing trusts that are 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 have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

Crowe observation: “Immediate family” as used in Topic 850 does not necessarily refer to just parents, children, spouses, and siblings. Rather, it is about whether a family member might control or influence the entity or its management (and vice versa) because of the family relationship.

Common related-party transactions identified in ASC 850-10-05-4* include:

• Sales, purchases, and transfers of real and personal property
• Services received or furnished, such as accounting, management, engineering, and legal services
• Use of property and equipment by lease or otherwise
• Borrowings, lendings, and guarantees
• Maintenance of compensating bank balances for the benefit of a related party
• Intra-entity billings based on allocations of common costs
• Filings of consolidated tax returns

Crowe observation: Topic 850 disclosure requirements apply to all related parties, and an entity might execute a related-party transaction not specifically listed as a common related-party transaction in GAAP. Complying with Topic 850 therefore requires consideration of the effectiveness of internal controls over not only the identification of related parties but also all transactions involving those parties.

Financial statement disclosure definitions

Rule 210.1-02(u) of Regulation S-X generally requires registrants to use the GAAP definition of related parties for financial statement disclosures. However, banks also must consider Rule 210.9-03.7(e)(4) of Regulation S-X, which provides a more prescriptive definition of related parties and bright-line thresholds for certain balance sheet disclosures.

Nonfinancial statement disclosure definitions

Item 404 of Regulation S-K governs related-party disclosure outside of the financial statements. The instructions to Item 404(a) of Regulation S-K provide a prescriptive definition of related persons for purposes of disclosure, including bright-line dollar thresholds.

Crowe observation: Related parties identified using the definitions in Rule 210.9-03.7(e)(4) of Regulation S-X and Item 404 of Regulation S-K might not exactly match related parties identified for GAAP disclosures because the SEC rules are prescriptive while Topic 850 is principles-based (for example, Rule 210.9-03.7(e)(4) and Item 404 specify that immediate family includes parents, but whether a parent is part of immediate family under Topic 850 is a matter of judgment).

Regulation O

Regulation O provides prescriptive definitions and applies to loans to an executive officer, director, principal shareholder, any bank holding company for which the lender is a subsidiary, and any other subsidiary of the bank holding company. Loans to a company controlled by a bank official or to a political or campaign committee that benefits or is controlled by a bank executive also are subject to Regulation O.

GAAP

ASC 850-10-50 provides general disclosure requirements for material related-party transactions:

Required disclosures*

Nature of the relationship Description of the transactions, even if the transaction value is zero Dollar amount of the transactions for each period that an income statement is presented Any changes to the transaction terms relative to the prior period Amount due from or to related parties as of the date of each balance sheet presented and the terms of settlement For entities that are part of a group that files a consolidated tax return, current and deferred income tax expense and other disclosures

 

Crowe observation: A specific related-party transaction might require consideration of both ASC 850 disclosures and other areas of GAAP (for example, a material related-party leasing arrangement might require disclosure under both ASC 850 and ASC 842).

SEC rules and regulations

In SEC filings, related-party disclosures incremental to GAAP often are required, and disclosure considerations apply both inside and outside the financial statements.

Inside financial statements

Regulation S-X reference	Disclosure requirements
Rule 4-08(k)	Material related-party transactions on the face of the income statement, balance sheet, and statement of cash flows Intercompany profits or losses from related-party transactions when separate financial statements of the registrant are presented
Rule 9-03	Aggregate amount of related-party loans (excluding loans less than $60,000) when the aggregate outstanding (or for the most recent year, the maximum amount outstanding during the year) exceeds 5% of stockholders’ equity A rollforward of related-party loan activity for the latest fiscal year If significant amounts of related-party loans are past due, nonaccrual, or otherwise troubled, the aggregate amount of such loans and any other material information needed to understand the impact to the financial statements Amounts payable to related parties when the aggregate balance exceeds 5% of stockholders’ equity

Outside financial statements

Regulation S-K reference	Disclosure requirements
Item 404	Various information (including name of related party, amount, relationship, and other material information) for related-party transactions exceeding $120,000 Policies and procedures for the review and approval of related-party transactions

 

Crowe observation: Smaller reporting companies (SRCs) follow Item 404(d) of Regulation S-K, which includes certain accommodations (for example, the quantitative threshold for reporting a related-party transaction is the lesser of $120,000 or 1% of the SRC’s total assets for the previous two year ends, and SRCs are not required to disclose policies and procedures for review and approval of related-party transactions).

Regulation O

Under Regulation O, “Schedule RC-M – Memoranda” in quarterly bank call reports requires disclosure of:

• Aggregate amount of loans to all related parties
• Number of related parties with outstanding loans individually exceeding the lesser of $500,000 or 5% of total capital

Crowe observation: Regulation O also requires banks to provide, upon written request, the names of any executive officers or principal shareholders (or their related interests) with aggregate loans outstanding at the previous quarter end exceeding the lesser of $500,000 or 5% of total capital. Specific amounts of the loans are not required.

The following examples illustrate how to apply the various standards, rules, and regulations to common scenarios and assume the reporting entity evaluating the transaction is a bank or bank holding company that must follow Article 9 of Regulation S-X. If the entity were not a bank or bank holding company, the column for Regulation S-X would be the same as the column for GAAP. “Yes” indicates the disclosure requirement is applicable to the transaction. “No” indicates the rule or regulation does not apply to the transaction.

Transaction	GAAP	SEC rules		Regulation O
		S-X	S-K
Registrant A loans $250,000 to an executive officer during the period. The loan is permissible under the Sarbanes Oxley-Act.	Yes	Yes	Yes	Yes
Registrant B enters into a service contract with the mother of its CEO. Year-to-date services provided total $150,000.	Further analysis is required using the definition of related parties in ASC 850-10-20(e) and the definition of immediate family.	Yes	Yes	No
Registrant C enters into various service contracts with Company Z and also loans Company Z $500,000. The president of Registrant C co-owns Company Z with other investors.	Further analysis is required using the definition of related parties in ASC 850-10-20 (f and g).	Further analysis is required under Rule 210.9-03.7(e)(4).	Further analysis is required using Item 404.	Further analysis is required to determine if the president of Registrant C controls Company Z.

Going forward

Applying related-party guidance likely will continue to be complex and require significant judgment. Financial institution statement preparers and those charged with governance might want to consider:

• Reviewing the entity’s processes, policies, and procedures for identification of related parties and how the list of related parties is maintained and communicated throughout the entity
• Examining how the entity evaluates disclosure of specific related-party transactions under the different definitions in GAAP, SEC rules and regulations, and Regulation O 
• Identifying whether and why any disclosure differences exist between the financial statements, nonfinancial statement information, and the bank’s call report
• Periodically reassessing the entity’s policies and procedures for the approval of related-party transactions

*FASB material is copyrighted by the Financial Accounting Foundation, 801 Main Avenue, Norwalk, CT 06851, and is used with permission.