## SA 550 — Related Parties: Meaning and Definition

A related party is defined as per the Applicable Financial Reporting Framework (AFRF). Where the AFRF establishes minimal or no related party requirements, SA 550 provides its own definition across three categories.

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### Category 1: Person–Reporting Entity Relationship

A person (or close family member) is a related party of the reporting entity (X Ltd) if that person:

Situation	Nature of Relationship
Has control over X Ltd	Direct control
Has significant influence over X Ltd	Direct significant influence
Has control/influence indirectly or through intermediaries	Indirect

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### Category 2: Entity–Entity Relationship

Y Ltd is a related party of X Ltd (reporting entity) if:

Situation	Example
X Ltd has control or significant influence over Y Ltd	Y Ltd is a subsidiary or associate of X Ltd
Y Ltd is controlled/influenced directly or indirectly by X Ltd	X Ltd → Intermediate Co → Y Ltd
Y Ltd is controlled/influenced through one or more intermediaries	Complex group structures

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### Category 3: Common Control or Common Influence

Entities are related if they share a common controlling or influencing party:

Situation	Example
X Ltd and Y Ltd both controlled by the same entity	Sibling companies (common controlling ownership)
Owners of X Ltd and Y Ltd are close family members	Husband controls X Ltd; wife controls Y Ltd
X Ltd and Y Ltd share common key management personnel	Same individuals on both Boards of Directors

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### Key Definitions

Control: Power to govern the financial and operating policies of an entity
Significant Influence: Power to participate in financial/operating policy decisions without control (typically 20–50% ownership)
Close Family Members: Spouse, children, dependants who may influence or be influenced by the related person

> Why this matters for the audit: Related party transactions may not occur at arm's length → risk of material misstatement, undisclosed transactions, or fraud. The auditor must obtain SAAE that related parties are properly identified and disclosed.

Worked example

### Example 1

Mr. A holds 60% shares in X Ltd (reporting entity) and 55% shares in Y Ltd. Both X Ltd and Y Ltd are related parties of each other — Category 3 (common controlling ownership through Mr. A).

### Example 2

X Ltd holds 40% stake in Z Ltd, giving it significant influence (but not control). Z Ltd is a related party of X Ltd — Category 2 (associate relationship).

### Example 3

The CEO of X Ltd also serves on the Board of Directors of Y Ltd (common KMP). X Ltd and Y Ltd are related parties — Category 3 (common key management personnel).

### Example 4

Mrs. B (wife of Mr. A) controls Y Ltd. Mr. A controls X Ltd. X Ltd and Y Ltd are related parties — Category 3 (owners are close family members: spouse relationship).

### Example 5

X Ltd controls P Ltd, which in turn controls Q Ltd. X Ltd and Q Ltd are related parties — Category 2 (indirect control through one intermediary, P Ltd).

⚠️ Common exam mistakes

Thinking 'related party' only means parent-subsidiary — it includes associates, entities with common KMP, and close family member ownership connections
Ignoring indirect relationships — control or influence through one or more intermediaries still creates a related party relationship
Confusing 'control' (typically >50% voting rights) with 'significant influence' (typically 20–50%) — both create related party relationships but with different disclosure and risk implications
Overlooking close family member connections in owner-managed businesses where spouses or relatives hold interests in connected entities
Assuming disclosure of related party transactions is optional when amounts are 'small' — all material related party transactions must be disclosed under AFRF

Bare-Act text Definitions — Related Party · SA 550 – Related Parties · click to expand

A related party as defined in the AFRF. Where the AFRF establishes minimal or no related party requirements, SA 550 requires the auditor to consider related parties to include: (1) a person or entity that has control or significant influence, directly or indirectly or through one or more intermediaries, over the reporting entity; (2) another entity over which the reporting entity has control or significant influence, directly or indirectly, or through one or more intermediaries; (3) another entity that is under common control with the reporting entity.

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Meaning and Definition of Related Parties

Worked example

⚠️ Common exam mistakes