What does GAAP require concerning related party transactions?

What does GAAP require concerning related party transactions?

• A. They must be ignored in financial statements
• B. They must be recorded at market value
• C. They must be disclosed in the financial statements
• D. They must be included as liabilities

Answer: (C)

GAAP requires that related party transactions be disclosed in the financial statements to ensure transparency. This requirement exists because related party transactions may not be conducted under normal market conditions, and there could be a potential for conflicts of interest that biases the terms of the transaction. By disclosing these transactions, financial statements provide users with a clearer picture of the financial position and performance of the entity, helping them make informed decisions. The necessity for disclosure helps to highlight any potential impacts these transactions may have on the entity's financial results, thus maintaining the integrity of the financial reporting process. Full disclosure allows stakeholders to assess the reliability of the financial statements and understand any risks associated with those transactions. Additionally, options stating that related party transactions must be ignored or included as liabilities do not align with GAAP principles, which prioritize both transparency and the accurate representation of financial dealings. Recording them at market value is not a requirement of GAAP either, as the emphasis is more on disclosure than on specific valuation methods in this context.

GAAP requires that related party transactions be disclosed in the financial statements to ensure transparency. This requirement exists because related party transactions may not be conducted under normal market conditions, and there could be a potential for conflicts of interest that biases the terms of the transaction. By disclosing these transactions, financial statements provide users with a clearer picture of the financial position and performance of the entity, helping them make informed decisions.

The necessity for disclosure helps to highlight any potential impacts these transactions may have on the entity's financial results, thus maintaining the integrity of the financial reporting process. Full disclosure allows stakeholders to assess the reliability of the financial statements and understand any risks associated with those transactions.

Additionally, options stating that related party transactions must be ignored or included as liabilities do not align with GAAP principles, which prioritize both transparency and the accurate representation of financial dealings. Recording them at market value is not a requirement of GAAP either, as the emphasis is more on disclosure than on specific valuation methods in this context.