Every company has that one transaction everyone understands internally but nobody quite knows how to explain properly in the financial statements.

 

“The director paid it personally.”

“It’s between group companies.”

“It’s temporary.”

“We’ve always done it this way.” 😅

 

Then the audit starts.

 

Related-party transactions are completely normal in business. In Malta, especially among owner-managed companies and group structures, they happen all the time. Directors lend money to companies, companies share costs, shareholders use company assets, and connected entities trade with each other regularly.

 

The issue is usually not the transaction itself. The issue is whether the disclosure around it makes sense, is properly supported, and tells the story clearly.

 

Because in financial reporting, confusion attracts attention.

 

What Actually Counts as a Related Party?

 

Broadly speaking, a related party is a person or entity connected closely enough to influence decisions or transactions within the company.

 

This may include:

• Directors
• Shareholders
• Parent companies
• Subsidiaries
• Companies under common ownership
• Close family members in certain situations

 

In practice, related-party transactions often involve:

• Loans
• Shared expenses
• Rent arrangements
• Management fees
• Asset transfers
• Guarantees
• Intercompany balances

 

Some are formal and documented carefully. Others begin with a quick conversation and a “we’ll sort the paperwork later.”

 

That second category tends to age badly.

 

The Real Problem Is Usually the Explanation

 

Many companies assume disclosure means adding more words to the notes.

 

It usually does not.

 

Good disclosure is not about overwhelming readers with detail. It is about clearly explaining:

• Who the transaction involves
• What happened
• The amount involved
• Whether terms are commercial
• Whether balances remain outstanding

 

That’s it.

 

If a reader needs detective skills to understand the note, the disclosure probably needs work.

 

Small improvements in clarity often prevent much bigger questions later.

 

Why Auditors Focus on Related Parties

 

Related-party transactions naturally attract audit attention because they can affect:

• Profitability
• Financial position
• Tax treatment
• Governance
• Fair presentation

 

Auditors are not automatically suspicious of related-party dealings. They simply need to understand whether:

• The transactions are genuine
• The treatment is appropriate
• The disclosures are complete
• The accounting makes sense

 

When records are organised and explanations are straightforward, the process becomes significantly smoother.

 

The Documentation Part Nobody Loves

 

This is usually where the panic starts.

 

Questions such as:

• “Do we actually have an agreement for this?”
• “Who approved the transfer?”
• “Was this balance ever reconciled?”
• “Why does the note say one amount but the ledger says another?”

 

tend to appear late in the process and under unnecessary pressure.

 

Keeping:

• ✔ Signed agreements
• ✔ Board approvals
• ✔ Reconciliations
• ✔ Supporting calculations
• ✔ Consistent accounting entries

 

makes a major difference.

 

It also reduces the number of meetings that begin with “Let’s try to remember what happened here.” 😅

 

Why Clarity Matters More Than Volume

 

Well-prepared related-party disclosures do more than satisfy accounting standards.

 

They:

• Improve transparency
• Reduce audit delays
• Strengthen governance
• Support due diligence exercises
• Help avoid unnecessary regulatory questions

 

Most importantly, they help financial statements tell a coherent story.

 

And good financial reporting is usually less about saying more and more about saying the right things clearly.

 

Main Take-Away

 

Related-party transactions are part of normal business operations for many Maltese companies. The goal is not to avoid them. The goal is to disclose them properly, consistently, and clearly.

 

Smart disclosure reduces confusion, speeds up audits, and builds confidence in the financial statements.

 

At Experia, we help companies review related-party transactions, improve disclosures, reconcile balances, and prepare financial statements that stand up to scrutiny without becoming impossible to read.

 

📞 Get in touch with our team if you would like support reviewing or improving your company’s related-party disclosures.