Register of Contracts with Related Party: Understanding Its Importance for Companies
The Register of Contracts with Related Party (RCRP) refers to a document that lists all transactions between a company and its related parties. Also known as the related party disclosure, this register is an essential tool for companies to maintain transparency and avoid conflicts of interest.
In this article, we’ll explore the importance of RCRP for businesses and how it can improve their operational efficiency.
What are related parties?
Related parties refer to individuals or organizations that have a close relationship with the company. These can include:
– Directors, officers, and key management personnel (KMP)
– Shareholders holding significant influence or control over the company
– Relatives of directors, officers, and KMP
– Companies controlled by directors, officers, or KMP
– Joint ventures with the company
Why is RCRP important?
Maintaining an RCRP is crucial for several reasons.
Firstly, it helps companies identify any potential conflicts of interest. When a company enters into a transaction with a related party, there is a risk that the related party may benefit at the company’s expense. By keeping a record of such transactions, the company can be more vigilant and ensure that all transactions are at arm’s length.
Secondly, an RCRP promotes transparency and accountability. Companies that are transparent in their dealings with related parties are more likely to gain the trust of their stakeholders. The RCRP is part of the company’s financial statements and is publicly available. Having a clear and comprehensive disclosure can enhance a company’s reputation and improve its relationships with stakeholders.
Thirdly, the RCRP helps the company comply with regulatory requirements. In many countries, companies are required to disclose related party transactions in their financial statements. The RCRP is a tool to ensure that the company is meeting its regulatory obligations.
How to maintain an RCRP
To maintain an RCRP, a company should:
1. Identify all related parties: The company should identify all individuals and organizations that could be considered related parties. This includes not only those who are currently related parties but also those who could become related parties in the future.
2. Record all transactions: The company should keep a record of all transactions with related parties, including the nature of the transaction, the amount, and the terms and conditions.
3. Review and analyze transactions: The company should regularly review and analyze related party transactions to ensure that they are consistent with arm’s length transactions.
4. Disclose in financial statements: The company should include the related party disclosure in its financial statements. The disclosure should be clear and comprehensive, providing all relevant information about the related parties and transactions.
Conclusion
The Register of Contracts with Related Party is a crucial tool for companies to maintain transparency and avoid conflicts of interest. By keeping a record of all transactions with related parties, companies can identify potential conflicts, promote transparency, and comply with regulatory requirements. Maintaining an RCRP is a best practice for any company that wants to build trust with stakeholders and operate with integrity and accountability.