6 November 2026
Related party disclosures: common UAE audit observations
Why related party notes keep attracting audit findings in the UAE, and how to get them right before the auditors arrive
-- Related party disclosures sit in the notes and often look immaterial, yet in our experience they remain one of the most frequent sources of audit observations in the UAE, and the transactions behind them can move the headline numbers. The reason is structural: family-owned groups, shareholder funding, common directors and government related ownership mean that almost every entity has a long list of related parties. - Most findings are not about how the note is written. They are about completeness: related parties that were never identified, transactions that were never recorded, and balances that were recorded but measured as if they were with a third party. - Interest free and below market balances with group companies and shareholders are a measurement issue, not just a disclosure issue. Unless they are repayable on demand, they often need to be recognised at fair value, with the difference taken to equity, to the cost of an investment or, in some cases, to profit or loss, depending on the substance.. - Since the introduction of UAE corporate tax, related party transactions also feed the transfer pricing disclosures in the tax return. The financial statement notes and the tax disclosures now need to be reconcilable, even though the definitions differ. - The fix is a living related party register, owned by finance and refreshed during the year, so that the year end note is an output of a process rather than a last-minute reconstruction."
Why related parties draw so much audit attention in the UAE
Related party disclosures exist for a simple reason. Users of financial statements assume that transactions are negotiated between independent parties, each acting in its own interest. When the counterparty is a shareholder, a sister company or a director, that assumption no longer holds. Prices, payment terms, guarantees and even the existence of a transaction can be shaped by the relationship rather than by commercial logic. The disclosure tells the reader that this has happened, and how much of the business it affects.
In the UAE, the relationship web is usually wider and denser than in many other markets. A significant part of the private sector is made up of family-owned groups, where the same family members sit on several boards and fund companies through current accounts rather than formal loans. Many businesses operate through a mainland entity, one or more free zone companies and an offshore holding vehicle, all under common control. Government related entities hold stakes across banking, real estate, energy, aviation and infrastructure. Where the same government controls, jointly controls or significantly influences several of them, those entities are related to each other. Entities owned by different governments, for example different emirates or the federal government, are not automatically related to one another, so each relationship needs to be assessed.
Related parties are a specific area of audit focus under ISA 550, which requires auditors to understand the entity’s related party relationships and to treat significant related party transactions outside the normal course of business as significant risks. Undisclosed relationships are a classic route for fraud, for window dressing and for transactions that would not survive scrutiny if they were with a third party. That means auditors will test the completeness of the list, ask management for written representations, read board minutes and shareholder registers, and look for transactions that sit outside the normal course of business.
The result is predictable. A related party note that looked fine on the surface turns into a list of observations once the auditor starts pulling threads: a director's company that supplies the business but is not on the list, a shareholder who paid the office rent personally, a guarantee to a bank for a sister company that appears nowhere in the financial statements.
Who counts as a related party: the definitions that trip people up
The definition in IAS 24 (paragraph 9) is built around a few ideas: control, joint control or significant influence over the reporting entity, membership of the same group, being key management personnel of the entity or its parent, close family of those individuals, and entities controlled by any of them.. Most finance teams are comfortable with the obvious cases, such as the parent, subsidiaries and fellow subsidiaries. The difficulties start at the edges of the definition, which is where most audit findings sit.
| Category | Who falls into it | Typical UAE example |
|---|---|---|
| Group entities | Parent, subsidiaries, fellow subsidiaries and the ultimate controlling party | A free zone trading company owned by the same holding company as the mainland contractor |
| Associates and joint ventures | Associates and joint ventures of the entity, and of any member of its group | A joint venture formed with a contractor for a single project, held by a sister company |
| Individuals with control or influence | Persons who control, jointly control or have significant influence over the entity | The founding family members who own the group through a holding company |
| Close family members | Family members who may be expected to influence, or be influenced by, the individual in their dealings with the entity. Paragraph 9 includes the spouse or domestic partner, children, the partner’s children and dependants. Other relatives, such as parents and siblings, are assessed on the facts. | A son of the chairman who owns a fit-out company that works on group projects |
| Key management personnel | People with authority and responsibility for planning, directing and controlling the entity, including directors | The group CEO and CFO who are employed and paid by the holding company |
| Entities controlled by those individuals | Entities controlled or jointly controlled by the persons above, and entities over which a person who controls the reporting entity has significant influence or is key management personnel (paragraph 9(b)(vi)-(vii)) | A real estate company controlled by a director that leases the head office to the entity |
| Management entities | An entity, or a member of its group, that provides key management personnel services to the reporting entity or its parent. The reporting entity discloses the amounts it incurred for those services (paragraph 18A). | A family office that provides the CEO and charges a management fee |
| Post-employment benefit plans | Plans for the benefit of employees of the entity or a related entity | Less common in the UAE, but relevant for groups with funded pension or savings schemes |
| Entities | Two entities that are joint ventures of the same third party, or one a joint venture and the other an associate of the same third part | A property developer and a contractor that are both joint ventures of the same investor (paragraph 9(b)(iii)-(iv)) |
Three groups are missed more often than others. The first is close family members and the businesses they own. Finance teams usually know the shareholders but rarely have a complete list of companies owned by the shareholders’ spouses, children and other relatives who may be expected to influence, or be influenced by, the shareholder. The second is entities controlled by key management personnel, which can include a director's side business that happens to supply the group. The third is the wider group: associates and joint ventures of fellow subsidiaries are related parties of the reporting entity, even though the reporting entity has no investment in them.
The test is about substance, not legal form (paragraph 10). Two entities are not related simply because they have a director in common, and an entity is not related to a customer or supplier just because of economic dependence (paragraph 11). But a shared person can matter: if the person who controls the reporting entity is also a director of, or has significant influence over, the other entity, the two are related (paragraph 9(b)(vii)).. Equally, the absence of a formal shareholding does not settle the question if one party in fact directs the other. Where the answer is not obvious, it should be documented, because the auditor will ask.
What has to be disclosed
The disclosure requirements can be grouped into four blocks. Each one tends to produce its own type of finding.
| Disclosure | What is required | Where it usually goes wrong |
|---|---|---|
| Relationships | The name of the parent and, if different, the ultimate controlling party (or the next most senior parent that produces public financial statements), and relationships with subsidiaries whether or not there have been transactions (paragraph 13) | The ultimate controlling party is not named, or is described vaguely as "the shareholders" |
| Transactions | The nature of the relationship, the amount of transactions, and enough information for users to understand the potential effect on the financial statements | Amounts are shown net, or only some categories of transaction are included |
| Balances and commitments | Outstanding balances, their terms and conditions (including whether secured and how settled),. guarantees given or received, any allowance for expected credit losses, and the expense recognised in the period for bad or doubtful related party debts (paragraph 18) | Terms are not disclosed, and guarantees for group borrowings are left out entirely |
| Key management personnel | Compensation in total and by category: short-term benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payment | Compensation paid by the parent on the entity’s behalf is left out because it does not pass through the entity’s payroll, or fees charged by a management entity for key management services are not disclosed (paragraphs 9, 17 and 18A) |
Two further points are worth stating plainly. First, a statement that related party transactions were made on terms equivalent to an arm's length transaction is allowed only if those terms can be substantiated (paragraph 23). It is not a standard sentence to include by default. Second, disclosures should be made separately for each category in paragraph 19: the parent, entities with joint control or significant influence over the entity, subsidiaries, associates, joint ventures in which the entity is a venturer, key management personnel of the entity or its parent, and other related parties (which is where fellow subsidiaries usually sit). Items of a similar nature may be aggregated unless separate disclosure is needed (paragraph 24). Lumping everything into one line labelled "related parties" makes the note less useful and is likely to be challenged.
Government related entities and the partial exemption
IAS 24 contains a partial exemption for transactions with a government that controls, jointly controls or significantly influences the reporting entity, and with other entities related to that same government. Without it, a government owned company would have to disclose every transaction with every other government owned company, which in the UAE could cover utilities, telecoms, airlines, banks and ports.
The exemption is partial, not total. An entity that applies it still has to disclose the name of the government and the nature of the relationship. It must also disclose, for individually significant transactions, their nature and amount, and for other transactions that are collectively significant, a qualitative or quantitative indication of their extent. Judging significance takes account of factors such as size, whether terms are non-market, whether the transaction is outside the normal course of business, and whether it is reported to regulators or senior management (paragraph 26). A project company owned by a government holding entity, which earns most of its revenue from a government developer, cannot simply say that it relies on the exemption and stop there.
The exemption also applies only to the government related relationship. If the same entity has transactions with its private sector joint venture partner, or with companies owned by its directors, those are disclosed in full in the usual way.
Common UAE audit observations
The findings we see most often follow a small number of patterns. They are rarely about wording. They are about missing parties, missing transactions and balances that were never measured properly.
| Observation | Root cause | What fixes it |
|---|---|---|
| Related parties identified by the auditor that are not on management's list | No process to collect declarations from directors and shareholders on their other interests | An annual declaration from each director and shareholder, matched to the vendor and customer master files |
| Expenses paid by a shareholder on the entity's behalf not recorded | Payments made personally, with no invoice addressed to the entity in finance's hands | Monthly reconciliation of shareholder current accounts and a clear policy on who may pay for what |
| Interest free loans to or from group companies carried at face value | Balances treated as simple current accounts with no assessment of terms | Documented terms for each balance and a fair value assessment where the loan is not repayable on demand |
| Guarantees given to banks for group borrowings not disclosed | Guarantees signed by the shareholders or the board, never shared with finance | A legal register of guarantees and securities, reviewed against bank facility letters at year end |
| Key management compensation understated | Directors and senior executives paid by the parent or another group company | A request to the paying entity for the amounts relating to the reporting entity, with an allocation basis |
| Related party balances classified as current or non-current by default | Balances labelled “due from/to related parties” without looking at the terms | For receivables, an assessment of when each balance is expected to be realised. For payables, an assessment of whether the entity has a right, at the reporting date, to defer settlement for at least 12 months (IAS 1 paragraphs 69-76). A balance repayable on demand is current unless that right exists. |
| No expected credit loss assessment on related party receivables | An assumption that group balances are always recoverable | An ECL assessment based on the counterparty’s financial position and the evidence of its ability to repay, including group support only where it is contractual or otherwise supportable. Informal intentions are not credit enhancements that form part of the contractual terms (IFRS 9 paragraph B5.5.55). |
| Statement that transactions were at arm's length, with no support | Wording copied forward from prior years | Remove the statement, or support it with benchmarking, which is often already available for transfer pricing |
The interest free loan issue deserves a closer look, because it changes the numbers and not just the note. Under IFRS 9, a financial asset or liability is recognised initially at fair value, adjusted for transaction costs where it is not measured at fair value through profit or loss (paragraph 5.1.1). A loan of AED 10 million to a sister company that is repayable in three years and carries no interest is not worth AED 10 million on day one. The difference between the cash paid and the fair value
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