Related Party Transactions in Saudi Arabia: IAS 24 Governs the Disclosure, the Companies Law Governs the Approval
A director's contract with the company can be fully disclosed under IAS 24 and still be annulled under Article 27 of the Companies Law, because disclosure and authorisation are separate duties. Who counts as a related party, what the notes must show, when the partners or the general assembly must approve, the auditor's special report in a joint stock company, and how SOCPA's Financial Accounting, Auditing and Laws papers test it.
Two otherwise unconnected companies that share a director are not related parties under IAS 24; paragraph 11 says so in terms. Yet a contract between them is that director's indirect interest under the regulations to the Saudi Companies Law, and if nobody licensed it, the company may ask the court to annul it. The reverse also holds: a director's lease to his own company can be disclosed in full in the notes and still be annulled.
IAS 24, as endorsed by SOCPA, decides what the financial statements show; the Companies Law of 2022 (Royal Decree M/132) decides who must approve the deal. Guides written before 2023 cite Article 71 of the repealed 1437H law for the licence, and that numbering is obsolete: the licence is now Article 27, the joint stock company's disclosure duty and the auditor's special report Article 71, loans Article 72 and the assembly vote Article 95.
Two duties, two rulebooks: disclosure under IAS 24, authorisation under the Companies Law
| Question | Rule | If it fails |
|---|---|---|
| Is the counterparty related, and what must the notes show? | IAS 24 as endorsed in the Kingdom; the auditor tests it under ISA 550 | A misstatement in the financial statements |
| May a manager or director hold an interest in the deal? | Companies Law, Article 27: only with a licence | The company may sue to annul the contract and recover any profit (Article 27(6)) |
| Did a joint stock company director tell the board? | Companies Law, Article 71 | The company or any interested party may sue to annul or recover the profit (Article 71(2)) |
Each rule has its own test of who is connected; ZATCA's test for tax is in Transfer Pricing in Saudi Arabia.
Who is a related party under IAS 24, and the relationships that are not
Under paragraph 9, a person, or a close member of that person's family, is related to the reporting entity if the person has control, joint control or significant influence over it, or is one of the key management personnel of the entity or its parent; every director counts. An entity is related if it is in the same group, is an associate or joint venture in the patterns the paragraph lists, is controlled or jointly controlled by a related person, is significantly influenced by, or has among its key management personnel, a person who controls or jointly controls the reporting entity, is a post-employment benefit plan for the employees of the reporting entity or a related entity, or supplies key management services. A related party transaction is a transfer of resources, services or obligations, priced or not, and substance outranks legal form (paragraph 10).
Paragraph 11 lists what is not enough on its own: a director in common, two venturers sharing joint control, lenders, trade unions, utilities, government departments that do not control or influence the entity, and a major customer or supplier, however dependent the entity is.
The Saudi change: parents, siblings and grandchildren
SOCPA endorsed IAS 24 with one modification, to the paragraph 9 definition of close members of a person's family, "to reflect the definition suitable to the Saudi environment". The Companies Law has its own list of relatives in Article 1, which the Article 72 loan ban uses.
| Family member | IAS 24 as issued | IAS 24 as endorsed in the Kingdom | Companies Law, Article 1 |
|---|---|---|---|
| Spouse, children, spouse's children | Yes | Yes | Spouse and children only |
| Parents and grandparents | Only if expected to influence or be influenced, or a dependant | Yes, the person's or the spouse's | Yes, all ascendants |
| Grandchildren | As above | Yes | Yes, all descendants |
| Brothers and sisters | As above | Yes | No |
For listed companies, the Capital Market Authority's regulation (Article 66) takes "relatives" from its Corporate Governance Regulations, which include siblings and half-siblings. See also How SOCPA Endorses IFRS.
What the notes must show: the relationship, transactions, balances, commitments and key management pay
| Disclosure | When | Paragraph |
|---|---|---|
| Parent and subsidiary relationships; the parent's name and, if different, the ultimate controlling party's | Always, even with no transactions | 13 |
| Key management compensation in total and in five categories: short-term, post-employment, other long-term, termination and share-based | Always | 17 |
| The relationship; the amount of transactions; balances and commitments with their terms, security, settlement and guarantees; doubtful-debt provisions and the period's bad-debt expense | Whenever transactions occurred | 18 |
The paragraph 18 figures are split into seven categories (paragraph 19): parent, entities with joint control or significant influence, subsidiaries, associates, joint ventures, key management personnel, and other related parties. A note may claim arm's length terms only if they can be substantiated (paragraph 23). Paragraph 25 relaxes that detail for dealings with a government that controls or influences the entity, and with its other entities, but the government's name and each individually significant transaction must still be disclosed (paragraph 26).
Article 27: the interest a manager or director may not hold without a licence
Article 27 sits in the Law's general provisions, so it binds every company form: a manager or board member may hold no direct or indirect interest in business and contracts made for the company's account without a licence from the partners, the general assembly or the shareholders, or their delegate (paragraph 1); the same applies to competing with the company (paragraph 2). Exempt are contracts awarded by public competition and personal-needs contracts on the terms the company offers everyone, within its ordinary activity, and any other contracts the regulations specify that do not conflict with the company's interest (paragraph 5).
In a joint stock company, the ordinary general assembly may delegate the licence to the board for at most one year or until the board's term ends, whichever comes first, under Article 16 of the Ministry of Commerce regulations and Article 64 of the Capital Market Authority's regulation for listed companies. The contract, or the year's total, must be below 1% of revenue in the latest financial statements (audited, for listed companies) and below SAR 10 million, within ordinary activity and on no preferential terms; otherwise the assembly decides. Both regulations count as indirect interests, among others, benefits to a director's relatives, to a joint stock company in which the director or relatives hold 5% or more, and to a company where either is a manager, director or senior executive. Knowingly using company funds against its interests to profit from such a deal carries up to three years in prison, a fine of up to SAR 5,000,000, or both (Article 260(b)).
Joint stock companies: disclosure to the board, no vote, and the auditor's special report
Article 71 adds a procedure for joint stock companies. A director must tell the board of any direct or indirect interest as soon as he knows of it, the notice is minuted, and he may not vote on the matter in the board or the general assemblies. The board then informs the general assembly, attaching a special report from the company's auditor prepared under the auditing standards endorsed in the Kingdom; neither the Law nor SOCPA's auditing endorsement document names the standard. Article 95(2) bars interested directors from voting at the assembly, Article 96(2) forbids bundling such contracts into one agenda item, and Article 72 voids loans to directors or their relatives and guarantees of their borrowing, except by banks and finance companies on their public terms and under approved employee incentive schemes.
The repealed Article 71 required a prior licence renewed every year; the current Article 27 says nothing of renewal. And Article 138 disapplies Articles 67 to 71 for the simplified joint stock company, so no special report is required there, though Article 27 still applies. Which companies need an auditor is set out in Which Saudi Companies Must Appoint an Auditor.
The auditor's side: ISA 550 procedures
SOCPA endorsed ISA 550 as issued. The auditor asks management who the related parties are and what transactions occurred and why (paragraph 13), learns the controls that identify and approve them (paragraph 14), and inspects bank and legal confirmations and the minutes of shareholders' and governance meetings for undisclosed ones (paragraph 15). Significant related party transactions outside the normal course of business are significant risks (paragraph 18): the auditor inspects the contracts, evaluates their business rationale and obtains evidence that they were properly authorised and approved (paragraph 23), which in a Saudi company points to the Article 27 licence and the Article 71 minutes. An arm's length claim needs its own evidence (paragraph 24), and management, and where appropriate those charged with governance, confirm in writing that they have disclosed to the auditor every related party, relationship and transaction they are aware of (paragraph 26; see The Management Representation Letter).
How SOCPA's Financial Accounting, Auditing and Laws papers ask it
| Subject and main topic | Subtopic | Guidance framework tasks and skill level |
|---|---|---|
| Financial Accounting, main topic 3: measurement, presentation and disclosure of certain events, conditions and transactions (25% to 45%) | 3/3 Related party disclosures | Identify relationships and transactions (Remembering and Understanding); identify balances and commitments (Application); identify when disclosure is required (Analysis) |
| Auditing, main topic 4: obtaining audit evidence (16% to 22%) | 4/7 Related parties (4/8 in the framework) | Identify related parties and perform procedures (Application); evaluate whether disclosure is adequate (Evaluation) |
| Laws, main topic 4: commercial laws (32% to 45%) | 4/2 Companies Law (4/1 in the framework) | Tasks 11 and 12, the board and the general assembly and their competences (Application); no task names conflicts of interest |
Expect Financial Accounting multiple choice on who is related (a shared director alone: no; a director's brother: yes, under the endorsed definition), and Auditing essays, worth 25 of the 100 marks, on the procedures once an undisclosed related party surfaces. Laws is all multiple choice: who licenses the interest, whether a public-tender contract is exempt (yes), and a loan to a director (void). The Financial Accounting and Audit study guides map the rest of each paper.
Where to practise this
Prepito's Financial Accounting course covers IAS 24 as endorsed, the Audit course ISA 550, and the Regulations course the Companies Law, each with practice questions and full explanations. The Laws paper also tests the Commercial Books Law. For the qualification as a whole, see the SOCPA Fellowship programme.
Sources: Companies Law (Bureau of Experts); repealed Companies Law of 1437H; Ministry of Commerce Implementing Regulations; Capital Market Authority regulation for listed companies and Corporate Governance Regulations; IAS 24 (IFRS Foundation), text as in Regulation (EU) 2023/1803; SOCPA's IFRS endorsement and auditing standards endorsement documents, ISA 550, exam topics and February 2026 guidance framework. A study guide, not legal advice: the Arabic text of each law governs, and regulations and endorsements change, so confirm thresholds before relying on them.
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Question 1 of 5
An entity has two classes of inventory at year end that it values item by item. The first class has a cost of 180,000 riyals and a net realisable value of 195,000 riyals, and the second class has a cost of 240,000 riyals and a net realisable value of 220,000 riyals. The inventory amount that appears in the statement of financial position is:
