How to Identify and Disclose Related-Party Transactions Under Item 404 and ASC 850

As of July 2026 · Written by Rohit Goel, US CPA · From the filing seat of a US-listed public company

Related-party disclosure failures are among the cheapest problems to prevent and the most expensive to discover late. The SEC's September 2023 order against Lyft, a $10 million civil penalty for omitting a single director's interest in a pre-IPO share sale from one Form 10-K, was brought under Exchange Act Section 13(a) and Rule 13a-1, not fraud. You do not need bad intent to get charged. You need one transaction that slipped past your D&O questionnaire.

This tutorial walks through the full identification-and-disclosure sequence I use with sub-$500M registrants, where the traps are different, and tighter, than at large accelerated filers. Run your own fact pattern through the Related-Party & Item 404 Disclosure Checker at app.unfoldingvalues.com as you go; it applies each test below to your inputs.

Who counts as a "related person" under Item 404?

Instruction 1 to Item 404(a) of Regulation S-K (17 CFR 229.404) defines a related person as:

• Any director or executive officer of the registrant, and any nominee for director (nominees count for proxy-statement purposes);
• Any beneficial owner of more than 5% of any class of the registrant's voting securities, when the transaction occurred while they held that position;
• Any immediate family member of the above, child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, plus any person (other than a tenant or employee) sharing the household of a director, officer, nominee, or 5% holder.

Two things practitioners miss. First, the 5% holder prong means a transaction with your largest institutional investor's affiliate can be reportable even if no board member touched it. Second, "sharing the household" reaches unmarried partners, a category your standard questionnaire may not ask about.

What transactions have to be disclosed under Item 404(a)?

Item 404(a) requires disclosure of any transaction since the beginning of the last fiscal year, or any currently proposed transaction, in which:

1. The registrant was or is to be a participant;
2. The amount involved exceeds $120,000; and
3. A related person had or will have a direct or indirect material interest.

Each element does independent work. "Participant" is broader than "party": in the Lyft matter, the SEC treated the company as a participant in a shareholder-to-shareholder sale because of its active role facilitating and approving the deal. "Amount involved" for indebtedness is the largest aggregate principal outstanding during the period plus interest, not the year-end balance. And the disclosure itself must state the related person's name, relationship, the amount involved, and the person's approximate dollar interest.

What is a "material interest," and can I skip disclosure without one?

Materiality of the interest is judged on the specific facts: the significance of the interest to the related person, not just to the registrant. The instructions to Item 404(a) carve out categories where the interest is deemed not direct or material, including interests arising solely from directorship of another party to the transaction, from ownership of under 10% of another entity's equity (together with immediate family), and transactions where rates or charges are set by competitive bids or regulated tariffs. Ordinary-course bank services (depositary, transfer agent) are also excluded, and compensation to executive officers is excluded if reported under Item 402 or approved by the compensation committee. Document the carve-out you're relying on. "We concluded it wasn't material" with no memo is what a comment letter, or an enforcement referral, feeds on.

What is the smaller-reporting-company threshold under Item 404(d)?

This is the trap for sub-$500M companies. If you are a smaller reporting company, Item 404(d) replaces the flat $120,000 trigger with the lesser of $120,000 or 1% of the average of your total assets at year-end for the last two completed fiscal years.

A company with $14 million and $10 million in total assets at the last two year-ends averages $12 million; 1% is $120,000, so the two tests converge. Shrink to a $9 million average and your threshold drops to $90,000, transactions you were trained to wave through at "under $120K" become reportable. Run the arithmetic every year; asset shrinkage silently lowers your trigger. SRCs also disclose transactions for the last two fiscal years, not one, and must provide the Item 404(c) promoter and control-person disclosure if applicable. The trade-off: SRCs are not required to provide the Item 404(b) policies-and-procedures narrative, though most do, because exchange listing standards require the underlying policy anyway.

The Checker at app.unfoldingvalues.com computes your 404(d) threshold from your last two balance sheets and flags transactions that clear it, so the $120,000 number in your head doesn't become the reason you under-disclose.

What does Item 404(b) require about policies and procedures?

Item 404(b) requires a description of your policies and procedures for the review, approval, or ratification of related-person transactions: the types of transactions covered, the standards applied, the persons or groups responsible (typically the audit committee under its charter and exchange rules), and whether the policies are in writing. Critically, 404(b)(2) requires you to identify any reportable transaction that was not subject to those policies, a self-indictment provision. If your policy exists only as a paragraph in the audit committee charter and nothing was ever formally "approved," say so accurately or fix the process before proxy season.

Where does the disclosure go, proxy statement or Form 10-K?

Both, by reference. Item 13 of Form 10-K Part III ("Certain Relationships and Related Transactions, and Director Independence") calls for the Item 404 disclosure. General Instruction G(3) to Form 10-K lets you incorporate Part III by reference to your definitive proxy statement, provided the proxy is filed within 120 days of fiscal year-end. Item 7 of Schedule 14A pulls Item 404 into the proxy for director elections. Miss the 120-day window and you must file a 10-K/A containing the full Part III disclosure, a deadline that ambushes calendar-year companies with late annual meetings every spring.

How is ASC 850 disclosure different from Item 404?

Treating the proxy disclosure and the footnote as the same exercise is a recurring audit finding. They differ on four axes:

1. Definition of related party. ASC 850-10-20 covers management, principal owners (owners of more than 10% of voting interests, not 5%), immediate families, affiliates, equity-method investees, and trusts for the benefit of employees. So a 7% holder is a related person for Item 404 but not a related party under ASC 850; a 12% holder is both.
2. Threshold. ASC 850 has no dollar threshold. Disclosure turns on materiality to the financial statements. A $90,000 transaction can require a footnote while falling below Item 404(a)'s $120,000 line, and vice versa for an SRC whose 404(d) threshold sits below $120,000.
3. Content. ASC 850-10-50-1 requires the nature of the relationship, a description of the transactions, dollar amounts for each income-statement period presented, and amounts due to or from related parties with settlement terms. ASC 850-10-50-6 requires disclosure of control relationships even when there were no transactions. And ASC 850-10-50-5 prohibits representing that terms were equivalent to arm's-length unless you can substantiate it, strike that boilerplate from your footnote unless you have support.
4. Location and audit exposure. The footnote sits in audited financial statements, tested under PCAOB AS 2410, which requires the auditor to evaluate whether related-party transactions have been properly identified, accounted for, and disclosed. Your Item 404 disclosure is unaudited but read against the footnote by the staff; inconsistencies between the two generate comment letters.

What identification process actually catches these transactions?

The paper controls, questionnaires, certifications, catch what people remember and admit. A defensible process layers on:

• A living related-persons list: directors, officers, nominees, 5% holders (refresh against 13D/G filings quarterly), and their disclosed family members and affiliated entities, pushed to accounts payable and procurement as a match file.
• Vendor and customer master scans against that list, including address and TIN matching, family-member entities rarely share a surname with the director.
• D&O questionnaires that ask the 404 questions precisely: household members, entities where the person or family holds 10%+ or a partnership interest, indebtedness in both directions. Remember Exchange Act Section 13(k) (Sarbanes-Oxley Section 402) separately prohibits most personal loans to directors and executive officers, that's not a disclosure question, it's a legality question.
• Board-minute and contract-log review each quarter for counterparties connected to insiders, because the transactions that trigger enforcement are the ones nobody routed through the policy.

Feed the output of that process through the free Related-Party & Item 404 checker before drafting: it cross-checks each transaction against the 404(a)/(d) elements, the instruction carve-outs, and the ASC 850 footnote requirements, and tells you which document each disclosure belongs in.

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