Which item may indicate a related party transaction?

Compensating balance arrangements can indicate a related party transaction due to the nature of the relationship and the potential for undisclosed terms that differ from market conditions. These arrangements often involve a financial institution requiring a borrower to maintain a minimum balance in their account as a condition for a loan. This type of arrangement can suggest a closer association between parties, potentially lessening the independence typical in regular market transactions.

Related party transactions are characterized by the ability of one party to exert influence over another party due to the nature of their relationship. Compensating balances may signal that such influence exists or that the transaction terms are not at arm's length, raising red flags for auditors.

In contrast, regular business transactions generally occur between independent parties and typically reflect market conditions. Standard terms of sale are consistent across many transactions and do not inherently suggest a related party dynamic. Nonrecurring transactions at year-end, while they may need scrutiny, do not automatically imply that a related party transaction is present without further context on the parties involved.