Final answer:
Related party relationships and transactions must be fully disclosed in financial statements according to accounting principles like IFRS or GAAP, regardless of the size. Option (c) is correct because it ensures transparency and accurate representation of an entity's financial position and performance.
Step-by-step explanation:
When dealing with related party relationships and transactions in financial statements, the correct approach is to ensure that they are fully disclosed by accounting principles and standards such as the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). The disclosure of related party transactions provides users of financial statements with important information regarding the potential influence that related parties may have on the financial position and performance of the entity.
Transactions with related parties may not be conducted under the same terms and conditions as transactions with unrelated parties, which could lead to the misrepresentation of an entity's financial position and performance if not properly disclosed. Therefore, simply treating them as material based on their size (option a) or ignoring them as immaterial (option b) is not adequate. Independent of how material they are, related party transactions are required to be identified and reported.
Option (c), fully disclosed in financial statements, is the correct approach to accounting for related party relationships and transactions. This involves disclosing the nature of the relationship, a description of the transactions, the amounts involved, and any other elements necessary to understand the potential impact on the financial statements. This does not exclude additional reporting to regulatory authorities (option d) where required by law or regulation.
Ensuring transparency through disclosure allows stakeholders to make informed decisions and helps to ascertain the true economic substance of the entity's transactions and balances.