What potential issue arises from related party transactions (RPTs)?

Related party transactions (RPTs) present a unique challenge in financial reporting because they often do not represent transactions that would occur between unrelated parties in the open market. Unlike typical market transactions where the pricing can be competitive and transparent, RPTs may involve a degree of influence or control that can skew the terms of the transaction.

Consequently, the price at which these transactions are executed may not equate to fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This lack of alignment with fair value can lead to financial statements that do not accurately represent the financial position and performance of a company. Therefore, there is an inherent risk that the reported figures could misinform stakeholders about the company's actual economic status. Recognizing this potential issue is crucial for both reporting and auditing practices, ensuring transparency and reliability in financial reporting.

The other options do not accurately capture the essential risk associated with RPTs. For instance, while RPTs may be recorded at fair value, the reality is that they often deviate from it. Immediate recognition as income is not a specific requirement tied to RPTs either; income recognition must still comply