Question

Describe the Arm’s Length transactions and non-Arm’s Length transactions?

Answer 1

Arm's length transactions are transactions between two unrelated parties independent of each other and there will be no conflict of interest between the parties and the price agreed between the parties will be free from any influence. Both buyers and sellers will have equal bargaining power and they will not be under pressure from any opposing party so that they can act in self interest so to get the most beneficial dealing in transactions.

Non- arm's length transactions are transactions between parties who have an identity of interest ie., they have an existing relationship in relation to business or through personal. Such transactions are considered as risky to the operations of the business as the parties have a conflict of interest. This transactions include transactions with family members, business partners etc. While entering into a transaction with a related party, the transactions to be done at arm's length price as if they are not related to each other and there is no conflict of interest.