Review of Transfer Pricing Arrangements -...
Transcript of Review of Transfer Pricing Arrangements -...
Contents
Contents 1
Executive Summary 2
Introduction 4
Background 5
BBC public service divisions and its commercial subsidiaries 6
Scope & methodology of the Review 8
Transfer Pricing Review scope 8
Methodology 8
Findings 11
Areas of good practice 11
Areas for improvement 12
Procedural improvements 12
Documentation and record-keeping 12
Referring “significant” transactions to the Fair Trading Team 12
Benchmarking and contract review period 14
Transparency 16
Application and interpretation of Fair Trading Guidelines 18
Other considerations 19
Annex – Implementation Plan submitted to the Trust by the BBC
Executive 22
October 2016 2
Executive Summary
1. The BBC Trust has commissioned Ernst and Young LLP (EY) to conduct an independent
review of the BBC Transfer Pricing regime. The report has found that:
a) Systems are in place to ensure transfer pricing processes are triggered for relevant
transactions;
b) The transfer pricing processes and governance procedures in place are effective,
and they have been applied correctly;
c) The BBC’s Fair Trading Team which works alongside the BBC Public Service
Divisions administers Fair Trading training designed to ensure that all BBC Public
Service staff understand the relevant procedures that need to be followed;
d) To ensure that the review covered a broad range of transfer pricing arrangements
across all three commercial subsidiaries and in the areas where we were aware
from previous consultations that stakeholders had expressed concerns about
transfer pricing matters, we asked EY to conduct a number of case studies to
examine in depth the BBC's application of and adherence to the Fair Trading Policy
framework and Guidelines and transfer pricing requirements in specific instances. In
none of the twelve case studies analysed by EY has it been found that the BBC is
subsidising any of its commercial businesses;
e) None of the case studies present evidence of State Aid law infringements;
f) The vast majority of case studies do not require any changes to be made and those
that do, require only minor improvements;
g) There are no fundamental inconsistencies between the outcomes of the transfer
pricing relationships and the Fair Trading Guidelines;
h) In all the case studies involving BBC Worldwide appropriate methodologies have
been adopted and satisfactory outcomes achieved;
i) While EY have not identified any particular examples of potentially significant
transactions that have not been referred to the Group’s /Division’s Fair Trading
Adviser, because of the lack of a specific definition of the term ‘significant’, there is a
risk that cases could be inappropriately overlooked;
j) There would be merit in improving record keeping and in transfer pricing activity
being tracked more systematically by the Fair Trading team;
k) In relation to BBC Global News Ltd (GNL) programme transactions, EY concluded
that if a narrow interpretation of the market is used, the use of incremental cost
pricing would appear inconsistent with a strict interpretation of the Fair Trading
Guidelines. However, if a wider interpretation of the market is used, there is
evidence to suggest that incremental cost pricing is used by market participants, and
therefore its use appears consistent with the Fair Trading Guidelines and EY did not
conclude that the transfer price was incorrect;
October 2016 3
l) In some circumstances different approaches have been applied to similar
transactions without providing a clear explanation as to why a consistent approach
has not been used;
m) In the brand agreement with GNL, the BBC Public Service has engaged in an open-
ended contract with limited scope for review of pricing and other contractual
arrangements. At the time of EY’s fieldwork the agreement had not triggered any
brand payments, however GNL have since paid a brand royalty for the financial year
2015/16. The lack of contractual review creates the risk of entrenching behaviour
that may not be consistent with market practice; and
n) While the Fair Trading Guidelines state that, under the cost-based pricing approach,
‘an appropriate contribution for reinvestment in the BBC’s Public Service Activities’ is
required, there is currently very little guidance as to what level this “margin” should
be;
o) The reasoning behind the setting of the rate for BBC Worldwide’s brand payment is
not clear, and there is a theoretical risk that some forms of rights deals by
Worldwide may inhibit the transparency associated with the pricing of individual
programmes.
2. We asked the BBC Executive to develop and submit to the Trust an implementation plan
to address those areas identified for improvement in the EY report. The Trust considers
this plan, attached as an Annex to this document, satisfactorily addresses all of EY’s
recommendations, paving the way for a more accountable and transparent transfer pricing
regime.
3. In most cases the actions proposed in the implementation plan are procedural
improvements that will deliver enhanced control and transparency and, we hope,
reassurance to other market participants.
4. Finally, it is worth noting that the report findings are relevant not only to the existing
commercial subsidiaries but also to the BBC Studios proposal, where robust transfer
pricing will be critical in satisfying the Trust that the requirement not to distort the market
is met.
October 2016 4
Introduction
5. Following a review and public consultation in 2014, the Trust published a Strategic
Framework for the BBC’s Commercial Services1 (effective from April 2015) that brought
oversight of the BBC's commercial services into line with the way that licence fee-funded
services are overseen. In the Framework we committed to commission and publish an
independent review to examine the principles and systems in place to ensure that the
pricing of transactions between the public and commercial parts of the BBC is set in line
with market practice, to test whether the application of these principles and systems is
delivering appropriate outcomes – in particular, ensuring that the BBC’s commercial
subsidiaries do not receive an unfair advantage from the BBC’s public service resources.
6. We also committed to consider how levels of transparency and assurance around the
application of transfer pricing arrangements might be improved.
7. The Trust appointed EY to conduct the review, and we are publishing their report today
alongside this document.
8. The purpose of this document is to present:
a) The BBC Trust’s response to the EY report’s findings; and
b) The implementation plan that the BBC Executive has submitted to the BBC
Trust to implement the recommendations in the report, which is attached as
an annex.
9. The EY report provides a critical insight into the BBC transfer pricing regime by looking
not only at its high level principles, but also at their practical application through the
analysis of case studies, which have been selected according to defined criteria, to cover a
broad cross-section of the many day-to-day transactions that occur between the BBC
public service and its commercial subsidiaries. In following this approach, we consider that
the EY report examines the areas of the BBC transfer pricing practice that have been the
subject of industry concerns.
10. The report delivers important reassurance to the Trust and to the market that the transfer
pricing arrangements in place between the BBC and its commercial subsidiaries are robust
and operate well. The report finds that the transfer pricing processes and governance
procedures in place are effective, and that they have been applied correctly, resulting in
satisfactory outcomes in terms of the fair transfer price being paid, i.e. demonstrating that
the BBC is not subsidising any of its commercial businesses. In particular, the report finds
that in all the case studies involving BBC Worldwide (where the total value of the
transactions concerned is greatest and where others in the market had expressed
concerns) appropriate methodologies have been adopted and satisfactory outcomes
achieved.
1
http://downloads.bbc.co.uk/bbctrust/assets/files/pdf/our_work/commercial/commercial_framework/strategic_framework_co
mmercial.pdf
October 2016 5
11. Overall the report has found no breaches of State Aid law and that the BBC takes transfer
pricing seriously implementing it to the highest standards.
12. When areas of improvement have been identified, the Trust has worked with the Executive
to identify the best approach to act upon them. As a result, the BBC Executive has
produced an implementation plan, which we have considered and endorsed, in which the
BBC Executive have committed to a series of specific actions to address EY’s concerns.
The BBC Executive’s implementation plan is attached to this document as an annex.
13. The vast majority of the proposed changes will be implemented in this or the next financial
year, and will be measurable against the proposed timeline. The Trust will monitor the
progress of the implementation plan throughout the duration of the current Charter,
however many of the actions proposed have an ongoing nature and will continue to be
important in the new Charter period, requiring ongoing oversight as part of the regulatory
framework under which the BBC will operate.
14. Should the Trust approve the BBC’s proposals for BBC Studios2 it will be important that
the BBC complies with fair trading and transfer pricing requirements when setting up and
operating this new commercial service.
15. We hope that as well as delivering transparency and assurance in the short term, this work
will be of value to the new BBC Board and to Ofcom in designing and implementing its
future arrangements for regulating the BBC’s transfer pricing activities.
Background
16. The BBC Trust is the sovereign body of the BBC. Amongst its responsibilities are to hold
the BBC Executive to account for the BBC’s compliance with its various regulatory
requirements and the general law and to have regard to the competitive impact of the
BBC’s activities on the wider market. In the context of the BBC’s commercial services, the
BBC’s compliance with the Fair Trading and Commercial Services Frameworks set by the
Trust as well as competition and State aid law (which underpins both of these frameworks)
are of particular relevance.
17. Under clause 68 of the BBC’s Agreement with the Secretary of State for Culture, Media
and Sport, the BBC itself cannot directly provide commercial services, and any such
services must be ‘organisationally separate’ and provided through commercial subsidiaries.
The purpose of these commercial services is to generate a return which can be reinvested
in the BBC’s public service activities, and each service must meet four ‘commercial criteria’.
A service must: (1) fit with the BBC's Public Purpose Activities; (2) exhibit commercial
efficiency; (3) not jeopardise the good reputation of the BBC or value of the BBC brand;
and (4) comply with the Fair Trading Guidelines, in particular, by avoiding distorting the
market.
2 The BBC submitted its application to the Trust on 26 August
October 2016 6
18. The Fair Trading Guidelines include a section on ‘separation’ and explain that separation of
the BBC’s different sources of funding3 is necessary to ensure that the commercial services
do not receive an unfair advantage from licence fee funds. This is achieved in two ways,
firstly via financial and operational separation between the BBC’s Public Service Activities
and its Commercial Activities and secondly via fair transfer pricing between the BBC’s
Public Service Groups and its Commercial Subsidiaries. The Guidelines state that:
‘The key principle of ‘fair transfer pricing’ is that charges for goods and services
supplied by the BBC’s Public Service Groups, whether sold to the BBC’s
Commercial Subsidiaries or to third parties, should be set in line with prevailing
market practice. 4’
19. This aims to secure the best price, in the interests of licence fee payers, and also reflects
state aid law and aims to prevent a situation in which an aid is given which favours a certain
firm (i.e. the BBC favours one of its commercial subsidiaries) and thereby threatens to
distort competition.
20. Following a review and public consultation in 2014, the Trust published a Strategic
Framework for the BBC’s Commercial Services (effective from April 2015) that brought
oversight of the BBC's commercial services into line with the way that licence fee-funded
services are overseen. In response to the consultation for the commercial framework
some respondents raised concerns about a lack of transparency in the transfer pricing
regime, in particular a lack of clarity about how the transfer pricing arrangements operate.
Some of the respondents also believed that the BBC’s brand and goodwill were not
explicitly charged for by the BBC. In response to these concerns, we committed to
commission and publish an independent review of the BBC’s separation and transfer pricing
practices, covering the levels of transparency and compliance when the BBC’s commercial
services buy rights to BBC content or pay to use BBC premises or services.
BBC public service divisions and its commercial subsidiaries
21. The BBC is the publicly funded, multi-platform (TV, radio, online, mobile etc.) broadcaster
of the United Kingdom and its output is aimed primarily at UK audiences.
22. The BBC currently has three subsidiaries engaged in commercial service activities: BBC
Worldwide, BBC Global News Ltd and BBC Studioworks (see box below). As noted
above, their purpose is to generate a return which can be reinvested in the BBC’s public
service activities, and each must meet the four “commercial criteria” listed above.
3 Licence Fee and commercial revenues
4
http://downloads.bbc.co.uk/aboutthebbc/insidethebbc/howwework/policiesandguidelines/pdf/fairtrading_guidelines_010812.p
df
October 2016 7
BBC Studioworks
BBC Studios and Post Production, the BBC commercial subsidiary which provides studios
and associated services, changed its name with effect from 4 May 2016 to BBC
Studioworks. The EY report uses the name of the business that was effective while their
fieldwork and writing-up was being done. We have adopted the new title when referring
to the business in this report, but both names can be taken as referring to the same
business unit.
23. BBC Worldwide is the main commercial arm and a wholly owned subsidiary of the BBC.
The company exists to maximise the value of the BBC’s content for the benefit of licence
fee payers by creating, acquiring, investing, developing and exploiting media content and
brands internationally. BBC Worldwide also creates value from non-BBC content and
showcases British talent both in the UK and around the world. Profits are then returned to
the BBC for reinvestment.
24. BBC Global News Ltd is a commercial subsidiary of the BBC, and operates the BBC’s
commercial, English language, international news services (BBC World News TV channel
and bbc.com/news) funded by advertising, subscription, sponsorship and distribution
revenues.
25. BBC Studioworks provides television studios, post production and digital media services. It
works in partnership with a broad range of media companies, helping to create content
across all genres for a variety of broadcasters.
26. The Trust is currently assessing plans from the BBC to transform its own production
activity from an in-house operation funded from the licence fee to a commercially-funded
operation. If approved this would lead to a further commercial service subsidiary, BBC
Studios.
October 2016 8
Scope & methodology of the Review
Transfer Pricing Review scope
27. We asked EY to review the separation and transfer pricing arrangements between the
BBC’s Public Service divisions and each of its commercial subsidiaries defined as BBC
Worldwide, BBC Global News Ltd, and BBC Studioworks to examine the control systems
in place and test whether the application of these systems was delivering appropriate
outcomes.
28. We commissioned an informed independent judgment based on case studies representing
the depth and breadth of the transfer pricing arrangements currently in place between BBC
Public Service and the commercial subsidiaries.
We asked EY to:
a) Describe the transactions between BBC’s Public Service divisions and its
commercial subsidiaries;
b) Review the methodologies and practices adopted by BBC’s Public Service
divisions when transacting with its commercial subsidiaries and assess
whether they were in line with market practices;
c) Review the controls that are in place to ensure that these transactions
are on an arm’s length basis;
d) Review the actual prices at which transactions took place and provide an
opinion on whether the prices were in line with market ones; and
e) Identify future transfer pricing challenges, with particular regard to the
proposal to create BBC Studios as the BBC's commercially-operated in-
house TV production unit.
29. The analysis was undertaken with regard to compliance with the Trust’s Fair Trading Policy
and the BBC’s Fair Trading Guidelines.
Methodology
30. The EY report has drawn on documentation supplied by the Trust and the BBC Executive,
and on interviews conducted with BBC and external personnel to ensure that the evidence
base took into account the views of external stakeholders with an interest in any of the
three commercial subsidiaries.
31. EY used the interviews to:
a) Understand the procedures and practices involved in the relevant transfer pricing
relationships;
b) Answer specific questions regarding the case studies;
c) Assist in verifying the data used in the case studies to calculate the transfer price
of assets; and
October 2016 9
d) Provide a further understanding of external stakeholders’ views on (and, where
relevant, concerns with) the current procedures and guidance for transfer pricing.
32. To ensure that the review covered a broad range of transfer pricing arrangements across
all three commercial subsidiaries and in the areas where we were aware from previous
consultations that stakeholders had expressed concerns about transfer pricing matters, we
asked EY to conduct a number of case studies to examine in depth the BBC's application of
and adherence to the Fair Trading Guidelines and transfer pricing requirements in specific
instances.
33. To ensure that the case studies were as representative of the transfer pricing regime as
possible, EY applied criteria agreed with the Trust to select the case studies:
a) To ensure the breadth of transfer pricing agreements, case studies were selected
that covered a similar transfer pricing agreement across each of the three
commercial subsidiaries – for example case studies relating to each subsidiary’s
use of the BBC brand.
b) To ensure the depth of transfer pricing agreements, case studies unique to each
commercial subsidiary were selected.
c) Case studies were selected to address concerns previously raised by third parties.
d) Based on the assumption that the greater the value of the arrangement, the
greater the possibility of market distortion if the transfer price is set too low,
transfer pricing arrangements with a significant financial value were selected.
e) The number of case studies assessed for each individual subsidiary considered the
size of the subsidiary. As such, more case studies were chosen that related to
activities conducted by BBC Worldwide given it is a significantly larger entity than
GNL or Studioworks.
34. Based on the above criteria, EY selected the case studies to ensure that robust conclusions
across a broad range of transfer pricing activities could be drawn.
35. EY sought to answer the following questions in relation to each of the case studies:
a) Was there a sufficiently documented agreement between the PS and the
commercial subsidiary, as required by section 3.10 of the Fair Trading Guidelines?
b) What was the transfer price?
c) How was the transfer price determined?
d) Was the choice of transfer pricing methodology rational?
e) Was the methodology applied with a satisfactory degree of accuracy and rigour?
36. On this basis, EY set out their assessment as to whether each of 12 types of transfer
pricing transactions reviewed were in line with the Fair Trading Guidelines; whether they
were conducted on an arm’s length basis; and whether a fair market price was paid.
37. EY benchmarked a sample of the key BBC processes and pricing practices against the
market, with this assessment based on interviews with the BBC and third parties, analysis
of BBC and external information, and EY research and analysis.
October 2016 10
38. Based on their case studies findings along with the analysis and the evidence gathered
through interviews conducted, EY have set out options for making improvements to the
current arrangements for separation and transfer pricing, in their report to the Trust.
October 2016 11
Findings
Areas of good practice
39. We are satisfied that EY, by selecting and carefully analysing case studies that reflect the
breadth and depth of the transfer pricing arrangements currently in place between BBC
Public Service and the commercial subsidiaries, have provided a report that enables robust
conclusions to be drawn.
40. We are reassured by the outcome that overall EY’s findings are positive, showing that the
transfer pricing processes and governance are adequate and have been applied correctly, in
particular in those areas where the transactions are of greater scale and (hence)
significance to the market. EY found that appropriate methodologies have been adopted in
the majority of the case studies including all those involving BBC Worldwide, and that,
where there is relevant market practice available, market prices have been used, and
benchmarking has been conducted.
41. Specifically, EY conclude in their report to the Trust that:
a) There is a substantial set of policies and procedures in place at the BBC to govern
the transfer pricing arrangements. This includes a tiered approach to training,
ensuring that BBC Public Service Staff across all divisions receive a basic level of
training, whilst those in more senior and more relevant positions receive more
thorough training; and
b) The transfer pricing processes and governance procedures in place:
a. are adequate; and
b. have been applied correctly, resulting in satisfactory outcomes in terms of a
fair transfer price being paid.
42. Finally, with regard to the application of the Transfer Pricing process and governance,
through the analysis of the case studies EY found that:
a) The majority of the case studies adhere to the procedures and processes
currently in place: for example, relevant agreements are in place, sign-off
procedures are followed, and relevant fair trading advice is sought where this is
required.
b) Appropriate methodologies have been adopted in the majority of the case studies
including all those involving BBC Worldwide.
c) Where there is relevant market practice available, market prices have been used,
and benchmarking has been conducted.
43. EY highlight their finding that appropriate methodologies have been adopted in the case
studies involving BBC Worldwide because of the relative size of BBC Worldwide with
respect to the other commercial subsidiaries (more than ten times bigger than GNL and
more than thirty times bigger than Studioworks in revenue terms).
October 2016 12
Areas for improvement
44. We welcome the positive findings from EY’s review, but we recognise the importance of
effective processes and controls to test the application of the BBC’s transfer pricing rules
and to deliver assurance and transparency to the market.
45. EY’s analysis of the case studies has identified a number of potential risks and areas for
improvement for the transfer pricing regime which they set out in their report, providing a
number of recommendations.
46. Having accepted these findings the Trust asked the BBC Executive to develop an
implementation plan setting out how the EY recommendations for improvement would be
addressed. We believe that the implementation plan submitted to us provides a sensible
and comprehensive approach to address EY’s concerns, by committing to the achievement
of direct measurable outcomes.5 We are publishing the BBC’s plan as an annex to this
report.
47. The plan shows that the BBC Executive will introduce changes to its arrangements and in
the vast majority of cases implement them in this or the next financial year.
Procedural improvements
Documentation and record-keeping
48. EY expressed concerns around documentation and record-keeping. In particular:
a) With regard to documentation, EY were unable to review the Studioworks brand
agreement since this could not be found either by the public service or
Studioworks.
b) With regard to record-keeping, EY noted that while transfer pricing agreements
are collated by the BBC’s finance teams, they are not tracked systematically, so
that, for example, EY were unable to assess the percentage of overall transfer
pricing agreements that are covered by the Review, as this information is not
tracked by the Fair Trading team.
49. Given the above findings EY suggested that better care needs to be taken in keeping the
documentation and that there would be merit in transfer pricing activity being tracked
more systematically by the Fair Trading team and the BBC Trust in order to enable the
BBC to gain a better overview across all of the BBC’s Transfer Pricing activity.
Referring “significant” transactions to the fair trading team
50. EY also suggest some changes to ensure that all relevant transactions are referred to the
BBC’s Fair Trading team for consideration. The current transfer pricing regime requires
the BBC divisions to decide which transactions are sufficiently “significant,” “novel” or
5 Note that the BBC implementation plan was submitted to us on the 7th of September, hence before the publication of the
new Charter and Agreement.
October 2016 13
“contentious” to be referred to the Fair Trading team for further review. EY have not
identified examples of potentially significant transactions that have not been referred.
However, they believe that there is sufficient ambiguity to suggest that there is a risk that
cases could be inappropriately overlooked.
51. EY notes that in this regard it would provide greater clarity if “significant” was defined in
the internal procedures which set out the triggers for referral, particularly as no cross-
checks are in place to ensure that the full range of relevant transactions are reviewed. EY
notes that providing the triggers are properly communicated and clear to division heads
and the consequences understood, via the training process, then this should help to
mitigate concerns that the responsibility for compliance lies, in part, with the divisions.
52. In addition, EY consider that the BBC Fair Trading team should conduct “dipstick” tests of
randomly selected transactions (which otherwise have not been referred to the Fair
Trading team) in order to assess whether appropriate procedures have been followed.
Interpretation of Fair Trading Guidelines
53. We discuss this recommendation separately later in the document.
Trust Response
54. The Trust accepts EY’s findings and recommendations concerning procedural
improvements. Transfer pricing arrangements must be clearly documented and the
associated documentation must be available when needed. We also accept that tracking
transfer pricing activities more systematically across the BBC will give a clearer picture of
the scale and extent of such activity and will help to ensure a consistent approach.
Recording transfer pricing transactions centrally should also provide assurance and
transparency as discussed later in this document.
55. The BBC has committed in its implementation plan to establish a record of the material
SLA’s / agreements between the BBC and its commercial subsidiaries. This will be collated
by the Fair Trading Team working with finance and other colleagues. In addition, the Fair
Trading Team will maintain a central repository specifically of advice provided to divisions
in relation to transfer pricing. This will be complemented by some additional transactional
analysis completed by the BBC Finance to summarise invoiced business between the public
service and the commercial subsidiaries. In line with EY’s recommendations the BBC will
use this data to gauge the overall scale of transfer pricing activity, which may be used to
help define further triggers, and would also aid any future transfer pricing reviews. The
BBC has committed to commence this work in October 2016.
56. With regard to the Studioworks brand agreement, the BBC has committed to review the
new Studioworks brand agreement in the last quarter of the current financial year, so that
the revised royalty fee arrangements will be implemented from financial year 2016-17
onwards. The BBC has confirmed that the brand agreement will move from a profit-based
rate to a revenue-based rate and that the new agreement will be drafted to include an
appropriate review mechanism.
57. We accept EY’s opinion that there needs to be more clarity in the Executive’s guidance
about which cases require referral to the Fair Trading Team, and their suggestion for
‘dipstick testing’.
October 2016 14
58. The BBC Executive has committed to update existing guidance in internal Fair Trading
procedures to include a further definition of significance, and provided a new wording for
the internal Fair Trading procedures. The internal procedures will be updated to say:
“Groups/Divisions…should refer any significant, novel or contentious transactions (for
example, length of time of a licence in comparison with market norms, use of non-
standard contractual terms, etc.) to the Group’s/Division’s Fair Trading Adviser.
Significance should be considered by each division/group with reference to their local
financial approval process i.e. anything that requires local divisional board level approval
or greater should be referred to FT.
For the avoidance of doubt, if the transaction is novel or contentious, this should be
referred to FT regardless of the financial value.”
59. While EY did not explicitly ask for these measures to be taken the Trust accepts as
appropriate the definition now provided by the BBC and welcomes its decision to publish
the definition on the Fair Trading pages on the BBC website.
60. The BBC has committed to update the internal procedures by the end of October and to
introduce the new definition in the fair trading training programme.
61. With regard to the recommendation to introduce dipstick testing of randomly selected
transactions, the BBC has committed to expand the existing sample testing programme.
The scale of the existing testing framework will be increased through a larger sample size
which will specifically include a larger number of intra-group transactions to be tested. It
has also decided to include a new requirement for divisions to outline the pricing
methodology used for each transaction sampled. These will then be reviewed for
compliance with the Fair Trading Guidelines.
62. The BBC will give greater prominence to the outcomes of compliance testing through the
introduction of a summary of findings that will be reported to Group Directors and the
Executive Fair Trading Committee as part of the existing bi-annual Fair Trading reporting
process. The BBC has committed to introduce this new regime straight away and to deliver
the first reporting to Group Directors and the Executive Fair Trading Committee at the
end of the current financial year.
Benchmarking and contract review period
63. EY have commented on the lack of sufficiently regular contractual review in certain cases,
which they consider might create the risk of entrenching behaviour that may not be
consistent with market practice. They note that the existing brand licence agreement
between the BBC and GNL was put in place in 2003 and, while there was a review in 2011,
this did not include any benchmarking against (then) current market practice. GNL has not
been required to make any royalty payment for use of the BBC brand under the terms of
October 2016 15
its existing agreement (which sets a rate based on profits). They observe that under normal
commercial agreements it would be unusual for the owner of a piece of intellectual
property to allow continued exploitation by a third party in return for no payment over a
prolonged period.
64. EY recommend that there should be regular reviews of contracts and relevant pricing
benchmarks, so as to ensure the terms continue to be in line with market practice. More
generally, EY considers the benchmarking analysis should be reviewed more regularly, and
that arrangements should be reviewed whenever there is material change to underlying
relationships (e.g. when there is restructuring of the commercial subsidiary in question).
65. EY also note that the BBC’s Fair Trading Guidelines require that prices include an
appropriate ‘contribution’, or ‘margin’, but that there is little guidance on the level at which
this should be set. They recommend that more detailed guidance is developed to ensure a
consistent approach.
Trust Response
66. With regard to the EY’s concerns on the GNL brand agreement, the BBC has committed
to review the exploitation of the BBC brand by GNL to determine a new royalty rate by
the end of the current financial year. The BBC has also confirmed that the agreement will
move from the current profit-base rate to a revenue-base rate so that payment for use of
the BBC brand will be required irrespective of levels of profitability. The new agreement
will be drafted to include an appropriate review mechanism and the revised royalty fee will
be implemented from the financial year 2016-2017 onwards.
67. With regard to contract and benchmarking regular reviews we agree that reviews should
be conducted in accordance with current market practices to ensure that agreements
continue to reflect market prices.
68. As well as committing to review the brand agreements for Studioworks and GNL, the BBC
has also committed to review the BBC Worldwide brand licence to ensure consistency of
approach across the commercial subsidiaries. More generally the BBC has committed to
review periodically the list of long-term agreements to identify whether any more detailed
review might be required, for example due to a material change in structure and/or
operations. The BBC expects to conduct the first review of the database of material
agreements in the 2017/2018 financial year and to review the BBC Worldwide brand
licence agreement in the financial year 2018/2019.6
69. We accept EY’s recommendation about providing further guidance on the level of the
margin that should be set. We agree that further clarity might provide reassurance and
improve the transfer pricing regime. In response to this recommendation the BBC will
formulate more detailed guidance for staff on the principles on charging a margin in
different intra-group trading scenarios, and that internal procedures will be updated to
reflect there more detailed principles. These principles will be reflected in internal guidance
for the financial year 2017/2018.
6 Note that the latest BBC Worldwide Brand Licence Agreement was updated and signed in 2015.
October 2016 16
Transparency
70. The report recommends improvements in transparency, picking up on the Trust’s
announcement in the context of its recent fair trading review that future annual fair trading
audits should have a greater focus on the outcomes of transactions as well as whether
processes have been followed correctly, and the Trust’s commitment to include more
information on the results of the audit in its annual report.
71. EY cite as examples of lack of transparency the BBC Worldwide brand payment, saying that
the reasoning behind some of the arrangements is not clear, and that bundled rights deals
by BBC Worldwide may inhibit the transparency associated with the pricing of individual
programmes.
72. EY note in their report that some stakeholders have called for greater regulatory scrutiny
and enforcement (including sanctions) around the relationship between the BBC and its
commercial subsidiaries to ensure that the parties are held to account, delivering greater
comfort for external parties. They observe a lack of understanding in industry about the
nature and extent of the existing governance framework and suggest that the Trust could
consider proactive steps to promote transparency to help to allay some of these concerns.
73. EY float the possibility of a regulator publishing (or requiring the BBC to publish) an Annual
Monitoring Report on the arm’s length agreements between the BBC public service and its
subsidiaries to review whether they are in line with the Fair Trading Guidelines.
74. Other measures to increase transparency suggested by EY are to change the Fair Trading
Policy document and Fair Trading Guidelines to simplify the guidance and to signpost
additional documents, and the possibility of a workshop on Fair Trading Policy and its
implementation.
Trust Response
75. At present the BBC Executive reports on and is held accountable for its dealings with its
subsidiaries through a range of controls presented to the BBC Trust:
a) The BBC Executive reports on the performance of its subsidiaries and their
compliance with the four commercial criteria (a component of which is
compliance with the requirements around transfer pricing in the Fair Trading
Guidelines).
b) The BBC is also subject to an annual Fair Trading Audit which looks at key areas
of risk and sample tests and interrogates the central advice records.
c) Sample testing of transfer pricing is also included within the BBC’s annual financial
audit.
d) All three subsidiaries publish annual accounts.
76. While these controls all contribute to delivering accountability and transparency, we
acknowledge that transparency could be improved. The challenge is to find the right
balance between protecting confidentiality and the competitive position of the subsidiaries
in the market, and providing sufficient information to give reassurance to the market that
October 2016 17
these businesses are not receiving any unfair advantage. The Trust is also keen that a
proportionate approach is taken, so that reporting requirements do not become an
unreasonable regulatory burden.
77. The BBC Executive has committed to a series of initiatives that we believe will increase the
level of transparency across the areas identified by the EY’s report. We are satisfied with
the proposals put forward and the proposed timeline for implementing them.
78. We also note that EY has recognised that, following the latest Fair Trading Review, the
Trust has taken steps to improve transparency, working closely with the BBC Executive. In
this respect, changes have already taken place in the last financial year:
a) The BBC Executive has acted to improve the transparency of the external audit by
facilitating the Trust’s request that the auditors provide additional detail of their
work to the BBC Trust in their Audit Report;
b) Further, the BBC’s Annual Report and Accounts 2015-16 includes additional
information related to the external Fair Trading audit compared to prior years.
This is published in Part One (Inside the Trust - Governance) and Part Two
(Governance – Fair Trading Report) of the report.7
79. With regard to the EY’s concerns about the reasoning behind some of the BBC Worldwide
brand payment arrangements, the BBC has committed to review the agreement as
required under the review provisions in the existing licence. During the review, which will
take place in the financial year 2018/2019, the BBC will ensure that a consistent approach
across commercial subsidiaries will be applied.
80. The Trust acknowledges the arguments presented by EY for sharing with the market more
information regarding the arm’s length agreements between the public service and its
commercial subsidiaries. However we believe that this can be achieved effectively by
publishing material in a single place rather than spread across several documents. We
believe that the Fair Trading pages on the BBC website represents a more appropriate
medium for publishing such information and therefore accept the BBC proposal to increase
the visibility of, and confidence in, the safeguards the BBC has in place by publishing
additional information on the Fair Trading pages on the website which summarises the
controls framework employed by the BBC to ensure compliance with the Fair Trading
Guidelines.
81. This would not include specifics on the value or number of transactions or any
commercially sensitive data but would include a repository of Fair Trading related data
such as:
a) Extracts from the BBC’s Annual Report and Accounts which reference Fair
Trading compliance;
b) A summary of the high level types of transactions that occur between the Public
Service and commercial subsidiaries;
c) A summary of compliance activity undertaken by the Fair Trading team;
d) Number of individual pieces of advice provided to the BBC groups;
7 http://downloads.bbc.co.uk/aboutthebbc/insidethebbc/reports/pdf/bbc-annualreport-201516.pdf
October 2016 18
e) Cross-reference to any other relevant information published by the Trust; and
f) Relevant extracts from internal procedures, such as the definition of significance.
82. The BBC has committed to start publishing this additional information from December
2016.
83. Finally, the BBC has confirmed that it would consider any requests from third parties for a
workshop on Fair Trading policy and its implementation, and that this would be arranged as
required.
Application and interpretation of Fair Trading Guidelines
84. EY found that the BBC’s approach to transfer pricing for transactions relating to GNL
programmes appeared to have departed from a strict interpretation of the Fair Trading
Guidelines. In Case Study 9, some programming sold to GNL was priced using an
incremental cost method. EY concluded that there was no evidence that this was market
practice, at least if one took a narrow definition of the market. In that event, the
Guidelines suggest that a price based on all relevant direct costs and overheads, plus a
margin for reinvestment by the BBC, should be employed. EY also notes that if a wider
market interpretation was used there is evidence to suggest that incremental cost pricing is
used by third parties.
85. In addition, EY found differences in the way that content is paid for between GNL-
commissioned content and BBC News-commissioned content, as well as co-commissioned
content:
a) For GNL-commissioned content, BBC News makes a payment to GNL via a
discount for overheads and margin based on the secondary value BBC News
derives from it.
b) For BBC News-commissioned content the GNL payment is set at incremental
cost.
c) For the co-commissioned programmes analysed, it appears that BBC News pays all
the overheads.
86. EY comments that there should be consistency in the approach taken for payment of
content i.e. that content should be priced using the same methodology unless there is
evidence to justify different approaches.
Trust Response
87. In the case highlighted by EY the proposed pricing arrangements were referred to the
BBC's Fair Trading Team as required by the Guidelines. The Trust notes that EY's concern
was whether the right methodology had been used. They did not conclude that the transfer
price used was incorrect. The Guidelines include provision for particular pricing
arrangements that do not fit the Guidelines to be referred to the Fair Trading team, who
October 2016 19
may consider that there is an objective justification for the proposed approach.8 This is the
process that was followed in the instance of Case Study 9.
88. The Trust regards this as a prudent and indeed necessary provision, as the Guidelines
cannot cover every situation. We also recognise that, in the absence of market benchmarks
or other evidence of market practice it is necessary to seek a proxy for market pricing, and
that there may well be circumstances where, taking into account such evidence as there is
(e.g. in Case Study 9, that there is effectively no market for BBC branded “ready-made
news” programmes outside the BBC), an approach based on incremental costs may be the
appropriate way to arrive at a valid transfer price.
89. An external review of the BBC Executive’s rationale and supporting evidence for the use of
incremental cost pricing, found there was very limited trade in ‘ready-made’ news
programming but, when looking at the wider market, there was some evidence to suggest
that incremental cost pricing is in accordance with market practice. While EY do not find
that incorrect transfer pricing has been used, they recommend that the matter is reviewed.
Having asked the Executive to revisit this, the Trust is satisfied that the Executive’s position
– explaining why reference to the wider market is appropriate – is acceptable. The Trust
also welcomes the Executive’s commitment to keep its approach under review as markets
change and evolve.
90. With regard to the different price methodologies used to price GNL commissioned
content and BBC News commissioned content, the BBC has committed to revisit these
transactions and that a consistent approach will be applied through the general review on
consistency in charging principles. The review is planned for completion in the financial year
2017/2018.
Other considerations
91. EY include some additional findings in their report to the Trust:
a) For similar transactions across subsidiaries, whilst the majority of these
similar transactions meet the Fair Trading Guidelines, the approaches taken to
negotiating the outcomes were managed separately, for example in the
Studioworks contracts for EastEnders and Holby City (case studies 7 and 8). EY
recommend that the BBC considers adopting an overarching framework for
similar transactions in future, to ensure that the approaches are either consistent
or that differences in approach are appropriate to the circumstances of the
particular deal.
b) For the purchase of rights by BBC Worldwide, EY note (case study 12) that some
payments are for bundled rights, in order to secure access to content. However
they believe that this practice could create negative competitive effects in the
market for this content, possibly pushing prices above competitive levels, or
restricting further access. EY state that this could become a particular issue if this
type of strategy becomes more prevalent.
8 See paragraph 3.17 of the Guidelines
October 2016 20
c) We invited EY to comment on any finding from their work that they would wish
to highlight for consideration in the context of the BBC’s plans to establish a new
commercial subsidiary, BBC Studios. EY offer a number of suggestions in their
report for the BBC when setting up BBC Studios:
a. Document, articulate and communicate transfer pricing procedures and
outcomes to stakeholders, in order to ensure transparency and address
industry concerns;
b. Be able to demonstrate the reasoning behind particular individual decisions –
for example why a specific value has been used in setting payments;
c. Continue to place great importance to the benchmarking analysis and when
possible use tendering process; and
d. Identify trigger points, or put in place a formal review process for long-term
contracts.
Trust Response 92. We agree that defining an overarching framework to similar transactions to ensure that the
approaches are either consistent or that differences in approach are appropriate to the
circumstances of the particular deal, can provide guidance to both the Public Service and its
commercial subsidiaries.
93. The BBC has committed to make changes to improve consistency in the approach to the
charging of central functions (like for example group functions utilised by the commercial
subsidiaries such as HR, Finance and Legal support), and more in general in their approach
to all the transfer pricing transactions. These pricing principles will be captured in a ‘BBC
Group Trading’ manual providing clear and consistent charging principles. The Fair Trading
training regime will be updated to include additional detail to delegates on charging for
group services and it will make reference the ‘Group Trading’ manual. The BBC has also
undertaken to set out central function principles for the financial year 2017/2018 and to
have a Group Trading manual for by April 2017.
94. With regard to the bundling of rights, while we acknowledge that a theoretical risk may
exist in some specific circumstances, we note that some bundling of rights (which allows
the buyer to spread risks on a set of rights) is an approach used not just in relation to BBC
rights but also for rights acquired from other broadcasters, and that bundling rights is the
market norm which reveals commercially preferable for buyers and sellers. On balance, in
this circumstance, we consider that the benefits of bundling rights are likely to outweigh
the potential risk of negative outcomes and as such we do not believe that further action is
necessary at this point.
95. Finally, with regard to the BBC Studios proposals we accept that all the recommendations
expressed by EY would be beneficial for the correct functioning of the transfer pricing
regime. We therefore expect these recommendations to be adopted if and when the BBC
Studios becomes a commercial subsidiary. More broadly, we expect that all the
improvements to the transfer pricing regime and the changes that the BBC has committed
to implement in this review will be applied to BBC Studios transactions if the Trust finds
October 2016 21
that the proposals meet the required regulatory tests and the new commercial subsidiary is
established.
October 2016 22
Annex – Implementation Plan submitted to the
Trust by the BBC Executive
EY finding / observation Actions Timing
1 It would provide greater clarity to
divisions if ‘significant’ was defined
in internal procedures which set
out triggers for referral.
1. The internal Fair Trading (‘FT’)
procedures currently reference
significance, alongside novelty
and whether the transaction
could be contentious.
However, we note that
additional clarity in our internal
Fair Trading procedures may be
helpful to provide additional
certainty to Divisions.
Therefore, existing guidance in
internal FT procedures will be
updated to include a further
definition of significance.
2. Our internal procedures will be
updated to say:
“Groups/Divisions…should refer
any significant, novel or
contentious transactions (for
example, length of time of a
licence in comparison with market
norms, use of non-standard
contractual terms, etc.) to the
Group’s/Division’s Fair Trading
Adviser.
Significance should be considered
by each division/group with
reference to their local financial
approval process i.e. anything that
requires local divisional board level
approval or greater should be
referred to FT.
For the avoidance of doubt, if the
transaction is novel or contentious,
this should be referred to FT
regardless of the financial value.”
By 31 Oct 2016
Update made to
the internal
procedures post
Trust Services
Committee.
By 31 Oct 2016
Communicated for
onward
dissemination
On-going
Maintain awareness
through discussion
in training sessions.
October 2016 23
EY finding / observation Actions Timing
3. The definition of significant and
the referral of transactions /
transfer pricing arrangements
will continue to be explored
through the existing FT training
programme.
4.
2 The BBC FT team should conduct
‘dipstick’ tests of randomly
selected transactions involving
transfer pricing (which would
otherwise have not been referred
to FT) in order to assess whether
appropriate procedures have
been followed.
1. Existing sample testing by the FT
team will be extended to
include the requirement for
divisions to outline their pricing
methodology for each
transaction sampled which will
be reviewed for compliance
with the FT guidelines.
2.
3. The scale of the existing testing
framework will be increased
through a larger sample size
which will specifically include a
larger number of intra-group
transactions to be tested /
reviewed.
4.
5. The outcome of compliance
testing will have greater
prominence internally through
the introduction of summary
RAG reporting setting out the
findings of compliance testing
(reporting detail by exception
i.e. where a potential issue has
been identified) to:
a. Group Directors via the existing
FT bi-annual reporting
processes
b. Executive Fair Trading
Committee (‘EFTC’) on a bi-
annual basis
Q3 2016-17
Inclusion of pricing
methodology data
collection in
existing sample
testing.
Q3 2016-17
Increase in sample
size.
Q4 2016-17
First bi-annual
reporting to Group
Directors.
Q4 2016-17
First reporting to
EFTC (to align with
bi-annual divisional
reporting).
NB: Q4 relates to
the transactions
sampled in that
quarter. Reporting
to Group directors
/ EFTC will actually
take place in Q1
17/18 reflecting Q4
activity.
3 There would be merit in transfer
pricing activity being tracked
more systematically by the FT
team and the BBC Trust to
enable the BBC to gain a better
understanding of the full scale of
1. In addition to existing records
the FT team will maintain a
central repository specifically of
advice provided to divisions in
relation to transfer pricing.
October 2016
2015-16
transactional
analysis prepared
for initial review.
October 2016 24
EY finding / observation Actions Timing
transfer pricing activity, which
could also be used to help define
further triggers, and would also
aid any future reviews similar to
this study.
2. The FT team will work with the
commercial subsidiaries and
finance colleagues to collate a
repository of material SLA’s /
contractual agreements
between the public service and
the commercial subsidiaries.
This combined with published
data on BBC Worldwide (‘BBC
WORLDWIDE’) content
investment and dividends paid
to the BBC will provide an
additional central overview of
material transactions and the
associated transfer pricing
principles.
3. This will be complemented by
additional transactional analysis
completed by BBC Finance to
summarise invoiced business
between the public service and
the commercial subsidiaries (not
including trade between the
commercial subsidiaries
themselves).
4.
5. In line with EY’s
recommendations we will use
this data to further inform our
understanding of the scale of
transfer pricing activity, which
may be used to help define
further triggers, and would also
aid any future reviews similar to
the EY study.
Q2 2016-17
Central repository
of FT pricing advice
created. To be
updated
retrospectively to
include Q1 2016-
17 advice with a
view to having a
full year picture for
the financial year
2016-17.
Q4 2016-17
Databank of SLAs /
contractual
agreements in
place for 2016-17
populated.
Quarterly from
Q2 2016-17
Transactional
analysis provided
to FT by finance
team.
4 Documentation and record
keeping – S&PP (now
Studioworks) brand agreement
could not be found.
1. A new brand licence agreement
with Studioworks will be drawn
up. See point 8b below.
See 8b
5 The BBC should consider
adopting an overarching
framework to similar transactions
in future to ensure that the
approaches are either consistent
or that differences in approach
1. In response to the specific
findings on brand licences for
Studioworks and Global News
Ltd. (‘GNL’), they will be
reviewed and a consistent
approach will be applied (see
March 2017
Fees payable under
new brand licences
based on 2016-17
results.
October 2016 25
EY finding / observation Actions Timing
are appropriate to the
circumstances of the particular
deal.
sections 8a and 8b).
2. The BBC Executive will make
some changes to improve
consistency in the approach to
the charging of central functions
(e.g. group functions utilised by
the commercial subsidiaries
such as HR / finance / legal
support).
3. BBC Studios (if and when it
becomes a commercial
subsidiary) will be subject to the
same consistent approach.
4. These pricing principles will be
captured in a ‘BBC Group
Trading’ manual providing clear
and consistent charging
principles.
5. The FT training regime will be
updated to include additional
detail to delegates on charging
for group services and make
reference the ‘Group Trading’
manual.
2017-18
Central functions
charging principles
to be in place for
the financial year
2017-18.
1 April 2017
‘Group Trading’
manual to be in
place for the start
of the financial
year.
2017-18
FT Training
sessions to include
additional detail on
Group Trading
pricing principles.
6 Use of incremental cost pricing
between GNL and News – in
such cases these pricing
arrangements should be subject
to further review by the Trust.
1. FT has reviewed the rationale
for the use of incremental cost
pricing for certain categories of
news content.
2. Any new instances of
incremental cost pricing will be
subject to approval from the FT
team as stated in the FT
Guidelines.
3. Strategic review of each
commercial subsidiary (including
GNL) as mandated by the
Government’s White Paper is
likely to include some
consideration of transfer pricing
and trading between the public
service and its commercial
On-going
Review of new
instances of
incremental cost
pricing.
By end 2018
First strategic
review to be
completed as per
the White Paper.
October 2016 26
EY finding / observation Actions Timing
subsidiaries. The FT team will
feed into the strategic reviews
of the commercial subsidiaries
as required.
7a
7b
7c
There should be regular review
of contracts and relevant pricing
benchmarks (open ended
contracts) so as to ensure the
terms continue to be in line with
market practice.
Where there is a significant
change in the market, (for
example with the creation and
restructuring of GNL), contracts
should be reviewed.
There is merit in reviewing
benchmarking analysis more
regularly, and ensuring that
arrangements are reviewed
whenever there is a material
change to underlying relationships
(e.g. when there is a restructuring
of the commercial subsidiary in
question.
1. The EY observations regarding
contract review and
benchmarking are primarily
made in relation to the GNL
and Studioworks brand licences
and as described in section 8
below the GNL and
Studioworks brand licences will
be reviewed and will
incorporate consistent review
points and triggers for review.
2.
3. The BBC Worldwide brand
licence will also be reviewed at
the current contractual review
point to ensure consistency of
approach across the commercial
subsidiaries.
4. Standardised SLA’s for group
services/central functions will be
utilised across the commercial
subsidiaries.
5.
6. Utilising the databank of
material agreements between
the PS and the commercial
subsidiaries as referred to in
section 3, alongside the FT
team’s knowledge of the
divisions and their activities, the
list of agreements will be
reviewed periodically to identify
whether a more detailed review
might be triggered, due to a
material change in structure /
operations.
2018-19
BBC
WORLDWIDE
brand licence
updated at current
contractual review
point to include
standardised
review
points/triggers.
2017-18
First review of
databank of
material
agreements.
Standardised SLA’s
drafted.
8a GNL brand licence review 1. The exploitation of the BBC
brand by GNL will be reviewed
to determine a new royalty rate.
Q4 2016-17
New royalty rate
agreed and licence
document in place.
October 2016 27
EY finding / observation Actions Timing
2. The brand fee will be set as a
percentage of applicable
revenue.
3. The new agreement will be
drafted to include an
appropriate review mechanism.
4. The revised royalty fee will be
implemented from financial year
2016-17 onwards.
March 2017
The fee payable
based on the new
royalty rate will be
calculated on 2016-
17 full year
financial results.
8b Studioworks brand licence review 1. The exploitation of the BBC
brand by Studioworks will be
reviewed to determine a new
royalty rate.
2. The brand fee will be set as a
percentage of applicable
revenue.
3. The new agreement will be
drafted to include an
appropriate review mechanism.
4. The revised royalty fee will be
implemented from financial year
2016-17 onwards.
Q4 2016-17
New royalty rate
agreed and licence
document in place.
March 2017
The fee payable
based on the new
royalty rate will be
calculated on 2016-
17 full year
financial results.
9 More detailed internal guidance
should be provided to BBC staff
as to what is considered an
appropriate contribution back to
PS (the ‘margin’) to ensure a
consistent approach.
1. The FT team will formulate
more detailed guidance for staff
on the principles on charging a
margin in different intra-group
trading scenarios.
2. Internal procedures will be
updated to reflect these more
detailed principles.
April 2017
Principles for
charging margins to
be reflected in
internal
procedures for the
new financial year
10 The reasoning behind some of the
arrangements for BBC
WORLDWIDE brand payment is
not clear.
The BBC will review the
agreement as required under
the review provisions in the
existing licence and document
conclusions.
2018-19
Review of brand
licence terms and
fee as required.
11 Bundled rights deals by BBC
WORLDWIDE may inhibit the
transparency associated with the
pricing of individual programmes.
1. The BBC Executive considers
that bundling rights in this
context is the market norm and
commercially logical for buyer
and seller. By spreading risk
N/A
October 2016 28
EY finding / observation Actions Timing
across the bundled rights, the
buyer mitigates risk and the
seller maximises price.
Therefore, the BBC Executive
does not believe any further
action is required in response to
this observation by EY.
12 EY note that the Trust is taking
steps to improve the
transparency of the BBC’s
transfer pricing arrangements. In
the Trust’s review of Fair Trading
Policy it states its intention to
“…ask the Executive to commission
a more thorough fair trading
audit…with a greater focus on
whether the outcomes of individual
cases are compliant, as well as
whether processes have been
followed correctly..”
1. The BBC Executive has acted to
improve the transparency of the
external audit by facilitating the
Trust’s request that the auditors
provide additional detail of their
work to the BBC Trust in their
Audit Report.
2. Further, the BBC’s Annual
Report and Accounts 2015-16
includes additional information
related to the external FT audit
compared to prior years. This
is published in Part One (Inside
the Trust - Governance) and
Part Two (Governance – Fair
Trading Report) of the report.
3. It sets out additional detail of
the work the auditors have
completed as described in their
audit report:
“Our work consisted of enquiry
and testing to enable us to form a
view as to whether an appropriate
system of internal controls was in
place. We conducted a risk-based
analysis to identify those aspects of
the BBC’s fair trading control
regime that represents the most
significant fair trading risk, and
focused our detailed testing on
those areas. Individual cases were
selected from the BBC’s fair
trading log for review. In each case
we examined written records and
interviewed relevant parties to
provide us with reasonable
Completed.
October 2016 29
EY finding / observation Actions Timing
assurance that the system of
internal control had been applied,
and the appropriateness of the
outcome. Cases examined, and the
areas of significant risk around
which the work was focused,
covered all three of the BBC’s
commercial service subsidiaries
and included examination of
transfer pricing and separation
arrangements, use of and payment
for the BBC brand, and the
application of the Trust’s
requirement that, subject to
fulfilling the public purposes, the
BBC should minimise any negative
market impact.”
13 Publish an annual monitoring
report on the arm’s length
agreements between the PS and
commercial subsidiaries to review
whether they are in line with the
FTGs.
The report could include:
- Results of dipstick tests
- Further clarity on the internal
processes undertaken to ensure
compliance, for example the
review of overhead allocation and
how this is applied to cost plus
transfer pricing arrangements.
1. There are already a range of
controls in place governing the
BBC’s reporting of its dealings
with its subsidiaries, however
the BBC Executive aim to
increase the visibility of, and
confidence in, the safeguards the
BBC has in place by publishing
additional information on the
Fair Trading pages of the BBC
website which summarises the
controls framework employed
by the Executive to ensure
compliance with the FT
Guidelines. This would not
include specifics on the value or
number of transactions or any
commercially sensitive data but
would include a repository of
FT related data such as:
a. Extracts from the BBC’s Annual
Report and Accounts which
references FT compliance
b. Summary of the high level types
of transactions that occur
between the PS and commercial
subsidiaries
December 2016
Additional
information
published on the
Fair Trading pages
of the BBC
website.
October 2016 30
EY finding / observation Actions Timing
c. Summary of compliance activity
undertaken by the FT team
d. Number of individual pieces of
advice provided to the BBC
groups
e. Links to other related
documents published by the
Trust
f. Relevant extracts from internal
procedures, such as the
definition of significance that has
been determined as a result of
this review (see section 1)
14 External stakeholders would
welcome a workshop on the FT
Policy and its implementation.
1. The BBC would consider any
requests from third parties for
such a workshop to outline in
more detail the FT policy and
framework and a workshop
would be arranged if requested
and/or required.
TBD
To be arranged as
required.