Transfer Pricing
-
Upload
rashwanth-tc -
Category
Documents
-
view
563 -
download
0
Transcript of Transfer Pricing
AN PRESENTATION ON THE TOPIC “TRANSFER PRICING”
Presented by:Rakesh T.C
DEFINITION AND MEANING:
A transfer price is defined as “ the price that is assumed to have been charged by one part of a company for products and services it provides to another part of the same company, in order to calculate each division’s profit and loss separately.”
Transfer price doesn’t have any direct impact in the organization’s profits as a whole because its effect on one’s division’s revenue is exactly offset by another division’s cost. 2
RA
SH
WA
NTH
CONCEPTS OF TRANSFER PRICING
Transfer mechanism work in different ways: If all divisions are made completely independent
of each other, then the selling division will set its product to the buying divisions only at the market price. So, the transfer price is the current market price; and divisional profitability is measured as if the division were an independent company.
The use of market price as transfer price establishes the discipline of the market on the divisional managers and allows them to operate their divisions with greater autonomy.
3
RA
SH
WA
NTH
OBJECTIVES OF TRANSFER PRICING
The main objective is proper distribution of revenue between profit centers.
Some of the other objectives are: Providing relevant information to the profit
centers regarding the trade-off between costs and revenues of the company.
Inducing goal-congruent decisions. Helping to measure the economic
performance of profit centers. Minimizing tax liability. 4
RA
SH
WA
NTH
IDEAL SITUATION FOR OPERATION OF TRANSFER PRICING MECHANISM
Goal congruenceSome of the pre-requisite are:
Competent people. Good organizational atmosphere. Details of market prices. Freedom to source. Availability of information. Scope for negotiation.
5
RA
SH
WA
NTH
COMPETENT PEOPLE
Organizations need managers who can balance long-term and short-term goals. Managers are often accused of sacrificing long-term gains for short-term profits. The approach can prove disastrous for the organizations. Hence, organizations should have competent people skilled at negotiation and arbitration, who are capable of determining the appropriate transfer prices.
6
RA
SH
WA
NTH
GOOD ATMOSPHERE
In order to achieve goal congruency, managers of profit centers, especially the buying centers, should ensure that the transfer prices charged by the selling profit centers are just. This will create the atmosphere of trust between selling profit center and buying profit centers.
7
RA
SH
WA
NTH
DETAILS OF MARKET PRICES
When a product is transferred from one profit center to another, the normal market price for the identical product can be taken as the basis for establishing the transfer prices.
8
RA
SH
WA
NTH
FREEDOM TO SOURCE
Managers of the selling profit centers should be given freedom to sell their goods in the external market, while managers of buying profit centers should be allowed to buy their goods from the external market. Thus the market becomes the main determinant of the transfer price.
9
RA
SH
WA
NTH
AVAILABILITY OF INFORMATION
Managers should be fully aware of market conditions and should have all the necessary information available to them, before they take any decision.
10
RA
SH
WA
NTH
SCOPE FOR NEGOTIATION
There must be a mechanism for negotiating contracts and managers who take transfer pricing decisions should be trained in negotiation.
11
RA
SH
WA
NTH
TRANSFER PRICING UNDER CONSTRAINTS ON SOURCING
The implications of constraints on sourcing on the appropriate transfer pricing policies are described below:
Limited markets. Excess or shortage of industry capacity. Sourcing constraints.
12
RA
SH
WA
NTH
METHODS OF CALCULATING TRANSFER PRICES
The following criteria should be used to evaluate the methods for calculating transfer price.
Goal congruence. Rationality. Autonomy. Performance evaluation.
13
RA
SH
WA
NTH
CONT..
The other common methods of calculating the transfer pricing are:
Market- based pricing method. Cost-based pricing method.
Actual costs approach. Standard costs approach. Variable costs approach. Marginal costs approach.
Negotiated pricing method.
14
RA
SH
WA
NTH
ADMINISTRATION OF TRANSFER PRICING
Negotiation. Arbitration and conflict resolution. Product classification.
15
RA
SH
WA
NTH