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Recognition of Transfer Pricing charges

28 August 2008 1,093 views No Comment

Quik question for the group.

How would you record transfer pricing charges to a foreign subsidiary above the profit line in the P&L? Specifically, if the TP charge is US$ 1.0MM – I understand the parent side would be an entry to a revenue account; however, the question is how to record it on the subsidiaries books (i) as a Cost of Sale or (ii) as a contra revenue?

I am treating it as revenue to the parent and COGS to the sub – looking for arguments that it should be treated as a contra on the sub’s books. It comes down to whether we want to see an increase in revenue along with a corresponding increase in COGS on the consolidated financial statements or do we want it to eliminate it during the consolidation process as would happen if we chose the contra method – obviously, profit remains unchanged. Thoughts?

Sonny

In the separate financial statements of each entity it is revenue for the selling entity and cost of ssales for the purchasing party. But only when the goods or service has been sold by the purchasing party (otherwise it would be revenue to the selling aprty and inventory to the purchasing party). On consolidation all intercompany transactions are eliminated. Items in inventory purchased from a entity part of the consolidation has to valued at cost to the group, that is the profit the selling party has recorded in its separate company accounts has to be eliminated. What remains is turnover to parties outside the group of companies consolidated and cost of sales from third parties and own production people.

Hope this helps,

Henk

From my consumer goods industry experience it is indeed COGS assuming for our purposes that it is a transfer of an inventory which is the core product that the Group sells as opposed to a transfer of say a “technological asset”

It does – thanks.

Sonny