Multiple Valuation Approaches/Transfer Prices 

Use

Transfer prices let organizations that divide tasks among different organizational units to valuate the goods and services exchanged between these units.

Particularly large corporations are often divided into a number of independently operating divisions or companies that exchange large quantities of goods and services with one another. Transfer prices are becoming an increasingly critical method for controlling corporate units as the division of labor between internationally operating units increases, value-added chains become more complex and responsibilities become more decentralized.

By valuating the exchange of goods and services using transfer prices, you can significantly influence the actual success of your corporate divisions or profit centers. Especially in this context, today’s accounting systems need to be able to provide decision support that represents operational results from different points of views and using different currencies.

The following example shows how this looks in reality.

Company A sells a product to Company B, thereby realizing a profit that must be shown in its balance sheet (corporate and tax balance sheets). Because Company A and Company B both belong to the same group, this sale is merely as an internal stock transfer when looked at from the point of view of the group. Thus no group (internal) profits can be realized as a result of this transfer. Such internal profits can also arise when the exchange is between two profit centers instead of two independent companies of the group.

The view of the individual company and the valuation according to legal reporting requirements only represents one of several possible perspectives on the economic reality. Balance sheet and tax considerations play an important role in the financial statements of the individual companies. In addition to this legal view, though, a successful corporate and group management needs other information that shows business activities from the point of view of the whole group or of individual profit centers.

Corporate controlling for the entire group requires you to valuate these business transactions using a cost of goods manufactured that is valid on a group-wide basis. Moreover, in many groups the management structures do not always correspond to the legally independent accounting units. Internal prices guide the individual profit centers according to market principles. Consequently, the value flows need to be represented from the point of view of profit centers for the purpose of internal profitability management.

In short, controlling and information systems are required that let you valuate and analyze these business activities from all three different perspectives.

Integration

For transfer prices to be consistent, you need to use them throughout your entire system. For more information, see Multiple Value Flows in Financials.

Features

For more detailed information on the use of multiple valuation approaches, see the following sections:

Managerial Aims of Transfer Pricing

Multiple Value Flows in Financials

Multiple Valuation Approaches in Individual Applications

Implementing Transfer Pricing in a Live System