Transfer Pricing Concepts 

A transfer price is a price used to valuate the transfer of a good or service between independently operating units of a corporate group. In Release 4.0A, you can use transfer prices to valuate goods movements. Activities cannot be valuated with transfer prices at this point.

The R/3 System supports three types of transfer prices to represent the three primary views of goods movements within a corporate group.

In the legal view, transfer prices represent the value (sales price) of goods or services transferred between legally independent member companies in the group. These values are reflected in the individual financial statements of these companies.

In the corporate view, the goods and services are valuated using the corporate cost of goods manufactured. For these prices, internal profits are eliminated from the prices of the legal view.

In the profit center view, transfer prices are the prices negotiated for goods and services exchanged between areas of responsibility (profit centers) and used to determine their internal profitability.

 

The above graphic shows the three different views:

  1. Group view, in which business transactions within the group are represented using group-wide cost rates
  2. Profit center view, in which business transactions between profit centers are valuated using managerial or controlling rates
  3. Legal view, in which business transactions between affiliated companies are valuated using external sales prices

 

The following concepts are also of importance for an understanding of transfer pricing in the R/3 System:

The three different views of business transactions - those of the individual company, the group as a whole and the profit center - are referred to as valuation views.

The R/3 System, each valuation view always uses its own currency type. the combination of currency type and valuation view is referred to as the valuation approach (see also Consistency of the Valuation Settings in Different Applications: Currency and Valuation Profile).

In a currency and valuation profile, you can specify up to three valuation approaches that you want to store in parallel in your system. This ensures that these approaches are updated consistently throughout all the affected application components (see also Consistency of the Valuation Settings in Different Applications: Currency and Valuation Profile).

Except in Profit Center Accounting, transfer prices from the legal view must be stored in all application components. Storing up to two additional valuation approaches for material inventories and goods movements in parallel is referred to as parallel valuation.