How to Use Transfer Prices for Intercompany Inventory Transfers with Standard Functionality

  • by Surajit Mohanty, Independent Consultant
  • August 25, 2015
Learn how to design a standard SAP solution to meet the business requirement to implement transfer prices or arm’s-length prices between intercompany, parent, or subsidiary inventory transfers. The main business reason for using transfer prices is to ensure that an organization having multiple affiliate companies is not manipulating income taxes by setting up prices over or under the comparative market prices while transferring goods or services.
Learning Objectives

By reading this article you will learn how to:

  • Use parallel valuation to transfer prices in case of intercompany transfers and carry this markup in the inventory ledger from the legal or local statutory rules perspective 
  • Use parallel valuation to report inventory without the markup from the perspective of the consolidated group viewpoint
  • Meet the currency translation requirement from an IRS standpoint
Key Concept

The parallel valuation function that is implemented using controlling (CO) functionality and particularly the material ledger enables general ledger (G/L) postings to carry multiple valuation data in various currencies in the same accounting document. This process is fully compatible with the SAP General Ledger and helps to post different valuation data in three local currency fields for any accounting document.

When a transfer price is used to value inventory (materials), it carries a profit or markup in addition to the base manufacturing cost. Many times this transfer pricing requirement is also known as profit in inventory. The parallel valuation solution offered by the SAP material ledger helps to meet the business requirement around transfer prices.

Using this standard solution, multinational companies can comply with various local US Generally Accepted Accounting Practices (GAAP) rules set up by the Financial Accounting Standards Board (FASB) and governed by the U.S. Securities and Exchange Commission (SEC) in the US, income tax rules set up by the IRS in the US, or transfer pricing rules set up by the Organization for Economic Co-operation and Development (OECD) in the EU. They can address the statutory need for preparing consolidated financial statements.

I describe the end-to-end process of using transfer prices for inventory transfers. This is a high-level currency remeasurement process used to valuate foreign currency balance sheet item balances in a financial statement of a company when this currency differs from company code currency. I also explain translation strategy and eventual elimination entries leading up to preparation of a consolidated financial statement.

This solution uses three valuation views in SAP ERP Central Component (ECC) to capture the transfer pricing postings. This solution can integrate with any final consolidation system (such as SAP Business Planning and Consolidation [SAP BPC] or Hyperion) seamlessly. Usually organizations do not develop this type of system in ECC and hence details are usually not available in the ECC system. An example of a system where this is usually developed is SAP BPC. If you do not have any solution in ECC, usually transfer pricing audits can become very cumbersome and can expose these organizations to potential fines.

Surajit Mohanty

Surajit Mohanty is an independent consultant with more than 14 years of SAP Financials consulting experience. In the past he has worked with various consulting firms such as IBM, Deloitte, and BearingPoint. He has vast experience in SAP CO (Controlling/Management Accounting) and FI areas spanning across nine end-to-end implementations. He has delivered solutions to a broad range of clients with various roles in the areas of product costing, material ledger average costing, transfer pricing, profitability analysis, revenue recognition, accounts receivable and payable, sales and use taxation, SAP General Ledger, and integration of the SAP General Ledger with materials management, production execution, and sales and distribution areas. He lives in Schaumburg, IL, with his wife and son.

 

 

See more by this author


Comments

No comments have been submitted on this article. 


Please log in to post a comment.

To learn more about subscription access to premium content, click here.