BMP6015 - Evaluating Transfer Pricing in Financial Reporting

This report provides a comprehensive evaluation of transfer pricing within the context of financial reporting, using Apple as a case study. It begins by defining transfer pricing and exploring its application in the real world, including cost-based and market-based pricing methods. The report discusses the motivations behind using these techniques, highlighting benefits such as fair cost allocation, avoidance of double taxation, and promotion of competitiveness, as well as outcomes like increased profitability, goal congruence, and effective performance evaluation. It critically appraises the recognition of transfer pricing in the current business environment, emphasizing its role in optimizing incomes and reducing logistics costs, while also addressing potential issues like tax evasion. The report concludes that transfer pricing is a crucial tool in financial reporting, with both advantages and disadvantages, and emphasizes the need for ethical implementation and compliance with regulations. Desklib provides a platform for students to access this and many other solved assignments.

Financial Reporting for
Management

Table of Contents
Introduction......................................................................................................................................3
Part 1................................................................................................................................................3
What is Transfer Pricing and how it is used in the real world. Explain the motivation behind
selection of the respective techniques along with the benefits and outcomes of the techniques.
................................................................................................................................................3
Benefits of transfer pricing.....................................................................................................4
Outcomes of Transfer PRICING............................................................................................5
Part – 2.............................................................................................................................................6
Critically appraise the recognition of transfer pricing in context to the current business
environment............................................................................................................................6
Conclusion.......................................................................................................................................6
Part - 3..............................................................................................................................................7
References........................................................................................................................................7
Books & Journals...................................................................................................................7

Introduction
Financial reporting can be defined as a practice of standard accounting that basically uses
different and relevant accounting statements. This helps the business organization in
disclosing the financial information along with the financial performance of the company to
the stakeholders of the business. It is considered as an important aspect of every
organization because it helps the management of the company to take certain significant
decisions which are basically dependent on the financial health and status of the company.
Profoundly, the potential investors use the company’s financial statements in order to decide
that whether they can grant loans or not. In context to this report, the technique of transfer
pricing is chosen in context to Apple company, in order to understand the effectiveness of
the financial control which can helps an organization in identifying the strengths and
weaknesses of the company.
Part 1
What is Transfer Pricing and how it is used in the real world. Explain the motivation behind
selection of the respective techniques along with the benefits and outcomes of the
techniques.
Transfer Pricing is an accounting practice that addresses the value that one business
division in an organization charges one more division for providing the goods and services.
Transfer Pricing considers the foundation of costs for the products and services traded between
auxiliaries, subsidiaries, or regularly controlled organizations that are important for a similar
bigger undertaking. Transfer Pricing can help in saving taxes in the investment funds for
partnerships, however tax authorities might or might not challenge their cases (Zhang, Zhang and
Yao, 2021). A transfer price is utilized to decide the expense to charge another division,
auxiliary, or holding organization for administrations delivered. Ordinarily, transfer costs are
effective for the business sector cost in order to maintain administration in a proper manner. such
type of pricing technique can likewise be applied to the intellectual property patents, licenses,
and royalties. In context to Apple, transfer pricing is considered as an important technique which

is used in its business operations as it offers many advantage to the company from the
perspective of taxation effectively. In different countries, the respective company is taking a lot
of tax advantages by basically raising the transfer prices for the range of its products and services
with low amount of tax rated associated with it (Zhang, Zhang and Yao, 2021). There are
basically two types of transfer pricing that is used by Apple and other companies as well. Both of
the methods are explained underneath:
1. Cost Based Transfer Pricing: It is one of the technique of transfer pricing which is
basically related to setting the prices when the products or services are being sold to a
business unit of the same business organization. There are various factors that play an
important role in this type od transfer pricing such as production costs, taxation,
competitors price and the review of the managers. Further in this technique there are
three more methods which can be used to apply cost based transfer pricing such as
marginal cost, production cost plus mark up and full production cost. In context to
Apple, it owns and operates its factor units in the country where the tax rates are low
but they sell its product in those countries which are having a higher tax rate.
Therefore, this allows the respective company to pay less amount of taxes by setting a
higher transfer price for its offerings (Simangunsong and Metekohy, 2019).
2. Market based pricing: It is a type transfer pricing method that works on the basis of
market conditions. It is basically the similar price at which the business organization is
going to sell its products to the market. For using this type of technique it is highly
necessary that the company must have an existing market. In context to Apple, the
company is trying to sell the products in the market based on the competitors which are
existing in the organization. Also, this type of transfer pricing is considered as one of
the best pricing method (Chancharoen, Vasuvanich and Laosillapacharoen, 2019). In
this method, both he entities will end up making the transactions in such a way that
would have been done with the third party.
Benefits of transfer pricing
 Transfer pricing is likewise crucial element that provides reasonable and fair cost when
the exchange happens between two common business organizations or entities.

 It also assists an business organization with the accounting of transactions with
recognizable entities. It therefore helps the company in taking decisions for its profits or
losses.
 It also helps in portraying valid and reasonable disclosure of transactions among two or
more business entities.
 Such evaluating technique additionally provides the organization a benefit of avoiding
the two-fold taxation and unnecessary costs for the business.
 It additionally supports the essence of competitiveness among various divisions as they
are well known about the incomes that the company is generating and the expense that it
is incurring.
 The documentation that an organization keeps up with help transfer pricing helps the tax
authorities and the analysts to survey the tax related liability of the business in an
effective manner.
Outcomes of Transfer PRICING
 Profitability: Transfer pricing helps an organization in increasing the profitability
margins considerably. In order to gain more and more profits it is also advised for the
company to keep the prices of the products and services as much as close to the market
prices.
 Goal Congruence: transfer pricing must be executed in such a way that the divisional
profit of every one of the divisions are very steady with the objectives of the parent
organization (Türegün, 2019). The overall revenues of the subsidiaries must increase
should but the profitability of the parent organization should not be affected negatively.
 Performance evaluation of individual units: Transfer pricing is the best option in order
to appraise the individual divisions in the best possible ways. Therefore, this method can
help the organization in guiding the process if the decision making (Seid, 2018). The key
areas that can be assisted are performance appraisal and performance management.
 Taxation: This is considered as one of the best outcome of transfer pricing as proper and
effective application of this transfer pricing technique helps in offsetting the liability of
taxes to maximize the overall profit earning of the whole organization.

Part – 2
Critically appraise the recognition of transfer pricing in context to the current business
environment.
The major role of transfer pricing is to ensure that the business transaction taking place
between the associated business transactions must take place in such a way that it is taking
place between the parties which are unrelated with each other (Ali and Yassin, 2020). With
the help of the effective planning schemes all the taxpayers get an opportunity to optimize
their incomes in an efficient and a proper manner. It has become feasible for the companies
and business organizations to maintain the structure of their business in a flexible and
different manner with the help of the transfer pricing rules. Also, at the later stage it should
also be taken care that any kind of non-compliance may result into serious consequences.
While considering the current business environment, transfer pricing can be used as an
effective tool that will ultimately help the companies in reducing the logistics costs or
shipping goods with high tax rates. In addition to this the lower transfer pricing will lead to
lowered transaction costs. For the business models of the company like Apple, currently
they are using transfer pricing very effectively through overpricing its products and
services which originally costs at a much lower rate (van Tulder, Verbeke and Piscitello,
eds., 2018). This is helping the respective business organization to increase its profit
margins in the most effective manner. If the current business environment is considered,
using this technique will come up with the implementation of a lot of polices and
regulation in order to prevent any type of malpractices. The rules and regulations will also
help in maintaining harmony between the associated divisions of the business
organizations. A considerable amount of funds are even invested in order to develop and
maintain the an effective yet efficient accounting system so that it can support the process
of transfer pricing without any errors of omissions.
Conclusion
From the above analysis performed in the report, it can be concluded that the tool, concept
or technique of transfer pricing has its own advantages as well as disadvantages associated with
its execution. While dealing with the related business subsidiaries the element of uncertainty can

be eliminated effectively. Also, on the other hand it can be used by the business organization for
the purpose of increasing its earning way of tax evasion which is considered as completely
unethical. Therefore, it is considered as one of the key important tool of financial reporting. This
helps in developing a stable financial status of the company.
Part - 3
References
Books & Journals
Zhang, Y., Zhang, Y. and Yao, T., 2021. Fraudulent Financial Reporting in China: Evidence
From Corporate Renaming. Journal of Contemporary Accounting & Economics,
p.100283.
Simangunsong, C. R. B. and Metekohy, E. Y., 2019. Exploring the Needs of Parties in Church
Management in Building Knowledge Management System of Financial
Reporting. Journal of Applied Accounting and Taxation, 4(2). pp.165-183.
Chancharoen, S., Vasuvanich, S. and Laosillapacharoen, K., 2019. Influence of International
Financial Reporting Standards on Earnings Management: Comparative Study of Pre-Post
IFRS Era in Malaysia. Journal of Computational and Theoretical Nanoscience, 16(11).
pp.4692-4697.
Türegün, N., 2019. Impact of technology in financial reporting: The case of Amazon Go. Journal
of Corporate Accounting & Finance, 30(3). pp.90-95.
Ali, B. R. and Yassin, A. T., 2020. The Role of Crisis management in reducing harmful practices
of using international financial reporting standards: an exploratory study of a sample of
financial statements preparers. Tikrit Journal of Administration and Economics
Sciences, 16(51 part 1).
van Tulder, R., Verbeke, A. and Piscitello, L. eds., 2018. International business in the
information and digital age. Emerald Group Publishing.
Seid, S., 2018. Global regulation of foreign direct investment. Routledge.
Blocher, E. J., and et. al., 2019. Cost Management (A Strategic Emphasis) 8e. McGraw-Hill
Education.
Maheshwari, S. N., Maheshwari, S. K. and Maheshwari, M. S. K., 2021. Principles of
Management Accounting. Sultan Chand & Sons.

Fabio, M., 2020. Customs law of the European Union. Kluwer Law International BV.
West, A., 2018. Multinational tax avoidance: Virtue ethics and the role of accountants. Journal
of Business Ethics, 153(4). pp.1143-1156.
Datar, S. M. and Rajan, M. V., 2018. Horngren’s cost accounting: a managerial emphasis.
Pearson.
Manville, M. and Goldman, E., 2018. Would congestion pricing harm the poor? Do free roads
help the poor?. Journal of Planning Education and Research, 38(3). pp.329-344.