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ESTABLISHED TRANSFER PRICE METHODS CAN BE USED TO MAKE EQUITABLE ALLOCATIONS OF INCOME BETWEEN RELATED ENTITIES WHEN ONE ENTITY IS BEING VALUED AND THE OTHERS IS NOT.
An intercompany transfer price is the price one related entity charges another related entity for tangible assets (including fixed assets and inventory), intangible assets (including the use of intellectual property), and services (such as corporate administration and accounting). For purposes of this discussion, a related party can include either a parent/subsidiary or a brother/sister corporation owned by a corporate parent/common shareholder. Within a business valuation context, intercompany transfer price considerations are particularly important in the following instances:
1. When a parent corporation transfers assets/services to a subsidiary-and only one of the entities is the valuation subject.
2. When brother/sister subsidiaries transfer assets/services to each other-and only one of the entities is the valuation subject.
3. When two (or more) corporations are owned by the same controlling shareholder-and only one of the entities is the valuation subject.
4. When a controlling shareholder has direct business dealings with the valuation subject, such as the license of personally owned intellectual property, the lease of personally owned real estate, etc.
In these business valuation situations, analysts want to be assured that the earnings of the subject company are not artificially understated or overstated. This would occur if the subject company paid or received excessive prices for the intercompany transfer of tangible/intangible assets or services. Accordingly, in these circumstances, valuation analysts must ensure that the subject intercompany prices are fair, arm's-length transfer prices.
Such concerns about earnings manipulation due to intercompany transfer prices are a particular concern in business valuations performed for purposes of:
1. Marital dissolution/family law.
2. Minority squeeze-out merger/shareholder appraisal rights.
3. Disputes involving alleged shareholder oppression or dissipation of corporate assets.
4. Bankruptcy and reorganization.
5. Lender liability/insolvency.
6. Fraud and misrepresentation in a merger or acquisition.
7. ERISA and ESOP litigation.
8. Calculation of breach of contract and economic damages.
9. Eminent domain/condemnation.
10. Alleged failure to disclose material facts, and other SEC violations.
The Objective of Intercompany Transfer Prices
Concerns about earnings manipulation may be resolved if the subject company uses the intercompany transfer pricing methods allowed for assets and services under Section 482. For...