IFRS: Transitional Impact On Transfer Pricing Analysis


Companies may interpret and apply IFRS differently, which may compromise comparability of financial statements

Transfer pricing involves the determination of an arm's length price that one member of a multinational firm should charge another for the sale of goods, services and intangibles across provincial/state and international borders. The determination of an arm's length price for a transaction between related parties is a complex, subjective and lengthy exercise. The planned switch to International Financial Reporting Standards ("IFRS'') in many countries will considerably complicate matters. IFRS is a set of accounting standards developed by the International Accounting Standards Board. Currently, over 100 countries allow or require publicly traded companies to prepare their financial statements in accordance with IFRS. The member countries of the European Union have required the use of IFRS since 2005 while other countries like Canada have only recently made the transition. Conversely, IFRS is not expected to be adopted until 2015 or 2016 at the earliest in the US. Even then, it is likely that there will be different rates of adoption and different or staggered transition periods. This article examines the impact of IFRS on transfer pricing in relation to Canadian and US companies with intercompany cross border transactions.

l. Comparables and transfer pricing methodologies

The Organisation for Economic Co-operation and Development ("OECD") outlines a number of methodologies that can be used to determine the arm's length returns attributable to the tested party within a transfer pricing setting. In general, these methodologies require locating comparable arm's length transactions to test the prices charged to one or more related parties by the tested party. The companies that undertake these arm's length transactions must perform and assume similar functions, assets and risks as the tested party. Otherwise, the results of the transfer pricing analysis will not be reliable as companies with materially different functions, assets and risks will likely charge different prices for a same or similar transaction. Thus, in any transfer pricing exercise, rigorous techniques must be applied to find comparable companies in order to properly and reliably attribute profits to the tested party.

While each search for comparable companies will be different, a typical search begins by locating comparable companies that fall within one or more...

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