The New U.S. Revenue Recognition Standard: Impacts and Considerations for Transfer Pricing Policy and Execution

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July 2017

Overview

The authors highlight how and where the accounting revenue recognition standard, ASC 606, is likely to have an effect on companies’ transfer pricing analyses, such as in applying profit-based methods, under cost sharing, and in preparing country-by-country reports.

They recommend proactive engagement between tax, finance and other stakeholders as the standard is adopted to make sure any necessary actions or key decisions are addressed fully.

The five-step review process

To understand how transfer pricing may be affected by the adoption of the new revenue standard, it is necessary first to review the analysis—in a five-step process—that is to be applied to practically all third-party customer contracts to determine what amount is to be recognized as revenue, and at what time. 

  1. Identify the contracts with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Actions to take

As the authors outline in this article, a complex analysis will need to be performed to determine the impact of the new revenue standard on the company’s transfer pricing profile. The key action for the tax team will then be to perform a detailed transfer pricing impact assessment, focusing on the following:

  • Inventory intercompany transactions and, for any arrangements not memorialized by a contract, capture established organizational practice.
  • Build a detailed mapping of referenced revenue to affected revenue streams identified in the organization’s pre-tax impact assessment of the new standard, including cost allocations and other transfer pricing calculations such as cost-sharing inputs.
  • Model the likely cash flow, reporting and tax liability effects over a multi-year period.
  • Where appropriate (and consistent with the arm’s length standard), evaluate opportunities to modify intercompany arrangements or agreements to use definitions and terms that are optimally aligned with the effects of the new standard.
  • Determine if changes to transfer pricing methods may be necessary as a result of anticipated changes—that is, will current pricing become non arm’s length? 
  • Consider how analysis of IP (functional versus symbolic) by accounting colleagues aligns with existing transfer pricing policy, anticipated approach to the master file and the potential need for reconciliation.

Illustrates reporting for calendar year-end companies

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David Nickson

Principal, Transfer Pricing, PwC US

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