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What Is An Effective Transfer Pricing System In A Divisional Organization

slang — Tue, 27 Oct 2009 10:00:12 +0000

An effective transfer pricing system in the context of a divisional organization has to satisfy several basic criteria. The challenge is presently no transfer pricing system has been perfect. However, for an effective system of transfer pricing, some of the basic criteria need to be satisfied:

it should encourage divisional managers to actin the best interests of the organization as a whole eg maximise the wealth of the shareholders and achieve goal congruence
facilitate the assessment of management performance by ensuring that one division is not subsidizing another division
support divisional autonomy eg managers should be abl to purchase from the cheapest supplier
the transfer pricing should be deemed to be fair
the system should be clear and understood by all concerned
if appropriate, the system should aim to minimize the tax liability of the company.

AN EXAMPLE OF USING OPERATIONAL KPI TO GAIN COMPETITIVE ADVANTAGES ( PART 3 OF 3)

slang — Tue, 27 Oct 2009 05:57:09 +0000

Below example assume the following scenario:

The business is a distributing company;
There is negligible chance of vertical integration and
Competitors are consolidating to reach the consumer which therefore affect margin and potential restriction or loss of distribution channel.

Management can adopt following Operational KPIs so that the business can focus to drive continued growth and competitive success in the marketplace:

On-hand / on-time inventory available
Outstanding “open” order value
Net-new accounts through distribution network
Advertising and Promotion costs

Explanatory Notes on above Operational KPIs:-

Operational KPI 1 & KPI 2

From an operational standpoint, the availability of inventory and open order value enabled field sales representatives to gain competitive advantage through a better view of the customer and the right price and delivery pressures to apply.

Operational KPI 3 & KPI 4

Strategically, senior management could keep a pulse on the key metrics driving new business and whether costly marketing programs were delivering or not.

EXAMPLES OF SOME OF BEST-IN-CLASS PERFORMANCE METRICS USED FOR OPERATIONAL KPI ( Part 2 of 3)

slang — Tue, 27 Oct 2009 05:35:34 +0000

Some of the best in class performance metrics extracted from Abe Aberdeen Group, June 2008 :-

Operational Metrics	Measurable Values(KPA)	Measured As(KPI)
Customer satisfaction index	Percentage improvement in customer satisfaction Issue resolution speed Resolution accuracy in past 12 months	Percentage improvement or decline (-50% to >50% in increments of 10%)
Customer retention	Rating of customer retention performance during past 12 months	Percentage of actual retention during past 12 months (raw percentage or “don’t know)
Time-to-information	Time between actual business events and access to information about those events during past 12 months	Months to weeks, weeks to days, days to hours, hours to minutes, minutes to seconds
Time-to-decision or action	Time between actual business events and action taken to address those events during past 12 months	Months to weeks, weeks to days, days to hours, hours to minutes, minutes to seconds
Decision-maker visibility to KPIs	Percentage increase or decrease in visibility to operational KPIs among employees with operational responsibilities during past 12 months	Percentage increase or decrease (-50% to >50% in increments of 10%)

Other important operational kpa/kpi are:

End-user satisfaction
Existence of KPIs in four major scorecard categories: financial, customer, process, HR and innovation
Increase in number and types of decisions that can be made
Improvement in quality of information upon which decisions are based

See more examples on KPI in the Balanced Scorecard Category re:Financial Perspective KPI ; Customer Perspective KPI ; Internal Process Perspectives KPI and Learning & Growth Perspective KPI

OPERATIONAL KPIs – THE IMPORTANCE TO THE SUCCESS OF THE BUSINESS(PART 1 OF 3)

slang — Tue, 27 Oct 2009 05:31:55 +0000

Whether you are using dashboard, scorecards (balanced scorecard, etc), business intelligence tools or query tool reporting, there is an urgent need for management to understand the importance to identify, define, track, and act upon operational key performance metrics / indicators.

[ Earlier article on kpa & kpi has shown to management the importance of creating, maintaining and monitoring such company’s kpa/kpi to meet company goals.]

In brief, Management need to understand the key operational business drivers that affect company performance ;establish a corporate and / or departmental set of operational KPIs ;align operational KPIs with line-of-business goals and incentives; provide a method for making KPI-based performance visible to the enterprise; create an on-going process for internal and external KPI review, evaluation, and re-alignment.

Executives and line-of-business management are feeling the pressure to enable timelier and more accurate decisions in order to improve operational efficiencies. The faster and more accurately KPIs can be accessed, reviewed, analyzed, and acted upon, the better an organization can manage day-to-day operations and customer interactions.

In the Abeerdeen report conducted in December 2007, improvement of operational efficiencies ranked the top amongst the concern of management:

Improvement of operational efficiencies
Accuracy of business decisions
Timeliness of business decisions
Improve management view to operation
Meet profitability objectives

Very often, management find its difficult to get the correct operational kpi for a business due to perhaps the need to integrate data from a variety of disparate sources ; the need to have a host of infrastructure requirements to deliver the information in a meaningful format like reports / dashboards, scorecards, alerts and via an effective medium (desktop, web, remote access, email, PDAs, mobile devices) and others.

[ See Part 2 on some of the best in class practise operational key performance operational kpi ]

WHAT IS ARM’S LENGTH PRINCIPLE AND WHAT ARE THE METHOD TO DETERMINE ARM’S LENGTH

slang — Mon, 19 Oct 2009 10:14:42 +0000

Arm length transaction is a very hot topic in transfer pricing. This article seeks to explain what it means “ at arm length and what are some of the traditional methods to determine “ arm length”

“ At Arm Length” means that a transaction performed within a company must be priced as if carried out between two UNRELATED parties. The price must be based on how much the transaction would cost if it were made in similar conditions on the open market.

Hence, it is important that a company should have a clear and well-defined transfer pricing policy that demonstrate every possible effort has been made to ensure that prices are determined at arm’s length.

Some of the normal methods to determine “arm length are as follows:

(i) Cost Plus(CP).

CP is often used for the sale of finished goods. The price is determined by adding a suitable mark-up to the costs incurred by the seller for raw materials, labour,etc. The mark up is based on the profit received by the company in comparable transactions with unrelated companies, or on profits received by a similar company in comparable transaction

(ii) Comparable Uncontrollable Price(CUP)

This method is a simple comparison. The price is effectively determined by using the price of a similar or comparable transaction between two unrelated companies

(iii) Resale Price(RP)

This method is often used for resale of finished goods. It is found by subtracting a suitable mark-up from the resale price. This mark-up is determined by examining the price for which the finished good would sell to a third party. This is estimated by comparing similar transactions between unrelated parties.

2008 Highest Paid CEO Of Public Listed Companies

slang — Thu, 06 Aug 2009 15:24:34 +0000

Reported in The Star Malaysia that the 2008′s highest income earner among chief executives is Genting Bhd chairman and CEO Tan Sri Lim Kok Thay-his earnings Rm77.7m despite a 10% pay cut. He achieved the similar feat when he also topped in the list of 2007 with Rm86.5 million. To make it more simple, he earns #Rm213k per day! The second place goes to IOI Corporation Bhd executive chairman Tan Sri Lee Shin Cheng with an annual income of Rm41.15mil almost doubling his 2007 income of Rm21.6mill.

Europe: French Bank BNP Making Huge Bonus Payout

slang — Thu, 06 Aug 2009 10:27:12 +0000

The 2008 Wall Street’s bonus pay-out has created a big uproar amongst the taxpayers. We see another counterpart in Europe-French bank BNP Paribas which on 5th August announced the expected pay-out of over one billion euros in bonus payments to traders, executives and some 17,000 staff in its investment banking divisions this year. It is estimated that this should average 59,000 euros (85,000 dollars) per person.

According to the spokesman, the proposed payout for this year are based on the following rationales:

It had to offer renewed bonuses and was “worried that many of our rivals, notably in the United States, are no longer applying the rules”
G20 leaders did not suppress bonus payments, but agreed to clamp down on guaranteed bonuses over multiple calendar or financial years, or their calculation on net earnings after write-downs on risk.

Wall Street’s Bonuses In 2008

slang — Fri, 31 Jul 2009 03:36:16 +0000

It was reported that at least 4,793 bankers and traders were paid more than US$1 million (RM3.5 million) in bonuses last year even as profits at the biggest banks dwindled and they accepted tens of billions of dollars of taxpayer money.

The following bonuses are reported by New York attorney-general, Andrew M. Cuomo pertaining to the Wall Street’s millionaire ranks.

1.0 Citigroup

· 738 bankers and traders at Citigroup took home bonuses of US$1 million or more in 2008 even as the bank posted a US$27.7 billion loss. In all, Citigroup paid US$5.33 billion in bonuses; it received US$45 billion in bailout funds.

2.0 Bank of America and Merrill Lynch

· Whose merger brought the combined company to the brink of collapse, paid 868 employees bonuses worth at least US$1 million. Both banks, turned to the government twice for bailouts, receiving a total of US$45 billion.

· Merrill’s bonuses totalled US$3.6 billion in a year that it lost US$27.6 billion, the report said, while Bank of America paid US$3.3 billion in bonuses on US$4 billion in earnings.

3.0 Goldman Sachs

· 953 bankers and traders took home bonuses worth at least US$1 million last year, including 212 employees who received more than US$3 million. The investment bank paid a total of US$4.8 billion in bonuses last year, more than twice its earnings of US$2.3 billion. The bank got US$10 billion in bailout funds.

3.0 Morgan Stanley

· Paid nearly 428 employees bonuses of at least US$1 million, including 290 who received more than US$2 million. It earned US$1.7 billion last year and received US$10 billion in federal aid, paid US$4.5 billion in bonuses.

4.0 JPMorgan Chase

· Paid 1,626 employees bonuses of more than US$1 million in 2008 and received US$25 billion in federal assistance. The bank earned US$5.6 billion, while its bonuses totalled US$8.69 billion.

(Source:NYT)

SIA Cut Pays After $307 million Quarterly loss( April to June’09)

slang — Fri, 31 Jul 2009 02:55:25 +0000

Singapore Airlines (SIA) will cut staff pay by 10 per cent after unveiling a net loss of S$307 million (RM736.8 million) in the April-June quarter — only its second-ever quarterly loss. It had recorded a net profit of S$358.6 million in the same quarter last year.

Details:

1. The pay cuts, set to affect an estimated 12,000 staff,

2. The cut is based on a formula linked to losses agreed with staff unions.

· Under agreements that SIA has signed with its three unions, staff pay can shrink by between 2.5 per cent and 10 per cent if the airline reports an operating loss of at least S$50 million in any quarter. All of the monthly variable component (MVC), which makes up 10 per cent of an employee’s total pay will gets cut if losses exceed S$200 million, which is now happening in this case.

· The MVC cut will be effective for three months. For new cabin crew, who earn a basic salary of S$1,300 a month, for example, the cut amounts to about S$130. Top management, who are already earning between 10 per cent and 20 per cent less, with effect from this month, will not be subjected to more cuts

· Interesting, the Presidents of the Air Line Pilots Association-Singapore and SIA Staff Union, Captain P.James and AlanTan respectively took it very positively as they believed by shaving of the pay at least jobs can be saved.

With the staff pay cut, as well as the new MVC cuts, it will save it an estimated S$60 million for SIA in the current financial year.

About SIA:

1. Listed in 1984, it has never posted a full-year loss except for a quarterly loss of S$312 million when SARS hit in 2003.

2. Presently, its cash balance remains strong and no forecast to raise capital

3. Latest Quarter end-June Financial Performance:

· SIA’s revenue fell 30 per cent to S$2.87billion in the three months to end-June compared to previous year were greatly impacted by both the economic slump and the H1N1 flu outbreak, as well as the cost of hedging fuel.

· Expenditure was down 15.8 per cent to S$3.19 billion, but in the end, the group recorded an operating loss of S$319 million, against a profit of S$343 million last year.

· The parent airline alone — excluding SilkAir and SIA Cargo, as well as subsidiaries SIA Engineering and Singapore Airport Terminal Services (Sats) — suffered a quarterly operating loss of S$271 million.

· Losses per share for the quarter were 26 cents, down from earnings per share of 30.3 cents a year earlier. Net asset value per share grew fell slightly to S$11.76 as at June 30 from S$11.78 as at March 31.

· SIA shares closed 18 cents higher at S$13.52 yesterday

Performance Management in Temasek Holdings

slang — Thu, 30 Jul 2009 12:12:08 +0000

It is interesting to note that Temasek Holdings has a compensation structure where all the staff share in both positive and negative results of the company which in essence having an owner’s approach to the business and operations. When Temasek achieves above-target returns, there is the Wealth Added and reported in the annual Temasek Review, it will have gains to share with its staff.

Reported recently Ho Ching (57),CEO of Temasek Holdings has announced that the entire staff from CEO to office attendants of Temasek will be receiving “negative bonuses.” where besides the annual bonuses being slashed due to poor performance over the past year and also, the staff will not get any money from the pool, or the value of the overall pool shrinks. If based on this negative bonus concept, it looks like there will be more negative bonuses for this year performance.

Details:

Part of every Temasek employee’s bonus goes into a pool that is paid out over a number of years rather than at the end of each year.

When Temasek meets its internal performance benchmarks with higher-than-targeted returns, the pool of bonuses to be distributed grows and each employee gets a bigger slice.

But when it fails to do so, employees get ‘negative bonuses’

This compensation structure is based on a key principle of having staff ‘share in the institution’s performance, both for positive and negative results’,