Internal Revenue Bulletin:  2004-15 

April 12, 2004 

ATTACHMENT B FORMULAS FOR BALANCE SHEET ADJUSTMENTS

Definitions of Variables:
AP = average accounts payable
AR = average trade accounts receivable, net of allowance for bad debt
cogs = cost of goods sold
INV = average inventory, stated on FIFO basis
opex = operating expenses (general, sales, administrative, and depreciation expenses)
PPE = property, plant, and equipment, net of accumulated depreciation
sales = net sales
tc = total cost (cogs + opex, as defined above)
h = average accounts payable or trade accounts receivable holding period, stated as a fraction of a year
i = interest rate
t = entity being tested
c = comparable
Equations:
If Cost of Goods Sold is controlled (generally, sales in denominator of PLI):
Receivables Adjustment (“RA”):   RA = {[(ARt / salest) x salesc] - ARc} x {i/[1+(i x hc)]}
Payables Adjustment (“PA”):   PA = {[(APt / salest) x salesc] - APc} x {i/[1+(i x hc)]}
Inventory Adjustment (“IA”):   IA = {[(INVt / salest) x salesc] - INVc } x i
PP&E Adjustment (“PPEA”):   PPEA = {[(PPEt / salest) x salesc] - PPEc} x i
If Sales are controlled (generally, costs in the denominator of PLI):[a]
Receivables Adjustment (“RA”):   RA = {[(ARt / tct) x tcc] - ARc} x {i/[1+(i x hc)]}
Payables Adjustment (“PA”):   PA = {[(APt / tct) x tcc] - APc} x {i/[1+(i x hc)]}
Inventory Adjustment (“IA”):   IA = {[(INVt / tct) x tcc] - INVc } x i
PP&E Adjustment (“PPEA”):   PPEA = {[(PPEt / tct) x tcc] - PPEc} x i
Then Adjust Comparables as Follows:
adjusted salesc = salesc + RA
adjusted cogsc = cogsc + PA - IA
adjusted opexc = opexc - PPEA

[a] Depending on the specific facts, the equations below may use total costs (“tc”) or cost of goods sold (“cogs”).


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