Internal Revenue Bulletin - April 18, 2005

*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 = {[(AR_t / sales_t) x sales_c] - AR_c} x {i/[1+(i x h_c)]}
Payables Adjustment (“PA”):			PA = {[(AP_t / sales_t) x sales_c] - AP_c} x {i/[1+(i x h_c)]}
Inventory Adjustment (“IA”):			IA = {[(INV_t / sales_t) x sales_c] - INV_c } x i
PP&E Adjustment (“PPEA”):			PPEA = {[(PPE_t / sales_t) x sales_c] - PPE_c} x i
*If Sales are controlled (generally, costs in the denominator of PLI):*^[a]
Receivables Adjustment (“RA”):			RA = {[(AR_t / tc_t) x tc_c] - AR_c} x {i/[1+(i x h_c)]}
Payables Adjustment (“PA”):			PA = {[(AP_t / tc_t) x tc_c] - AP_c} x {i/[1+(i x h_c)]}
Inventory Adjustment (“IA”):			IA = {[(INV_t / tc_t) x tc_c] - INV_c } x i
PP&E Adjustment (“PPEA”):			PPEA = {[(PPE_t / tc_t) x tc_c] - PPE_c} x i
*Then Adjust Comparables as Follows:*
adjusted sales_c = sales_c + RA
adjusted cogs_c = cogs_c + PA - IA
adjusted opex_c = opex_c - PPEA
^[a]Depending on the specific facts, the equations below may use total costs (“tc”) or cost of goods sold (“cogs”).

Prev	Up	Next
	Home