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What standards relate to the allocation of Parent company to subsidiary company expenses?

Our parent company is in the process of apportioning some of its General, Selling and Administrative expenses to its subsidiary company and we want to know if there is a specific International Standard that relates to how it should be done

Answers

(Agent, JKS Solutions, Inc.) |

Unfortunately I am not aware of a specific standard however this is a very common practice. Essentially, the business cannot operate without administrative functions and these areas touch every aspect of the business and this is the justification for allocation.

The allocation of these parent "corporate" costs to operational P&L areas are a type of cost accounting or activity based costing concept that helps management be aware of the total cost of operation, rather than having knowledge of only the costs they control individually.

If this is a new implementation you may get some push back from those VP's who have not had their budgets impacted by allocations of overhead in the past.

Appears you are the Treasurer, you might have a better time discussing this with your Controller who will be well versed in company policy.

Gerard Brinkman
Title: Owner
Company: Gerard J. Brinkman CPA
(Owner, Gerard J. Brinkman CPA) |

One source of guidance would be to look into the various accounting references regarding carve out financial statements. They try to explain what costs and expenses should be reflected on the subsidiary's books if it had been a stand alone company.

David Hughes
Title: Executive VP of Operations
Company: On Target Performance Group
(Executive VP of Operations, On Target Performance Group) |

In addition to the good information previously posted, I can provide a little more history. Many years ago (and in some cases currently), businesses "allocated" corporate overheads to subs based on sales revenues. Newer techniques and technologies allow for improved methods, such as ABC (mentioned by Valerie above). If you want a true picture of how the subs are consuming corporate overheads, you need to understand what is driving those corporate overheads. For example, if your corporate HR dept consumes resources because of the high employee turnover of just one particular sub, then it would misstate the P&L of all of the subs if the HR costs were allocated based on revenues rather than the driver (employee turnover).

Chinwe Anochie
Title: Project Cost Controller
Company: United Cement Company of Nigeria Ltd.
(Project Cost Controller, United Cement Company of Nigeria Ltd.) |

The standard that will play here is that of "Related party Transactions". Also you will go further to find out the basis of their charges (per headcount, volume of sales or nature of transactions). Note, what we are looking at is the SG&A cost which falls within the fixed cost element.

Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

As noted regarding related party transactions, there most definitely are transfer pricing tax rules that apply the arm's length standard to intercompany transactions with a foreign affiliate. While the cost allocation process follows standard accounting principles, there are specific rules on the type of costs that should be charged. For example, management stewardship or shareholder service type costs should not be charged. And there are rules for determining the cost plus markup. Finally, there are rules regarding the documentation to support the transfer pricing to protect against tax penalties in case of a tax adjustment.

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