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Contemporary Accounting

Notes While designing the contents to be included in social reporting, due care should be taken to see
that it does not conflict with the shareholders’ interest.

!

Caution Social reporting presently is being either included in the Annual Reports or finds
some reference in the Chairman’s Address or the Director’s Report. Social reporting format
tends to vary from one company to another company as till date no format has been
described by any Act in India.

Self Assessment

Fill in the blanks:

6. ……………..is reporting on those activities of an organisation that have an impact on
society at large and are not necessarily represented by its traditional financial report.
7. Social reporting presently is being either included in the …………….or finds some reference
in the Chairman’s Address or the Director’s Report.

9.3 Transfer Pricing

Large business units are usually organised into different divisions for better control. In such a
situation, if one division supplies its finished output as input to other division, there arises a
very important issue. The issue being at which price should be transferring unit transfer its
product or service. Such price is known as transfer price.
Transfer prices are the amounts charged by one segment of an organization for a product or
service that it supplies to another segment of the same organization.
Transfer price in simple words is the price that one sub-unit (segment, department, division and
so on) of an organization charges for a product or service supplied to another subunit of the
same organization. It is different from the normal price in that both divisions are a part of the
same organisation and therefore it is only an internal transfer and not sale. The pricing of these
flows is likely to have an impact on the performance evaluation of the divisions. Setting of
transfer pricing policies within the company is of great significance. The important issue now is
at what price should such transfers be made.

Did u know? Why do transfer-pricing systems exist?
To communicate data that will lead to goal-congruent decisions.
To evaluate segment performance and thus motivate managers toward goal-
congruent decisions.
Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and
tariffs. Ideally, the chosen transfer-pricing method should lead each subunit manager to make
optimal decisions for the organization as a whole. The three specific criteria that can help in
choosing a transfer-pricing method are:
Promotion of Goal Congruence: Goal congruence exists when each divisional or sub-unit
manager acting in his or her own best interest takes actions that automatically result in
achieving the organisation goals established by top management.
Promotion of a Sustained High Level of Management Effort: Effort is defined as exertion
towards a goal, for example, sellers are motivated to hold down costs of supplying product
or service, and buyers are motivated to acquire and use inputs efficiently. The environment

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