Internal Revenue Bulletin: 2004-15 |
April 12, 2004 |
| 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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