A standardised database is necessary to conduct a transfer
pricing study. Be safe, be sure, use Prowess TraX.
A non-standardised database of financial data increases the
risk of arriving at mis-leading results in a transfer pricing study.
A non-standardised database comprises of data that are not
comparable across companies and over time. It does not ensure that the
individual data items are classified and defined such that they are
comparable. For example, if some companies classify expenses on coal as
a part of raw materials and others classify these as a part of energy
expenses distinct from raw material expenses, a non-standardised database
would report it as given by the companies. In the process, it makes both,
raw materials and energy expenses of the two companies not-comparable.
A standardised database on the other hand, ensures a clear
definition of each data item and therefore it classifies each data
item consistently as per this definition. This ensures that the data is
comparable across companies, and also over time. This enables a meaningful
peer comparison, which is critical to any transfer pricing study.
Consistent classification of income items such as sale of scrap,
fiscal benefits, gains from securities transactions into say “other
income” or not could make a material difference to a study. CMIE ensures
that you would never have to worry about this problem.
A lot of the standardisation process is about the consistent
classification of specific accounting items. It therefore largely leads
to the appropriate re-distribution of items heads into appropriate
data items. This re-distribution should not have a major impact upon
profits. Yet, we find that standardisation is necessary even to make
profits comparable. This is critically important in a transfer pricing
A transfer pricing study essentially is about comparing profit
margins of the target company with its most appropriate peers. An
assumption in the study is that the profit margins of all companies as
computed from the published Annual Reports is comparable. But, this is
not necessarily true.
We find that about five per cent of the companies report a
profit that is not comparable. In over two per cent of the companies
the difference between the stated profit and the comparable profits is
over five per cent or there is a sign change (ie profits turn to losses
or vice versa).
Save the risk of comparing non-comparables and drawing
incorrect results. Be safe. Use Prowess TraX - a well standardised
database. Further, be sure. Prowess TraX provides complete transparency
in the standardisation process adopted by CMIE.