Private company financials play an important role in Transfer Pricing by providing the data necessary for comparability studies, documentation, and defending positions in audits. For multinational enterprises, accurate financial data is vital to ensuring transactions are conducted at arm’s length. Understanding these financials is key to maintaining transparency and meeting compliance standards in global business operations.

Private Company financials

Obtaining financial information on private companies is difficult since they are not required to publicly disclose their financials, unlike public companies. While private companies prepare financial statements for internal use (for stakeholders, lenders, and investors), they are privately held, with ownership concentrated among a small group of investors. In contrast to public companies, they do not offer publicly traded shares. Private firms often raise funds from venture capitalists or private equity firms, appealing to investors seeking high-risk, high-reward opportunities.

Most private companies keep their financial information confidential, and if it is available, it often comes in an unstructured format. For investors and businesses, understanding the financial health of private companies is essential for making informed decisions, making it crucial to access the right data.

Private company financials are used for a wide range of purposes, including internal management, investor and creditor evaluations, regulatory compliance, and strategic planning. They provide essential information for making informed decisions and maintaining transparency with various stakeholders. Among most common areas where financial data are used, you can find internal decision-making, lending and financing, reports for investors and shareholders, and tax and regulatory compliance.

Key components of Private company financials

Unlike public companies, private firms have more flexibility in how they report financials, but they typically follow accounting standards like GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). However, the level of detail and disclosure is often less strict than for public companies. Below you may find the key components of the Private company financials:

• Balance Sheet. It is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It details the company’s assets, liabilities, and equity, and is used to assess the company’s financial health and stability.
• Income Statement, also knowns as Profit & Loss Statement. It is a financial document that summarizes a company’s revenues, expenses, and profits or losses over a specific period, such as a quarter or a year. It provides insights into the company’s operational performance and profitability.
• Cash Flow Statement. It is a financial document that tracks the flow of cash into and out of a company over a specific period (e.g. a quarter, year). It provides a detailed view of how cash is generated and used in the company’s operations, investing activities, and financing activities. Unlike the Income Statement, which focuses on profitability, the Cash Flow Statement focuses on the company’s liquidity and its ability to manage cash.
• Statement of Changes in Equity. It is a financial statement that outlines the changes in a company’s equity over a specific period. It provides details on how the equity, or ownership interest, in the company has changed due to various factors such as net income, dividends, and other equity transactions.
• Notes to the Financial Statements: Provide additional context or explanations about specific line items in the financial statements, such as accounting policies, outstanding debts, or other liabilities.

Private Company financials and Transfer Pricing

Private company financials play an important role in Transfer Pricing by providing the data necessary for comparability studies, documentation, functional analysis, and defending positions in audits.

• Benchmarking Comparability. Transfer Pricing requires comparing the pricing of transactions between related parties (such as subsidiaries) with transactions between independent parties. Private company financials are often used to identify comparable companies to perform these benchmarking analyses, especially when public company data is not available.
• Documentation and Compliance. To comply with Transfer Pricing regulations, multinational enterprises (MNEs) must document their transactions with related parties and show that they adhere to the arm’s length principle. Private company financials provide critical information to demonstrate that the pricing of intra-group transactions (such as the sale of goods, services, or intellectual property) is consistent with market prices.
• Functional Analysis. Transfer pricing analysis involves a detailed functional analysis, which includes evaluating the functions performed, risks assumed, and assets used by the related parties. The financials of private companies involved in these transactions provide the necessary data to support the analysis and justify the allocation of profits.
• Profitability Analysis. Transfer Pricing regulations often require analyzing the profitability of related parties to ensure that profits are allocated appropriately among different entities within a corporate group. Private company financials are essential in calculating profit margins, operating expenses, and other key metrics to support this analysis.
• Tax Authority Reviews and Audits. During Transfer Pricing audits, tax authorities examine the financials of both public and private companies to assess whether transactions between related parties are priced fairly. Private company financials help support the taxpayer’s position and defend against any Transfer Pricing adjustments.

In conclusion, private company financials are indispensable for effective Transfer Pricing, providing crucial data for benchmarking, documentation, and compliance with regulatory standards. The unique challenges of accessing these financials highlight the importance of structured data sources for informed decision-making. As multinational enterprises navigate complex global markets, a thorough understanding of private financials is essential for maintaining transparency and ensuring that intra-group transactions adhere to the arm’s length principle. Ultimately, leveraging accurate financial data fosters sound business practices and supports regulatory compliance in an increasingly scrutinized environment.

If you need assistance in finding the right comparables or selecting the appropriate method for your benchmarking analysis, consider exploring the solutions provided by RoyaltyRange here.

Sources:

https://guides.loc.gov/company-research/private

https://kpmg.com/xx/en/what-we-do/services/audit/corporate-reporting-institute/ifrs/illustrative-financial-statements.html

https://www.tandfonline.com/doi/full/10.1080/00014788.2021.1982670#d1e226