Difference between revisions of "CAS 403 - 3 Factor Formula"
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== 3 Factor Formula == | == 3 Factor Formula == | ||
| + | '''(c)''' '''(1)''' Where residual expenses are required to be allocated pursuant to 9904.403-40(c)(2), the three factor formula described below must be used. This formula is considered to result in appropriate allocations of the residual expenses of home offices. It takes into account three broad areas of management concern: | ||
| + | :# The employees of the organization, | ||
| + | :# the business volume, and | ||
| + | :# the capital invested in the organization. | ||
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| + | The percentage of the residual expenses to be allocated to any segment pursuant to the three factor formula is the '''arithmetical average of the following three percentages''' for the same period. | ||
| + | |||
| + | *(i) The '''percentage of the segment's payroll dollars to the total payroll dollars of all segments'''. | ||
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| + | *(ii) The '''percentage of the segment's operating revenue to the total operating revenue of all segments'''. For this purpose, the operating revenue of any segment shall include amounts charged to other segments and shall be reduced by amounts charged by other segments for purchases. | ||
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| + | *(iii) The '''percentage of the average net book value of the sum of the segment's tangible capital assets plus inventories to the total average net book value of such assets of all segments.''' Property held primarily for leasing to others shall be excluded from the computation. The average net book value shall be the average of the net book value at the beginning of the organization's fiscal year and the net book value at the end of the year. | ||
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| + | '''(d)''' The following paragraphs provide guidance for implementing the requirements of 9904.403-40(c)(3). | ||
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| + | '''(1)''' An indication that a segment received significantly less benefit in relation to other segments can arise if a segment, unlike all or most other segments, performs on its own many of the functions included in the residual expense. Another indication may be that, in relation to its size, comparatively little or no costs are allocable to a segment pursuant to 9904.403-40(b) (1) through (5). Evidence of comparatively little communication or interpersonal relations between a home office and a segment, in relation to its size, may also indicate that the segment receives significantly less benefit from residual expenses. Conversely, if the opposite conditions prevail at any segment, a greater allocation than would result from the application of 9904.403-40(c) (1) or (2) may be indicated. This may be the case, for example, if a segment relies heavily on the home office for certain residual functions normally performed by other segments on their own. | ||
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| + | '''(2)''' Segments which may require special allocations of residual expenses pursuant to 9904.403-40(c)(3) include, but are not limited to foreign subsidiaries, GOCO's, domestic subsidiaries with less than a majority ownership, and joint ventures. | ||
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| + | '''(3)''' The portion of residual expenses to be allocated to a segment pursuant to 9904.403-40(c)(3) shall be the cost of estimated or recorded efforts devoted to the segments. | ||
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[[Category: CAS 403 - Allocation of Home Office Expenses to Segments]] | [[Category: CAS 403 - Allocation of Home Office Expenses to Segments]] | ||
Revision as of 09:58, 29 September 2014
3 Factor Formula
(c) (1) Where residual expenses are required to be allocated pursuant to 9904.403-40(c)(2), the three factor formula described below must be used. This formula is considered to result in appropriate allocations of the residual expenses of home offices. It takes into account three broad areas of management concern:
- The employees of the organization,
- the business volume, and
- the capital invested in the organization.
The percentage of the residual expenses to be allocated to any segment pursuant to the three factor formula is the arithmetical average of the following three percentages for the same period.
- (i) The percentage of the segment's payroll dollars to the total payroll dollars of all segments.
- (ii) The percentage of the segment's operating revenue to the total operating revenue of all segments. For this purpose, the operating revenue of any segment shall include amounts charged to other segments and shall be reduced by amounts charged by other segments for purchases.
- (iii) The percentage of the average net book value of the sum of the segment's tangible capital assets plus inventories to the total average net book value of such assets of all segments. Property held primarily for leasing to others shall be excluded from the computation. The average net book value shall be the average of the net book value at the beginning of the organization's fiscal year and the net book value at the end of the year.
(d) The following paragraphs provide guidance for implementing the requirements of 9904.403-40(c)(3).
(1) An indication that a segment received significantly less benefit in relation to other segments can arise if a segment, unlike all or most other segments, performs on its own many of the functions included in the residual expense. Another indication may be that, in relation to its size, comparatively little or no costs are allocable to a segment pursuant to 9904.403-40(b) (1) through (5). Evidence of comparatively little communication or interpersonal relations between a home office and a segment, in relation to its size, may also indicate that the segment receives significantly less benefit from residual expenses. Conversely, if the opposite conditions prevail at any segment, a greater allocation than would result from the application of 9904.403-40(c) (1) or (2) may be indicated. This may be the case, for example, if a segment relies heavily on the home office for certain residual functions normally performed by other segments on their own.
(2) Segments which may require special allocations of residual expenses pursuant to 9904.403-40(c)(3) include, but are not limited to foreign subsidiaries, GOCO's, domestic subsidiaries with less than a majority ownership, and joint ventures.
(3) The portion of residual expenses to be allocated to a segment pursuant to 9904.403-40(c)(3) shall be the cost of estimated or recorded efforts devoted to the segments.
