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Dear Professor
The output of A is timber that is partly transferred to B and partly sold in an external market. If A did not exist, B could buy its timber from the market. The output of B has no external market and is transferred to C at an internal transfer price. C sells the finished product in an external market and the sales revenue achieved by C is not affected by the fact that the three stages of production are all performed by the entity.
Sir as far as the above question is concerned my Kaplan text says that A cash inflows should be measured with respect to market price for its output and B’s cash outflows should be based on again market prices, not an internal transfer price.
So my query is do we always have to take the external market price and base our cash flows on it? Why cannot we take the actual price paid/received for calculating PV of future cash flows(in value in use)?
Many thanks:)
I would say you take the selling price in a regular market with regular market participants. So that would be an external price. That would be following the principles in IFRS 13. But this has always been a sticky issue.
If it cheers you up, I haven’t seen anything like that in the exam in the current century.
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