What aspect of an intercompany pricing policy is crucial for subsidiaries?

• A. It sets random pricing strategies
• B. It governs transaction terms and conditions
• C. It is only beneficial for the parent company
• D. It focuses solely on external transactions

Answer: (B)

A foundational aspect of an intercompany pricing policy is that it governs transaction terms and conditions, which is vital for subsidiaries. This policy outlines how prices are determined for transactions between related entities within the same corporate family. By establishing clear guidelines for pricing, it ensures that transactions are conducted at fair market values while complying with local regulatory requirements and tax laws. This is particularly important because it helps mitigate risks related to transfer pricing, which can lead to significant financial and reputational issues if not managed correctly.

The governance provided by such policies promotes transparency and consistency across subsidiaries, allowing for smoother operational processes and financial reconciliation. Furthermore, it helps subsidiaries in budgeting and financial planning, ensuring they can operate sustainably while adhering to corporate standards.