Example 2
12. The facts are the same as Example 1, except that the per-unit value of Service 1 is 103 (that is, both Service 1 and Service 2 are low-value services). Assume, therefore, that the calculation of the costs and value of the services is as follows:
Cost to Company A of providing services (30 units * 100 per unit) | 3 000 | (60% of total costs) |
Cost to Company B of providing services (20 units * 100 per unit) | 2 000 | (40% of total costs |
Total cost to group | 5 000 | |
Value of contribution made by Company A (30 units * 103 per unit) | 3 090 | (59.5% of total contributions) |
Value of contribution made by Company B (20 units * 105 per unit) | 2 100 | (40.5% of total contributions) |
Total value of contributions made under the CCA | 5 190 |
Company A and Company B each consume 15 units of Service 1 and 10 units of Service 2: Benefit to Company A:
Benefit to Company B | ||
Service 1: 15 units * 103 per unit | 1 545 | |
Service 2: 10 units * 105 per unit | 1 050 | |
Total | 2 595 | (50% of total value of 5190) |
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13. Under the CCA, the value of Company A and Company B’s contributions should each correspond to their respective proportionate shares of expected benefits, i.e. 50%. Since the total value of contributions under the CCA is 5 190, this means each party must contribute 2 595. The value of Company A’s in-kind contribution is 3 090. The value of Company B’s in-kind contribution is 2 100. Accordingly, Company B should make a balancing payment to Company A of 495. This has the effect of “topping up” Company B’s contribution to 2 595; and offsets Company A’s contribution to the same
14. In this example, since all contributions to the CCA are low-value services, for practical reasons, contributions may be valued at cost since this will achieve results which are broadly consistent with the arm’s length principle. Under this practical approach, the cost of Company A’s in-kind contribution is 3 000; the cost of Company B’s in-kind contribution is 2 000; and each participant should bear the costs associated with 50% of the total cost of contributions (2 500). Accordingly, Company B should make a balancing payment to Company A of 500.