Methods & benchmarking
Functional Analysis
Functional analysis, often called FAR analysis, examines the functions performed, assets used, and risks assumed by each party to a controlled transaction, forming the foundation of any transfer pricing study. It guides selection of the tested party and the most appropriate transfer pricing method to be applied.
Functions considered include manufacturing, research, marketing, and distribution, while assets examined cover tangible items and intangibles like patents and know-how. Risk analysis assesses which party controls and has the capacity to bear risks, since allocation must match actual decision-making behaviour.
A well-documented functional analysis relies on interviews, organisational charts, and intercompany agreements to build a picture of value creation across the group. Under BEPS-aligned guidance, risk allocation is respected only where the party assuming the risk also controls it and can bear the consequences.
In practice
What matters when applying functional analysis
- Examines functions, assets, and risks of each party
- Foundation for transfer pricing method selection
- Includes tangible and intangible asset assessment
- Risk allocation tested against control and capacity
- Relies on interviews and intercompany agreements
Frequently asked
Common questions
Why is functional analysis considered the foundation of transfer pricing?+
Functional analysis is foundational because it determines which party to a transaction genuinely creates value, which informs the selection of the tested party, the most appropriate transfer pricing method, and the profit level indicator used for benchmarking. Without a clear understanding of functions, assets, and risks, any pricing conclusion risks being based on contractual form rather than the economic substance of how the parties actually operate.
How does functional analysis affect risk allocation for transfer pricing purposes?+
Under current OECD guidance, contractual risk allocation is only respected if the party bearing the risk exercises meaningful control over it through actual decision-making and has the financial capacity to absorb the consequences if it materialises. Functional analysis tests this by examining who makes and implements risk-related decisions in practice, which can override contractual terms if actual conduct does not match them.
See how the tooling handles this in practice
Our transfer pricing tools calculate intercompany charges, benchmark financing and reconcile the intercompany ledger from your own data. Book a short walkthrough and we will show the workflow on a scenario that matches your group structure, rather than a generic demo dataset.