Berry Ratio: The Related-Party Payables Indicator

Definition

The Berry ratio is the working-capital indicator that measures the related-party payables behind the operations: the cost of goods sold (the numerator) over the related-party payables (the denominator) — how much of the goods the entity bought, it bought on the related party’s credit. It is a structural indicator, not a profitability PLI: it prices the financing relationship (the intra-group trade credit) that sits behind the operating result, and it is used in the working-capital adjustment context — where the tested party’s and the pool members’ working-capital positions differ because of the related-party payables, the Berry ratio is the number that shows the difference.

Berry ratio = cost of goods sold ÷ related-party payables

A low ratio   → the goods are bought mostly on the related party’s credit
               (the intra-group trade credit funds the operations)
A high ratio  → the goods are bought mostly on the market credit (the
               related-party payables are a small share of the COGS)

The use	The content
The comparability screen	The tested party’s Berry ratio against the pool’s — the member whose related-party payables structure is different (the no-related-party-payables distributor, against the tested party that buys on the group’s credit) is the member the working-capital question reaches
The adjustment input	Where the difference is material and the positions are otherwise comparable, the working-capital adjustment levels the days (the current assets, the current liabilities — the related-party payables included in the liabilities) — the working capital adjustment guide has the computation
The documentation	The related-party payables’ character (the trade credit on the goods, the terms, the pricing where the credit is priced) stated in the file — the intercompany finance line, not the silent line

The working read: the Berry ratio is the number the TPO looks at when the tested party’s working-capital position looks “too good” (the low current liabilities, the high days) — and the answer is the related-party payables structure, documented: the trade credit the group extends, the terms, the pricing (the safe harbour’s loan circumstance, or the benchmark, where the credit is priced). The ratio itself is a diagnostic; the adjustment or the documentation is the treatment.

Example

The tested party (an Indian distributor) buys the group’s product on the group’s 60-day trade credit: the COGS is ₹400 cr, the related-party payables (average) are ₹200 cr — the Berry ratio is 2.0. The pool’s comparable distributors buy on the market credit (the supplier credit, the no-group-credit position): their related-party payables are near nil, their Berry ratios are high / not meaningful. The working-capital question: the tested party’s current-liability position is better than the pool’s because of the group credit — the days’ computation (the working capital adjustment) levels the positions (the related-party payables included in the tested party’s liabilities, the pool’s market-credit equivalent treated), or the documentation states the credit’s character and pricing where the treatment is the documentation, not the adjustment.

See also

• Working Capital Adjustment
• Profit Level Indicator (PLI)
• Intercompany Loans, Guarantees & Cash Pooling

FAQ

Is the Berry ratio a PLI? No — it is a working-capital indicator, not a profitability PLI: it does not price the tested party’s result against the pool’s, it prices the financing structure behind the result. The PLI (the OP/S, the OP/OC) is the profitability measure; the Berry ratio is the structure measure the working-capital adjustment works from where the structure differs.

When does the Berry ratio trigger the working-capital adjustment? Where the tested party’s and the pool members’ working-capital positions differ materially on the related-party payables — the tested party buys on the group credit (the low Berry ratio), the pool buys on the market credit (the high / nil) — and the difference is a comparability difference (the financing the tested party has that the pool does not). The adjustment levels the days (or the ratios) on the documented base; where the difference is not material, or the positions are comparable on the facts, the documentation states the structure and the ratio is the note, not the adjustment.

Where does the Berry ratio appear in the documentation? In the working-capital block of the benchmarking annex: the tested party’s ratio, the pool’s distribution, the difference, and the treatment (the adjustment applied, with the days’ computation, or the documentation of the structure where the treatment is the statement). The related-party payables’ character and pricing (the MAA for the loan line, the safe harbour for the eligible credit) is the cross-reference — the credit that funds the operations is priced, not silent.