Review of Transfer

Pricing Arrangements

BBC Trust Report

October 2016

Contents

Contents 1

Executive Summary 2

Introduction 4

Background 5

BBC public service divisions and its commercial subsidiaries 6

Scope & methodology of the Review 8

Transfer Pricing Review scope 8

Methodology 8

Findings 11

Areas of good practice 11

Areas for improvement 12

Procedural improvements 12

Documentation and record-keeping 12

Referring “significant” transactions to the Fair Trading Team 12

Benchmarking and contract review period 14

Transparency 16

Application and interpretation of Fair Trading Guidelines 18

Other considerations 19

Annex – Implementation Plan submitted to the Trust by the BBC

Executive 22

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Executive Summary

1. The BBC Trust has commissioned Ernst and Young LLP (EY) to conduct an independent

review of the BBC Transfer Pricing regime. The report has found that:

a) Systems are in place to ensure transfer pricing processes are triggered for relevant

transactions;

b) The transfer pricing processes and governance procedures in place are effective,

and they have been applied correctly;

c) The BBC’s Fair Trading Team which works alongside the BBC Public Service

Divisions administers Fair Trading training designed to ensure that all BBC Public

Service staff understand the relevant procedures that need to be followed;

d) To ensure that the review covered a broad range of transfer pricing arrangements

across all three commercial subsidiaries and in the areas where we were aware

from previous consultations that stakeholders had expressed concerns about

transfer pricing matters, we asked EY to conduct a number of case studies to

examine in depth the BBC's application of and adherence to the Fair Trading Policy

framework and Guidelines and transfer pricing requirements in specific instances. In

none of the twelve case studies analysed by EY has it been found that the BBC is

subsidising any of its commercial businesses;

e) None of the case studies present evidence of State Aid law infringements;

f) The vast majority of case studies do not require any changes to be made and those

that do, require only minor improvements;

g) There are no fundamental inconsistencies between the outcomes of the transfer

pricing relationships and the Fair Trading Guidelines;

h) In all the case studies involving BBC Worldwide appropriate methodologies have

been adopted and satisfactory outcomes achieved;

i) While EY have not identified any particular examples of potentially significant

transactions that have not been referred to the Group’s /Division’s Fair Trading

Adviser, because of the lack of a specific definition of the term ‘significant’, there is a

risk that cases could be inappropriately overlooked;

j) There would be merit in improving record keeping and in transfer pricing activity

being tracked more systematically by the Fair Trading team;

k) In relation to BBC Global News Ltd (GNL) programme transactions, EY concluded

that if a narrow interpretation of the market is used, the use of incremental cost

pricing would appear inconsistent with a strict interpretation of the Fair Trading

Guidelines. However, if a wider interpretation of the market is used, there is

evidence to suggest that incremental cost pricing is used by market participants, and

therefore its use appears consistent with the Fair Trading Guidelines and EY did not

conclude that the transfer price was incorrect;

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l) In some circumstances different approaches have been applied to similar

transactions without providing a clear explanation as to why a consistent approach

has not been used;

m) In the brand agreement with GNL, the BBC Public Service has engaged in an open-

ended contract with limited scope for review of pricing and other contractual

arrangements. At the time of EY’s fieldwork the agreement had not triggered any

brand payments, however GNL have since paid a brand royalty for the financial year

2015/16. The lack of contractual review creates the risk of entrenching behaviour

that may not be consistent with market practice; and

n) While the Fair Trading Guidelines state that, under the cost-based pricing approach,

‘an appropriate contribution for reinvestment in the BBC’s Public Service Activities’ is

required, there is currently very little guidance as to what level this “margin” should

be;

o) The reasoning behind the setting of the rate for BBC Worldwide’s brand payment is

not clear, and there is a theoretical risk that some forms of rights deals by

Worldwide may inhibit the transparency associated with the pricing of individual

programmes.

2. We asked the BBC Executive to develop and submit to the Trust an implementation plan

to address those areas identified for improvement in the EY report. The Trust considers

this plan, attached as an Annex to this document, satisfactorily addresses all of EY’s

recommendations, paving the way for a more accountable and transparent transfer pricing

regime.

3. In most cases the actions proposed in the implementation plan are procedural

improvements that will deliver enhanced control and transparency and, we hope,

reassurance to other market participants.

4. Finally, it is worth noting that the report findings are relevant not only to the existing

commercial subsidiaries but also to the BBC Studios proposal, where robust transfer

pricing will be critical in satisfying the Trust that the requirement not to distort the market

is met.

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Introduction

5. Following a review and public consultation in 2014, the Trust published a Strategic

Framework for the BBC’s Commercial Services1 (effective from April 2015) that brought

oversight of the BBC's commercial services into line with the way that licence fee-funded

services are overseen. In the Framework we committed to commission and publish an

independent review to examine the principles and systems in place to ensure that the

pricing of transactions between the public and commercial parts of the BBC is set in line

with market practice, to test whether the application of these principles and systems is

delivering appropriate outcomes – in particular, ensuring that the BBC’s commercial

subsidiaries do not receive an unfair advantage from the BBC’s public service resources.

6. We also committed to consider how levels of transparency and assurance around the

application of transfer pricing arrangements might be improved.

7. The Trust appointed EY to conduct the review, and we are publishing their report today

alongside this document.

8. The purpose of this document is to present:

a) The BBC Trust’s response to the EY report’s findings; and

b) The implementation plan that the BBC Executive has submitted to the BBC

Trust to implement the recommendations in the report, which is attached as

an annex.

9. The EY report provides a critical insight into the BBC transfer pricing regime by looking

not only at its high level principles, but also at their practical application through the

analysis of case studies, which have been selected according to defined criteria, to cover a

broad cross-section of the many day-to-day transactions that occur between the BBC

public service and its commercial subsidiaries. In following this approach, we consider that

the EY report examines the areas of the BBC transfer pricing practice that have been the

subject of industry concerns.

10. The report delivers important reassurance to the Trust and to the market that the transfer

pricing arrangements in place between the BBC and its commercial subsidiaries are robust

and operate well. The report finds that the transfer pricing processes and governance

procedures in place are effective, and that they have been applied correctly, resulting in

satisfactory outcomes in terms of the fair transfer price being paid, i.e. demonstrating that

the BBC is not subsidising any of its commercial businesses. In particular, the report finds

that in all the case studies involving BBC Worldwide (where the total value of the

transactions concerned is greatest and where others in the market had expressed

concerns) appropriate methodologies have been adopted and satisfactory outcomes

achieved.

1

http://downloads.bbc.co.uk/bbctrust/assets/files/pdf/our_work/commercial/commercial_framework/strategic_framework_co

mmercial.pdf

October 2016 5

11. Overall the report has found no breaches of State Aid law and that the BBC takes transfer

pricing seriously implementing it to the highest standards.

12. When areas of improvement have been identified, the Trust has worked with the Executive

to identify the best approach to act upon them. As a result, the BBC Executive has

produced an implementation plan, which we have considered and endorsed, in which the

BBC Executive have committed to a series of specific actions to address EY’s concerns.

The BBC Executive’s implementation plan is attached to this document as an annex.

13. The vast majority of the proposed changes will be implemented in this or the next financial

year, and will be measurable against the proposed timeline. The Trust will monitor the

progress of the implementation plan throughout the duration of the current Charter,

however many of the actions proposed have an ongoing nature and will continue to be

important in the new Charter period, requiring ongoing oversight as part of the regulatory

framework under which the BBC will operate.

14. Should the Trust approve the BBC’s proposals for BBC Studios2 it will be important that

the BBC complies with fair trading and transfer pricing requirements when setting up and

operating this new commercial service.

15. We hope that as well as delivering transparency and assurance in the short term, this work

will be of value to the new BBC Board and to Ofcom in designing and implementing its

future arrangements for regulating the BBC’s transfer pricing activities.

Background

16. The BBC Trust is the sovereign body of the BBC. Amongst its responsibilities are to hold

the BBC Executive to account for the BBC’s compliance with its various regulatory

requirements and the general law and to have regard to the competitive impact of the

BBC’s activities on the wider market. In the context of the BBC’s commercial services, the

BBC’s compliance with the Fair Trading and Commercial Services Frameworks set by the

Trust as well as competition and State aid law (which underpins both of these frameworks)

are of particular relevance.

17. Under clause 68 of the BBC’s Agreement with the Secretary of State for Culture, Media

and Sport, the BBC itself cannot directly provide commercial services, and any such

services must be ‘organisationally separate’ and provided through commercial subsidiaries.

The purpose of these commercial services is to generate a return which can be reinvested

in the BBC’s public service activities, and each service must meet four ‘commercial criteria’.

A service must: (1) fit with the BBC's Public Purpose Activities; (2) exhibit commercial

efficiency; (3) not jeopardise the good reputation of the BBC or value of the BBC brand;

and (4) comply with the Fair Trading Guidelines, in particular, by avoiding distorting the

market.

2 The BBC submitted its application to the Trust on 26 August

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18. The Fair Trading Guidelines include a section on ‘separation’ and explain that separation of

the BBC’s different sources of funding3 is necessary to ensure that the commercial services

do not receive an unfair advantage from licence fee funds. This is achieved in two ways,

firstly via financial and operational separation between the BBC’s Public Service Activities

and its Commercial Activities and secondly via fair transfer pricing between the BBC’s

Public Service Groups and its Commercial Subsidiaries. The Guidelines state that:

‘The key principle of ‘fair transfer pricing’ is that charges for goods and services

supplied by the BBC’s Public Service Groups, whether sold to the BBC’s

Commercial Subsidiaries or to third parties, should be set in line with prevailing

market practice. 4’

19. This aims to secure the best price, in the interests of licence fee payers, and also reflects

state aid law and aims to prevent a situation in which an aid is given which favours a certain

firm (i.e. the BBC favours one of its commercial subsidiaries) and thereby threatens to

distort competition.

20. Following a review and public consultation in 2014, the Trust published a Strategic

Framework for the BBC’s Commercial Services (effective from April 2015) that brought

oversight of the BBC's commercial services into line with the way that licence fee-funded

services are overseen. In response to the consultation for the commercial framework

some respondents raised concerns about a lack of transparency in the transfer pricing

regime, in particular a lack of clarity about how the transfer pricing arrangements operate.

Some of the respondents also believed that the BBC’s brand and goodwill were not

explicitly charged for by the BBC. In response to these concerns, we committed to

commission and publish an independent review of the BBC’s separation and transfer pricing

practices, covering the levels of transparency and compliance when the BBC’s commercial

services buy rights to BBC content or pay to use BBC premises or services.

BBC public service divisions and its commercial subsidiaries

21. The BBC is the publicly funded, multi-platform (TV, radio, online, mobile etc.) broadcaster

of the United Kingdom and its output is aimed primarily at UK audiences.

22. The BBC currently has three subsidiaries engaged in commercial service activities: BBC

Worldwide, BBC Global News Ltd and BBC Studioworks (see box below). As noted

above, their purpose is to generate a return which can be reinvested in the BBC’s public

service activities, and each must meet the four “commercial criteria” listed above.

3 Licence Fee and commercial revenues

4

http://downloads.bbc.co.uk/aboutthebbc/insidethebbc/howwework/policiesandguidelines/pdf/fairtrading_guidelines_010812.p

df

October 2016 7

BBC Studioworks

BBC Studios and Post Production, the BBC commercial subsidiary which provides studios

and associated services, changed its name with effect from 4 May 2016 to BBC

Studioworks. The EY report uses the name of the business that was effective while their

fieldwork and writing-up was being done. We have adopted the new title when referring

to the business in this report, but both names can be taken as referring to the same

business unit.

23. BBC Worldwide is the main commercial arm and a wholly owned subsidiary of the BBC.

The company exists to maximise the value of the BBC’s content for the benefit of licence

fee payers by creating, acquiring, investing, developing and exploiting media content and

brands internationally. BBC Worldwide also creates value from non-BBC content and

showcases British talent both in the UK and around the world. Profits are then returned to

the BBC for reinvestment.

24. BBC Global News Ltd is a commercial subsidiary of the BBC, and operates the BBC’s

commercial, English language, international news services (BBC World News TV channel

and bbc.com/news) funded by advertising, subscription, sponsorship and distribution

revenues.

25. BBC Studioworks provides television studios, post production and digital media services. It

works in partnership with a broad range of media companies, helping to create content

across all genres for a variety of broadcasters.

26. The Trust is currently assessing plans from the BBC to transform its own production

activity from an in-house operation funded from the licence fee to a commercially-funded

operation. If approved this would lead to a further commercial service subsidiary, BBC

Studios.

October 2016 8

Scope & methodology of the Review

Transfer Pricing Review scope

27. We asked EY to review the separation and transfer pricing arrangements between the

BBC’s Public Service divisions and each of its commercial subsidiaries defined as BBC

Worldwide, BBC Global News Ltd, and BBC Studioworks to examine the control systems

in place and test whether the application of these systems was delivering appropriate

outcomes.

28. We commissioned an informed independent judgment based on case studies representing

the depth and breadth of the transfer pricing arrangements currently in place between BBC

Public Service and the commercial subsidiaries.

We asked EY to:

a) Describe the transactions between BBC’s Public Service divisions and its

commercial subsidiaries;

b) Review the methodologies and practices adopted by BBC’s Public Service

divisions when transacting with its commercial subsidiaries and assess

whether they were in line with market practices;

c) Review the controls that are in place to ensure that these transactions

are on an arm’s length basis;

d) Review the actual prices at which transactions took place and provide an

opinion on whether the prices were in line with market ones; and

e) Identify future transfer pricing challenges, with particular regard to the

proposal to create BBC Studios as the BBC's commercially-operated in-

house TV production unit.

29. The analysis was undertaken with regard to compliance with the Trust’s Fair Trading Policy

and the BBC’s Fair Trading Guidelines.

Methodology

30. The EY report has drawn on documentation supplied by the Trust and the BBC Executive,

and on interviews conducted with BBC and external personnel to ensure that the evidence

base took into account the views of external stakeholders with an interest in any of the

three commercial subsidiaries.

31. EY used the interviews to:

a) Understand the procedures and practices involved in the relevant transfer pricing

relationships;

b) Answer specific questions regarding the case studies;

c) Assist in verifying the data used in the case studies to calculate the transfer price

of assets; and

October 2016 9

d) Provide a further understanding of external stakeholders’ views on (and, where

relevant, concerns with) the current procedures and guidance for transfer pricing.

32. To ensure that the review covered a broad range of transfer pricing arrangements across

all three commercial subsidiaries and in the areas where we were aware from previous

consultations that stakeholders had expressed concerns about transfer pricing matters, we

asked EY to conduct a number of case studies to examine in depth the BBC's application of

and adherence to the Fair Trading Guidelines and transfer pricing requirements in specific

instances.

33. To ensure that the case studies were as representative of the transfer pricing regime as

possible, EY applied criteria agreed with the Trust to select the case studies:

a) To ensure the breadth of transfer pricing agreements, case studies were selected

that covered a similar transfer pricing agreement across each of the three

commercial subsidiaries – for example case studies relating to each subsidiary’s

use of the BBC brand.

b) To ensure the depth of transfer pricing agreements, case studies unique to each

commercial subsidiary were selected.

c) Case studies were selected to address concerns previously raised by third parties.

d) Based on the assumption that the greater the value of the arrangement, the

greater the possibility of market distortion if the transfer price is set too low,

transfer pricing arrangements with a significant financial value were selected.

e) The number of case studies assessed for each individual subsidiary considered the

size of the subsidiary. As such, more case studies were chosen that related to

activities conducted by BBC Worldwide given it is a significantly larger entity than

GNL or Studioworks.

34. Based on the above criteria, EY selected the case studies to ensure that robust conclusions

across a broad range of transfer pricing activities could be drawn.

35. EY sought to answer the following questions in relation to each of the case studies:

a) Was there a sufficiently documented agreement between the PS and the

commercial subsidiary, as required by section 3.10 of the Fair Trading Guidelines?

b) What was the transfer price?

c) How was the transfer price determined?

d) Was the choice of transfer pricing methodology rational?

e) Was the methodology applied with a satisfactory degree of accuracy and rigour?

36. On this basis, EY set out their assessment as to whether each of 12 types of transfer

pricing transactions reviewed were in line with the Fair Trading Guidelines; whether they

were conducted on an arm’s length basis; and whether a fair market price was paid.

37. EY benchmarked a sample of the key BBC processes and pricing practices against the

market, with this assessment based on interviews with the BBC and third parties, analysis

of BBC and external information, and EY research and analysis.

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38. Based on their case studies findings along with the analysis and the evidence gathered

through interviews conducted, EY have set out options for making improvements to the

current arrangements for separation and transfer pricing, in their report to the Trust.

October 2016 11

Findings

Areas of good practice

39. We are satisfied that EY, by selecting and carefully analysing case studies that reflect the

breadth and depth of the transfer pricing arrangements currently in place between BBC

Public Service and the commercial subsidiaries, have provided a report that enables robust

conclusions to be drawn.

40. We are reassured by the outcome that overall EY’s findings are positive, showing that the

transfer pricing processes and governance are adequate and have been applied correctly, in

particular in those areas where the transactions are of greater scale and (hence)

significance to the market. EY found that appropriate methodologies have been adopted in

the majority of the case studies including all those involving BBC Worldwide, and that,

where there is relevant market practice available, market prices have been used, and

benchmarking has been conducted.

41. Specifically, EY conclude in their report to the Trust that:

a) There is a substantial set of policies and procedures in place at the BBC to govern

the transfer pricing arrangements. This includes a tiered approach to training,

ensuring that BBC Public Service Staff across all divisions receive a basic level of

training, whilst those in more senior and more relevant positions receive more

thorough training; and

b) The transfer pricing processes and governance procedures in place:

a. are adequate; and

b. have been applied correctly, resulting in satisfactory outcomes in terms of a

fair transfer price being paid.

42. Finally, with regard to the application of the Transfer Pricing process and governance,

through the analysis of the case studies EY found that:

a) The majority of the case studies adhere to the procedures and processes

currently in place: for example, relevant agreements are in place, sign-off

procedures are followed, and relevant fair trading advice is sought where this is

required.

b) Appropriate methodologies have been adopted in the majority of the case studies

including all those involving BBC Worldwide.

c) Where there is relevant market practice available, market prices have been used,

and benchmarking has been conducted.

43. EY highlight their finding that appropriate methodologies have been adopted in the case

studies involving BBC Worldwide because of the relative size of BBC Worldwide with

respect to the other commercial subsidiaries (more than ten times bigger than GNL and

more than thirty times bigger than Studioworks in revenue terms).

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Areas for improvement

44. We welcome the positive findings from EY’s review, but we recognise the importance of

effective processes and controls to test the application of the BBC’s transfer pricing rules

and to deliver assurance and transparency to the market.

45. EY’s analysis of the case studies has identified a number of potential risks and areas for

improvement for the transfer pricing regime which they set out in their report, providing a

number of recommendations.

46. Having accepted these findings the Trust asked the BBC Executive to develop an

implementation plan setting out how the EY recommendations for improvement would be

addressed. We believe that the implementation plan submitted to us provides a sensible

and comprehensive approach to address EY’s concerns, by committing to the achievement

of direct measurable outcomes.5 We are publishing the BBC’s plan as an annex to this

report.

47. The plan shows that the BBC Executive will introduce changes to its arrangements and in

the vast majority of cases implement them in this or the next financial year.

Procedural improvements

Documentation and record-keeping

48. EY expressed concerns around documentation and record-keeping. In particular:

a) With regard to documentation, EY were unable to review the Studioworks brand

agreement since this could not be found either by the public service or

Studioworks.

b) With regard to record-keeping, EY noted that while transfer pricing agreements

are collated by the BBC’s finance teams, they are not tracked systematically, so

that, for example, EY were unable to assess the percentage of overall transfer

pricing agreements that are covered by the Review, as this information is not

tracked by the Fair Trading team.

49. Given the above findings EY suggested that better care needs to be taken in keeping the

documentation and that there would be merit in transfer pricing activity being tracked

more systematically by the Fair Trading team and the BBC Trust in order to enable the

BBC to gain a better overview across all of the BBC’s Transfer Pricing activity.

Referring “significant” transactions to the fair trading team

50. EY also suggest some changes to ensure that all relevant transactions are referred to the

BBC’s Fair Trading team for consideration. The current transfer pricing regime requires

the BBC divisions to decide which transactions are sufficiently “significant,” “novel” or

5 Note that the BBC implementation plan was submitted to us on the 7th of September, hence before the publication of the

new Charter and Agreement.

October 2016 13

“contentious” to be referred to the Fair Trading team for further review. EY have not

identified examples of potentially significant transactions that have not been referred.

However, they believe that there is sufficient ambiguity to suggest that there is a risk that

cases could be inappropriately overlooked.

51. EY notes that in this regard it would provide greater clarity if “significant” was defined in

the internal procedures which set out the triggers for referral, particularly as no cross-

checks are in place to ensure that the full range of relevant transactions are reviewed. EY

notes that providing the triggers are properly communicated and clear to division heads

and the consequences understood, via the training process, then this should help to

mitigate concerns that the responsibility for compliance lies, in part, with the divisions.

52. In addition, EY consider that the BBC Fair Trading team should conduct “dipstick” tests of

randomly selected transactions (which otherwise have not been referred to the Fair

Trading team) in order to assess whether appropriate procedures have been followed.

Interpretation of Fair Trading Guidelines

53. We discuss this recommendation separately later in the document.

Trust Response

54. The Trust accepts EY’s findings and recommendations concerning procedural

improvements. Transfer pricing arrangements must be clearly documented and the

associated documentation must be available when needed. We also accept that tracking

transfer pricing activities more systematically across the BBC will give a clearer picture of

the scale and extent of such activity and will help to ensure a consistent approach.

Recording transfer pricing transactions centrally should also provide assurance and

transparency as discussed later in this document.

55. The BBC has committed in its implementation plan to establish a record of the material

SLA’s / agreements between the BBC and its commercial subsidiaries. This will be collated

by the Fair Trading Team working with finance and other colleagues. In addition, the Fair

Trading Team will maintain a central repository specifically of advice provided to divisions

in relation to transfer pricing. This will be complemented by some additional transactional

analysis completed by the BBC Finance to summarise invoiced business between the public

service and the commercial subsidiaries. In line with EY’s recommendations the BBC will

use this data to gauge the overall scale of transfer pricing activity, which may be used to

help define further triggers, and would also aid any future transfer pricing reviews. The

BBC has committed to commence this work in October 2016.

56. With regard to the Studioworks brand agreement, the BBC has committed to review the

new Studioworks brand agreement in the last quarter of the current financial year, so that

the revised royalty fee arrangements will be implemented from financial year 2016-17

onwards. The BBC has confirmed that the brand agreement will move from a profit-based

rate to a revenue-based rate and that the new agreement will be drafted to include an

appropriate review mechanism.

57. We accept EY’s opinion that there needs to be more clarity in the Executive’s guidance

about which cases require referral to the Fair Trading Team, and their suggestion for

‘dipstick testing’.

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58. The BBC Executive has committed to update existing guidance in internal Fair Trading

procedures to include a further definition of significance, and provided a new wording for

the internal Fair Trading procedures. The internal procedures will be updated to say:

“Groups/Divisions…should refer any significant, novel or contentious transactions (for

example, length of time of a licence in comparison with market norms, use of non-

standard contractual terms, etc.) to the Group’s/Division’s Fair Trading Adviser.

Significance should be considered by each division/group with reference to their local

financial approval process i.e. anything that requires local divisional board level approval

or greater should be referred to FT.

For the avoidance of doubt, if the transaction is novel or contentious, this should be

referred to FT regardless of the financial value.”

59. While EY did not explicitly ask for these measures to be taken the Trust accepts as

appropriate the definition now provided by the BBC and welcomes its decision to publish

the definition on the Fair Trading pages on the BBC website.

60. The BBC has committed to update the internal procedures by the end of October and to

introduce the new definition in the fair trading training programme.

61. With regard to the recommendation to introduce dipstick testing of randomly selected

transactions, the BBC has committed to expand the existing sample testing programme.

The scale of the existing testing framework will be increased through a larger sample size

which will specifically include a larger number of intra-group transactions to be tested. It

has also decided to include a new requirement for divisions to outline the pricing

methodology used for each transaction sampled. These will then be reviewed for

compliance with the Fair Trading Guidelines.

62. The BBC will give greater prominence to the outcomes of compliance testing through the

introduction of a summary of findings that will be reported to Group Directors and the

Executive Fair Trading Committee as part of the existing bi-annual Fair Trading reporting

process. The BBC has committed to introduce this new regime straight away and to deliver

the first reporting to Group Directors and the Executive Fair Trading Committee at the

end of the current financial year.

Benchmarking and contract review period

63. EY have commented on the lack of sufficiently regular contractual review in certain cases,

which they consider might create the risk of entrenching behaviour that may not be

consistent with market practice. They note that the existing brand licence agreement

between the BBC and GNL was put in place in 2003 and, while there was a review in 2011,

this did not include any benchmarking against (then) current market practice. GNL has not

been required to make any royalty payment for use of the BBC brand under the terms of

October 2016 15

its existing agreement (which sets a rate based on profits). They observe that under normal

commercial agreements it would be unusual for the owner of a piece of intellectual

property to allow continued exploitation by a third party in return for no payment over a

prolonged period.

64. EY recommend that there should be regular reviews of contracts and relevant pricing

benchmarks, so as to ensure the terms continue to be in line with market practice. More

generally, EY considers the benchmarking analysis should be reviewed more regularly, and

that arrangements should be reviewed whenever there is material change to underlying

relationships (e.g. when there is restructuring of the commercial subsidiary in question).

65. EY also note that the BBC’s Fair Trading Guidelines require that prices include an

appropriate ‘contribution’, or ‘margin’, but that there is little guidance on the level at which

this should be set. They recommend that more detailed guidance is developed to ensure a

consistent approach.

Trust Response

66. With regard to the EY’s concerns on the GNL brand agreement, the BBC has committed

to review the exploitation of the BBC brand by GNL to determine a new royalty rate by

the end of the current financial year. The BBC has also confirmed that the agreement will

move from the current profit-base rate to a revenue-base rate so that payment for use of

the BBC brand will be required irrespective of levels of profitability. The new agreement

will be drafted to include an appropriate review mechanism and the revised royalty fee will

be implemented from the financial year 2016-2017 onwards.

67. With regard to contract and benchmarking regular reviews we agree that reviews should

be conducted in accordance with current market practices to ensure that agreements

continue to reflect market prices.

68. As well as committing to review the brand agreements for Studioworks and GNL, the BBC

has also committed to review the BBC Worldwide brand licence to ensure consistency of

approach across the commercial subsidiaries. More generally the BBC has committed to

review periodically the list of long-term agreements to identify whether any more detailed

review might be required, for example due to a material change in structure and/or

operations. The BBC expects to conduct the first review of the database of material

agreements in the 2017/2018 financial year and to review the BBC Worldwide brand

licence agreement in the financial year 2018/2019.6

69. We accept EY’s recommendation about providing further guidance on the level of the

margin that should be set. We agree that further clarity might provide reassurance and

improve the transfer pricing regime. In response to this recommendation the BBC will

formulate more detailed guidance for staff on the principles on charging a margin in

different intra-group trading scenarios, and that internal procedures will be updated to

reflect there more detailed principles. These principles will be reflected in internal guidance

for the financial year 2017/2018.

6 Note that the latest BBC Worldwide Brand Licence Agreement was updated and signed in 2015.

October 2016 16

Transparency

70. The report recommends improvements in transparency, picking up on the Trust’s

announcement in the context of its recent fair trading review that future annual fair trading

audits should have a greater focus on the outcomes of transactions as well as whether

processes have been followed correctly, and the Trust’s commitment to include more

information on the results of the audit in its annual report.

71. EY cite as examples of lack of transparency the BBC Worldwide brand payment, saying that

the reasoning behind some of the arrangements is not clear, and that bundled rights deals

by BBC Worldwide may inhibit the transparency associated with the pricing of individual

programmes.

72. EY note in their report that some stakeholders have called for greater regulatory scrutiny

and enforcement (including sanctions) around the relationship between the BBC and its

commercial subsidiaries to ensure that the parties are held to account, delivering greater

comfort for external parties. They observe a lack of understanding in industry about the

nature and extent of the existing governance framework and suggest that the Trust could

consider proactive steps to promote transparency to help to allay some of these concerns.

73. EY float the possibility of a regulator publishing (or requiring the BBC to publish) an Annual

Monitoring Report on the arm’s length agreements between the BBC public service and its

subsidiaries to review whether they are in line with the Fair Trading Guidelines.

74. Other measures to increase transparency suggested by EY are to change the Fair Trading

Policy document and Fair Trading Guidelines to simplify the guidance and to signpost

additional documents, and the possibility of a workshop on Fair Trading Policy and its

implementation.

Trust Response

75. At present the BBC Executive reports on and is held accountable for its dealings with its

subsidiaries through a range of controls presented to the BBC Trust:

a) The BBC Executive reports on the performance of its subsidiaries and their

compliance with the four commercial criteria (a component of which is

compliance with the requirements around transfer pricing in the Fair Trading

Guidelines).

b) The BBC is also subject to an annual Fair Trading Audit which looks at key areas

of risk and sample tests and interrogates the central advice records.

c) Sample testing of transfer pricing is also included within the BBC’s annual financial

audit.

d) All three subsidiaries publish annual accounts.

76. While these controls all contribute to delivering accountability and transparency, we

acknowledge that transparency could be improved. The challenge is to find the right

balance between protecting confidentiality and the competitive position of the subsidiaries

in the market, and providing sufficient information to give reassurance to the market that

October 2016 17

these businesses are not receiving any unfair advantage. The Trust is also keen that a

proportionate approach is taken, so that reporting requirements do not become an

unreasonable regulatory burden.

77. The BBC Executive has committed to a series of initiatives that we believe will increase the

level of transparency across the areas identified by the EY’s report. We are satisfied with

the proposals put forward and the proposed timeline for implementing them.

78. We also note that EY has recognised that, following the latest Fair Trading Review, the

Trust has taken steps to improve transparency, working closely with the BBC Executive. In

this respect, changes have already taken place in the last financial year:

a) The BBC Executive has acted to improve the transparency of the external audit by

facilitating the Trust’s request that the auditors provide additional detail of their

work to the BBC Trust in their Audit Report;

b) Further, the BBC’s Annual Report and Accounts 2015-16 includes additional

information related to the external Fair Trading audit compared to prior years.

This is published in Part One (Inside the Trust - Governance) and Part Two

(Governance – Fair Trading Report) of the report.7

79. With regard to the EY’s concerns about the reasoning behind some of the BBC Worldwide

brand payment arrangements, the BBC has committed to review the agreement as

required under the review provisions in the existing licence. During the review, which will

take place in the financial year 2018/2019, the BBC will ensure that a consistent approach

across commercial subsidiaries will be applied.

80. The Trust acknowledges the arguments presented by EY for sharing with the market more

information regarding the arm’s length agreements between the public service and its

commercial subsidiaries. However we believe that this can be achieved effectively by

publishing material in a single place rather than spread across several documents. We

believe that the Fair Trading pages on the BBC website represents a more appropriate

medium for publishing such information and therefore accept the BBC proposal to increase

the visibility of, and confidence in, the safeguards the BBC has in place by publishing

additional information on the Fair Trading pages on the website which summarises the

controls framework employed by the BBC to ensure compliance with the Fair Trading

Guidelines.

81. This would not include specifics on the value or number of transactions or any

commercially sensitive data but would include a repository of Fair Trading related data

such as:

a) Extracts from the BBC’s Annual Report and Accounts which reference Fair

Trading compliance;

b) A summary of the high level types of transactions that occur between the Public

Service and commercial subsidiaries;

c) A summary of compliance activity undertaken by the Fair Trading team;

d) Number of individual pieces of advice provided to the BBC groups;

7 http://downloads.bbc.co.uk/aboutthebbc/insidethebbc/reports/pdf/bbc-annualreport-201516.pdf

October 2016 18

e) Cross-reference to any other relevant information published by the Trust; and

f) Relevant extracts from internal procedures, such as the definition of significance.

82. The BBC has committed to start publishing this additional information from December

2016.

83. Finally, the BBC has confirmed that it would consider any requests from third parties for a

workshop on Fair Trading policy and its implementation, and that this would be arranged as

required.

Application and interpretation of Fair Trading Guidelines

84. EY found that the BBC’s approach to transfer pricing for transactions relating to GNL

programmes appeared to have departed from a strict interpretation of the Fair Trading

Guidelines. In Case Study 9, some programming sold to GNL was priced using an

incremental cost method. EY concluded that there was no evidence that this was market

practice, at least if one took a narrow definition of the market. In that event, the

Guidelines suggest that a price based on all relevant direct costs and overheads, plus a

margin for reinvestment by the BBC, should be employed. EY also notes that if a wider

market interpretation was used there is evidence to suggest that incremental cost pricing is

used by third parties.

85. In addition, EY found differences in the way that content is paid for between GNL-

commissioned content and BBC News-commissioned content, as well as co-commissioned

content:

a) For GNL-commissioned content, BBC News makes a payment to GNL via a

discount for overheads and margin based on the secondary value BBC News

derives from it.

b) For BBC News-commissioned content the GNL payment is set at incremental

cost.

c) For the co-commissioned programmes analysed, it appears that BBC News pays all

the overheads.

86. EY comments that there should be consistency in the approach taken for payment of

content i.e. that content should be priced using the same methodology unless there is

evidence to justify different approaches.

Trust Response

87. In the case highlighted by EY the proposed pricing arrangements were referred to the

BBC's Fair Trading Team as required by the Guidelines. The Trust notes that EY's concern

was whether the right methodology had been used. They did not conclude that the transfer

price used was incorrect. The Guidelines include provision for particular pricing

arrangements that do not fit the Guidelines to be referred to the Fair Trading team, who

October 2016 19

may consider that there is an objective justification for the proposed approach.8 This is the

process that was followed in the instance of Case Study 9.

88. The Trust regards this as a prudent and indeed necessary provision, as the Guidelines

cannot cover every situation. We also recognise that, in the absence of market benchmarks

or other evidence of market practice it is necessary to seek a proxy for market pricing, and

that there may well be circumstances where, taking into account such evidence as there is

(e.g. in Case Study 9, that there is effectively no market for BBC branded “ready-made

news” programmes outside the BBC), an approach based on incremental costs may be the

appropriate way to arrive at a valid transfer price.

89. An external review of the BBC Executive’s rationale and supporting evidence for the use of

incremental cost pricing, found there was very limited trade in ‘ready-made’ news

programming but, when looking at the wider market, there was some evidence to suggest

that incremental cost pricing is in accordance with market practice. While EY do not find

that incorrect transfer pricing has been used, they recommend that the matter is reviewed.

Having asked the Executive to revisit this, the Trust is satisfied that the Executive’s position

– explaining why reference to the wider market is appropriate – is acceptable. The Trust

also welcomes the Executive’s commitment to keep its approach under review as markets

change and evolve.

90. With regard to the different price methodologies used to price GNL commissioned

content and BBC News commissioned content, the BBC has committed to revisit these

transactions and that a consistent approach will be applied through the general review on

consistency in charging principles. The review is planned for completion in the financial year

2017/2018.

Other considerations

91. EY include some additional findings in their report to the Trust:

a) For similar transactions across subsidiaries, whilst the majority of these

similar transactions meet the Fair Trading Guidelines, the approaches taken to

negotiating the outcomes were managed separately, for example in the

Studioworks contracts for EastEnders and Holby City (case studies 7 and 8). EY

recommend that the BBC considers adopting an overarching framework for

similar transactions in future, to ensure that the approaches are either consistent

or that differences in approach are appropriate to the circumstances of the

particular deal.

b) For the purchase of rights by BBC Worldwide, EY note (case study 12) that some

payments are for bundled rights, in order to secure access to content. However

they believe that this practice could create negative competitive effects in the

market for this content, possibly pushing prices above competitive levels, or

restricting further access. EY state that this could become a particular issue if this

type of strategy becomes more prevalent.

8 See paragraph 3.17 of the Guidelines

October 2016 20

c) We invited EY to comment on any finding from their work that they would wish

to highlight for consideration in the context of the BBC’s plans to establish a new

commercial subsidiary, BBC Studios. EY offer a number of suggestions in their

report for the BBC when setting up BBC Studios:

a. Document, articulate and communicate transfer pricing procedures and

outcomes to stakeholders, in order to ensure transparency and address

industry concerns;

b. Be able to demonstrate the reasoning behind particular individual decisions –

for example why a specific value has been used in setting payments;

c. Continue to place great importance to the benchmarking analysis and when

possible use tendering process; and

d. Identify trigger points, or put in place a formal review process for long-term

contracts.

Trust Response 92. We agree that defining an overarching framework to similar transactions to ensure that the

approaches are either consistent or that differences in approach are appropriate to the

circumstances of the particular deal, can provide guidance to both the Public Service and its

commercial subsidiaries.

93. The BBC has committed to make changes to improve consistency in the approach to the

charging of central functions (like for example group functions utilised by the commercial

subsidiaries such as HR, Finance and Legal support), and more in general in their approach

to all the transfer pricing transactions. These pricing principles will be captured in a ‘BBC

Group Trading’ manual providing clear and consistent charging principles. The Fair Trading

training regime will be updated to include additional detail to delegates on charging for

group services and it will make reference the ‘Group Trading’ manual. The BBC has also

undertaken to set out central function principles for the financial year 2017/2018 and to

have a Group Trading manual for by April 2017.

94. With regard to the bundling of rights, while we acknowledge that a theoretical risk may

exist in some specific circumstances, we note that some bundling of rights (which allows

the buyer to spread risks on a set of rights) is an approach used not just in relation to BBC

rights but also for rights acquired from other broadcasters, and that bundling rights is the

market norm which reveals commercially preferable for buyers and sellers. On balance, in

this circumstance, we consider that the benefits of bundling rights are likely to outweigh

the potential risk of negative outcomes and as such we do not believe that further action is

necessary at this point.

95. Finally, with regard to the BBC Studios proposals we accept that all the recommendations

expressed by EY would be beneficial for the correct functioning of the transfer pricing

regime. We therefore expect these recommendations to be adopted if and when the BBC

Studios becomes a commercial subsidiary. More broadly, we expect that all the

improvements to the transfer pricing regime and the changes that the BBC has committed

to implement in this review will be applied to BBC Studios transactions if the Trust finds

October 2016 21

that the proposals meet the required regulatory tests and the new commercial subsidiary is

established.

October 2016 22

Annex – Implementation Plan submitted to the

Trust by the BBC Executive

EY finding / observation Actions Timing

1 It would provide greater clarity to

divisions if ‘significant’ was defined

in internal procedures which set

out triggers for referral.

1. The internal Fair Trading (‘FT’)

procedures currently reference

significance, alongside novelty

and whether the transaction

could be contentious.

However, we note that

additional clarity in our internal

Fair Trading procedures may be

helpful to provide additional

certainty to Divisions.

Therefore, existing guidance in

internal FT procedures will be

updated to include a further

definition of significance.

2. Our internal procedures will be

updated to say:

“Groups/Divisions…should refer

any significant, novel or

contentious transactions (for

example, length of time of a

licence in comparison with market

norms, use of non-standard

contractual terms, etc.) to the

Group’s/Division’s Fair Trading

Adviser.

Significance should be considered

by each division/group with

reference to their local financial

approval process i.e. anything that

requires local divisional board level

approval or greater should be

referred to FT.

For the avoidance of doubt, if the

transaction is novel or contentious,

this should be referred to FT

regardless of the financial value.”

By 31 Oct 2016

Update made to

the internal

procedures post

Trust Services

Committee.

By 31 Oct 2016

Communicated for

onward

dissemination

On-going

Maintain awareness

through discussion

in training sessions.

October 2016 23

EY finding / observation Actions Timing

3. The definition of significant and

the referral of transactions /

transfer pricing arrangements

will continue to be explored

through the existing FT training

programme.

4.

2 The BBC FT team should conduct

‘dipstick’ tests of randomly

selected transactions involving

transfer pricing (which would

otherwise have not been referred

to FT) in order to assess whether

appropriate procedures have

been followed.

1. Existing sample testing by the FT

team will be extended to

include the requirement for

divisions to outline their pricing

methodology for each

transaction sampled which will

be reviewed for compliance

with the FT guidelines.

2.

3. The scale of the existing testing

framework will be increased

through a larger sample size

which will specifically include a

larger number of intra-group

transactions to be tested /

reviewed.

4.

5. The outcome of compliance

testing will have greater

prominence internally through

the introduction of summary

RAG reporting setting out the

findings of compliance testing

(reporting detail by exception

i.e. where a potential issue has

been identified) to:

a. Group Directors via the existing

FT bi-annual reporting

processes

b. Executive Fair Trading

Committee (‘EFTC’) on a bi-

annual basis

Q3 2016-17

Inclusion of pricing

methodology data

collection in

existing sample

testing.

Q3 2016-17

Increase in sample

size.

Q4 2016-17

First bi-annual

reporting to Group

Directors.

Q4 2016-17

First reporting to

EFTC (to align with

bi-annual divisional

reporting).

NB: Q4 relates to

the transactions

sampled in that

quarter. Reporting

to Group directors

/ EFTC will actually

take place in Q1

17/18 reflecting Q4

activity.

3 There would be merit in transfer

pricing activity being tracked

more systematically by the FT

team and the BBC Trust to

enable the BBC to gain a better

understanding of the full scale of

1. In addition to existing records

the FT team will maintain a

central repository specifically of

advice provided to divisions in

relation to transfer pricing.

October 2016

2015-16

transactional

analysis prepared

for initial review.

October 2016 24

EY finding / observation Actions Timing

transfer pricing activity, which

could also be used to help define

further triggers, and would also

aid any future reviews similar to

this study.

2. The FT team will work with the

commercial subsidiaries and

finance colleagues to collate a

repository of material SLA’s /

contractual agreements

between the public service and

the commercial subsidiaries.

This combined with published

data on BBC Worldwide (‘BBC

WORLDWIDE’) content

investment and dividends paid

to the BBC will provide an

additional central overview of

material transactions and the

associated transfer pricing

principles.

3. This will be complemented by

additional transactional analysis

completed by BBC Finance to

summarise invoiced business

between the public service and

the commercial subsidiaries (not

including trade between the

commercial subsidiaries

themselves).

4.

5. In line with EY’s

recommendations we will use

this data to further inform our

understanding of the scale of

transfer pricing activity, which

may be used to help define

further triggers, and would also

aid any future reviews similar to

the EY study.

Q2 2016-17

Central repository

of FT pricing advice

created. To be

updated

retrospectively to

include Q1 2016-

17 advice with a

view to having a

full year picture for

the financial year

2016-17.

Q4 2016-17

Databank of SLAs /

contractual

agreements in

place for 2016-17

populated.

Quarterly from

Q2 2016-17

Transactional

analysis provided

to FT by finance

team.

4 Documentation and record

keeping – S&PP (now

Studioworks) brand agreement

could not be found.

1. A new brand licence agreement

with Studioworks will be drawn

up. See point 8b below.

See 8b

5 The BBC should consider

adopting an overarching

framework to similar transactions

in future to ensure that the

approaches are either consistent

or that differences in approach

1. In response to the specific

findings on brand licences for

Studioworks and Global News

Ltd. (‘GNL’), they will be

reviewed and a consistent

approach will be applied (see

March 2017

Fees payable under

new brand licences

based on 2016-17

results.

October 2016 25

EY finding / observation Actions Timing

are appropriate to the

circumstances of the particular

deal.

sections 8a and 8b).

2. The BBC Executive will make

some changes to improve

consistency in the approach to

the charging of central functions

(e.g. group functions utilised by

the commercial subsidiaries

such as HR / finance / legal

support).

3. BBC Studios (if and when it

becomes a commercial

subsidiary) will be subject to the

same consistent approach.

4. These pricing principles will be

captured in a ‘BBC Group

Trading’ manual providing clear

and consistent charging

principles.

5. The FT training regime will be

updated to include additional

detail to delegates on charging

for group services and make

reference the ‘Group Trading’

manual.

2017-18

Central functions

charging principles

to be in place for

the financial year

2017-18.

1 April 2017

‘Group Trading’

manual to be in

place for the start

of the financial

year.

2017-18

FT Training

sessions to include

additional detail on

Group Trading

pricing principles.

6 Use of incremental cost pricing

between GNL and News – in

such cases these pricing

arrangements should be subject

to further review by the Trust.

1. FT has reviewed the rationale

for the use of incremental cost

pricing for certain categories of

news content.

2. Any new instances of

incremental cost pricing will be

subject to approval from the FT

team as stated in the FT

Guidelines.

3. Strategic review of each

commercial subsidiary (including

GNL) as mandated by the

Government’s White Paper is

likely to include some

consideration of transfer pricing

and trading between the public

service and its commercial

On-going

Review of new

instances of

incremental cost

pricing.

By end 2018

First strategic

review to be

completed as per

the White Paper.

October 2016 26

EY finding / observation Actions Timing

subsidiaries. The FT team will

feed into the strategic reviews

of the commercial subsidiaries

as required.

7a

7b

7c

There should be regular review

of contracts and relevant pricing

benchmarks (open ended

contracts) so as to ensure the

terms continue to be in line with

market practice.

Where there is a significant

change in the market, (for

example with the creation and

restructuring of GNL), contracts

should be reviewed.

There is merit in reviewing

benchmarking analysis more

regularly, and ensuring that

arrangements are reviewed

whenever there is a material

change to underlying relationships

(e.g. when there is a restructuring

of the commercial subsidiary in

question.

1. The EY observations regarding

contract review and

benchmarking are primarily

made in relation to the GNL

and Studioworks brand licences

and as described in section 8

below the GNL and

Studioworks brand licences will

be reviewed and will

incorporate consistent review

points and triggers for review.

2.

3. The BBC Worldwide brand

licence will also be reviewed at

the current contractual review

point to ensure consistency of

approach across the commercial

subsidiaries.

4. Standardised SLA’s for group

services/central functions will be

utilised across the commercial

subsidiaries.

5.

6. Utilising the databank of

material agreements between

the PS and the commercial

subsidiaries as referred to in

section 3, alongside the FT

team’s knowledge of the

divisions and their activities, the

list of agreements will be

reviewed periodically to identify

whether a more detailed review

might be triggered, due to a

material change in structure /

operations.

2018-19

BBC

WORLDWIDE

brand licence

updated at current

contractual review

point to include

standardised

review

points/triggers.

2017-18

First review of

databank of

material

agreements.

Standardised SLA’s

drafted.

8a GNL brand licence review 1. The exploitation of the BBC

brand by GNL will be reviewed

to determine a new royalty rate.

Q4 2016-17

New royalty rate

agreed and licence

document in place.

October 2016 27

EY finding / observation Actions Timing

2. The brand fee will be set as a

percentage of applicable

revenue.

3. The new agreement will be

drafted to include an

appropriate review mechanism.

4. The revised royalty fee will be

implemented from financial year

2016-17 onwards.

March 2017

The fee payable

based on the new

royalty rate will be

calculated on 2016-

17 full year

financial results.

8b Studioworks brand licence review 1. The exploitation of the BBC

brand by Studioworks will be

reviewed to determine a new

royalty rate.

2. The brand fee will be set as a

percentage of applicable

revenue.

3. The new agreement will be

drafted to include an

appropriate review mechanism.

4. The revised royalty fee will be

implemented from financial year

2016-17 onwards.

Q4 2016-17

New royalty rate

agreed and licence

document in place.

March 2017

The fee payable

based on the new

royalty rate will be

calculated on 2016-

17 full year

financial results.

9 More detailed internal guidance

should be provided to BBC staff

as to what is considered an

appropriate contribution back to

PS (the ‘margin’) to ensure a

consistent approach.

1. The FT team will formulate

more detailed guidance for staff

on the principles on charging a

margin in different intra-group

trading scenarios.

2. Internal procedures will be

updated to reflect these more

detailed principles.

April 2017

Principles for

charging margins to

be reflected in

internal

procedures for the

new financial year

10 The reasoning behind some of the

arrangements for BBC

WORLDWIDE brand payment is

not clear.

The BBC will review the

agreement as required under

the review provisions in the

existing licence and document

conclusions.

2018-19

Review of brand

licence terms and

fee as required.

11 Bundled rights deals by BBC

WORLDWIDE may inhibit the

transparency associated with the

pricing of individual programmes.

1. The BBC Executive considers

that bundling rights in this

context is the market norm and

commercially logical for buyer

and seller. By spreading risk

N/A

October 2016 28

EY finding / observation Actions Timing

across the bundled rights, the

buyer mitigates risk and the

seller maximises price.

Therefore, the BBC Executive

does not believe any further

action is required in response to

this observation by EY.

12 EY note that the Trust is taking

steps to improve the

transparency of the BBC’s

transfer pricing arrangements. In

the Trust’s review of Fair Trading

Policy it states its intention to

“…ask the Executive to commission

a more thorough fair trading

audit…with a greater focus on

whether the outcomes of individual

cases are compliant, as well as

whether processes have been

followed correctly..”

1. The BBC Executive has acted to

improve the transparency of the

external audit by facilitating the

Trust’s request that the auditors

provide additional detail of their

work to the BBC Trust in their

Audit Report.

2. Further, the BBC’s Annual

Report and Accounts 2015-16

includes additional information

related to the external FT audit

compared to prior years. This

is published in Part One (Inside

the Trust - Governance) and

Part Two (Governance – Fair

Trading Report) of the report.

3. It sets out additional detail of

the work the auditors have

completed as described in their

audit report:

“Our work consisted of enquiry

and testing to enable us to form a

view as to whether an appropriate

system of internal controls was in

place. We conducted a risk-based

analysis to identify those aspects of

the BBC’s fair trading control

regime that represents the most

significant fair trading risk, and

focused our detailed testing on

those areas. Individual cases were

selected from the BBC’s fair

trading log for review. In each case

we examined written records and

interviewed relevant parties to

provide us with reasonable

Completed.

October 2016 29

EY finding / observation Actions Timing

assurance that the system of

internal control had been applied,

and the appropriateness of the

outcome. Cases examined, and the

areas of significant risk around

which the work was focused,

covered all three of the BBC’s

commercial service subsidiaries

and included examination of

transfer pricing and separation

arrangements, use of and payment

for the BBC brand, and the

application of the Trust’s

requirement that, subject to

fulfilling the public purposes, the

BBC should minimise any negative

market impact.”

13 Publish an annual monitoring

report on the arm’s length

agreements between the PS and

commercial subsidiaries to review

whether they are in line with the

FTGs.

The report could include:

- Results of dipstick tests

- Further clarity on the internal

processes undertaken to ensure

compliance, for example the

review of overhead allocation and

how this is applied to cost plus

transfer pricing arrangements.

1. There are already a range of

controls in place governing the

BBC’s reporting of its dealings

with its subsidiaries, however

the BBC Executive aim to

increase the visibility of, and

confidence in, the safeguards the

BBC has in place by publishing

additional information on the

Fair Trading pages of the BBC

website which summarises the

controls framework employed

by the Executive to ensure

compliance with the FT

Guidelines. This would not

include specifics on the value or

number of transactions or any

commercially sensitive data but

would include a repository of

FT related data such as:

a. Extracts from the BBC’s Annual

Report and Accounts which

references FT compliance

b. Summary of the high level types

of transactions that occur

between the PS and commercial

subsidiaries

December 2016

Additional

information

published on the

Fair Trading pages

of the BBC

website.

October 2016 30

EY finding / observation Actions Timing

c. Summary of compliance activity

undertaken by the FT team

d. Number of individual pieces of

advice provided to the BBC

groups

e. Links to other related

documents published by the

Trust

f. Relevant extracts from internal

procedures, such as the

definition of significance that has

been determined as a result of

this review (see section 1)

14 External stakeholders would

welcome a workshop on the FT

Policy and its implementation.

1. The BBC would consider any

requests from third parties for

such a workshop to outline in

more detail the FT policy and

framework and a workshop

would be arranged if requested

and/or required.

TBD

To be arranged as

required.