International Accounting

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• International Accounting
• and Financial Reporting
• Summer 2007
• William F. OBrien, MBA, CPA

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Session XI-A

• Control, Tax Audit Issues

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Control, Tax Audit Issues

• Strategic Planning
• Financial Measurement
• Financial Planningdont call it a Budget
• Transfer Pricing
• Performance Measurement

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Integrated Planning
SP
P
MBOs
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MNE Planning Stages

• Strategic review
• Annual operating plan
• Financial
• Non-financial
• Integration monitoring
• Personal planning rewards

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Integrated Planning Benefits

• Greater clarity realism
• Performance stretch
• Increased motivation
• More timely intervention
• Clearer ownership

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Financial Measurement

• Varies by region
• US versus Japan
• Numerous targets
• ROI
• Sales
• Quality
• Market share
• Income
• Variance minimization

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Key Financial Planning Questions

• Formal process?
• Who participates?
• Style of communication?
• Establishment of targets?
• International logistics?
• Time frame?
• Industry and geography volatility impact?
• Measurement of variances?

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International Considerations

• FX determination
• FX impact on results
• Resolution of FX fluctuation

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Cross-National Examples

• Mexico
• High participation among local senior managers
• High participation among local low level managers
• Low participation among subsidiary managers
• Asia-Pacific
• High participation

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Cross-National ExampleUS and Japan

• US 12 days longer
• US focus on ROI Japan focus on sales
• US is more participative
• Both are bottoms up
• Japan greater focus on action against variances
• US uses plan for evaluation, compensation and
  incentives

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Goals of Intl Transfer Pricing

• Strategic goal congruence
• Preservation of local management discretion
• Minimization of built-in conflicts
• Taxes versus duties
• Local balance of payment status
• Inflation and politics

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Transfer Pricing Issues

• Government regulations and restrictions
• Tax statutes
• Tariff and duty rates
• Currency restrictions
• Inflation rates
• Local motivation

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T/P Approaches

• Market-based (recommended approach)
• Cost-based
• Negotiated rate
• Advanced pricing agreement
• General rule
• Variable cost plus opportunity cost

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Why Market-Based?

• Legal
• Goal congruence
• Equity
• Simplicity

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Taxation

• Types
• Credits versus deductions
• Other issues
• Tax planning

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Types of Taxes

• Direct
• Income taxes
• Double taxation impact due to dividends
• Indirect
• Value-added taxes (VAT or TVA)
• See Exhibit 16.1
• Paid at transfer point of goods or services
• Recovery of prior assessment

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Tax Credits and Deductions

• Two approaches to offset multinational taxation
• Credits usually result in more equitable impact
• See Exhibit 16.2 for an example

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Other Tax Issues

• Tax havens
• Attitudes and avoidance
• U.S. foreign source income
• Sub-part F exceptiontaxed when earned
• Transfer price issues
• Recall our discussion in Session XVI
• See pages 479-482
• Note IRS Code Section 482
• Incentives, rates and tax treaties

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Tax Planning

• Exports
• Withholding issues
• Branches
• No income deferral good for start-ups with
  losses
• Subsidiaries
• Normal sheltering of income until distributed
• Locations
• Influenced by incentives, rates and treaties

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Internal/Operational Auditing Objectives

• S-C-O-R-E
• Safeguarding assets
• Compliance with laws and regulations
• Organization goal attainment
• Reliability of information
• Effectiveness and efficiency of operations

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Current Governance Climate

• Shift to Board focus from Senior Mgmt. focus
• Global perspective
• FCPA-Foreign Corrupt Practices Act (1977)
• COSO-Treadway Commission Committee of Sponsoring
  Organizations (1987)
• IIA, FEI, IMA, AICPA, AAA

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Foreign Corrupt Practices Act

• Passed in 1977
• No bribery
• No influence peddling
• Facilitating payments are OK
• Influences action that must be taken anyway

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MNE Audit Challenges

• FX
• Language and culture
• Legal considerations
• Supply of audit professionals
• Training

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External Auditors

• True and Fair View (TFV)
• EU base 4th directive
• Subject to cultural interpretation
• Presents Fairly
• More standardized meaning
• Independent audit environment--varies widely
• Brazil, Germany, Japan, Netherlands US

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Other Audit Related Issues

• Harmonization of GAAS
• Same fundamental arguments as GAAP
• Driven by globalization of capital markets
• International Federation of Accountants-IFAC
• Worldwide equivalent of AICPA
• Practices, education, ethics
• Financial and managerial actg. concerns
• Also involves IT information
• Compliance is encouraged

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International Audit Variances

• Note the drive for harmonization on pages 436 -
  450

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Institute of Internal Auditors--IIA

• Established 1941
• Professional body for internal auditors
• Certification
• Literature
• Lobbying
• Training
• Code of ethics

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Risk Management(includes Economic and Political
Risk)

• Risk identification
• Risk assessment
• Risk assignment
• Risk quantification
• Risk consolidation
• Risk settlement
• Avoid
• Diversify
• Share
• Transfer
• Control
• Accept--Exploit

At SBU-local level
At corporate level
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Risk Mgmt. Issues

• Threat identification and mitigation approaches
• High risk makes planning more important
• Some risk factors to consider
• Loss of resources directly involved
• Loss of time
• Loss of resources indirectly involved
• Risk mitigation
• Use of joint ventures or alliances
• Geographic dispersion
• Avoiding certain competitors

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Keep This Paradigm Shift in Mind

• Moving from Results of Operations
• To Operating information for Results

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Session XI-B

• Course Wrap-Up
• Major Themes

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Major Themes

• Derivation of GAAP
• Impact of social, cultural and accounting values
• Global perceptions of ethics
• International financial reporting and
  transactional accounting
• International financial statement analysis
• International financial management overview
• Organizational structure
• Risk assessment and mitigation
• Planning, control and measurement
• Transfer pricing
• Global auditing and taxation
• All presented in the context of current newspaper
  and media events