International Accounting and Financial Reporting Winter 2010 William F. O’Brien, MBA, CPA.

International Accounting and Financial Reporting

Winter 2010

William F. O’Brien, MBA, CPA

Session XV

Strategic Accounting Issues

INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010

17-3

Organizational Strategic Processes

Planning and evaluation

Transfer pricing

Taxation issues

Global risk management


17-4

Planning and Evaluation

Integrated planning International complexities Evaluation issues Capital asset planning issues


17-5

Integrated Planning

SP $P

MBOs

Integration

Participation Commitment


17-6

International Planning Complexities

Use appropriate measures Rarely does one size fit all (Adidas) Political risk Economic risk, including inflation Financial risk, Taxation

Consider a Balanced Scorecard approach Select the proper currency

Functional currency considerations Philosophy regarding currency risk management


17-7

Manager v. Subsidiary Performance

Motivation is critical Ascertain local management control Consider a broad assessment

Think Balanced Scorecard


17-8

Balanced Scorecard Model

Financial Perspective

Customer Perspective

Internal BusinessProcess Perspective

Learning & GrowthPerspective


17-9

Organizational Structure

Ethnocentric

Polycentric

Geocentric


17-10

Comparative Research on Planning

More time spent on planning in U.S. v. Japan U.S. focus is on profits Japan focus is on volume and market share U.S. used plan to evaluate management ROI used in approx. 70% of U.S. analyses; 5% in

Japanese analyses UK firms focus on short-term controls Australian firms focus on cost controls in production v.

Japanese focus on cost controls in design (Target Costing)


17-11

Planning & Performance Evaluation

Implementation Integrate with overall business strategy Incorporate feedback and review Use comprehensive measures Encourage ownership throughout the process Make the objectives fair and achievable K.I.S.S.


17-12

Capital Asset Planning Issues

Holistic approach to cash flows Financing techniques are critical

Local subsidies or tax advantages Currency, inflation and political risk Forecasting complexities


17-13

Strategic Objectives of Int’l Transfer Pricing

Preserves local management decision-making Provides for rapid local response Allows the use of manageable pieces Gives local managers responsibility

Establishes a vehicle for goal congruence Minimization of “built-in” conflicts

Taxes versus duties Local balance of payment status Inflation and politics


17-14

Tactical Objectives of Int’l Transfer Pricing

Performance evaluation Minimization of taxes

Income Duties

Circumvent currency restrictions Circumvent currency devaluations Enhance local image and competitiveness


17-15

Transfer Pricing Methods

Cost-based Market-based

Comparable uncontrolled price method Recommended approach

Negotiated rate Advanced pricing agreement

Binding agreement with tax authority General rule

Variable cost plus opportunity cost


17-16

Why Market-Based?

Legal Goal congruence Equity Simplicity Avoids IRS Code Section 482 problems

Allows IRS to adjust the source of worldwide income


17-17

Transfer Pricing Enforcement

Worldwide enforcement is increasing Increased local liability Double or triple taxation Penalties and interest On-going problems with local tax authorities

2007 E&Y survey Over 50% of MNC have had transfer pricing

audits since 2003


17-18

Decisions Involving Taxes

Location Legal form of operation Financing


17-19

Types of Taxes

Income taxes Withholding taxes Value-added taxes


17-20

Tax Issues

Tax rates can vary dramatically Tax treaties

Bilateral agreements between countries establishing tax rates

U.S. general model: interest & royalties are exempt, dividends taxed @ 15%

Tax havens Locations for legal but questionable avoidance of tax Controlled Foreign Corporations (CFC)

Tax strategy: major enterprise-wide effort


17-21

Controlled Foreign Corporation

Created in reaction to the use of tax havens Subpart F income

Certain types of income are subject to immediate taxation

Does not apply if foreign tax rate is 90% of U.S. corporate tax rate


17-22

Tax Issues, cont.

Tax incentives Tax holidays DISCs

Double taxation Foreign tax credits

Jurisdiction Worldwide versus territorial

Worldwide: all income is subject to tax Territorial: only local income is subject to tax


17-23

Tax Holidays & DISCs

Tax holidays Temporary curtailment of taxes in a region in

return for investment Domestic International Sales Corporation

Export subsidiary formed in the U.S. Tax deferred until profit distribution to parent


17-24

Foreign Tax Credits

Offsets the impact of double taxation Credits versus deductions

Credits more beneficial


17-25

Managing FX Risk

Do not forget the cost benefit factor Some firms DO NOT manage FX risk

But…reliable earnings stream lowers overall risk, cost of capital and tax rates

Types of exposure Translation, transaction and operating

Methods Forward contracts, exchange options, money market

accounts and currency futures See Exhibit 7-1 on page 7-232


17-26

Key Points-Session XV

The financial team must contribute to all aspects of planning

Cross border operations expand the complexity of strategic planning

Performance measures are critical Transfer pricing and taxation go hand-in-hand Risk CAN be managed Do not forget the trifecta (Q-S-T)

International Accounting and Financial Reporting Winter 2010 William F. O’Brien, MBA, CPA.

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