International Accounting and Financial Reporting Summer 2007 William F. O’Brien, MBA, CPA

International Accounting and Financial Reporting

Summer 2007

William F. O’Brien, MBA, CPA

Session XI-A

Control, Tax & Audit Issues

INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007

15-3

Control, Tax & Audit Issues

Strategic Planning Financial Measurement Financial Planning…don’t call it a “Budget” Transfer Pricing Performance Measurement


15-4

Integrated Planning

SP $P

MBOs

Integration

Participation Commitment


15-5

MNE Planning Stages

Strategic review

Annual operating plan Financial Non-financial

Integration & monitoring

Personal planning & rewards


15-6

Integrated Planning Benefits

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


15-7

Financial Measurement

Varies by region US versus Japan

Numerous targets ROI Sales Quality Market share Income Variance minimization


15-8

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?


15-9

International Considerations

FX determination

FX impact on results

Resolution of FX fluctuation


15-10

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


15-11

Cross-National Example…US 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


15-12

Goals of Int’l 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


15-13

Transfer Pricing Issues

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


15-14

T/P Approaches

Market-based (recommended approach) Cost-based Negotiated rate Advanced pricing agreement General rule

Variable cost plus opportunity cost


15-15

Why Market-Based?

Legal Goal congruence Equity Simplicity


15-16

Taxation

Types Credits versus deductions Other issues Tax planning


15-17

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


15-18

Tax Credits and Deductions

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


15-19

Other Tax Issues

Tax havens Attitudes and avoidance

U.S. foreign source income Sub-part F exception…taxed 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


15-20

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


15-21

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


15-22

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


15-23

Foreign Corrupt Practices Act

Passed in 1977 No bribery No influence peddling Facilitating payments are OK

Influences action that must be taken anyway


15-24

MNE Audit Challenges

FX

Language and culture

Legal considerations

Supply of audit professionals

Training


15-25

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


15-26

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”


15-27

International Audit Variances

Note the drive for harmonization on pages 436 - 450


15-28

Institute of Internal Auditors--IIA

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


15-29

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


15-30

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


15-31

Keep This Paradigm Shift in Mind

Moving from “Results of Operations”

To “ Operating information for Results”

Session XI-B

Course Wrap-Up

Major Themes


15-33

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

Documents

International Accounting and Financial Reporting Summer 2007 William F. O’Brien, MBA, CPA