1. Emerging Issues In International Accounting

2. International Accounting poses a number of problems, although a lot has been discussed on this issue and experts have elucidated ways out to tackle these issues. The performance evaluation of International business also poses problems relating to exchange rate fluctuation and currency Translation, transfer pricing and presentation of accounts . International Business Operations:- refers to business operations in more than one country with governance or management centered in a host country and business operations in other countries. In very simple words, an International Business Operations involves:- 1.A parent or a host company. 2.Branches or subsidiaries in countries over the world. 3. Branches Operating individually in terms of objectives, with in a framework defined by the parent company. 4.The host company and the branches subject to the laws of the country in which they operate.

3. Issues in global accounting
The international business houses with a parent company in one country has its own currency, its own legal framework, an inflation rate or in other words a price change rate. When goods or services are transferred from the host country to the branches or subsidiaries globally, a price has to be charged. This Price is commonly Known as a Transfer Price. The rate of inflation or the change in price level also varies from one country to another and such local variations are inevitable. These are the issues to be tackled while accounting for foreign operations.

4. Transfer pricing
Simply defined the Transfer Price is the amount charged by a transferor, generally the host country, for raw materials, semi-finished goods or finished products to the receiving unit, the transferee, which is generally the branch or a subsidiary. Taking a simple example if a host company based the U.S.A, transfers raw materials or components to its branch in India, it will charge a price for this transfer and such a price will be known as a transfer price. Continuing the example, the parent company would like to charge a higher rate so as to report higher-profits while the subsidiary may desire a lower transfer rate to report a high local profit. However, setting aside the local profitability, the top management would desire: (1)Overall after tax earning & (2)Minimize tax liability.

5. External factors and transfer pricing policies
External factors in the transfer price policy refer mainly to local tax agencies like customs, sales tax and Income tax authorities. These agencies look upon the MNCs with a suspecting eye, often viewing them as tax evaders and profiteers, accusing them to dumping with a view to devastating the local economy. MNCs often use the transfer pricing as a tool to minimize their taxes or to crush their competitors by dumping at very low cost to destroy competition. At times the parent company or the transferor may price high in order to: (1). Lower the local profitability of the branch or the subsidiary. (2). Earn a higher subsidy on exports. (3). Snub the demand for higher wages or participation in profits by the workers. (4). Transfer pricing may also be used to offset or reduce losses on account of exchange rate fluctuations.

6. Cause and effect of transfer pricing

7. Transfer pricing methods:-
Transfer price may be based on (1) Cost (2) Market Price or (3) A Negotiated Price acceptable to the receiver and the transferor. 1.Cost Based Method of Transfer:- Under this method the inputs are transferred to the subsidiary at a cost which is often historical along with a profit mark-up. The profit markup is another aspect to the considered and the profit margin should represent a percentage of investments in fixed assets valued at a standard level and inventories at current replacement cost. The cost based method should therefore include:- (1).Variable cost of the product/Input transferred. (2).A part of upstream fixed cost for facilities provided and (3).A reasonable profit markup. The cost based methods followed by MNCs may broadly be classified into:- (a). Full Cost Method. (b).Full Cost Plus Method. (c).Variable Cost Method.

8. 2. Market Based Methods
As the name suggests, the transfer price that is based on the current market price of similar products/components is charge by the transferor but the approach pre requires the following conditions:- (a). Existence of a competitive market. (b). The list price or the nominal price is real and representative. (c). The transfer is fully utilizing its installed capacity. (d). Market Prices are adjusted to market variables. In Simple terms, the application of the market price method requires perfect competition, perfect information, representative prices and absence of collusions and unfair schemes.

9. 3. Negotiated or bargained prices
As the name suggests, the bargained price is a price settled by the receiving and the transfer unit where comparable market prices or arm’s length market prices are not available. This method is a refinement of the market price system, by negotiation that requires sufficient information inputs with both the parties.

10. Accounting financial restrictions
The state may sometimes imposes financial restrictions on an MNC by way of restriction on cash remittance or disallowing certain items of overhead s to be charged to the income. Times, the MNCs may face a threat of takeover by the country of operations. In such cases the transfer price administration can be used for countering financial restrictions or projecting or even a high profitability , as the situation requires.

11. Management of currency fluctuations:- A country that suffers from balance of payment problem may devalue its currency, in which case the MNC may use the transfer price mechanism to offset the balance of payment adversity. Appeasing the Host Country:- Transfer prices are essentially the corporate decisions but every country monitors the impact of transfer prices on the reported profits of the MNC. If an MNC resorts to unfavorable prices that reduce the tax liability and hence the revenues accruing to the government, the host country may not appreciate the move on the contrary, transfer price policies that appease the host state are satisfying to the foreign authorities.

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