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

2. Session XV Strategic Accounting Issues

3. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-3 Organizational Strategic Processes n Planning and evaluation n Transfer pricing n Taxation issues n Global risk management

4. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-4 Planning and Evaluation n Integrated planning n International complexities n Evaluation issues n Capital asset planning issues

5. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-5 Integrated Planning SP$P MBOs Integration ParticipationCommitment

6. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-6 International Planning Complexities n Use appropriate measures n Rarely does one size fit all (Adidas) n Political risk n Economic risk, including inflation n Financial risk, n Taxation n Consider a Balanced Scorecard approach n Select the proper currency n Functional currency considerations n Philosophy regarding currency risk management

7. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-7 Manager v. Subsidiary Performance n Motivation is critical n Ascertain local management control n Consider a broad assessment n Think Balanced Scorecard

8. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-8 Balanced Scorecard Model Financial Perspective Customer Perspective Internal Business Process Perspective Learning & Growth Perspective

9. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-9 Organizational Structure n Ethnocentric n Polycentric n Geocentric

10. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-10 Comparative Research on Planning n More time spent on planning in U.S. v. Japan n U.S. focus is on profits n Japan focus is on volume and market share n U.S. used plan to evaluate management n ROI used in approx. 70% of U.S. analyses; 5% in Japanese analyses n UK firms focus on short-term controls n Australian firms focus on cost controls in production v. Japanese focus on cost controls in design (Target Costing)

11. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-11 Planning & Performance Evaluation Implementation n Integrate with overall business strategy n Incorporate feedback and review n Use comprehensive measures n Encourage ownership throughout the process n Make the objectives fair and achievable n K.I.S.S.

12. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-12 Capital Asset Planning Issues n Holistic approach to cash flows n Financing techniques are critical n Local subsidies or tax advantages n Currency, inflation and political risk n Forecasting complexities

13. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-13 Strategic Objectives of Int’l Transfer Pricing n Preserves local management decision-making n Provides for rapid local response n Allows the use of manageable pieces n Gives local managers responsibility n Establishes a vehicle for goal congruence n Minimization of “built-in” conflicts n Taxes versus duties n Local balance of payment status n Inflation and politics

14. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-14 Tactical Objectives of Int’l Transfer Pricing n Performance evaluation n Minimization of taxes n Income n Duties n Circumvent currency restrictions n Circumvent currency devaluations n Enhance local image and competitiveness

15. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-15 Transfer Pricing Methods n Cost-based n Market-based n Comparable uncontrolled price method n Recommended approach n Negotiated rate n Advanced pricing agreement n Binding agreement with tax authority n General rule n Variable cost plus opportunity cost

16. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-16 Why Market-Based? n Legal n Goal congruence n Equity n Simplicity n Avoids IRS Code Section 482 problems n Allows IRS to adjust the source of worldwide income

17. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-17 Transfer Pricing Enforcement n Worldwide enforcement is increasing n Increased local liability n Double or triple taxation n Penalties and interest n On-going problems with local tax authorities n 2007 E&Y survey n Over 50% of MNC have had transfer pricing audits since 2003

18. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-18 Decisions Involving Taxes n Location n Legal form of operation n Financing

19. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-19 Types of Taxes n Income taxes n Withholding taxes n Value-added taxes

20. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-20 Tax Issues n Tax rates can vary dramatically n Tax treaties n Bilateral agreements between countries establishing tax rates n U.S. general model: interest & royalties are exempt, dividends taxed @ 15% n Tax havens n Locations for legal but questionable avoidance of tax n Controlled Foreign Corporations (CFC) n Tax strategy: major enterprise-wide effort

21. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-21 Controlled Foreign Corporation n Created in reaction to the use of tax havens n Subpart F income n Certain types of income are subject to immediate taxation n Does not apply if foreign tax rate is 90% of U.S. corporate tax rate

22. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-22 Tax Issues, cont. n Tax incentives n Tax holidays n DISCs n Double taxation n Foreign tax credits n Jurisdiction n Worldwide versus territorial n Worldwide: all income is subject to tax n Territorial: only local income is subject to tax

23. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-23 Tax Holidays & DISCs n Tax holidays n Temporary curtailment of taxes in a region in return for investment n Domestic International Sales Corporation n Export subsidiary formed in the U.S. n Tax deferred until profit distribution to parent

24. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-24 Foreign Tax Credits n Offsets the impact of double taxation n Credits versus deductions n Credits more beneficial

25. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-25 Managing FX Risk n Do not forget the cost benefit factor n Some firms DO NOT manage FX risk n But…reliable earnings stream lowers overall risk, cost of capital and tax rates n Types of exposure n Translation, transaction and operating n Methods n Forward contracts, exchange options, money market accounts and currency futures n See Exhibit 7-1 on page 7-232

26. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2010 17-26 Key Points-Session XV n The financial team must contribute to all aspects of planning n Cross border operations expand the complexity of strategic planning n Performance measures are critical n Transfer pricing and taxation go hand-in-hand n Risk CAN be managed n Do not forget the trifecta (Q-S-T)