1. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Chapter Fifteen Learning Concepts – Chapter 15 1. Understand the forces that lead to different national accounting systems and accounting zones. 2. Understand the pressures to create a system of harmonization of these different systems. …/… International Accounting for Global Operations. International Accounting for Global Operations.

2. Chapter Fifteen Copyright, John Wiley and Sons, Inc. three Learning Concepts – Chapter 15 (cont) 3. Understand the concept of foreign currency translation and the major methods used in translation. 4. Understand the issues and concepts of Multinational Enterprise transfer pricing. International Accounting for Global Operations. International Accounting for Global Operations. Chapter Fifteen

3. Copyright, John Wiley and Sons, Inc. The Case Compaq Won Compaq Computer got in a transfer pricing argument with the IRS. The IRS claimed the Singapore division of Compaq charged too high a price for circuit boards and artificially lowered Compaq’s income tax liability. They also claimed that the Singapore division made excess profits, thus shifting income to a lower tax haven. Compaq’s arguments were successful. There were not other suppliers capable of producing the boards “at any cost”. They also supported the claim that the IRS calculations were “arbitrary, capricious, and unreasonable, based upon unrealistic material, labor and overhead markups.” Net result? A $21 million positive tax adjustment.

4. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Country Differences in Accounting There are major differences in accounting systems worldwide. The aim of an accounting system is to identify, measure, and communicate economic information to allow informed judgments and decisions by users of the information. International accounting involves accounting and taxation issues for companies that have international economic activities across borders where accounting standards and practices vary.

5. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Why Accounting Systems Differ Among Countries Accounting is a product of its external environment. It is shaped by the forces peculiar to its national environment. A country’s accounting system is shaped by institutions, societal culture, and external relations with other countries.

6. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Accounting System Shape: Institutions National Institutions that Shape Accounting:  Economic System Factors, industrial structure, complexity of the business system, and governmental economic institutional influences  Political System Factors, the political system will impact accounting because political philosophy (like liberal democracy, egalitarianism, authoritarianism) all impact how economic information is reported and distributed …/…

7. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Accounting System Shape: Institutions  Legal System Factors, the legalistic or nonlegalistic system factors, codified law and basic legal system all impacts how accounting information is collected and used  Taxation System, the taxation system is an important factor in systems where accounting systems are influenced by state objectives …/…

8. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Accounting System Shape: Institutions  Professional System, the accounting profession is influential because the way in which the profession is organized and society’s attitude toward accountants affect their ability to control or audit companies or their financial systems. Some countries have codified accounting professions; others do not

9. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Accounting System Shape: Society Culture Societal Culture influences the accounting system. French statistical traditions influence the accounting profession there. In Australia, accounting regulations for corporations are quite permissive, and reflect the national frontier culture. Societal influence from individualism or uncertainty avoidance also impacts the degree to which accounting is kept and codified.

10. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Accounting System Shape: External Relations External Relations, economic or political, influence accounting practices and regulations through colonization or regionalization. Colonies were generally expected to adopt the colonial power’s accounting system. Now, regional arrangements impact accounting harmonization so profits can be fairly decided and distributed.

11. Chapter Fifteen Copyright, John Wiley and Sons, Inc. National Accounting Zones  British American (Australia, Bahamas, Botswana). Aimed to decision needs of investors and managers  Continental (Algeria, Angola, Austria, Belgium, Burkina Faso). Legalistic accounting in general  South American (Argentina, Brazil, Chile, Peru). Persistent accounting adjustment for inflation  Transitional Economy (Armenia, Azerbaijan, Croatia, Hungary, China, Russia). Accounting helps move economies to capitalistic markets  Centrally Planned Economy (Cuba, North Korea, Vietnam). Government controlled production. Owner’s equity doesn’t exist

12. Chapter Fifteen Copyright, John Wiley and Sons, Inc. International Accounting Harmonization Harmonization is a process of increasing the compatibility of financial information from different countries. Standardization means the imposition of a rigid and narrow set of rules and may even apply to a single standard in all situations. Harmonization deals with measurement and disclosure, public disclosures in public entities, auditing standards.

13. Chapter Fifteen Copyright, John Wiley and Sons, Inc. International Accounting Standards The different standards bodies:  International Accounting Standards Committee, IASC  Commission Of The European Union, CEU  International Organization Of Securities Commissions, IOSCO  International Federation Of Accountants, IFAC  International Standards Of Accounting And Reporting, ISAR …/…

14. Chapter Fifteen Copyright, John Wiley and Sons, Inc. International Accounting Standards  United Nations Conference On Trade And Development, UNCTAD  Organization For Economic Cooperation And Development Working Group On Accounting Standards

15. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Foreign Currency Translation Translation is the most prominent issue that directly affects the results in Multinational Enterprise financial statements. The Multinational Enterprise cannot prepare consolidated financial statements unless their accounts and those of their subsidiaries are expressed in a single currency, usually the currency in the home country. Translation is the process of restating accounting data, recorded in one currency, into another currency.

16. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Commonly Used Translation Methods  Current Rate Method, where all assets and liabilities are translated at the current or closing rate  Current/Non-Current Method, where current assets are translated into current rates, and non-current assets are translated into historical rates  Monetary/Non-Monetary Method, where monetary assets are translated into current rates, and nonmonetary items are translated into historical rates  Temporal Method, where monetary items are at current rate. Non-monetary items are translated at the rates that preserve their original measurement bases

17. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Harmonization of Translation Methods Because there is no standard, the Multinational Enterprise may harmonize. Guides are in IAS 21 and SFAS/FASB 52. The core premises are on functional currency.

18. Chapter Fifteen Copyright, John Wiley and Sons, Inc. International Accounting Information Systems International Accounting Information Systems involve accounting related reporting systems, data management, and communication between various units of the same Multinational Enterprise. These help harmonization.

19. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Transfer Pricing Transfer pricing refers to the pricing of goods and services transferred between members of the Multinational Enterprise network. The benefits are:  Tax And Tariff Reduction  Avoiding Exchange Controls  Increasing Profits From Joint Ventures

20. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Transfer Pricing Techniques Transfer Pricing Techniques:  Current Open Market Prices  Gross Margin Methods  Operating Profit Methods

21. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Tax Havens, Treaties, and Strategies Using tax havens and taking advantage of tax treaties between home and host countries have served as important instruments for Multinational Enterprises seeking tax reduction.

22. Chapter Fifteen Copyright, John Wiley and Sons, Inc. The Tax Haven Multinational Enterprises seek refuge in tax havens. These are geographical locations in which taxation is substantially lower then in a home country. Bermuda has virtually non income taxes, so it is home to 75% of Fortune 100 corporations. Meetings and conventions in Bermuda at 100% tax deductible in United States.

23. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Tax Havens  Zero % Havens: Bahamas, Caymans, Andorra, Bahrain, Campiona, Monaco, Turks, Tonga, and Vanuatu  Low % Havens: British Virgin Islands, Channel Islands, Gibraltar, Liechtenstein, Switzerland, Angola, Antilles, Kiribati, Tuvalu, Montserrat, Norfolk Island, Solomon Islands  Haven from tax on domestic products: Hong Kong, Liberia, Panama  Special Privilege Havens: Brazil, Luxembourg, Netherlands

24. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Tax Treaties Eliminate multiple taxation through foreign tax credits and tax treaties.

25. Chapter Fifteen Copyright, John Wiley and Sons, Inc. Other Tax Strategies  Set up a holding company in host country  Establish holding company in integrated region  Build a finance corporation  Locate within a low tax region in host country