International Accounting

1

• International Accounting
• A) Agency problem amplified in MNCs due to
• a) too many subsidiaries scattered
  (physical distance).
• b) foreign mangers have different
  cultures/goals/agenda.
• c) sheer size of the firms.
• d) lack of uniform international rule.
• B) Sabarnes-Oxley Act (SOX) in 2002
• It is designed to ensure a more
  transparent process for managers to report on
  the financial condition of their firms. To comply
  with SOX,
• a) establishing a centralized database of
  information.
• b) ensuring consistency in reporting among
  the subsidiaries.
• c) implementing a system to check unusual
  discrepancies.
• d) making executives personally
  accountable for accuracy.

2

• C) 2 steps in financial reporting
• 1) Translation
• a)
• b)
• 2) Consolidation
• Prepare one F/S for the whole MNC.

3

• D) Translation Methods
• Current Temporal
• B/S All ( )
  Monetary(cash,A/R, A/P)
• except equity ( )
  ( )
• 
  Non-monetary(F/A,Inv.,Eqty)
• ( )
• I/S All ( )
  CGS Dep. ( )
• 
  others ( )
• Translation
• gain/loss Balance sheet Income
  statement
• ( )
  ( )

4

• D) Rules for translation
• FASB 8 (old) all temporal method.
• Problem 1.
• 2.
• FASB 52(new) current method can be used
  if
• (
  ) .
• Functional Currency
• Most of the MNCs can use current method under
• FASB 52 !!

5

• International Tax Management
• Importance of tax management
• 1) the location 2) business mode
• 3) financing source 4) investment decision
• MNCs are exposed to risk of double taxation
  because each
• country has different philosophy/method to
  impose tax.

6

• Intl Tax Management
• 2 principles of taxation on foreign sourced
  income.
• 1) Tax Credit
• designed to (
  )
• ( Domestic tax liability of U.S. firm is
  reduced by the
• 
  !! ).
• 2) Tax Deferral
• designed to (
  )
• (Collection of tax on foreign income will be
  delayed until
• 
  !! ).

7

• Two types of foreign operation
• Branch
  Subsidiary
• Legal unincorporated unit created under
  foreign law
• ( )
  ( )
• Income immediately taxed delayed until
  remitted
• tax ( )
  ( )
• Loss
• Which one would be better if they have loss?
• Which one would be better if they have income?
• What can be the best way to minimize tax
  liability?

8

• Many MNCs abused subsidiary as a tool to
• avoid U.S. tax by creating a paper
• company in ( )
  country.
• 
  
• Two types of F. Subsidiary
• 1. Non controlled F.S
  
• a. U.S. partner is minority stock holder.
• b. Tax deferral applied (
  )
• 2. Controlled F.S.
• a. U.S. partner is majority stock holder.
• b. Income will be more scrutinized.
• (
  )

paper co.
FS
A
B
FS
FS
Parent in US
9

• Income generated by controlled foreign sub.
• to be classified as
• a) Active income Normal business income
• b) Passive income Abnormal/suspicious income
• resulted
  from tax evasive
• 
  maneuvering (such as
• 
  ).

10

• ( Application of Tax Deferral )
• Foreign Operation
• Branch Subsidiary
• Non
• Controlled
  Controlled
• Active Passive