Question

Assume you are working for a company that is considering opening a business in another country. Analyze possible accounting problems the company might encounter and offer possible solutions for overcoming these problems.

Please tell me at least three possible accounting problems that might happen!

Answer 1

Following are some of the major accounting-related challenges a company considering to open a business in a different country might encounter and the possible solutions to tackle them:

1. Different Local Regulations For Every Country:

Generally Accepted Accounting Principles (GAAP) vary from one country to another. For instance, IFRS, SFRS, US GAAP ; there is no single universally-accepted reporting standard. Regulations related to accounting, legal matters, taxation, etc. vary for almost all countries in the world, which impacts accounting, presentation, disclosure and even the profitability of a company operating in a different country.

Solution: It is extremely important to keep track of the changes in regulations to ensure that financial statements of a corporation that’s spread out in a different geography, are in proper order. Additionally, decision in adopting the right regulation is critical in presentation of financial statements to the Board of directors and the public, in case of a publicly listed company.

2. Accounting and reporting for foreign exchange differences:

Accounts of each individual entity needs to be maintained as per the rules and accounting standards of the country of operations. However, given the continuous fluctuations in different currency rates, it is important to ensure that appropriate foreign exchange rates are applied for evaluations and for converting the respective local currency amounts into the reporting currency. For example, if a country in the United States wants to open a business in United Kngdom, for the purpose of reporting in US (since the company is based in US), it has to convert the financials of its UK entity from GBP to USD at applicable rates of exchange.

Solution: Monthly, Quarterly, Half yearly processes with regards to accounting for foreign exchange gains/losses on conversion should be put in place as a result of which the management has a substantial control over their impact on the financials at consolidated level.

3. Transfer Pricing And Inter company Cost Allocations:

Transfer Pricing (TP) is fixing the price of goods and services sold between the related entities, within a group of entities. For instance, if a subsidiary sells goods or services to the parent company, the consideration for those goods/services paid by the parent to the subsidiary is the TP. TP results in the setting of prices among divisions within an enterprise and can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before calculating tax to countries where it does business.

Solution: Appropriate accounting from the perspective of TP and inter company cost allocations is required for multinational corporations who are involved in regular financial transactions with global subsidiaries. Compliance of various laws and rules related to TP, and ensuring compliance in different jurisdictions that the Group operates in, is crucial.