Title: Major issues addressed by accountants while dealing with international financial transactions and measures to mitigate related risks.
Different Local Regulations for Every Country.
Consolidation of Entities in a Group.
Calculation of Impairment of Investment in Subsidiaries.
Transfer Pricing and Intercompany Cost Allocations.
Title: The debate between legality and ethicality behind tax avoidance by large companies.
The Good Governance.
Tax: a social responsibility.
Title: Does adoption of IFRS15 might lead to significant changes in the pattern of revenue and profit recognition.
Implications for real estate.
Installing a specific piece of large equipment/machinery.
The business being operational in multiple countries of the world is a sign of achievement, but there are various challenges that accountants faces while dealing with international financial transactions held at multiple locations. There is a phenomenal translation from manpower stress to financial resources and time management that needs to be ensured for smooth functioning of business. It takes extraordinary effort to create proper alignment amongst various stakeholders who are different from their nationalities and languages, work cultures and legal and political establishment, towards a common organizational target.
The preparation and maintenance of accounting books for a business along with compliance of the domestic accounting laws and standards is a tough task for the accountant. The accountant needs to present the standalone reports as per the domestic accounting standards and further prepare a consolidated report for a cohesive presentation. Apart from the conflicting accounting standards, different rules, regulations and practices, the primary issue comes with different currencies or foreign currency translation.
The Generally Accepted Accounting Principles (GAAP) is still not united across the globe and varies with each country, for example IFRS, AASB, Ind AS and US GAAP; there are no globally accepted accounting standards. The rules, regulations and legislations for taxation, accounting, business laws, etc. changes from one nation to the other and cause crucial impacts on the accounting policies and the profitability of the organization. Therefore it becomes extremely important for keeping the tracks of the possible changes in rules and regulations for ensuring that financial statements of a company that’s has visibility in different international geographies are in proper order.
It is required for each individual entity to maintain the accounts of the organization as per the rules and standards of the nation of operations. Also, since there are continuous fluctuations and high volatility in the currency rates of different countries, hence it becomes important for ensuring that the company should follow an appropriate foreign exchange policy to mange and mitigate the foreign exchange risks. The policy structure has effects on all aspects of an entity i.e., Revenue and Expenses, Current Liabilities and assets, Share Capital and Fixed Assets, Loans etc. The implementation and exercising the policy properly is has its own set of challenges and also is quite time-consuming.
Multinational companies generally make investments in various foreign subsidiaries of different nations. Thus, it becomes important look after the possible impairments in such foreign subsidiaries investments. As per IFRS, testing for impairments is an ongoing process and must be done periodically, especially in the continuously loss making entities or in the entities that are existed at countries with a difficult political scenario or at inaccessible locations.
The term Transfer Pricing (aka TP) refers to the fixation of prices of services and goods that are sold or transferred between the constituent entities of a group of companies; the accountant has to look after various factors while deciding an appropriate TP. For instance, a subsidiary sells goods to its parent company, then the consideration paid by the parent for those goods to the subsidiary will be called as TP. TP is a crucial factor in the price setting among divisions and can be used for profit allocation method to attribute the net profit (or loss) of a multinational corporation.
As per the discussion made in the essay, it can be stated that an accountant has to deal with lots of issues while dealing with international financial transactions and implement measures to mitigate the related risks. The accounting standards provide guidelines to measure and report the financial transactions and position of the business, it includes guidelines for accounting of inventories, research & development costs, depreciation, income taxes, intangible assets, employee benefits, investments, etc. Various countries are converging their domestic GAAP into IFRS, however, the process is very slow, but the work of accountants at multinational companies will become much easier.
The article entitled ‘One third of large Australian Companies pay no tax, ATO Data Shows’ (ABC, 14 December 2018, Topic 3) states ‘About one third of large companies have failed to pay tax even though they made a gross profit … but the Tax Office says most have good reasons…’. In terms of the Code of Ethics for Professional Standards what issues may arise in this type of situation for the Professional Accountant?
As per ATO data and media reports, around one third of large Australian Companies pay no tax, however this is not only an Australian case but a global-wide fact that most large for-profit, despite of generating huge profits find legal loopholes to avoid (not evade) taxes.
The taxation policy of a nation is not isolated or limited to taxes on income but it has multiple faces including income tax, land tax, corporate tax, capital gains tax, inheritance tax, death tax, sales tax, excise and customs tax, and goods and services tax. The citizens need to feed these multiple mouths (of government). With these taxes revenues, the government funds various public policies initiatives and makes investments in the benefit of the national economy and betterment of the citizens of the country. The governments are largely dependent on the taxes as the sole source of revenue, while a few large riches try to dodge their responsibilities; most of us meet these expectations.
Companies typically seek to minimize their respective tax liabilities through "taxation-planning" as part of good governance. They utilize the mechanisms and tools which are made available to them by the government and their agencies (like ATO in Australia) specifically for the purpose of mitigating tax liabilities. The tools include allowances and deductions, rebates and exemptions, etc. The process of tax planning is a tax compliant behavior but there exists a grey area between tax planning and tax avoidance.
Tax avoidance seems to be legitimate because while practicing such methodologies, laws are not violated, but rather they are manipulated. It involves the use of financial instruments which are not intended to be used as a vehicle for tax advantage. A classical example of tax avoidance is the use of a typical financial instrument that most large companies practice is the overseas (or foreign) tax havens. However, tax avoidance and manipulation of taxation laws and rules cannot be considered to be illegal (unlike tax evasion). In other words, the ethics of taxation is violated with such aggressively tax avoidance policies, formally this is legal but seriously harmful, highly questionable and generally unethical. The large companies operate as per the letter of laws, but perhaps not in the spirit, of the law.
The taxation policies of a nation has substantial impact of the life of its citizens, whenever government announce cuts in spending, then the everyday lives of people gets really impacted. In such economic environment (applicable not only in Australia but the whole world), how can large companies avoids the payments of their fair share of taxes? A nation must formulate its policy in such a way that rich must be liable to pay for poorer welfare, but as per the ATO’s report, it can be stated the richer (the large companies) are legally (but unethically) keeping and not sharing their part of earnings. Such practices results in a situation where rich are getting richer and poor poorer
Talking about Australia, the tax planning industry is required to get prior clearance before implementation of any new tax avoidance scheme. This helps in giving clarification about what is fair to the government agencies. Tax policies should be developed as per the guiding principles of ethics including accountability, consistency and transparency. The planning arrangements related to taxation within a company that go beyond the intention of the law and involve intentional approaches to exploit the national taxation system or manipulate taxation laws are not ethical.
However, the companies argue that it is their fiduciary duty to maximize the profits of the company and return larger to its shareholders and investors. Therefore, both government and companies are required to efficiently communicate their positions on the issue of tax avoidance and their how they interpret the law and above all they are required to open and transparent about the issue.
When IFRS15/AASB15 Revenue from contracts with customers was released, one of the large international accounting firms issued a short document entitled IFRS Industry issues: Construction and Real Estate. In the document the following was stated: ‘The adoption of IFRS15 may lead to significant changes in the pattern of revenue and profit recognition. Careful consideration and planning will be needed for a range of issues, including the effect on compliance with bank covenants and performance based compensation.’ Why do you consider this advice was given? Do you agree with this advice? Why or why not? (Adapted from Deegan, C., Financial Accounting, 2016).
IFRS 15/ AASB 15: is the accounting standard for “Revenue from contracts with customers”. The standard implements a wide-ranging framework for recognition of revenues from contracts with customers, with a core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services (using a five-step model). The standard applies to all types of contracts with customers in all industries (subject to certain scoping exemptions), and generally provides more prescriptive guidance in many areas relevant to the real estate sector.
The profile of revenue and profit recognition will change for some real estate entities, particularly those engaged in development, construction and engineering, as well as activities that are subject to performance based fees as the new Standard is more detailed and more prescriptive than the existing guidance and introduces new complexities. In particular, real estate companies will need to consider:
While IFRS 15 allows revenue to be based on the proportion of costs incurred to date (‘costs incurred to date’ model), which is similar to the ‘percentage of completion’ method under AASB 111 Construction Contracts, it potentially differs significantly in respect of the pattern of profit recognition when the construction contract involves the installation of large pieces of specific equipment or machinery (e.g. lifts, turbines, engines, etc.), which have a significant cost.
IFRS 15 requires that the cost of the equipment/machinery be excluded from the ‘costs incurred to date’ model when determining the profit recognized, because that cost is not indicative of the progress of the construction activity. When such material is installed and control passes, revenue is only recognized to the extent of the costs of the materials installed, and no profit margin is recognized.
Under AASB 118, revenue and profit margin is typically recognized when the equipment is installed as part of the percentage of completion method.
In situations where large pieces of equipment are installed early on in the construction contract, IFRS 15 will most likely delay the recognition of revenue, and therefore profit, compared with current practice under AASB 111.
For real estate companies it will be crucial to assess whether the property developer has an enforceable right to payment for performance completed to date or not. This is not the only criterion to decide, but it is prevailing for real estate. If the specific contract does not meet this criterion (and also the other two), then the revenue is recognized at the point of time; that is, when an asset is delivered to customer. Only slight change in the provisions of the specific contract may trigger the necessity to recognize revenue at the point of time rather than over time – or vice versa.
Timing of revenues matters due to your tax payments, dividends, financial rations, etc. Also note, that under IAS 11, you would probably account for both contracts in the same way (as for contract B), but NOT under IFRS 15. Maybe you should revise your contracts now and see whether you need to make some changes in order to prevent this situation.
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