Aligning accounts and tracking foreign accounting standards can become unruly. Here’s how to approach it.
It goes without saying that CFOs are responsible for ensuring that their companies are on a sound financial track, have clear strategic plans and that they apply the necessary financial tools and resources to execute. As CFOs, we must remain on course and focus on where the company is headed, be that an IPO, acquisition or market expansion.
For the sake of this column, let’s focus on expansion — specifically international expansion. For a foreign entity, financial executives will need to reconcile U.S.-headquartered financial results based on U.S. generally accepted accounting principles (GAAP). Reconciliation is increasingly more complicated when accounting standards from multiple countries are involved. Aligning accounts and tracking foreign accounting standards can become unruly. I have found some basic strategies to help with our company’s and our clients’ foreign entities.
Setting a Baseline
As a CFO, it’s imperative to have a basic understanding of all the rules, regulations and compliance standards in each country where the company conducts business. When the company expands into a new region, I research the local accounting standards, especially pertaining to fixed-asset capitalization, depreciation, accruals and foreign exchange gain and loss treatments.
International accounting standards issued by the International Accounting Standards Board (IASB) tend to be common, but there are exceptions. For instance, the presentation of accounts within the United States requires three years of comparative figures, compared to just one year in a majority of other countries. Other differences may be found in stock valuation methods — GAAP permits the use of LIFO, which is not allowed under International Financial Reporting Standards (IFRS). Yet another key factor involves the recognition of accruals, which are often not reflected in local reporting unless applicable criteria are met.
Many countries require listed public companies and sometimes unlisted companies to use IASB standards. It’s important to keep the location in mind, as certain regions diverge from GAAP procedures more so than others. Some countries, such as Brazil, can be particularly onerous. Reporting in Brazil generally follows IFRS, with reports to be produced in local currency only, although with a lower detail requirement. Material discrepancies can occur in the application of policy, especially regarding revenue recognition. There are limited disclosures within accounts, assets are recorded at historical cost and all leases are generally treated as operating leases.
Another important consideration involves reviewing intercompany agreements and understanding transfer-pricing requirements. Transfer pricing can be a company’s primary defense against additional corporate taxes. The role of intercompany agreements in transfer-pricing compliance may dictate the way in which local tax authorities impose tax liabilities on the reporting entity.
Reporting and Reconciling
It’s also important to understand specific local requirements for the recording of invoices. This may include simple matters such as how local invoices are to be addressed, and how and what payments need to be made from the local bank account.
A related concern involves local accounting software requirements, which vary from country to country. And don’t forget about required audits by preapproved registered firms. In Germany, for instance, companies must upload accounting data into the local (DATEV) software to cope with the required XBRL (eXtensive Business Reporting Language) filing. Also, be sure to check for any items that cannot be considered in local accounts. This might include foreign virtual bank accounts or transactions from those accounts.
For foreign reconciliation, determine when one is needed, and how often. The frequency may be set by local regulations or within the company’s own corporate accounting standards. This requirement is market-specific, but sometimes it’s better to perform reconciliations more often than just at year’s end, even if once-per-year is the local requirement. Periodic checks can guard against growing discrepancies between accounts.
Adjustments may be required in the local books to comply with local GAAP rules, as local accounting requirements will often come into play, particularly for accruals, fixed assets and the recording of expenses.
Be sure to properly record any expenses incurred or reimbursed by the parent company or other group company. Likewise, carry out revenue reconciliations in cases of transfer-pricing arrangements. Calculate any costs as per the terms of indirect cost accounting on the basis of costs for the local books. Identify differences in tax provisions as per the two sets of accounts to determine whether these need to be adjusted or carried forward. For countries such as Brazil, it’s important to ensure that agreements are in line with local regulations, such as the safe harbor.
Lastly, keep track of any changes to accounting standards or local GAAP regulations. Not only will this keep accounting compliant, it will also help showcase the value of partnering with colleagues and the local accounting authorities.
This is a simplified look at foreign reconciliations, because there are many other factors to consider. Be sure to do your homework in advance so that processes are in lockstep with the company’s strategic goals.
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