Management Accounts

A company having international operations has the requirement to maintain accounts in multiple jurisdictions. Some of the issues that arise are discussed below.

Format

Many service providers will use the locally accepted or statutory format in which to maintain the accounts. This can cause significant problems to you in Head Office when you try to incorporate or consolidate these accounts. It can also cause problems when you try to analyse specific figures e.g. to compare figures between international operations in different locations. It is, therefore, advisable to agree that the accounts will be maintained in US GAAP format and to your specific chart of accounts.

Maintaining Accounts On Your Own System

At Nucleus, our teams also have the knowledge of most accounting systems to enable us to maintain accounts directly on your system. This has the advantage that you can access figures immediately and have total visibility of the figures.

Frequency  

Management accounts can be maintained at any frequency level e.g. monthly, quarterly or bi-annually. For a small local entity, maintaining accounts quarterly is often adequate. However, VAT regulations will often drive this as in some countries the VAT Return must be submitted monthly - this would require the accounts to be maintained monthly from which the VAT Return can be compiled.

Currency

  • Normally the functional currency will be the local currency since that will be currency in which revenue is generated and expenses are incurred. Books and records will be maintained in this currency.
  • However, where a foreign entity is a wholly owned subsidiary and operates in the parent's reporting currency, then that reporting currency (US$ for a US parent) may be the appropriate functional currency. Books and records will be maintained in US $ or maintained in local currency and translated in US $.
  • We work with you upfront to determine the currency to save time and costs later on.  

Translation Of Foreign Entity Transactions   

Where the functional currency is not the same as that of the reporting entity (generally the parent company), transactions will need to be translated into the reporting currency.  

  • Inevitably this translation will give rise to foreign currency gains or losses. 
  • The method of translation will need to be agreed for:  
    • Assets and Liabilities    
    • Capital Accounts    
    • Revenues and Expenses   

Exchange Rates 

  • The exchange rate to be used in the translation process will need to be agreed.
  • This could be an average exchange rate or the rate ruling at the date of the transaction.
  • Certain items may be translated using the year end exchange rate.
  • Certain matters will need special consideration - examples are Goodwill arising from the acquisition of a business whose functional currency is the local currency, debt denominated in a currency other than the functional currency and intercompany transactions between subsidiaries.
  • Particular care needs to be taken if there is any change to the functional currency.

Transfer Pricing Issues

  • For foreign operations consideration will need to be given and an intercompany agreement drawn up to reflect the income of the local entity / branch.  
  • It is important that the revenue of the local entity can be properly supported especially if it is based on a cost + % uplift of costs agreement.
  • If the local entity is an invoicing entity then it is important that VAT issues are properly reflected in the accounts.   

These are general guidelines, for more information on your specific country or situation, please connect with us.

 

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