FROM PRINCIPLES TO PLANNING FROM PRINCIPLES TO PLANNING International Accounting Issues International Accounting Issues Joel Mitchell, Plante Moran PLLC Randy Janiczek, Plante Moran PLLC Frank.
Download ReportTranscript FROM PRINCIPLES TO PLANNING FROM PRINCIPLES TO PLANNING International Accounting Issues International Accounting Issues Joel Mitchell, Plante Moran PLLC Randy Janiczek, Plante Moran PLLC Frank.
Slide 1
FROM PRINCIPLES TO PLANNING
FROM PRINCIPLES TO PLANNING
International Accounting Issues
Slide 2
International Accounting Issues
Joel Mitchell, Plante Moran PLLC
Randy Janiczek, Plante Moran PLLC
Frank Kacsandi, MNP LLP
Slide 3
International Accounting Issues
Session Topics
• Income Tax Accounting (ASC 740)
• Foreign Currency Translation and Transaction
Accounting (ASC 830)
• IFRS
• Canadian and U.S. Tax Accounting
Slide 4
International Accounting Issues
Income Tax Accounting ASC 740
Objectives of ASC 740
• Recognize the amount of taxes payable or refundable for the
current year
• Recognize deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in a company’s
financial statement or tax returns
Slide 5
International Accounting Issues
Basic Principles
• A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year
• A deferred tax liability or asset is recognized for estimated future
taxes created by temporary differences and carry forwards
• The measurement of current and deferred taxes is based on the
provisions of the enacted tax law
• Measurement of deferred tax assets is reduced if they will not be
recognized
Slide 6
International Accounting Issues
Components of Income Tax Expense
Current income tax expense (benefit)
+ Deferred income tax expense (benefit)
Total income tax expense (benefit)
Slide 7
International Accounting Issues
Applicability
• Domestic federal income taxes
• Foreign, state and local taxes based on income
• Domestic and foreign operations that are consolidated, combined
or accounted for by the equity method
• Foreign enterprises in preparing financial statements under US
GAAP
Slide 8
International Accounting Issues
Temporary Differences
• The difference between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in
taxable or deductible amounts in future years when the reported
amount of the asset or liability is recovered or settled, respectively.
Slide 9
International Accounting Issues
ASSETS
LIABILITIES
Taxable temporary
difference
Book carrying value Tax basis > book
> tax basis
carrying value
Deductible
temporary
difference
Tax basis > book
carrying value
Book carrying value
> tax basis
Slide 10
International Accounting Issues
Calculation
DTL = Taxable temporary differences * applicable tax rate
DTA = [(Deductible temporary differences + loss and
deduction carryforwards) * applicable federal rate] + tax
credit carryforwards
Slide 11
International Accounting Issues
Tax Rates Used
• U.S. Federal Income Tax Rate
• State Income Taxes
• Foreign Income Taxes
• Foreign deferred is difference between US GAAP and
Foreign Tax Law
Slide 12
International Accounting Issues
Tax Rates Used
Change in Tax Rate
• A change in the tax rate imposed in a jurisdiction will require a
revaluation of existing DTAs and DTLs
• The change in value of the deferred tax items is recognized as
a current benefit or expense in the period in which the tax
rate change was enacted
Slide 13
International Accounting Issues
Deferred Tax Expense/Benefit
Net DTA or DTL at end of year
Less: Net DTA or DTL at beginning of year
Deferred income tax expense (benefit)
Slide 14
International Accounting Issues
Presentation of DTAs and DTLs
• Classified as Current or Noncurrent based on the financial accounting
classification of the underlying liability or asset to which the temporary
difference relates
• If not specifically related to an asset or liability, a DTA or DTL is
classified based on its expected reversal date
• Each tax paying component within each tax jurisdiction should:
• net all current DTAs and DTLs to present as a single amount
• net all noncurrent DTAs and DTLs to present as a single amount
• There should be no offsetting of DTAs and DTLs attributable to different
tax paying components or to different tax jurisdictions
Slide 15
International Accounting Issues
Valuation Allowance
Impairment Approach
• A valuation allowance is required if the deferred tax asset is
“impaired”
Realization Test
• A probability level of more than 50%
• A single criterion “more likely than not”
All available evidence is considered, with the greatest weight given to
objectively verifiable information
• Future taxable income is required
• Cumulative loss over recent years is a common basis for valuation
allowances
Slide 16
International Accounting Issues
Valuation Allowance
Examples of Future Taxable Income
• Existing taxable temporary differences that will reverse in the
future
• Refunds available by carryback of losses to offset taxable income
in prior years
• Tax planning strategies
• Future taxable income exclusive of reversing temporary
differences and carry forwards
It may be necessary to schedule out future income to illustrate ability
to utilize DTAs based on expected reversals or expiration
Slide 17
International Accounting Issues
Application to Foreign Subsidiaries
• Measure temporary differences separately for each foreign sub –
jurisdictional approach
• US GAAP v. Tax Basis under foreign law
• Valuation allowances determined in light of foreign law
• Review of uncertain foreign tax positions
• Taxpayer must generally record the tax impact of fully liquidating
foreign subsidiaries – impact of outside basis differences, including
foreign currency translation amounts
Slide 18
International Accounting Issues
Investment in Foreign Corporations
• First tier CFCs generally result in an outside basis difference caused
by the increase in investment in subsidiary account as earnings are
recognized for book purposes but not for tax purposes
• Under ASC 740, this basis difference generally requires the
recognition of a DTL and related tax expense
• A company can avoid recognition of such a DTL if its investment of
the foreign earnings is essentially permanent in duration and it
meets the indefinite reversal criteria
Slide 19
International Accounting Issues
Application to Foreign Branches
• Branch income subject to both foreign and US tax
• Additional set of temporary differences
• US GAAP v. US Tax
• US tax recorded net of US foreign tax credit
• Review of uncertain foreign tax positions
Slide 20
International Accounting Issues
Recognition Criteria (a.k.a. FIN 48)
•
•
•
•
Applies to all income tax positions
A tax position is defined as a position taken in a previously filed return or
expected to be taken in a future return
A position can result in a permanent reduction of taxes (permanent
differences), a deferral of taxes (temporary differences), or a change in
the expected realizability of deferred tax assets
FIN 48 also encompasses decisions not to file an income tax return,
jurisdictional allocations (i.e., transfer pricing) and characterization of
income
Slide 21
International Accounting Issues
“More Likely Than Not” Recognition Threshold
• Greater than 50%
•
•
•
Matter of judgment
Based on facts and circumstances
Consider all available evidence
• A positive assertion that the reporting enterprise believes that it is entitled
to the economic benefits of the tax position
• Presumption of examination by taxing authority includes resolution of
appeal or litigation process, if any
• Technical merits of a tax position are derived from sources of authority
•
•
•
Legislation & statutes
Legislative intent
Regulations, rulings, case law
Slide 22
International Accounting Issues
Measurement
•
•
For a tax position that meets the more-likely-than-not recognition threshold
•
Measure initially and subsequently as the largest amount of tax benefit that is
greater than 50% likely of being realized upon ultimate settlement with a
taxing authority having full knowledge of all relevant information
•
Consider the amounts and probabilities of the outcomes that could be realized
upon ultimate settlement
•
Based on facts, circumstances, and information available at the reporting date
Cumulative Probability Assessment
Slide 23
International Accounting Issues
Foreign Currency Matters (ASC 830)
Session Goals
• Gain a practical understanding of foreign currency
transactions and translation
• Highlight tax accounting and reporting
considerations
Slide 24
International Accounting Issues
Overview and Objectives
• The standards for foreign currency translation are
designed to
• Provide information that is generally compatible
with the expected economic effects of a rate
change on an enterprise’s cash flows and equity
• Reflect in consolidated statements the financial
results and relationships as measured in the
primary currency in which each entity conducts its
business (referred to as its “functional currency”)
Slide 25
International Accounting Issues
Overview and Objectives
Foreign Currency Matters are addressed in a 3
Step Process
1. Determine the Functional Currency of the
foreign entity
2. Remeasure foreign currency items into the
foreign entity’s functional currency
3. Translate functional currency amounts into
the reporting currency of the parent
Slide 26
International Accounting Issues
Functional Currency
• Functional Currency – is the currency of the primary economic
environment in which the entity operates
• The currency in which an entity primarily generates and
expends cash
• Key indicators include cash flow, sales price, sales market,
expenses, financing, intra-entity transactions and agreements
• Determining a foreign entity’s functional currency requires
management’s judgment
• Once the functional currency is determined, it shall be used
consistently unless significant changes in economic facts and
circumstances indicate clearly that it has changed
Slide 27
International Accounting Issues
Functional Currency
• A currency in a highly inflationary environment (3-year
inflation rate of approximately 100 percent or more) is not
considered stable enough to serve as a functional currency
and the more stable currency of the reporting parent is to be
used instead
• A highly inflationary economy is one that has a
cumulative inflation of approximately 100 percent or
more over a 3 year period
• Qualitative factors such as the trend of inflation must be
taken into account
Slide 28
International Accounting Issues
Foreign Currency Transactions
• Foreign Currency Transactions
•
•
May produce receivables or payables that are fixed in terms of the
foreign currency that will be received or paid
Common transactions include:
• Buy/sell goods on credit in a foreign currency
• Borrow/lend money denominated in a foreign currency
• Party to an unperformed forward exchange contract
• Acquire/dispose of assets denominated in a foreign currency
• Incur/settle liability denominated in a foreign currency
Slide 29
International Accounting Issues
Foreign Currency Transactions
• Initial Measurement
•
•
•
At the date a foreign currency transaction is recognized, each item
arising from the transaction shall be recorded in the functional
currency of the reporting entity
The Initial Measurement in functional currency is made by using the
foreign exchange rate in effect on the date of the transaction
An average or a method of approximation may be used
Slide 30
International Accounting Issues
Foreign Currency Transactions
•
•
Subsequent Measurement – the change in foreign exchange rates between the
functional currency and the transaction currency increase or decrease the
expected functional currency cash flow upon settlement and must be recognized
•
Gains and losses on those foreign currency transactions are generally
included in determining net income for the period in which exchange rates
change
•
Exceptions include hedges of a foreign currency commitment or a net
investment in a foreign entity where the gains and losses are included in
Other Comprehensive Income
From a tax perspective, the gains and losses recognized during a subsequent
measurement period are considered Unrealized and generally create a temporary
difference on which deferred taxes must be provided
Slide 31
International Accounting Issues
Foreign Currency Transactions
• Derecognition – the transaction gain or loss realized upon
the settlement of a foreign currency transaction is measured
from the most recent of the transaction date or the most
recent intervening balance sheet date
• As with gains and losses recognized on subsequent
measurement dates, these foreign currency transaction
amounts are generally included in determining net income for
the period in which the settlement occurs
• From a tax perspective, the gains and losses recognized at
the Derecognition event are considered Realized and
generally become taxable at such time
Slide 32
International Accounting Issues
Foreign Currency Transactions
• Other Income Tax Accounting Matters
• When an entity has DTAs or DTLs in nonfunctional
currency, remeasurement from a change in FX rate
results in transaction gain or loss recognized in Net
Income
• Any income taxes associated with transaction gains or
losses reported in Other Comprehensive Income also
need to be allocated to Other Comprehensive Income
Slide 33
International Accounting Issues
Foreign Currency Translation
•
•
Translate P&L on the dates the elements are recognized or by using an
appropriately weighted average exchange rate for the period (daily, weekly,
monthly, or annually)
• Translating foreign exchange rates on the specific date of each
transaction is generally impractical
Translate Balance Sheet using period end spot rate, except
•
Accounts denominated in a currency other than functional currency are
remeasured into functional currency using the spot rate for monetary accounts
and historical exchange rates for nonmonetary accounts
•
Capital Accounts – translated at historical rates in order to eliminate with
investment in subsidiary accounts
Slide 34
International Accounting Issues
Foreign Currency Translation
• Translation adjustments are an inherent result of the process of
translating a foreign entity’s financial statements of the functional
currency to U.S dollars
•
•
Translation adjustments are NOT included in determining net income
for the period but are disclosed and accumulated in a separate
component of consolidated equity until sale or until substantially
complete liquidation of the net investment in the foreign entity takes
place
Translation adjustments are accounted for in the same way as
temporary adjustments under ASC 740 and deferred taxes must be
provided for unremitted earnings unless the indefinite reversal
criteria are met (permanent reinvestment)
Slide 35
International Accounting Issues
Basic Translation Adjustment - Example
XYZ Company
12/31/2012
Income Statement
(CDN)
Ave Rate
Income Statement
(USD)
Sales
(30,000)
1.02
(30,600)
COGS
20,000
1.02
20,400
Cash
9,000
1.02
9,180
(1,000)
1.02
(1,020)
Office Expense
Net Income
1.05
Average Rate
1.02
Historical Rate
1.00
Spot Rate
Balance Sheet
(USD)
12/31/2012
12/31/2012
12/31/2012
800
1.05
840
A/R
1,700
1.05
1,785
A/P
(300)
1.05
(315)
Loans
(700)
1.05
(735)
Common Stock
(500)
1.00
(500)
(1,000)
1.02
(1,020)
Net (Income)/Loss
Year End Spot Rate
Balance Sheet
(CDN)
FX Translation
Adjustment
-
(55)
Balance to Zero
-
-
Slide 36
International Accounting Issues
Intraperiod Allocations
• Transaction gains/losses on other items are
generally recorded as income/loss amounts in the
Income Statement
• Translation gains/losses on equity investments are
recorded as Other Comprehensive Income (“OCI”)
as part of the Cumulative Translation Account
(“CTA”)
Slide 37
International Accounting Issues
Mitigation for companies
• To help reduce the risk of misapplying rules for foreign
currency translations and, in the end, misstating the
financial statements
•
•
•
Adopt understandable accounting policies
Scrutinize the system
Implement adequate internal controls (to detect
misstatements in foreign-currency gains and losses)
Slide 38
International Accounting Issues
U.S. GAAP v.s. IFRS Convergence
IFRS Adoption
• Approximately 120 nations and reporting jurisdictions
permit or require IFRS for domestic listed companies
• Approximately 90 countries have fully conformed with
IFRS
Slide 39
International Accounting Issues
IFRS Adoption
Country
Date of Adoption
Listed Companies
Required
Private Companies
Required
Canada
1/1/2011
Yes, certain listed
companies are
deferred from
adoption
IFRS for SMEs is
prohibited
Germany
2005
Yes, some exceptions
for subs of foreign
parents
No, but can be
permitted as long as
local GAAP is prepared
Mexico
1/1/2013
Yes, foreign listed
issues are allowed to
use US GAAP
No, but can use IFRS or
Mexican FRS
US
Possibly in 2015
No, cannot issue in
IFRS yet
No, but Foreign private
issuers may use IFRS
Slide 40
International Accounting Issues
U.S. GAAP vs. IFRS Convergence
List of Projects that FASB and IASB are working to make US GAAP and
IFRS compatible
•
•
•
•
Financial instruments
Revenue recognition
Leases
Statement of comprehensive
income
• Fair value measurement
• Derecognition
• Consolidations
• Post-employment benefits
• Balance sheet - Netting
• Financial statement
presentation
• Discontinued operations
• Financial instruments with
characteristics of equity
• Insurance Contracts
• Emissions trading schemes
Slide 41
International Accounting Issues
Areas with Significant Differences
•
•
•
•
•
•
•
•
•
•
Financial statement presentation
Consolidations, joint venture
accounting and equity method
investees
Business combinations
Intangible assets
Inventory
Long-lived assets
Lease
Financial Instruments
Foreign currency matters
Income taxes
•
•
•
•
•
•
•
•
•
Provisions and contingencies
Revenue recognition
Share-based payments
Employee benefits other than
share-based payments
Segment reporting
Earnings per share
Interim financial reporting
Subsequent events
Related parties
Slide 42
International Accounting Issues
Canadian and U.S. Tax Accounting
• Unrealized foreign exchange gain & losses
• Main differences between Canadian and U.S. tax
accounting
• Canadian parent with U.S. subsidiaries
• U.S. parent with Canadian subsidiaries
Slide 43
International Accounting Issues
Unrealized Foreign Exchange Gain & Losses
• Monetary Asset or Liability
•
•
•
Current income tax – permanent and temporary
difference adjustments
Deferred income tax – corresponding temporary
difference movements
Non monetary Asset or Liability
•
Translation temporary difference
Slide 44
International Accounting Issues
Main Differences in Canadian and U.S. Tax Accounting
• Classification
• Recognition
• Uncertain tax positions
• Translation temporary difference
Slide 45
International Accounting Issues
Main Differences in Canadian and U.S. Tax Accounting
•
•
•
•
Initial recognition exemption
Subsequent changes
Undistributed earnings on investments
Tax consequences of intercompany sales
Slide 46
International Accounting Issues
Canadian Parent with U.S. Subsidiaries
• Translation temporary differences from the non
monetary assets
• The outside basis difference
Slide 47
International Accounting Issues
U.S. Parent with Canadian Subsidiaries
•
Intercompany sales consideration
Slide 48
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we
inform you that any U.S. federal tax advice contained in this
communication (including any attachments) is not intended or
written to be used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue Code or (ii)
promoting, marketing, or recommending to another party any
transaction or matter addressed herein.
Slide 49
Questions?
Slide 50
Contact Information
Joel Mitchell, Plante Moran PLLC
[email protected]
Randy Janiczek, Plante Moran PLLC
[email protected]
Frank Kacsandi, MNP LLP
[email protected]
FROM PRINCIPLES TO PLANNING
FROM PRINCIPLES TO PLANNING
International Accounting Issues
Slide 2
International Accounting Issues
Joel Mitchell, Plante Moran PLLC
Randy Janiczek, Plante Moran PLLC
Frank Kacsandi, MNP LLP
Slide 3
International Accounting Issues
Session Topics
• Income Tax Accounting (ASC 740)
• Foreign Currency Translation and Transaction
Accounting (ASC 830)
• IFRS
• Canadian and U.S. Tax Accounting
Slide 4
International Accounting Issues
Income Tax Accounting ASC 740
Objectives of ASC 740
• Recognize the amount of taxes payable or refundable for the
current year
• Recognize deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in a company’s
financial statement or tax returns
Slide 5
International Accounting Issues
Basic Principles
• A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year
• A deferred tax liability or asset is recognized for estimated future
taxes created by temporary differences and carry forwards
• The measurement of current and deferred taxes is based on the
provisions of the enacted tax law
• Measurement of deferred tax assets is reduced if they will not be
recognized
Slide 6
International Accounting Issues
Components of Income Tax Expense
Current income tax expense (benefit)
+ Deferred income tax expense (benefit)
Total income tax expense (benefit)
Slide 7
International Accounting Issues
Applicability
• Domestic federal income taxes
• Foreign, state and local taxes based on income
• Domestic and foreign operations that are consolidated, combined
or accounted for by the equity method
• Foreign enterprises in preparing financial statements under US
GAAP
Slide 8
International Accounting Issues
Temporary Differences
• The difference between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in
taxable or deductible amounts in future years when the reported
amount of the asset or liability is recovered or settled, respectively.
Slide 9
International Accounting Issues
ASSETS
LIABILITIES
Taxable temporary
difference
Book carrying value Tax basis > book
> tax basis
carrying value
Deductible
temporary
difference
Tax basis > book
carrying value
Book carrying value
> tax basis
Slide 10
International Accounting Issues
Calculation
DTL = Taxable temporary differences * applicable tax rate
DTA = [(Deductible temporary differences + loss and
deduction carryforwards) * applicable federal rate] + tax
credit carryforwards
Slide 11
International Accounting Issues
Tax Rates Used
• U.S. Federal Income Tax Rate
• State Income Taxes
• Foreign Income Taxes
• Foreign deferred is difference between US GAAP and
Foreign Tax Law
Slide 12
International Accounting Issues
Tax Rates Used
Change in Tax Rate
• A change in the tax rate imposed in a jurisdiction will require a
revaluation of existing DTAs and DTLs
• The change in value of the deferred tax items is recognized as
a current benefit or expense in the period in which the tax
rate change was enacted
Slide 13
International Accounting Issues
Deferred Tax Expense/Benefit
Net DTA or DTL at end of year
Less: Net DTA or DTL at beginning of year
Deferred income tax expense (benefit)
Slide 14
International Accounting Issues
Presentation of DTAs and DTLs
• Classified as Current or Noncurrent based on the financial accounting
classification of the underlying liability or asset to which the temporary
difference relates
• If not specifically related to an asset or liability, a DTA or DTL is
classified based on its expected reversal date
• Each tax paying component within each tax jurisdiction should:
• net all current DTAs and DTLs to present as a single amount
• net all noncurrent DTAs and DTLs to present as a single amount
• There should be no offsetting of DTAs and DTLs attributable to different
tax paying components or to different tax jurisdictions
Slide 15
International Accounting Issues
Valuation Allowance
Impairment Approach
• A valuation allowance is required if the deferred tax asset is
“impaired”
Realization Test
• A probability level of more than 50%
• A single criterion “more likely than not”
All available evidence is considered, with the greatest weight given to
objectively verifiable information
• Future taxable income is required
• Cumulative loss over recent years is a common basis for valuation
allowances
Slide 16
International Accounting Issues
Valuation Allowance
Examples of Future Taxable Income
• Existing taxable temporary differences that will reverse in the
future
• Refunds available by carryback of losses to offset taxable income
in prior years
• Tax planning strategies
• Future taxable income exclusive of reversing temporary
differences and carry forwards
It may be necessary to schedule out future income to illustrate ability
to utilize DTAs based on expected reversals or expiration
Slide 17
International Accounting Issues
Application to Foreign Subsidiaries
• Measure temporary differences separately for each foreign sub –
jurisdictional approach
• US GAAP v. Tax Basis under foreign law
• Valuation allowances determined in light of foreign law
• Review of uncertain foreign tax positions
• Taxpayer must generally record the tax impact of fully liquidating
foreign subsidiaries – impact of outside basis differences, including
foreign currency translation amounts
Slide 18
International Accounting Issues
Investment in Foreign Corporations
• First tier CFCs generally result in an outside basis difference caused
by the increase in investment in subsidiary account as earnings are
recognized for book purposes but not for tax purposes
• Under ASC 740, this basis difference generally requires the
recognition of a DTL and related tax expense
• A company can avoid recognition of such a DTL if its investment of
the foreign earnings is essentially permanent in duration and it
meets the indefinite reversal criteria
Slide 19
International Accounting Issues
Application to Foreign Branches
• Branch income subject to both foreign and US tax
• Additional set of temporary differences
• US GAAP v. US Tax
• US tax recorded net of US foreign tax credit
• Review of uncertain foreign tax positions
Slide 20
International Accounting Issues
Recognition Criteria (a.k.a. FIN 48)
•
•
•
•
Applies to all income tax positions
A tax position is defined as a position taken in a previously filed return or
expected to be taken in a future return
A position can result in a permanent reduction of taxes (permanent
differences), a deferral of taxes (temporary differences), or a change in
the expected realizability of deferred tax assets
FIN 48 also encompasses decisions not to file an income tax return,
jurisdictional allocations (i.e., transfer pricing) and characterization of
income
Slide 21
International Accounting Issues
“More Likely Than Not” Recognition Threshold
• Greater than 50%
•
•
•
Matter of judgment
Based on facts and circumstances
Consider all available evidence
• A positive assertion that the reporting enterprise believes that it is entitled
to the economic benefits of the tax position
• Presumption of examination by taxing authority includes resolution of
appeal or litigation process, if any
• Technical merits of a tax position are derived from sources of authority
•
•
•
Legislation & statutes
Legislative intent
Regulations, rulings, case law
Slide 22
International Accounting Issues
Measurement
•
•
For a tax position that meets the more-likely-than-not recognition threshold
•
Measure initially and subsequently as the largest amount of tax benefit that is
greater than 50% likely of being realized upon ultimate settlement with a
taxing authority having full knowledge of all relevant information
•
Consider the amounts and probabilities of the outcomes that could be realized
upon ultimate settlement
•
Based on facts, circumstances, and information available at the reporting date
Cumulative Probability Assessment
Slide 23
International Accounting Issues
Foreign Currency Matters (ASC 830)
Session Goals
• Gain a practical understanding of foreign currency
transactions and translation
• Highlight tax accounting and reporting
considerations
Slide 24
International Accounting Issues
Overview and Objectives
• The standards for foreign currency translation are
designed to
• Provide information that is generally compatible
with the expected economic effects of a rate
change on an enterprise’s cash flows and equity
• Reflect in consolidated statements the financial
results and relationships as measured in the
primary currency in which each entity conducts its
business (referred to as its “functional currency”)
Slide 25
International Accounting Issues
Overview and Objectives
Foreign Currency Matters are addressed in a 3
Step Process
1. Determine the Functional Currency of the
foreign entity
2. Remeasure foreign currency items into the
foreign entity’s functional currency
3. Translate functional currency amounts into
the reporting currency of the parent
Slide 26
International Accounting Issues
Functional Currency
• Functional Currency – is the currency of the primary economic
environment in which the entity operates
• The currency in which an entity primarily generates and
expends cash
• Key indicators include cash flow, sales price, sales market,
expenses, financing, intra-entity transactions and agreements
• Determining a foreign entity’s functional currency requires
management’s judgment
• Once the functional currency is determined, it shall be used
consistently unless significant changes in economic facts and
circumstances indicate clearly that it has changed
Slide 27
International Accounting Issues
Functional Currency
• A currency in a highly inflationary environment (3-year
inflation rate of approximately 100 percent or more) is not
considered stable enough to serve as a functional currency
and the more stable currency of the reporting parent is to be
used instead
• A highly inflationary economy is one that has a
cumulative inflation of approximately 100 percent or
more over a 3 year period
• Qualitative factors such as the trend of inflation must be
taken into account
Slide 28
International Accounting Issues
Foreign Currency Transactions
• Foreign Currency Transactions
•
•
May produce receivables or payables that are fixed in terms of the
foreign currency that will be received or paid
Common transactions include:
• Buy/sell goods on credit in a foreign currency
• Borrow/lend money denominated in a foreign currency
• Party to an unperformed forward exchange contract
• Acquire/dispose of assets denominated in a foreign currency
• Incur/settle liability denominated in a foreign currency
Slide 29
International Accounting Issues
Foreign Currency Transactions
• Initial Measurement
•
•
•
At the date a foreign currency transaction is recognized, each item
arising from the transaction shall be recorded in the functional
currency of the reporting entity
The Initial Measurement in functional currency is made by using the
foreign exchange rate in effect on the date of the transaction
An average or a method of approximation may be used
Slide 30
International Accounting Issues
Foreign Currency Transactions
•
•
Subsequent Measurement – the change in foreign exchange rates between the
functional currency and the transaction currency increase or decrease the
expected functional currency cash flow upon settlement and must be recognized
•
Gains and losses on those foreign currency transactions are generally
included in determining net income for the period in which exchange rates
change
•
Exceptions include hedges of a foreign currency commitment or a net
investment in a foreign entity where the gains and losses are included in
Other Comprehensive Income
From a tax perspective, the gains and losses recognized during a subsequent
measurement period are considered Unrealized and generally create a temporary
difference on which deferred taxes must be provided
Slide 31
International Accounting Issues
Foreign Currency Transactions
• Derecognition – the transaction gain or loss realized upon
the settlement of a foreign currency transaction is measured
from the most recent of the transaction date or the most
recent intervening balance sheet date
• As with gains and losses recognized on subsequent
measurement dates, these foreign currency transaction
amounts are generally included in determining net income for
the period in which the settlement occurs
• From a tax perspective, the gains and losses recognized at
the Derecognition event are considered Realized and
generally become taxable at such time
Slide 32
International Accounting Issues
Foreign Currency Transactions
• Other Income Tax Accounting Matters
• When an entity has DTAs or DTLs in nonfunctional
currency, remeasurement from a change in FX rate
results in transaction gain or loss recognized in Net
Income
• Any income taxes associated with transaction gains or
losses reported in Other Comprehensive Income also
need to be allocated to Other Comprehensive Income
Slide 33
International Accounting Issues
Foreign Currency Translation
•
•
Translate P&L on the dates the elements are recognized or by using an
appropriately weighted average exchange rate for the period (daily, weekly,
monthly, or annually)
• Translating foreign exchange rates on the specific date of each
transaction is generally impractical
Translate Balance Sheet using period end spot rate, except
•
Accounts denominated in a currency other than functional currency are
remeasured into functional currency using the spot rate for monetary accounts
and historical exchange rates for nonmonetary accounts
•
Capital Accounts – translated at historical rates in order to eliminate with
investment in subsidiary accounts
Slide 34
International Accounting Issues
Foreign Currency Translation
• Translation adjustments are an inherent result of the process of
translating a foreign entity’s financial statements of the functional
currency to U.S dollars
•
•
Translation adjustments are NOT included in determining net income
for the period but are disclosed and accumulated in a separate
component of consolidated equity until sale or until substantially
complete liquidation of the net investment in the foreign entity takes
place
Translation adjustments are accounted for in the same way as
temporary adjustments under ASC 740 and deferred taxes must be
provided for unremitted earnings unless the indefinite reversal
criteria are met (permanent reinvestment)
Slide 35
International Accounting Issues
Basic Translation Adjustment - Example
XYZ Company
12/31/2012
Income Statement
(CDN)
Ave Rate
Income Statement
(USD)
Sales
(30,000)
1.02
(30,600)
COGS
20,000
1.02
20,400
Cash
9,000
1.02
9,180
(1,000)
1.02
(1,020)
Office Expense
Net Income
1.05
Average Rate
1.02
Historical Rate
1.00
Spot Rate
Balance Sheet
(USD)
12/31/2012
12/31/2012
12/31/2012
800
1.05
840
A/R
1,700
1.05
1,785
A/P
(300)
1.05
(315)
Loans
(700)
1.05
(735)
Common Stock
(500)
1.00
(500)
(1,000)
1.02
(1,020)
Net (Income)/Loss
Year End Spot Rate
Balance Sheet
(CDN)
FX Translation
Adjustment
-
(55)
Balance to Zero
-
-
Slide 36
International Accounting Issues
Intraperiod Allocations
• Transaction gains/losses on other items are
generally recorded as income/loss amounts in the
Income Statement
• Translation gains/losses on equity investments are
recorded as Other Comprehensive Income (“OCI”)
as part of the Cumulative Translation Account
(“CTA”)
Slide 37
International Accounting Issues
Mitigation for companies
• To help reduce the risk of misapplying rules for foreign
currency translations and, in the end, misstating the
financial statements
•
•
•
Adopt understandable accounting policies
Scrutinize the system
Implement adequate internal controls (to detect
misstatements in foreign-currency gains and losses)
Slide 38
International Accounting Issues
U.S. GAAP v.s. IFRS Convergence
IFRS Adoption
• Approximately 120 nations and reporting jurisdictions
permit or require IFRS for domestic listed companies
• Approximately 90 countries have fully conformed with
IFRS
Slide 39
International Accounting Issues
IFRS Adoption
Country
Date of Adoption
Listed Companies
Required
Private Companies
Required
Canada
1/1/2011
Yes, certain listed
companies are
deferred from
adoption
IFRS for SMEs is
prohibited
Germany
2005
Yes, some exceptions
for subs of foreign
parents
No, but can be
permitted as long as
local GAAP is prepared
Mexico
1/1/2013
Yes, foreign listed
issues are allowed to
use US GAAP
No, but can use IFRS or
Mexican FRS
US
Possibly in 2015
No, cannot issue in
IFRS yet
No, but Foreign private
issuers may use IFRS
Slide 40
International Accounting Issues
U.S. GAAP vs. IFRS Convergence
List of Projects that FASB and IASB are working to make US GAAP and
IFRS compatible
•
•
•
•
Financial instruments
Revenue recognition
Leases
Statement of comprehensive
income
• Fair value measurement
• Derecognition
• Consolidations
• Post-employment benefits
• Balance sheet - Netting
• Financial statement
presentation
• Discontinued operations
• Financial instruments with
characteristics of equity
• Insurance Contracts
• Emissions trading schemes
Slide 41
International Accounting Issues
Areas with Significant Differences
•
•
•
•
•
•
•
•
•
•
Financial statement presentation
Consolidations, joint venture
accounting and equity method
investees
Business combinations
Intangible assets
Inventory
Long-lived assets
Lease
Financial Instruments
Foreign currency matters
Income taxes
•
•
•
•
•
•
•
•
•
Provisions and contingencies
Revenue recognition
Share-based payments
Employee benefits other than
share-based payments
Segment reporting
Earnings per share
Interim financial reporting
Subsequent events
Related parties
Slide 42
International Accounting Issues
Canadian and U.S. Tax Accounting
• Unrealized foreign exchange gain & losses
• Main differences between Canadian and U.S. tax
accounting
• Canadian parent with U.S. subsidiaries
• U.S. parent with Canadian subsidiaries
Slide 43
International Accounting Issues
Unrealized Foreign Exchange Gain & Losses
• Monetary Asset or Liability
•
•
•
Current income tax – permanent and temporary
difference adjustments
Deferred income tax – corresponding temporary
difference movements
Non monetary Asset or Liability
•
Translation temporary difference
Slide 44
International Accounting Issues
Main Differences in Canadian and U.S. Tax Accounting
• Classification
• Recognition
• Uncertain tax positions
• Translation temporary difference
Slide 45
International Accounting Issues
Main Differences in Canadian and U.S. Tax Accounting
•
•
•
•
Initial recognition exemption
Subsequent changes
Undistributed earnings on investments
Tax consequences of intercompany sales
Slide 46
International Accounting Issues
Canadian Parent with U.S. Subsidiaries
• Translation temporary differences from the non
monetary assets
• The outside basis difference
Slide 47
International Accounting Issues
U.S. Parent with Canadian Subsidiaries
•
Intercompany sales consideration
Slide 48
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we
inform you that any U.S. federal tax advice contained in this
communication (including any attachments) is not intended or
written to be used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue Code or (ii)
promoting, marketing, or recommending to another party any
transaction or matter addressed herein.
Slide 49
Questions?
Slide 50
Contact Information
Joel Mitchell, Plante Moran PLLC
[email protected]
Randy Janiczek, Plante Moran PLLC
[email protected]
Frank Kacsandi, MNP LLP
[email protected]