Converging Accounting Standard

In this essay previous literature has been studied for analysing the use of convergence of national and international accounting standards in multinational companies. For analysing the converged accounting standards various examples are studied. It has been revealed from the analysis that convergence of accounting standards play a very important role in operations of multinational companies but it has not yet been completely implemented in all countries around the world.

Introduction

Accounting standards are authentic statements that are used by companies with an aim to narrow the areas of differences in practice of accounting. It has been stated by Christensen et al (2015) that in order to regulate practices of accounting, accounting standards play a significant role. Accounting standards serve as a contract among various parties who take part in a company like management, investors and creditors (Chen et al, 2014).

Due to increased globalisation, firms operate in different countries all around the world. While operating in various countries, companies are involved in using national accounting standards. With increased globalization, the concept of converged accounting standards has also been increased. Accounting standards are served as financial regulatory systems, integrated with efficiency of market, coordination of resources and control over system. With the help of better accounting standards, goals of efficiency and coordination are patched together (Crawford et al, 2014). Accounting standards have gained a lot of importance but it has also become difficult and complex in global market. The national accounting standards cannot be applied to any financial architecture around the world, so there is an increased demand of global accounting standards. In order to operate in global business world, users of financial statements need a set of global accounting standards through which they can get a lot of benefits. However, development of converged and global accounting standards requires addressing various difficulties and intricacies (Tarca et al, 2013). This essay is about critical analysis of international convergence of global accounting standards. This essay deals with benefits and drawbacks of convergence of national and international accounting standards have been analysed.

Discussion

International convergence of accounting standards is not a completely a new concept. The notion of convergence was initiated in 1950s in response to economic integration of World War II and relevant enhancement in capital flows across the border. The focus of starting efforts was on harmonization for decreasing differences among principles of accounting utilised by users in major capital markets. In 1990s, this concept was replaced by notion of convergence. Convergence of accounting standards include the process of developing integrated set of high quality standards that can be utilised in all major capital markets all around the world (Wang, 2014).

According to Albu et al (2014) the goal of convergence of accounting standards is formulation of single set of accounting standards that can be used by companies internationally. There are different factors due to which international convergence of accounting standards is driven. These factors include the belief that comparability among various accounting numbers of entities can be increased through a converged accounting standard. The convergence of national and international accounting standards help in increasing movement of international investment and give advantages to stakeholders. International converged accounting standards include Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). With the help of convergence of accounting standards the conflict and confusion can be avoided. In addition to this, simplicity, consistency, clarity and streamlining can be promoted through international accounting standards.

In various countries around the world, there is an existence of convergence of national and international accounting standards. The countries where convergence has not taken place, are in phase of planning for adopting IFRS. For example, in Canada all listed companies are required to use IFRS in their accounting practices since 1st January, 2012. Moreover, for some multinational companies in Japan, permission has been given for using IFRS. In contrast to this, in some countries very few companies have adopted converged accounting standards like in Nigeria companies are in phase of training in order to adopt IFRS (Adibah Wan Ismail et al, 2013).

In addition to various benefits of convergence of accounting standards, companies have to face various complications while adopting international accounting standards. It is complicated to develop global set of accounting standards due to the differences that exist between environments in which development, application and utilisation of standards is done. Although it is difficult to adopt international set of accounting standards but with the help of these multinational companies become capable of easily consolidating financial statements. With the help of this management control systems are promoted. It is easily to comply IFRS statements with financial needs of overseas stock. As globalisation has been increased to a great extent, so, companies have to be involved in cross border transactions. For facilitating the ease of cross border transactions, a significant role is played by IFRS (Taipaleenmäki and Ikäheimo, 2013).

The convergence of accounting standards includes efforts used for reducing the major differences between national and international accounting standards in order to produce quality financial statements. This is considered to be a goal as well as a path used for reaching it. It is believed by FASB that ultimate aim of converging accounting standards is that companies can use these standards for local as well as international financial reporting. For example, in US FASB and IASB has made integrated efforts for improving accounting principles of US that is GAAP and eliminating the difference between these standards (Glaum et al, 2013).

The analysis has shown that in opposite to all these benefits, it has not yet been implemented on global scale. The convergence of national and international accounting standards creates transitional costs and costs to maintain a standard-setting for worldwide accounting standards. In order to successfully develop a single set of accounting standard, there is a need of involving negotiations among national boards of standards, IASB, government and professionals. It requires a significant amount of money and time to do so. In most of countries, it has not yet been applied appropriately due to the fact this increases direct cost of compliance needed for retaining users, regulators and auditors (Brusca et al, 2013). This cost is needed to be incurred as it helps in applying and interpreting converged global accounting standards. One of the greatest challenges faced by countries in which IFRS is implemented is lack of workforce. In order to successfully implement IFRS, there is a need of having trained and expert workforce in multinational companies who have the knowledge of using accounting standards effectively and efficiently. For example, before 6 months of implementation of IFRS, the requirement to have skilled and expert accountants has been increased. It has been stated by XVY (2000) that China is in continuous dispute of struggling for fulfilling the deadline of shift in accounting standards. The multinational companies in China are searching for 300,000 expert accountants who have knowledge about global accounting standards. It has been analysed that in China companies are facing difficulty in implementing converged accounting standard due to the lack of expert workforce (Zehri and Chouaibi, 2013).

The setters of national accounting standard have to incur extra costs due to the reduction in demand for their services and publications. Due to the convergence of accounting standards, a cost on issuers is also imposed by lack of capability of selecting to work in jurisdictions. It has been supported by empirical evidence that companies select to follow those accounting policies through which their contractual positions can be maximized. The accounting standards are developed in different countries under various cultural, communal, economic and legal environments. For achieving convergence, it is important to be there at agreed settlement with an aim of financial reporting. The direction of convergence of accounting standards is serving needs of capital market and investors. The countries where different philosophy to report financial statements is used, usually find difficulty in harmonizing their national standards with global accounting standards (Reineking et al, 2013).

Conclusion

Convergence of accounting standards is aimed at reducing major differences between international accounting standards and national standards. Due to the differences that exist in national and international accounting standards, it becomes difficult for comparing and interpreting financial statements by companies listed in various countries. With the help of convergence of accounting standards, multinational companies become capable of developing their financial statements. The convergence of national and international accounting standards increases external investments and opportunities for firms to start business in foreign countries. Although there are various benefits of convergence of accounting standards but they have not yet been implemented fully in all countries due to some issues like high cost, difficulty in understanding, lack of training opportunities and lack of expert workforce.

 

 

 

 

References

Adibah Wan Ismail, W., Anuar Kamarudin, K., Van Zijl, T. and Dunstan, K., 2013. Earnings quality and the adoption of IFRS-based accounting standards: Evidence from an emerging market. Asian Review of Accounting,21(1), pp.53-73.

Albu, C.N., Albu, N. and Alexander, D., 2014. When global accounting standards meet the local context—Insights from an emerging economy.Critical Perspectives on Accounting25(6), pp.489-510.

Brusca, I., Montesinos, V. and Chow, D.S., 2013. Legitimating international public sector accounting standards (IPSAS): the case of Spain. Public Money & Management33(6), pp.437-444.

Chen, C.J., Ding, Y. and Xu, B., 2014. Convergence of accounting standards and foreign direct investment. The International Journal of Accounting49(1), pp.53-86.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review24(1), pp.31-61.

Crawford, L., Ferguson, J., Helliar, C.V. and Power, D.M., 2014. Control over accounting standards within the European Union: the political controversy surrounding the adoption of IFRS 8. Critical Perspectives on Accounting,25(4), pp.304-318.

Glaum, M., Baetge, J., Grothe, A. and Oberdörster, T., 2013. Introduction of International Accounting Standards, disclosure quality and accuracy of analysts' earnings forecasts. European Accounting Review22(1), pp.79-116.

Reineking, C., Chamberlain, D.H., Rudolph, H.R. and Smith, L.M., 2013. An examination of inventory costing convergence under generally accepted accounting principles and International Financial Reporting Standards.Journal of International Business Research12(2), p.17.

Tarca, A., Morris, R.D. and Moy, M., 2013. An investigation of the relationship between use of international accounting standards and source of company finance in Germany. Abacus49(1), pp.74-98.

Taipaleenmäki, J. and Ikäheimo, S., 2013. On the convergence of management accounting and financial accounting–the role of information technology in accounting change. International Journal of Accounting Information Systems14(4), pp.321-348.

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research52(4), pp.955-992.

Zehri, F. and Chouaibi, J., 2013. Adoption determinants of the International Accounting Standards IAS/IFRS by the developing countries. Journal of Economics, Finance and Administrative Science18(35), pp.56-62.

 

 

 

 

 

 

 

 

 

Task 2

Abstract

This essay has been written for critically analysing the influence of transfer pricing on performance of companies. It has been shown from critical analysis of literature review that there is a significant influence of transfer pricing on performance of companies. Multinational companies focus on transfer pricing for getting leverage from tax that positively affect their accounting statements. In addition to this, multinational companies set transfer prices in accordance with the need of benefits. Through the focus on transfer pricing, the interaction among business units become easy and effective.

Introduction

In today’s competitive business world, due to increased globalisation, multinational companies use various comparative benefits of countries for wining market share and growing revenues through reduction in costs (Johnson et al, 2016). The maximum transactions in case of international trade take place among relevant entities within multinational companies without passing through independent business market (Otley and Emmanuel, 2013). Due to this, they become capable of fixing internal prices of their products and services in accordance with their own ease and motives with respect to transactions between themselves. These prices are known as transfer prices also called as accounting prices. Due to increased international flow of products and services, the focus towards transfer pricing has been amplified both with respect to regulation and challenges for management (Drury, 2013). This essay is about critical analysis of transfer pricing and its influence on performance of firms. In this essay it has been analysed that how multinational companies use transfer pricing for improving their performance and how it affects the performance negatively.

Main Body

The ultimate aim of a multinational company is competing in a globalized world, by making or sustaining a competitive position in market. In order to get competitive position in market, multinational companies are in need of selecting the best transfer pricing method and it is influenced by changes in strategic and organisational aspects of companies. In order to achieve enhancement in performance of companies, the management has to ensure selection of best transfer pricing method that has the consistency with strategy of organisation (Klassen et al, 2016). According to Feinschreiber and Kent (2012) the aim of transfer pricing is on achievement of organisational objectives through which performance of companies is improved. With the help of transfer pricing, various objectives of multinational companies are fulfilled like maximisation of project, management of tax and managing fluctuations in currency. The set price of products and services purchased or sold between relevant entities like parent and subsidiary is called as transfer price.

Transfer pricing is termed as pricing of products and services purchased or sold between multinational companies like from parent to subsidiaries and vice versa. In addition to this, the internal transfer involves transferring of raw material, allocating fixed costs, royalties and finished goods. The introduction of transfer pricing was done as a tool for decentralisation of authority involved in decision making. Thus, with the help of transfer pricing, the company becomes capable of increasing efficiency of internal departments like production department. This is done by making improvement in resource utilisation of department and incentives by management through focusing on result orientation. The companies’ performance is improved through transfer pricing as it helps in reducing tax liability in case of multinational companies (Chan et al, 2015).

Martini et al (2012) stated that the transfer pricing system of company has a considerable effect on performance of business unit as well as success and image of company. When there is a tight connection between control mechanism and motivation of manager, then it becomes crucial for performance of company. This is the reason due to which from last some decades a lot of focus is given to system of transfer pricing.

With the help of transfer pricing system the way of interaction between business units is governed significantly. Firms can create close links among business units through negotiated transfer pricing. Due to the creation of close linkages between business units, firms become capable of improving their performance. In contrast to this, market based transfer prices result in no linkage at all, because in this case firms prefer external sources rather than internal sources. It has been stated by Hammami and Frein (2014) that transfer prices are considered to be fair throughout the firm. It means their contribution is reflected to overall profit of firm. In case of unfair transfer pricing, conflict can be aroused and in addition to this it also creates dysfunctional behaviour of management.

It is very difficult for multinational companies to develop a system of transfer pricing as compared to development of local system. As with the help of Local Corporation the pricing system of multinational company helps managers in decision making for enhancing congruency of goals. It is an irrelevant objective of transfer pricing in which economic performance of company is evaluated through appropriate measure, in case of dealing with a multinational company (MNC). The transfer pricing system of a MNC must have an aim of meeting objectives of strategic plan, control system of management and system of evaluating the performance. With the help of international transfer pricing system, firms achieve goals that are irrelevant in local operation. So, this significantly affects the performance in a positive way by fulfilling organisational objectives (Dürr and Göx, 2013).

According to Moore et al (2016) there is a need of transfer price in case of creating interdependence, when products and services are bought and sold by profit centres, since managers have the responsibility of revenues and costs. In firms, transfer pricing helps in creating inter- profit centre relationships and their management must be done effectively for preventing overwhelming of benefits of multiple profit centre. Due to increased involvement of top management in these relationships, the less benefits of decentralization are gained. This means in case of implementation of transfer pricing, interrelationship must be developed with less involvement of top management. With the help of this, due to increased involvement of top management the performance of companies is affected in a negative way.

In MNCs less or high transfer prices are used in accordance with its benefit. Less transfer price is set by MNCs for maximizing after tax income. The most significant reason of less pricing of internal transfers is taxation. The under-priced products can be sold by MNC to foreign subsidiaries and these products can be sold by subsidiaries at prices that cannot be matched by competitors. In case of tough laws of antidumping implied on final goods, then under-priced semi-finished products can be sold by MNC. So, final product is finished by subsidiaries at dumping prices and their importing is done directly to county rather than manufactured inside (Park et al, 2016).

Lohse et al (2012) claimed that in addition to this, transfer pricing is used by MNCs for reducing the effect of tariffs. Due to increased tariffs, the import prices are increased. Although, tariffs cannot be totally changed but with the help of transfer pricing the performance of MNCs is improved with reduced tariffs and increased profitability. This is done by under-pricing of exported products to buying firm. Firms can also improve their performance with the help of under-pricing corporate transfers by getting more goods in to a country through which its currency is rationed.

There is a significant impact of transfer pricing practices on economic decisions that in turn impact the performance of corporate. With the help of transfer pricing, measurement and evaluation of performance is also affected and due to this viewpoint of managers regarding fairness is affected. The significant issue in managing transfer pricing includes establishment of practices through which those decisions are taken that can enhance performance of corporate (Fernandes et al, 2015).

Fig 1: Causes and effects of transfer pricing

Source: (Zinn et al, 2014)

There are two standards that can be used for evaluating the effectiveness of transfer pricing practices of company. The first standard is whether economic decisions are resulted by these practices through which performance of corporate is affected positively. These include decisions related to capital investment, level of output for final product and pricing of products. As it can be seen from Figure 1 that strategy and process of administration affect performance of corporate and they have an impact on practices of transfer pricing. Although, performance of corporate can be affected by transfer pricing, but it has been suggested by Hiemann and Reichelstein (2012) that it is difficult to manage this relationship of transfer pricing and corporate performance.

Another standard for evaluating practices of transfer pricing is whether it is perceived by managers that they are provided with fair rewards for contributing in the company or not. If in case they are not satisfied with their rewards then this can negatively affect the performance of companies. A significant role is played by administration in reflection of thinking of fairness through its impact on practices of transfer pricing, on ways of measuring, evaluating and rewarding performance (Alino and Lane, 2016).

Conclusion

It has been concluded from the analysis that the use of transfer pricing has been increased to a great extent with increase in globalisation. Companies make use of transfer pricing for the purpose of transactions. Transfer prices are prices levied for products and services internally in a company between various departments or subsidiaries. Due to the creation of close linkages between business units, firms become capable of improving their performance. Companies set transfer prices in accordance with needs of benefits like less transfer price is set by MNCs for maximizing after tax income and vice versa. By focussing on transfer pricing, firms can improve their performance.

 

 

 

 

 

 

References

Alino, N.U. and Lane, S., 2016. A Conceptual Model of the Effects of Taxation, Exchange Rate, and Regulations on the Transfer Pricing Behavior of Multinational Firm Managers. Journal of Comparative International Management18(1).

Chan, K.H., Lo, A.W. and Mo, P.L., 2015. An empirical analysis of the changes in tax audit focus on international transfer pricing. Journal of International Accounting, Auditing and Taxation24, pp.94-104.

Drury, C.M., 2013. Management and cost accounting. Springer.

Dürr, O.M. and Göx, R.F., 2013. Specific investment and negotiated transfer pricing in an international transfer pricing model. Schmalenbach Business Review65, pp.27-50.

Feinschreiber, R. and Kent, M., 2012. Transfer Pricing Handbook: Guidance for the OECD Regulations (Vol. 588). John Wiley & Sons.

Fernandes, R., Pinho, C. and Gouveia, B., 2015. Supply chain networks design and transfer-pricing. The International Journal of Logistics Management26(1), pp.128-146.

Hammami, R. and Frein, Y., 2014. Integration of the profit-split transfer pricing method in the design of global supply chains with a focus on offshoring context. Computers & Industrial Engineering76, pp.243-252.

Hiemann, M. and Reichelstein, S., 2012. Transfer pricing in multinational corporations: An integrated management-and tax perspective. InFundamentals of International Transfer Pricing in Law and Economics (pp. 3-18). Springer Berlin Heidelberg.

Johnson, E., Johnson, N.B. and Pfeiffer, T., 2016. Dual transfer pricing with internal and external trade. Review of Accounting Studies21(1), pp.140-164.

Klassen, K.J., Lisowsky, P. and Mescall, D., 2016. Transfer pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research.

Lohse, T., Riedel, N. and Spengel, C., 2012. The increasing importance of transfer pricing regulations–a worldwide overview. Oxford University Centre for Business Taxation Working Paper12, p.27.

Martini, J.T., Niemann, R. and Simons, D., 2012. Transfer Pricing or Formula Apportionment? Tax?Induced Distortions of Multinationals’ Investment and Production Decisions. Contemporary Accounting Research29(4), pp.1060-1086.

Moore, J., Harold, H. and Coleman, C., 2016. Transfer Pricing Equity: An Examination of Reported Revenue versus Expected Revenue. The Winthrop McNair Research Bulletin1(1), p.11.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Park, S.J., Park, W.J., Sun, E.J. and Woo, S., 2016. Is Foreign Direct Investment Effective From The Perspective Of Tax Avoidance? An Analysis Of Tax Avoidance Through The International Transfer Pricing Behaviors Of Korean Corporations. Journal of Applied Business Research (JABR)32(3), pp.917-934.

Zinn, T., Riedel, N. and Spengel, C., 2014. The increasing importance of transfer pricing regulations: a worldwide overview. Intertax42(6), pp.352-404.

 

 


Converging Accounting Standard

In this essay previous literature has been studied for analysing the use of convergence of national and international accounting standards in multinational companies. For analysing the converged accounting standards various examples are studied. It has been revealed from the analysis that convergence of accounting standards play a very important role in operations of multinational companies but it has not yet been completely implemented in all countries around the world.

Introduction

Accounting standards are authentic statements that are used by companies with an aim to narrow the areas of differences in practice of accounting. It has been stated by Christensen et al (2015) that in order to regulate practices of accounting, accounting standards play a significant role. Accounting standards serve as a contract among various parties who take part in a company like management, investors and creditors (Chen et al, 2014).

Due to increased globalisation, firms operate in different countries all around the world. While operating in various countries, companies are involved in using national accounting standards. With increased globalization, the concept of converged accounting standards has also been increased. Accounting standards are served as financial regulatory systems, integrated with efficiency of market, coordination of resources and control over system. With the help of better accounting standards, goals of efficiency and coordination are patched together (Crawford et al, 2014). Accounting standards have gained a lot of importance but it has also become difficult and complex in global market. The national accounting standards cannot be applied to any financial architecture around the world, so there is an increased demand of global accounting standards. In order to operate in global business world, users of financial statements need a set of global accounting standards through which they can get a lot of benefits. However, development of converged and global accounting standards requires addressing various difficulties and intricacies (Tarca et al, 2013). This essay is about critical analysis of international convergence of global accounting standards. This essay deals with benefits and drawbacks of convergence of national and international accounting standards have been analysed.

Discussion

International convergence of accounting standards is not a completely a new concept. The notion of convergence was initiated in 1950s in response to economic integration of World War II and relevant enhancement in capital flows across the border. The focus of starting efforts was on harmonization for decreasing differences among principles of accounting utilised by users in major capital markets. In 1990s, this concept was replaced by notion of convergence. Convergence of accounting standards include the process of developing integrated set of high quality standards that can be utilised in all major capital markets all around the world (Wang, 2014).

According to Albu et al (2014) the goal of convergence of accounting standards is formulation of single set of accounting standards that can be used by companies internationally. There are different factors due to which international convergence of accounting standards is driven. These factors include the belief that comparability among various accounting numbers of entities can be increased through a converged accounting standard. The convergence of national and international accounting standards help in increasing movement of international investment and give advantages to stakeholders. International converged accounting standards include Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). With the help of convergence of accounting standards the conflict and confusion can be avoided. In addition to this, simplicity, consistency, clarity and streamlining can be promoted through international accounting standards.

In various countries around the world, there is an existence of convergence of national and international accounting standards. The countries where convergence has not taken place, are in phase of planning for adopting IFRS. For example, in Canada all listed companies are required to use IFRS in their accounting practices since 1st January, 2012. Moreover, for some multinational companies in Japan, permission has been given for using IFRS. In contrast to this, in some countries very few companies have adopted converged accounting standards like in Nigeria companies are in phase of training in order to adopt IFRS (Adibah Wan Ismail et al, 2013).

In addition to various benefits of convergence of accounting standards, companies have to face various complications while adopting international accounting standards. It is complicated to develop global set of accounting standards due to the differences that exist between environments in which development, application and utilisation of standards is done. Although it is difficult to adopt international set of accounting standards but with the help of these multinational companies become capable of easily consolidating financial statements. With the help of this management control systems are promoted. It is easily to comply IFRS statements with financial needs of overseas stock. As globalisation has been increased to a great extent, so, companies have to be involved in cross border transactions. For facilitating the ease of cross border transactions, a significant role is played by IFRS (Taipaleenmäki and Ikäheimo, 2013).

The convergence of accounting standards includes efforts used for reducing the major differences between national and international accounting standards in order to produce quality financial statements. This is considered to be a goal as well as a path used for reaching it. It is believed by FASB that ultimate aim of converging accounting standards is that companies can use these standards for local as well as international financial reporting. For example, in US FASB and IASB has made integrated efforts for improving accounting principles of US that is GAAP and eliminating the difference between these standards (Glaum et al, 2013).

The analysis has shown that in opposite to all these benefits, it has not yet been implemented on global scale. The convergence of national and international accounting standards creates transitional costs and costs to maintain a standard-setting for worldwide accounting standards. In order to successfully develop a single set of accounting standard, there is a need of involving negotiations among national boards of standards, IASB, government and professionals. It requires a significant amount of money and time to do so. In most of countries, it has not yet been applied appropriately due to the fact this increases direct cost of compliance needed for retaining users, regulators and auditors (Brusca et al, 2013). This cost is needed to be incurred as it helps in applying and interpreting converged global accounting standards. One of the greatest challenges faced by countries in which IFRS is implemented is lack of workforce. In order to successfully implement IFRS, there is a need of having trained and expert workforce in multinational companies who have the knowledge of using accounting standards effectively and efficiently. For example, before 6 months of implementation of IFRS, the requirement to have skilled and expert accountants has been increased. It has been stated by XVY (2000) that China is in continuous dispute of struggling for fulfilling the deadline of shift in accounting standards. The multinational companies in China are searching for 300,000 expert accountants who have knowledge about global accounting standards. It has been analysed that in China companies are facing difficulty in implementing converged accounting standard due to the lack of expert workforce (Zehri and Chouaibi, 2013).

The setters of national accounting standard have to incur extra costs due to the reduction in demand for their services and publications. Due to the convergence of accounting standards, a cost on issuers is also imposed by lack of capability of selecting to work in jurisdictions. It has been supported by empirical evidence that companies select to follow those accounting policies through which their contractual positions can be maximized. The accounting standards are developed in different countries under various cultural, communal, economic and legal environments. For achieving convergence, it is important to be there at agreed settlement with an aim of financial reporting. The direction of convergence of accounting standards is serving needs of capital market and investors. The countries where different philosophy to report financial statements is used, usually find difficulty in harmonizing their national standards with global accounting standards (Reineking et al, 2013).

Conclusion

Convergence of accounting standards is aimed at reducing major differences between international accounting standards and national standards. Due to the differences that exist in national and international accounting standards, it becomes difficult for comparing and interpreting financial statements by companies listed in various countries. With the help of convergence of accounting standards, multinational companies become capable of developing their financial statements. The convergence of national and international accounting standards increases external investments and opportunities for firms to start business in foreign countries. Although there are various benefits of convergence of accounting standards but they have not yet been implemented fully in all countries due to some issues like high cost, difficulty in understanding, lack of training opportunities and lack of expert workforce.

 

 

 

 

References

Adibah Wan Ismail, W., Anuar Kamarudin, K., Van Zijl, T. and Dunstan, K., 2013. Earnings quality and the adoption of IFRS-based accounting standards: Evidence from an emerging market. Asian Review of Accounting,21(1), pp.53-73.

Albu, C.N., Albu, N. and Alexander, D., 2014. When global accounting standards meet the local context—Insights from an emerging economy.Critical Perspectives on Accounting25(6), pp.489-510.

Brusca, I., Montesinos, V. and Chow, D.S., 2013. Legitimating international public sector accounting standards (IPSAS): the case of Spain. Public Money & Management33(6), pp.437-444.

Chen, C.J., Ding, Y. and Xu, B., 2014. Convergence of accounting standards and foreign direct investment. The International Journal of Accounting49(1), pp.53-86.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review24(1), pp.31-61.

Crawford, L., Ferguson, J., Helliar, C.V. and Power, D.M., 2014. Control over accounting standards within the European Union: the political controversy surrounding the adoption of IFRS 8. Critical Perspectives on Accounting,25(4), pp.304-318.

Glaum, M., Baetge, J., Grothe, A. and Oberdörster, T., 2013. Introduction of International Accounting Standards, disclosure quality and accuracy of analysts' earnings forecasts. European Accounting Review22(1), pp.79-116.

Reineking, C., Chamberlain, D.H., Rudolph, H.R. and Smith, L.M., 2013. An examination of inventory costing convergence under generally accepted accounting principles and International Financial Reporting Standards.Journal of International Business Research12(2), p.17.

Tarca, A., Morris, R.D. and Moy, M., 2013. An investigation of the relationship between use of international accounting standards and source of company finance in Germany. Abacus49(1), pp.74-98.

Taipaleenmäki, J. and Ikäheimo, S., 2013. On the convergence of management accounting and financial accounting–the role of information technology in accounting change. International Journal of Accounting Information Systems14(4), pp.321-348.

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research52(4), pp.955-992.

Zehri, F. and Chouaibi, J., 2013. Adoption determinants of the International Accounting Standards IAS/IFRS by the developing countries. Journal of Economics, Finance and Administrative Science18(35), pp.56-62.

 

 

 

 

 

 

 

 

 

Task 2

Abstract

This essay has been written for critically analysing the influence of transfer pricing on performance of companies. It has been shown from critical analysis of literature review that there is a significant influence of transfer pricing on performance of companies. Multinational companies focus on transfer pricing for getting leverage from tax that positively affect their accounting statements. In addition to this, multinational companies set transfer prices in accordance with the need of benefits. Through the focus on transfer pricing, the interaction among business units become easy and effective.

Introduction

In today’s competitive business world, due to increased globalisation, multinational companies use various comparative benefits of countries for wining market share and growing revenues through reduction in costs (Johnson et al, 2016). The maximum transactions in case of international trade take place among relevant entities within multinational companies without passing through independent business market (Otley and Emmanuel, 2013). Due to this, they become capable of fixing internal prices of their products and services in accordance with their own ease and motives with respect to transactions between themselves. These prices are known as transfer prices also called as accounting prices. Due to increased international flow of products and services, the focus towards transfer pricing has been amplified both with respect to regulation and challenges for management (Drury, 2013). This essay is about critical analysis of transfer pricing and its influence on performance of firms. In this essay it has been analysed that how multinational companies use transfer pricing for improving their performance and how it affects the performance negatively.

Main Body

The ultimate aim of a multinational company is competing in a globalized world, by making or sustaining a competitive position in market. In order to get competitive position in market, multinational companies are in need of selecting the best transfer pricing method and it is influenced by changes in strategic and organisational aspects of companies. In order to achieve enhancement in performance of companies, the management has to ensure selection of best transfer pricing method that has the consistency with strategy of organisation (Klassen et al, 2016). According to Feinschreiber and Kent (2012) the aim of transfer pricing is on achievement of organisational objectives through which performance of companies is improved. With the help of transfer pricing, various objectives of multinational companies are fulfilled like maximisation of project, management of tax and managing fluctuations in currency. The set price of products and services purchased or sold between relevant entities like parent and subsidiary is called as transfer price.

Transfer pricing is termed as pricing of products and services purchased or sold between multinational companies like from parent to subsidiaries and vice versa. In addition to this, the internal transfer involves transferring of raw material, allocating fixed costs, royalties and finished goods. The introduction of transfer pricing was done as a tool for decentralisation of authority involved in decision making. Thus, with the help of transfer pricing, the company becomes capable of increasing efficiency of internal departments like production department. This is done by making improvement in resource utilisation of department and incentives by management through focusing on result orientation. The companies’ performance is improved through transfer pricing as it helps in reducing tax liability in case of multinational companies (Chan et al, 2015).

Martini et al (2012) stated that the transfer pricing system of company has a considerable effect on performance of business unit as well as success and image of company. When there is a tight connection between control mechanism and motivation of manager, then it becomes crucial for performance of company. This is the reason due to which from last some decades a lot of focus is given to system of transfer pricing.

With the help of transfer pricing system the way of interaction between business units is governed significantly. Firms can create close links among business units through negotiated transfer pricing. Due to the creation of close linkages between business units, firms become capable of improving their performance. In contrast to this, market based transfer prices result in no linkage at all, because in this case firms prefer external sources rather than internal sources. It has been stated by Hammami and Frein (2014) that transfer prices are considered to be fair throughout the firm. It means their contribution is reflected to overall profit of firm. In case of unfair transfer pricing, conflict can be aroused and in addition to this it also creates dysfunctional behaviour of management.

It is very difficult for multinational companies to develop a system of transfer pricing as compared to development of local system. As with the help of Local Corporation the pricing system of multinational company helps managers in decision making for enhancing congruency of goals. It is an irrelevant objective of transfer pricing in which economic performance of company is evaluated through appropriate measure, in case of dealing with a multinational company (MNC). The transfer pricing system of a MNC must have an aim of meeting objectives of strategic plan, control system of management and system of evaluating the performance. With the help of international transfer pricing system, firms achieve goals that are irrelevant in local operation. So, this significantly affects the performance in a positive way by fulfilling organisational objectives (Dürr and Göx, 2013).

According to Moore et al (2016) there is a need of transfer price in case of creating interdependence, when products and services are bought and sold by profit centres, since managers have the responsibility of revenues and costs. In firms, transfer pricing helps in creating inter- profit centre relationships and their management must be done effectively for preventing overwhelming of benefits of multiple profit centre. Due to increased involvement of top management in these relationships, the less benefits of decentralization are gained. This means in case of implementation of transfer pricing, interrelationship must be developed with less involvement of top management. With the help of this, due to increased involvement of top management the performance of companies is affected in a negative way.

In MNCs less or high transfer prices are used in accordance with its benefit. Less transfer price is set by MNCs for maximizing after tax income. The most significant reason of less pricing of internal transfers is taxation. The under-priced products can be sold by MNC to foreign subsidiaries and these products can be sold by subsidiaries at prices that cannot be matched by competitors. In case of tough laws of antidumping implied on final goods, then under-priced semi-finished products can be sold by MNC. So, final product is finished by subsidiaries at dumping prices and their importing is done directly to county rather than manufactured inside (Park et al, 2016).

Lohse et al (2012) claimed that in addition to this, transfer pricing is used by MNCs for reducing the effect of tariffs. Due to increased tariffs, the import prices are increased. Although, tariffs cannot be totally changed but with the help of transfer pricing the performance of MNCs is improved with reduced tariffs and increased profitability. This is done by under-pricing of exported products to buying firm. Firms can also improve their performance with the help of under-pricing corporate transfers by getting more goods in to a country through which its currency is rationed.

There is a significant impact of transfer pricing practices on economic decisions that in turn impact the performance of corporate. With the help of transfer pricing, measurement and evaluation of performance is also affected and due to this viewpoint of managers regarding fairness is affected. The significant issue in managing transfer pricing includes establishment of practices through which those decisions are taken that can enhance performance of corporate (Fernandes et al, 2015).

Fig 1: Causes and effects of transfer pricing

Source: (Zinn et al, 2014)

There are two standards that can be used for evaluating the effectiveness of transfer pricing practices of company. The first standard is whether economic decisions are resulted by these practices through which performance of corporate is affected positively. These include decisions related to capital investment, level of output for final product and pricing of products. As it can be seen from Figure 1 that strategy and process of administration affect performance of corporate and they have an impact on practices of transfer pricing. Although, performance of corporate can be affected by transfer pricing, but it has been suggested by Hiemann and Reichelstein (2012) that it is difficult to manage this relationship of transfer pricing and corporate performance.

Another standard for evaluating practices of transfer pricing is whether it is perceived by managers that they are provided with fair rewards for contributing in the company or not. If in case they are not satisfied with their rewards then this can negatively affect the performance of companies. A significant role is played by administration in reflection of thinking of fairness through its impact on practices of transfer pricing, on ways of measuring, evaluating and rewarding performance (Alino and Lane, 2016).

Conclusion

It has been concluded from the analysis that the use of transfer pricing has been increased to a great extent with increase in globalisation. Companies make use of transfer pricing for the purpose of transactions. Transfer prices are prices levied for products and services internally in a company between various departments or subsidiaries. Due to the creation of close linkages between business units, firms become capable of improving their performance. Companies set transfer prices in accordance with needs of benefits like less transfer price is set by MNCs for maximizing after tax income and vice versa. By focussing on transfer pricing, firms can improve their performance.

 

 

 

 

 

 

References

Alino, N.U. and Lane, S., 2016. A Conceptual Model of the Effects of Taxation, Exchange Rate, and Regulations on the Transfer Pricing Behavior of Multinational Firm Managers. Journal of Comparative International Management18(1).

Chan, K.H., Lo, A.W. and Mo, P.L., 2015. An empirical analysis of the changes in tax audit focus on international transfer pricing. Journal of International Accounting, Auditing and Taxation24, pp.94-104.

Drury, C.M., 2013. Management and cost accounting. Springer.

Dürr, O.M. and Göx, R.F., 2013. Specific investment and negotiated transfer pricing in an international transfer pricing model. Schmalenbach Business Review65, pp.27-50.

Feinschreiber, R. and Kent, M., 2012. Transfer Pricing Handbook: Guidance for the OECD Regulations (Vol. 588). John Wiley & Sons.

Fernandes, R., Pinho, C. and Gouveia, B., 2015. Supply chain networks design and transfer-pricing. The International Journal of Logistics Management26(1), pp.128-146.

Hammami, R. and Frein, Y., 2014. Integration of the profit-split transfer pricing method in the design of global supply chains with a focus on offshoring context. Computers & Industrial Engineering76, pp.243-252.

Hiemann, M. and Reichelstein, S., 2012. Transfer pricing in multinational corporations: An integrated management-and tax perspective. InFundamentals of International Transfer Pricing in Law and Economics (pp. 3-18). Springer Berlin Heidelberg.

Johnson, E., Johnson, N.B. and Pfeiffer, T., 2016. Dual transfer pricing with internal and external trade. Review of Accounting Studies21(1), pp.140-164.

Klassen, K.J., Lisowsky, P. and Mescall, D., 2016. Transfer pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research.

Lohse, T., Riedel, N. and Spengel, C., 2012. The increasing importance of transfer pricing regulations–a worldwide overview. Oxford University Centre for Business Taxation Working Paper12, p.27.

Martini, J.T., Niemann, R. and Simons, D., 2012. Transfer Pricing or Formula Apportionment? Tax?Induced Distortions of Multinationals’ Investment and Production Decisions. Contemporary Accounting Research29(4), pp.1060-1086.

Moore, J., Harold, H. and Coleman, C., 2016. Transfer Pricing Equity: An Examination of Reported Revenue versus Expected Revenue. The Winthrop McNair Research Bulletin1(1), p.11.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Park, S.J., Park, W.J., Sun, E.J. and Woo, S., 2016. Is Foreign Direct Investment Effective From The Perspective Of Tax Avoidance? An Analysis Of Tax Avoidance Through The International Transfer Pricing Behaviors Of Korean Corporations. Journal of Applied Business Research (JABR)32(3), pp.917-934.

Zinn, T., Riedel, N. and Spengel, C., 2014. The increasing importance of transfer pricing regulations: a worldwide overview. Intertax42(6), pp.352-404.

 

 


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