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Ensuring Timely and Accurate Financial Reporting for Your Foreign Subsidiaries

Make sure you have all the components in place for accurate, and timely, financial reporting from your foreign subsidiary.

Recently we were asked to help a company set up the financial reporting infrastructure for a foreign subsidiary it had recently acquired. The company’s management team recognized that in order to effectively manage an offshore operation, they needed timely and accurate financial information from their subsidiary, not just at year end but on a regular basis. As we embarked on this project, we were reminded of the significant complexity a foreign subsidiary, or multiple foreign subsidiaries, can add to your financial reporting processes. Whether you have just formed or acquired your foreign subsidiary, or you have been operating outside the U.S. for many years, it’s worthwhile to take a close look at your reporting process in order to ensure that you are receiving accurate and valuable information, when you need it.

Regardless of where in the world you do business, there are critical issues that should be addressed in order to ensure that you have a sound financial reporting process in place for your foreign entities. The following is a discussion of those issues.

Local Statutory Reporting Requirements

Although there is a movement afoot to move all countries to a common set of accounting standards (see upcoming articles for an update on the status of International Financial Reporting Standards [IFRS]), most every country currently has its own local, generally accepted accounting standards (GAAP)In addition, many countries have statutory audit requirements and, of course, their own tax regulations. Your Blackman Kallick engagement team can assist you in anticipating and planning for these rules and regulations, but you will need the support of local accountants as well, such as a member of our international network of accounting firms, HLB International.  Taking the time to understand local country rules and regulations will save you money and time later, and will help you ensure that you are in compliance with local country requirements.

Your Group Reporting Package

One of the first steps you should take when designing the financial reporting process for your foreign subsidiary is to create a group reporting package. The group reporting package contains the financial statements, analysis, and detail that you need from your subsidiary each reporting period. We have seen significant variety in the reporting packages our clients use, but they generally contain:

• An instructions and accounting policy document
• Balance sheet, income statement, and cash- flow statement templates
• Detail breakdowns of key financial statement line items such as:
  • Accounts receivable detail, including analysis of the allowance for bad debts
  • Inventory detail, including analysis of the allowance for obsolete inventory
  • Fixed asset schedules
  • Budget-to-actual comparison of the statement of operations accounts with detail explanations of significant variances

However you choose to design your reporting package, you should make sure that it facilitates an easy consolidation process.

Conversion from Local Country GAAP to USGAAP

As discussed above, your foreign subsidiary may be required to account for its transactions using local country GAAP. This may cause the subsidiary to follow accounting policies that are not in conformance with USGAAP. Examples of such differences can include:

• Different depreciation methods for fixed assets
• Differences in calculating impairments of tangible and intangible assets
• Requirements to accrue expenses that do not meet the definition of a liability for USGAAP purposes
• Differences in revenue recognition methods
• Differences in methods for computing reserves

Because of these differences, you may need to convert your foreign company financial statements into USGAAP financial statements prior to consolidation. Some of the issues to consider are:

• The most efficient and effective process and format for accomplishing the conversion.
• Who will do the conversion — local country accounting staff or parent company accounting staff?

Thinking these issues through up front will help you avoid future issues as you prepare your consolidated financial statements.

The Quality and Capabilities of your Local Country Accounting Staff

All of the above issues can be challenging, depending on the size and scope of your foreign operations. Make sure you have qualified staff, or have made provision for contracted support, on the ground at your foreign subsidiary. The best-laid plans will not matter if you don’t have the resources in place to execute your plan.

Foreign Currency Translation

Once you have finalized your foreign subsidiary financial statements, and converted them to USGAAP, you will need to translate the balances from local currency to U.S. dollars. The basic rules are:

• Translate asset and liability balances using the exchange rate as of the balance sheet date.
• Translate income and expense balances using the exchange rate at the transaction date. Most companies use an average exchange rate for the year to translate the income statement, which is acceptable.
• Equity sections balances come forward at historic cost.

There are more specific rules that may impact your company, so make sure to think this through in advance of your first reporting deadline.

Timelines

As you can see from the above, a new foreign subsidiary raises many new financial reporting challenges. You should plan for and schedule the completion of these new tasks so that you can meet your deadlines for consolidated reporting. This may entail coordinating not only with your subsidiary accounting staff but with foreign service providers as well. Planning ahead, and making sure that everyone understands the required deadlines, will ensure a smooth reporting process.

Your new foreign subsidiary represents an investment in future opportunities that will help you increase the value of your enterprise. As with all aspects of such a venture, up-front planning of the financial reporting process will help you ensure that your new foreign venture is a success.

For more information, please contact Paul Oetter, Partner, at 312-980-2920, or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.