International Accounting

Question 1

What are the main components of the International Business Framework?

Name the key components

Answer 1

8 key components

The International Business Environment consists of:
1. Global Trends: trends that affect all aspects of international business
2. Host-Home Country Interaction: dynamic between the country where a company is based and the foreign countries where it operates
3. Macroeconomic Context & Global Business Systems
4. Cultural Differences:
5. International Business Law & Ethics

=> in regards to organisations, there are three more blocks:

1. Internationalization and Market Entry Strategies
   which influences together with
2. Financial and Risk Management of International Operations: such as stability issues, currency fluctuations, and political risks.
   the
3. **Effects on Value-Chain & Functional Strategies **: how international operations affect a company’s value chain, including primary activities like Inbound Logistics, Operations, Outbound Logistics, Sales & Marketing, and Support Activities like Firm Infrastructure, Human Resource Management, and Technology Development.

Question 2

define

Total decentrallisation

Organisation Structure

Answer 2

means:
* min. constraints
* max. freedom
=> for managers at the lowest levels of an organisation to make decisions

Question 3

define

Total centralisation

Organisation Structure

Answer 3

means:
* max. constraints
* min. freedom
=> for *managers at the owest levels *of an organisation to make decisions

Question 4

name

What are the benefits and costs of decentralisation in organisational management?

*

Answer 4

5 Benefits of decentralisation include:

• Creates greater responsiveness to local needs
• Leads to gains from quicker decision-making
• Increases motivation of subunit managers
• Aids management development and learning
• Sharpens the focus of subunit managers.

4 Costs of decentralisation include:

• Leads to suboptimal decision-making (incongruent or dysfunctional decision-making due to loss of control)
• Focuses manager’s attention on the subunit rather than the organisation as a whole
• Increases costs of gathering information
• Results in duplication of activities (e.g. marketing, accounting)

Note: Multinational corporations often adopt decentralisation because centralised control of a company with subunits in three or four different continents is often physically and practically impossible.

Question 5

Name the 4 types of responsibility centres

and the accountability within it

Answer 5

4 types of responsitbilty centres:

1. Cost centre - the manager is accountable for costs only
2. Revenue centre - the manager is accountable for revenues only
3. Profit centre - the manager is accountable for revenues and costs
4. Investment centre - the manager is accountable for investments, revenues and costs

Question 6

Which responsibility units can be found in which organisaiton structures?

arrange

Answer 6

Each of the 4 responsibility units can be found either in centralised or decentralised organiations

=> Profit centres can be coupled with a highly centralized organisation (as everything is managed at one centre, so it’s easy to do both, revenue and cost accountability)

=> Cost centrescan be coupled with **highly decentralized organisations **(as there it’s even more important to focus on costs due to double activies, more effort to gather information…)

Question 7

What is a transfer price and what are intermediate products in the context of organizational subunits?

Answer 7

Transfer Price:
* is the cost charged by one subunit of an organization for products / services provided to another subunit within the same organization
=> the transfer price generates revenue for the selling subunit and incurs purchase costs for the buying subunit, influencing each subunit’s **operating profit

Intermediate Products:
Intermediate products are *items transferred between subunits *of an organization. These products may be processed further by the receiving subunit or sold to external customers.

Question 8

What are the general transfer pricing methods?

Answer 8

3 transfer pricing methods:
1. market-based prices
2. cost-based prices
3. negotiated prices (when subunits are free to negotiate the transfer price between them => then decide if buy/sell internally or externally)

Note: Different transfer-pricing methods produce different operating profits for individual subunits.

Question 9

What are the key criteria that transfer prices should fulfill?

Answer 9

Transfer prices should (4):
* promote goal congruence (interest and action of division mgr aligns with top mgt)
* help evaluate subunit performance
* induce high effort levels (subunits selling => cost low / buying => use inputs efficiently)
* preserve subunit autonomy, especially in a decentralized organization (=> subunit mgr should have freedom to transact with other subunits, based on transfer prices, or with external parties)

Question 10

What is the market-based transfer price from a transportation subunit?

Answer 10

It is based on the external purchase price from outside suppliers.

Question 11

What is the cost-based transfer price from a transportation unit?
Additional: at 112% of full costs?

Answer 11

cost-based transfer price:
* Purchase price
* variable costs
* fixed costs
= total costs

Additional Q, at 112%: total costs x 1.12

Question 12

What is the negotiated transfer price?

Answer 12

It is between the market-based (comparisan with outside supplier) and cost-based transfer price (total cost with a margin).

Question 13

What is a transportation divisons’ operating profit using the xx transfer price?

Answer 13

The operating profit for the subunit selling input product internal, consists of:
Revenues : purchase price x qty sold
- Deduct full costs: full costs x qty sold
= operating profit

Question 14

What is a processing divions’ operating profit using the xx transfer price?

Answer 14

The operating profit of a subunit selling the output product external:
Revenues (ext. price x output qty
- deduct costs :
- transferred-in : mb price x qty used
- Division variable : x qty sold
- Division fixed : x qty sold
= operating profit

Question 15

How is a perfectly competitive market is characterized?

Answer 15

4 characteristics:
* * no ideal capacity
* Division managers freely buy and sell at market price
* homogeneous product
* Prices equivalent and unaffected by individual buyers or sellers

Question 16

What is the role of market prices in setting transfer prices?

Answer 16

• Evaluate economic viability and profitability of divisions
• Motivate managers to act as they would in the external market
• Ensure decisions reflect true market conditions (external market)

Question 17

What benefits can market-based transfer prices bring to a company in a competitive market?

Answer 17

• Goal congruence with management objectives
• Enhanced management effort
• Accurate evaluation of subunit performance
• Maintained subunit autonomy

=> fullfilling the 4 key criterias for trnasfer prices

Question 18

• When are cost-based transfer prices used and when are they applied?

Answer 18

Used when:
* market prices are unavailable, inappropriate, or too costly to obtain

applied to:
* approximate market prices => set at full cost plus a margin

Note: Many companies set transfer prices based on full costs

Question 19

How should a company (subunit) decide whether to buy from an external supplier or continue with its current purchasing?

Answer 19

**Calculate both alternatives and compare costs **

1. Alternative 1 (old): Calculate the total current purchasing costs (price per unit × quantity)
2. Alternative 2 (new): Calculate the total cost of purchasing from the external supplier (external price per unit + transportation cost per unit × quantity)
   Compare the two total costs to identify the lower cost option

=> If go for the alternative with less total costs

Note: just take into account initial purchase costs vs. new purchase price + transport costs
DON’T TAKE INTO ACCOUNT ANY VARIABLE OR FIXED COSTS OR LOST PROFIT FROM THE TRANSPORT SUBUNIT => bc. subunit transport is now purchasing the new price, makes no sense if they still would go for the higher one with all their cost

Question 20

What is a minimum transfer price ?

Answer 20

• Covers the selling division’s variable costs
• Minimum a division will accept for its product
• Ensures the selling division does not incur a loss
• a price above the min. contributes to the fixed costs => margin to cover fixed costs !

Question 21

How do transfer prices create incentives for internal transactions?

Answer 21

• Set above variable cost to incentivize the selling division
• Set below the external market price to incentivize the buying division
• Encourage divisions to transact internally rather than externally

Question 21

What is a maximum transfer price?

Answer 21

• Equal to external market price
• Maximum a division will pay internally
• Ensures internal price competitiveness with the market

Question 22

What is prorating in the context of transfer pricing?

Answer 22

• Equitable allocation of profit margin between divisions
• Balances between maximum and minimum transfer prices
• Based on an agreed-upon factor, often variable costs

Question 22

How do you calculate a prorated transfer price?

Answer 22

1. Determine the surplus available : maximum - minimum
2. Allocate the surplus based on an equitable factor, according to the variable costs of each division
3. Add allocated surplus to the minimum transfer price to set the transfer price : price (+ transport) + allocation

Question 22

not focus for exam

What is dual pricing in the context of transfer pricing and what are its characteristics?

v complex, diff. to interpret profitability, misleading to tax auth.

Answer 22

• Involves using two separate transfer-pricing methods for transactions
• Aims to meet key criteria of goal congruence, management effort, subunit performance evaluation, and autonomy
• Credits one division with a higher transfer price and debits the other with a lower market-based price
• The corporate bears the difference between the two prices
• Not commonly used due to its complexity and potential to reduce goal congruence

Question 23

How is the minimum transfer price made up?

Answer 23

= Incremental costs per unit incurred up to the point of transfer
**+ Opportunity costs per unit **to the selling division

Note: The ‘correct’ transfer price depends on the economic circumstances and the decision at hand.

Question 24

What is the minimum price in a perfectly competitive transfer pricing market and how is it calculated?

Answer 24

• Sum of purchase price and transport costs.
• Or independent supplier price plus transport costs.
• Reflects the selling price in the external market.

First Calculation:
Long-term contract purchase price: £13 per barrel of crude oil.
Variable costs to transport the oil: £2 per barrel.
Variable costs to refine the oil into petrol: Since crude oil is turned into petrol, the variable costs associated with refining must be included.

Second Calculation:
Independent supplier price: £19 per barrel of crude oil.
Transportation costs from an independent supplier: Again, £2 per barrel is added for the transportation.
Additional costs: An extra £4 is added to the cost. This could represent additional variable costs, perhaps associated with the transaction or processing that hasn’t been detailed in your message.

Question 25

What are the tax implications of transfer pricing in multinational corporations?

Multinational transfer pricing

Answer 25

3 main implications:
* Affects various taxes beyond profit tax.
* Can shift profits to reduce tax burden.
* Subject to strict international regulations.

Question 26

What is BEPS and how does it relate to transfer pricing?

Multinational transfer pricing

Answer 26

BEPS = Base Erosion Profit Shifting

• BEPS refers to tax avoidance strategies using gaps in tax rules
• Leads to profit shifting to low/no-tax jurisdictions
• BEPS actions aim to improve tax rule coherence and transparency

Question 27

What are the current trends in transfer pricing management according to recent studies (Horvath, 2023)?

Multinational transfer pricing

Answer 27

According to Horvath, 2023:
* Legal compliance for tax purposes remains the **primary motivation **NOT tax optimization
* **Transfer pricing processes **are mainly manual
* There is an acceptance of double taxation by many companies

Question 28

What is the expected future outlook on transfer pricing audits (EY, 2021)?

Multinational transfer pricing

Answer 28

• Anticipated increase in transfer pricing audits over the next few years.
• Companies are likely to change their transfer pricing approaches due to new legislation
• Changes in transfer pricing driven by global tax reform, supply chain changes, and increased enforcement behavior