Due to their very nature transnational corporations (TNCs) operate in various taxation and legal jurisdictions, and out of necessity goods and services are exchanged across national borders. TNCs may well transact with organizations which are not fully independent and may be related entities. Accordingly, it can become difficult to determine the cost at which this transfer should be transacted given that the transaction has not occurred in a true "arms-length" environment. Unfortunately, abuses do occur as TNCs seek to transfer profits and to minimize income taxes, import duties, sales taxes and the like. TNCs themselves must carefully study the complex rules which exist in various countries, as practices which are acceptable in one country may not be in another. Furthermore, there is also the risk of double taxation.
The Organisation for Economic Cooperation and Development (OECD) has established guidelines which attempt to develop a consensus in this truly controversial area which is referred to as transfer pricing. The subject is dealt with in more detail in the report (TD/B/ITNC/AC.1/(XIV)CRP.2) which the UNCTAD secretariat will present to the upcoming fourteenth session (1 to 5 July) of the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR).
The objectives of ISAR are to find solutions to deficiencies in reporting problems. The Group was established to study and promote the harmonization of accounting and reporting standards. If a globally accepted methodology were established to value the transfer of goods and services between related TNCs much of the controversy which surrounds this topic would be resolved.
ISAR promotes harmonisation of national accounting standards. One way to address this issue is to analyse the various impediments to the harmonization of accounting standards among nations. A report on this topic (TD/B/ITNC/AC.1(XIV)/CRP.1), that will be presented during the session, identifies three main root causes for the divergence of national accounting standards. These are:
- unique events which are often of a historical nature, which at certain times, due to economic factors, have effectively led to differing accounting treatments, for example accounting for inventory valuation, or differences in deferred tax treatments;
- external influences whereby former colonies often adopt accounting rules and standards which are similar to that used by the colonizer, which has effectively spread two or three schools of thought on accounting around the world; and
- accounting rules are driven by the diverse needs of different users of financial statements such as governments, investors and creditors.
The report describes trends in accounting and reporting regulations, particularly by country groupings, with reference to these three root causes.
Important accountancy developments
The Group will also review the activities of major international and regional accounting bodies. A report (TD/ITNC/AC.1(XIV)/CRP.3) on this topic describes how the movement towards harmonization of accounting standards advanced significantly during 1995. The International Organisation of Securities Commissions (IOSCO) and the International Accounting Standards Committee (IASC) announced that they had agreed to work towards the development of core standards, after which IOSCO will endorse the usage of IASC´s accounting standards. Some TNCs wishing to issue securities in foreign capital market reconcile their domestic financial statements to IASs (international accounting standards promulgated by the IASC) instead of the requirements of the foreign capital market concerned. This approach is used in the United Kingdom and Hong Kong. The Financial Accounting Standards Board of the United States has began a qualitative and comprehensive analysis of the similarities and differences between their own accounting rules and international standards with the purpose of narrowing the differences. This is a significant event because the United States is the world´s largest capital market and due to its unique rules and regulations many TNCs are reluctant to seek a listing due to the cost and complexities of keeping multiple "sets of books", or more correctly, different sets of financial statements for each country in which the TNC wishes to list its shares. Clearly greater harmonization of accounting standards would be a major contributor to the mobility of capital.
The Group will also resume its work on environmental accounting. An ad hoc meeting was held in November 1995 which reviewed current regulations and guidelines on environmental accounting as promulgated by various national and regional standard setters. The background report of the ad hoc session is now presented to the annual session together with the conclusions and recommendations reached by the November session. The report (TD/B/ITNC/AC.1(XIV)/CRP.4) is essentially a "road map" of current guidance on environmental accounting. The ad hoc meeting felt that ISAR should undertake a project to develop an environmental accounting framework which would draw upon the pronouncements of national and regional standard setters. A common global framework would assist countries which have not already established their own national standard and if a common starting point was used it is hoped that ensuing national standards would not be too divergent.
Often governments may grant a concession to the private sector or sometimes to quasi governmental bodies to build and/or operate large infrastructure projects such as bridges, airports or road ways, for example the Channel tunnel. Legal title to the land or waterways usually is not transferred and hence a paradox is experienced by the contractor, particularly when trying to place a value on the benefit or the right to undertake the project and to utilise public assets for commercial purposes. The appropriate disclosure of this information within financial statements is an issue which is open to interpretation. The arguments are presented in a report which will also be discussed at the session (TD/B/ITNC/AC.1/8).
The future of the profession
The experts will also discuss the work to date of the World Trade Organization´s Working Party on Professional Services (WPPS) which will have a considerable impact upon the accountancy profession once its recommendations for reducing barriers to trade in professional services are formulated and accepted by the Council on Trade in Services. A hand-out note prepared by the UNCTAD secretariat on the status of the accounting profession within certain developing countries and countries in transition will be presented to both ISAR and the WPPS. Furthermore, the need for a global accountancy qualification will again be discussed. The qualification could be used as a benchmark to ensure that accountants entering foreign markets under the auspices of the General Agreement on Trade in Services (GATS) have attained a minimum level of competence.
Disclosure by commercial banks
The Group will also consider a report of the secretariat (TD/B/ITNC/AC.1/9) which analyses the accounting and legal requirements for the disclosure of financial and other information by commercial banks. Requirements of France, Germany, Italy, the United Kingdom, the United States, the European Commission, the OECD and the International Accounting Standards Committee (IASC) are reviewed in order to recommend "best practices". A number of spectacular collapses of commercial banks during the past few years, notably the United States´ savings and loans institutions, Barings and the Japanese bank, Daiwa, which lost $1.1 billion, have been attributed to a number of factors including the lack of internal control. However, the magnitude of the circumstances and conditions which led to the financial situations which precipitated the collapses should have been apparent from a review of the financial statements. Clearly, guidelines and regulations concerning the format and content of financial statements, particularly the notes to the accounts, need to be reviewed to ensure that sufficient information is available.
To highlight this topic UNCTAD will organize a one-day forum with leading bankers to elicit their views on disclosure. It is extremely important that investors and depositors are able to judge the performance of banks based on their financial statements. Globalization and liberalisation have had a significant impact upon the commercial activities of banks. However, disclosure has lagged behind leaving the public unprotected. The forum of leading experts will explore the issues and answer questions raised by ISAR participants. The forum will take place on Thursday 4 July (see Note to correspondents No.10).
The annual ISAR session is open to all member countries of UNCTAD. Experts from the European Commission, the OECD, the International Chamber of Commerce, the International Federation of Accountants, the International Accounting Standards Committee, the Fédération des Experts Comptables Européens attend as observers and/or specially invited guests.