Common pitfalls of financial reporting for multinational organisations

Depending on the size of an organisation, its activities, the jurisdictions where it operates and other factors, achieving compliance can be a huge undertaking. Rules differ by country, sometimes drastically, and are constantly changing.

Not surprisingly given the financial and reputational stakes, organisations typically focus on achieving cross-border tax compliance, but following rules in other areas (such as labour and data protection) is equally important to lowering organisational risk. In some jurisdictions, failure to comply with financial and other rules can even lead to criminal charges for those in senior positions.

One area of compliance that’s sometimes overlooked or misunderstood is financial reporting across jurisdictions. This article addresses some of the common pitfalls multinational organisations encounter when fulfilling their cross-border reporting obligations.

Reporting — and auditing — rules may remain the same, but your obligations may not

Financial reporting requirements may be based in part on an entity’s headcount, annual revenue, whether it’s publicly traded and other factors. To remain compliant, then, a multinational organisation must not only keep track of changing reporting rules in each jurisdiction, but also its own growth in each jurisdiction.

To take an example, as of this writing, a company in the European Union is typically defined as “small” when it meets two of the following three criteria:

• It has a balance sheet total of less than €6 million
• It has a turnover of less than €12 million
• It has fewer than 50 employees

If, say, a US-based company has a German subsidiary that grows from €3 million to €8 million in revenues, and from 30 to 90 employees, its own reporting requirements will change, though the financial reporting rules have not. This kind of situation — in which compliance requirements are dictated in part by company thresholds — often leads to reporting errors (and resultant fines and penalties) as a company grows.

It’s also important to note that even within a bloc such as the EU, different countries can interpret rules differently. So, if the multinational organisation in our example expands into France, it must not assume that its financial reporting requirements there will be identical to those in Germany.

The same concept applies to audit requirements involving financial reporting. To take our German example, an audit is required under local rules for companies considered medium-sized based on the above thresholds. Some other jurisdictions — such as the UK — base company size on worldwide group income, not an entity’s income. As a result, a subsidiary in Germany that employs 50 people and is considered small by local rules may not require an audit, whereas a UK entity that employs just a single person but is part of a large multinational group might require an audit.

Financial leaders must be mindful, then, of the reporting requirements in each jurisdiction with respect to their entities’ revenues and other factors, and they must track all relevant data before generating and filing reports. Most finance departments will want to work with a third-party expert familiar with reporting rules in each jurisdiction of operation to ensure they keep abreast of new and changing reporting obligations and enforcement practices.

It’s worth adding that, depending on the jurisdiction, some financial statements may be available for anyone to view online, in some cases without charge. Depending on an organisation’s activities, countries of operations, and where it is in its growth cycle, this public availability often comes as a surprise.

Local accounting standards may differ from home-country standards

Accounting standards across the globe are in general becoming more aligned, but inconsistencies remain. For example, the US standard ASU 2014-17 allows acquiring companies to include specific transactions in the financial statements of acquired companies, while International Financial Reporting Standards (IFRS) and many local generally accepted accounting principles (GAAP) do not. Converting reports into local GAAP when required can be complex and administratively burdensome, but it is essential to achieving cross-border compliance and lowering risk of fines and needless administrative burdens that come with correcting mistakes.

Reporting related to stock-based compensation is another commonly challenging area for multinational organisations. An organisation must use accepted accounting standards for stock-based compensation at the group level and at the local level. As we’ve emphasised, those standards may not align.

In some instances, it may be permissible under local rules to use IFRS instead of local accounting standards when preparing and filing financial reports. Typically, this is allowed only once, rather than on an ongoing basis, and organisations considering this approach should understand well in advance of filing if it is allowed and if it is in the organisation’s best interest to do so.

It pays to maintain accounting records on separate ledgers

When a multinational organisation manages the accounting records of an entity outside the home country, it should maintain those records on a separate ledger. Although it may seem convenient and efficient to maintain a single ledger for all accounting records in a group, this strategy can cause complications.

For example, to comply with local reporting rules that differ from the those of the home country, an organisation must extract balances from a single ledger when preparing the foreign subsidiary’s year-end reports. When considering all requirements, then, maintaining separate ledgers ultimately reduces administrative burdens and costs and the risk of reporting errors.