TRANSFER PRICING AND TAXATION INTERNATIONAL

TRANSFER PRICING AND TAXATION INTERNATIONAL

1. Defines the basic concepts of international taxation

Indonesia as a sovereign state has the right to make provisions on taxation. Function of the tax was withdrawn by the government primarily to finance government activities in order to provide public goods and services needed by all people of Indonesia. In addition, the tax also serves to regulate the behavior of citizens of the State to do or not do something.
Indonesia is also part of the international world is definitely in the running wheels of government to international relations. International relations can be cooperation in defense security, cooperation in the social, economic, cultural and other, but the discussion is limited to the export and import (International Trade Transactions) related to international tax.

For that we need the international tax policy in terms of set the tax applicable in a country, assuming that each country could certainly have been set up in the tax provisions into its sovereign territory. But every country is free to regulate the taxation of the entity or a foreign national, international taxation is a form of international law, in which each state must submit to the international agreement known as the Vienna Convention.

Purpose of the International Tax Policy

Each policy would have a specific purpose to be achieved, as well as international tax policy also has the objective to be achieved, namely to promote trade between countries, pushing the pace of investment in each country, the government tried to minimize the taxes that inhibit trade and investment. One attempt to minimize the burden is by doing penghindaraan international double taxation.

The principles that must be understood in international taxation. Doernberg (1989) mention three elements that must be met netraliats in international taxation policy:

A. Capital Export Neutrality (Domestic Market Neutrality): Wherever we invest, the burden of taxes paid should be the same. So it makes no difference if we invest in domestic or foreign. So do not get when investing abroad, a greater tax burden because of the two countries bear the tax. This will underpin Income Tax Act Art 24 governing foreign tax credits.

2. Capital Import Neutrality (International Market Neutrality): investment from wherever derived, subject to the same tax. So that investors from both domestic or overseas will be subject to the same tax rate when investing in a country. It is the right of taxation of the same underlying denagn taxpayer of the Interior (WPDN) of the permanent establishment (PE) or Fixed Uasah Agency (BUT), which can be a branch of the company or service activities through the time-test of the regulations.

3. National Neutrality: Every country has the same tax on income. So if any foreign taxes that can not be deducted as an expense credited earnings deduction.

Taxation of cross border transactions

Double taxation occurs because the clash between the claims of taxation. This is because of the principle of global taxation for the taxpayer in the country (global principle) where the income of the foreign and domestic residents are taxed by the state (state taxpayer's domicile). In addition, there are territorial taxation (source principle) for foreign taxpayers (WPLN) by the state where the income source of income that comes from that country are taxed by the source country. This makes the income is taxed twice, first by country and by source country residents Example: PT A has a branch in Japan. Branch income is taxed in Japan by the Japanese tax authorities. And in Indonesia with a combined income is then multiplied by the domestic income tax rate of the domestic law of Indonesia.

2. Understand the concept of linkage with the tax return from abroad

One of the principles in the Income Tax Act is a substance over form; cost or selling price in every transaction there is a special relationship must be based on reasonable rates or prices that should be accepted (Article 10 Income Tax Act). Income taxes are calculated based on the multiplication rate of VAT to taxable income (PKP). Reduced taxable income derived from the deduction of income (Article 16 Income Tax Act).

In transactions between the taxpayer that is a special relationship, often items of income and deduction not necessarily the same proficiency level when compared to transactions conducted an independent party Atar, the impact of reporting income and deduction to calculate taxable income is not in accordance with the principles of fairness and the predominance of business. Therefore in accordance with the provisions of Article 18 paragraph (3) Income Tax Act, the Director General of Taxation has the right to adjust the amount of income and deduction which becomes the basis for calculating taxable income.
Core regulatory

PER 43/PJ-2010 a guideline for the taxpayer in the application of the principles of fairness and the prevalence of business, in order to reach a fair price and reasonable profit in the transaction between the parties that have links istimewa.Harga fair or reasonable profit, the pricing or profit in the transaction that there should be the same or related parties in certain price ranges when compared to similar transactions between independent parties.

The method of proportionality

There are five methods are applied in sequence, namely:

a) Comparable Uncontrolled Price Method (CUPM) commonly known as the CUP Method), suitable for comparing prices between transactions that have a special relationship with the independent parties in comparable conditions (identical goods and services).
b) Resale Price Method (RPM), to compare the transaction price minus gross natural product that reflects the functions, assets and risks in independent transactions (identical functions, although different goods and services).

c) Cost Plus Method (CPM) to compare the normal gross profit obtained by the company's gross profit would be similar to other companies that are comparable, at a Cost of Goods Sold in accordance with the Arm's Length Price (ALP). Transaction in the form of intermediate goods, transaction services, there are joint facilities or long-term agreement).
d) Profit Split Method (PSM) or a transactional profit method of determination by identifying the combined profit to be distributed to the parties affiliated with acceptable basic economics that provides a reasonable estimate of earnings when the transaction is independent (there is a unique form of goods not , and there are no appropriate comparators).
e) Transactional Net Margin Method (TNMM), a method which compares with operating earnings of profits, sales, assets, the percentage of net operating income is comparable if performed by an independent party. The fourth method is used when the above is not applicable).
The proportionality test includes:

A. Characteristics of goods or services traded both tangible goods (characteristic of quality, durability, availability, etc.), not the form of goods or services (transaction really occurred, geography etc.)

2. Function of each of the transacting parties (organization structure, the primary function of an organization, the type of assets used, risks, etc.)

3. Term of contract (the level of responsibility, risk, shared benefits, etc.)

4. Economic conditions (conditions that are relevant to the geographic location, competition,

market area, the level of supply and demand, and ketersediaaan items)

5. Business strategy (level of product innovation, product diversification, market penetration rate, etc).

Bookkeeping Process Analysis of proportionality

A. Taxpayers are required to record and document the steps of determining the principles of fairness and the predominance of business, the selection of comparators, the factors which influence the proportionality, as well as the analysis of proportionality, in accordance with Article 28 of UU KUP.

2. Document the information supporting the determination of the reasonableness of such principles, overview and organizational structure, business group structure, ownership structure, operasinal aspects of business, its competitors, and the corporate environment, price setting and cost alocation.

3. Transactions between the taxpayer with the parties that have a Related Party has a value of income or expenditure does not exceed Rp 10,000,000.00 (ten million rupiah) are not required to conduct proportionality analysis, determine the methods, analysis and documentation of proportionality, but the taxpayer still required comply with the provisions of Article 28 of Law KUP.

3. Understanding the reasons for a foreign tax credit

Crediting provisions of the Income Tax paid or payable in foreign countries
Under the terms of taxation, the taxpayer of the State tax payable on taxable income from all income received or obtained either from domestic or from abroad (World Wide Income). To avoid double taxation and provide the same taxation treatment of income received or accrued by the taxpayer of the State of foreign income received or accrued from Indonesia, then the tax paid or payable from the income derived from abroad may credited to the tax payable in the same tax year.

The incorporation of income from abroad is done as follows:

- For income from business done in the year earned income tax

- For income in the form of dividends, was conducted in the tax year when the acquisition of such dividends (SE-22/PJ.4/1995 Jo SE-35/PJ.4/1995)

- For other income, carried out in the receipt of such income tax year
- Losses incurred abroad should not be combined in calculating taxable income in Indonesia.
Income tax is creditable against income tax payable in Indonesia is a lesser amount of tax paid on overseas income by an amount calculated according to a specific comparison, namely: the amount of foreign income / Total income x number of PPh terhutang.Apabila amount of income from abroad came from several countries, the calculation of Income Tax Article 24 carried out for each country.

The crediting mechanism Tax Paid Abroad

(164/KMK.03/2002)

Income tax paid or payable in the State may be credited against income tax payable on income tax paid Indonesia.Pengkreditan Abroad (PPh Article 24) conducted in fiscal year income from abroad Combined with income in Indonesia.

Number of Income Tax Article 24 which can be credited to a maximum of a lower amount of income tax paid or payable in Foreign Countries and the number calculated by the ratio between income from abroad and the entire taxable income, or the maximum amount of income tax payable on all taxable tax in the country in terms of loss (income from LN is greater than the amount of taxable income).

4. Being sensitive to international tax planning within multinational corporations

In general, U.S. corporate taxes based on income at a rate of 35%, without considering the income derived from domestic or from abroad of its subsidiaries. Due to subsidiaries of U.S.

companies pay income tax on his country, the U.S. eliminate double taxation by allowing companies to US'nya tax credit against taxes paid abroad. Because tax rates vary widely between countries, U.S. foreign tax credit becomes more rumit.Sebagai example, a home-based computer company obtained $ 100 jt in the U.S. and $ 100 jt of the firm's subsidiary in Sweden. Under a pure worldwide system, the company is taxed in the U.S. 35jt% and imposed $ 35jt in Sweden. In order to prevent double taxation on income in Sweden, the U.S. foreign tax credits $ 28 jt paid to Sweden at a rate of 28%. Under the U.S. tax system, the company still owes taxes on $ 7jt residual income in Sweden. These numbers illustrate the difference between the amount to be paid to the mother country and the amount that was taxed at US.Terdapat limit the amount of tax credits that can be taken, the limit is comparable to U.S. rates.

The complexity of the U.S. system is the fact that the U.S. system does not impose a tax for income received from abroad until the company actually returning profits to the U.S.. Part of the U.S. international tax system is called "deferral" because the company can defer tax payments on overseas income for income re-invested enterprises in subsidiaries are active in foreign countries.

More detail, the U.S. has a system of "anti-defferal" which is also owned by another country, where taxes from state sources in one year earned U.S. parent company was not returned to their home countries. Complex rules are known as "Subpart F", as stated in U.S. tax law.

Complicated regulations

Not surprisingly, most economists and tax practitioners agreed that the U.S. International Tax System is not effective, complex, and provide a high cost. For example, according to the tax office on 1672 survey of large enterprises, it was found that there are high costs to meet the U.S. International Tax System, approximately 39% of the overall tax burden.

Taxation issues

The cost of not only the burden of taxation International tax law. Multinational companies are also trying to consider tax planning resources to minimize the tax burden. Contrary to what is believed to be the authors of the law on corporate behavior, the study illustrates how sensitive the economy of multinational corporations to tax rates and tax laws, and what to do with the company in order to minimize taxes.

Not only in U.S. companies that are sensitive to differences in tax rates abroad, but foreign investors are also sensitive to U.S. tax; main corporate tax rate (the body). The study found that tax rates have a significant influence on the location of the new plant. One is a study which revealed that high tax rates gives a negative effect on the establishment of new plants and plant expansions that have been established (meaning: the higher the tax rate, investment will be smaller), but the high tax rate would be positively correlated to the purchase of domestic firms by foreign companies.

Strategies to minimize taxes

There are several ways that multinationals taken to minimize the tax burden (tax worldwide). One method that has been developed known as "Transfer Pricing", which is the parent company where the price of commodities transferred to affiliated companies (products, components and trademarks) in foreign countries. Although very complex in practice, this technique is very simple goal is to allocate a greater burden on countries with high tax rates, with the goal of minimizing taxes, and allocating a large income in a country with lower tax rates.

5. Knowing the variables in the international transfer pricing

A. INITIAL CONCEPT

The complexity of the laws and rules that determine the tax for foreign companies and the profits generated abroad actually derived from some basic concepts
a. Tax neutrality is that the tax has no effect (or neutral) of the resource allocation decisions.
b. Tax equity is that taxpayers who are facing similar situations should pay similar taxes and the same thing but on disagreements between how to implement this concept.

2. PROFIT FROM THE SUMBAR taxation abroad,

Some States separti french, costal Rica, hongkong panama south africa, swiss and venezuala apply the principle of territorial taxation and impose taxes on companies that are domiciled in the country that profits generated outside the State. While most countries (including Australia, Brazil, China, Czech Republic, Germany, Japan, Mexico, Netherlands, UK, and Amarika States) to apply the principles throughout the world and impose taxes on profits or income of companies and citizens in it, regardless of the territory of the .

3. FOREIGN TAX CREDIT

The tax credit can be expected if the amount of foreign income tax paid is not too obvious (ie when the foreign subsidiary sent most profits come from overseas to the domestic parent company). Dividends are reported here in the parent company's tax return should be calculated gross (gross-up) to cover the amount of taxes (which are considered paid) plus all foreign levies taxes applicable. This means that as if the parent company receives dividends domestically which includes taxes payable kepeda foreign government and then pay the tax.

4. TAX PLANNING IN MULTINATIONAL COMPANIES

In the tax planning of multinational companies have certain advantages over a purely domestic firm because it has greater flexibility in determining the geographic location of production and distribution systems. This flexibility provides the opportunity to utilize their own national tax ataryuridis differences so as to lower the overall corporate tax burden.
The observation of these tax planning issues at the start with two basic things:
a. Tax considerations should never mengandalikan business strategy
b. Changes in tax laws are constantly limit the benefits of tax planning in the long term.

5. VARIABLES IN TRANSFER PRICING

Transfer prices set a monetary value on the exchange between firms that take place between the operating unit and is a substitute for market prices. In general, the transfer price is recorded as revenue by one unit and the unit cost by others. Cross-border transactions of multinational corporations are also open to a number of environmental influences that created the same time destroying the opportunity to increase profits through transfer pricing. A number of variables separti tax rate competition infalsi rates, currency values, limitations on the transfer of funds, political risk and the interests of joint venture partners are very complicated transfer pricing decisions.

6. Tax factor

Reasonable transaction price is the price to be received by parties not related to special items the same or similar in the exact same situation or similar. Reasonable method of determining the transaction price that is acceptable is:

(1) the method of determining the comparable uncontrolled price.

(2) method of determining the resale price.

(3) plus the cost price determination methods and

(4) other methods of assessment rates

6. Understanding the fundamental problems in the transfer pricing method

In the method of determining a fair price or a reasonable profit shall be conducted a study to determine the Transfer Pricing methods are most appropriate.
Transfer Pricing Methods that can be applied are:

A. method of price comparison between the independent (comparable uncontrolled price / CUP);
2. the resale price method (resale price method / RPM) or cost-plus method (cost plus method / CPM);

3. method of distribution of profit (profit split method / PSM) or the transactional net income method (transactional net margin method / TNMM).

In applying the Transfer Pricing methods must consider the following matters:
A. application of Transfer Pricing method performed in a hierarchical manner starting by applying the method of price comparison between the independent (comparable uncontrolled price / CUP) in accordance with appropriate conditions;

2. in terms of price comparison between the methods are independent (comparable uncontrolled price / CUP) is not appropriate to apply, must apply the method resale (resale price method / RPM) or cost-plus method (cost plus method / CPM) in accordance with the right conditions ;

Price Comparison method between the Independent Party (comparable uncontrolled price / CUP)
Method of price comparison between the independent (comparable uncontrolled price / CUP) is a method of Transfer Pricing is done by comparing the prices in transactions between parties who have Excellent prices in transactions between parties who do not have a Special Relationship in comparable conditions or circumstances.

Right conditions in applying the method of price comparison between the independent (comparable uncontrolled price / CUP) is:

1. traded goods or services have characteristics that are identical in comparable conditions, or
2. conditions of transactions between parties who have a Special Relationship with parties who do not have identical or Related Parties have a high degree of proportionality or accurate adjustments can be done to eliminate the influence of different conditions that arise.

 The resale price method (resale price method / RPM)

The resale price method (resale price method / RPM) is a method of Transfer Pricing is done by comparing the transaction price of a product is made between the parties that have a Special Relationship with the resale price of the product after deducting reasonable gross profit, which reflects the function , assets and risks, the resale of such products to others who do not have the Related Parties or the resale of products made in fair condition.
Right conditions in applying the method resell (resale price method / RPM) is:

1. a high degree of proportionality between the transaction between the taxpayer who has a Special Relationship with the transaction between the taxpayer has no Related Parties, in particular the level of proportionality based on the results of analytic functions, although the goods or services are bought and sold different; and

2. the seller's return (reseller) does not provide significant added value for goods or services sold.

FINANCIAL RISK MANAGEMENT

FINANCIAL RISK MANAGEMENT

1. Identify the main components of foreign exchange risk

The main objective of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities, and equities. The risk of price volatility faced is called market risk. There is market risk in various forms. Although the volatility of prices or rates, management accountants need to consider other risks:

1. liquidity risk,

2. arises because not all products can be traded freely management

3. market discontinuities,

4. refers to the risk that the market does not always lead to a gradual change in price

5. credit risk,

6. is a possibility that the other side of risk management in the contract can not meet its obligations

7. regulatory risk,

8. is the risk arising from public authorities banned the use of a financial product for a particular purpose

9. tax risk,

10. is a risk that certain hedging transactions can not obtain the desired tax treatment
11. accounting risk, is the chance that a hedging transaction can not be recorded in addition to part of the transaction is hedged about

Management accounting plays an important role in the process of risk management. They assist in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the hedging program.

The basic framework is useful for identifying different types of market risk can potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company's value and its competitors. The trigger value refers to the financial condition and operating performance items that affect the main financial value of a company.

Market risks include the risk of foreign exchange rates and interest rates, and commodity and equity price risk. State the source of the purchase currency depreciates in value relative to currencies domnestik State, then these changes can lead to domestic competitors able to sell at lower prices, is referred to as the risk of facing currency competitive. Management accountants have to enter a function such that the probability associated with a series of output values ​​of each trigger. Another role played by accountants in the process of risk management involves balancing the quantification process relating to the alternative risk response strategies. Foreign exchange risk is one of the most common form of risk and will be faced by multinational companies. In the world of floating exchange rates, risk management include: (1) anticipation of exchange rate movements, (2) measurement of exchange rate risk faced by the company, (3) design of appropriate protection strategies, and (4) the manufacture of internal risk management control

Potential foreign exchange risk arises when the foreign exchange rate changes also change the net asset value, earnings, and cash flows of a company. Traditional accounting measurement of the potential foreign exchange risk is centered on two types of potential risks: translation and transactions.

2. Knowing the task of managing foreign exchange risk

Main objectives of financial risk management is to minimize the potential
losses arising from unexpected changes in currency rates, credit, commodities, and equities. The risk of price volatility faced is known as market risk.

Market participants tend not to take risks. Intermediary financial services and a market maker responds by creating a financial product that allows a trader to shift the risk of unexpected price changes to others-the other side.

There is market risk in various forms, other risks:

• Liquidity risk arises because not all the financial risk management products can be traded freely. Highly illiquid market is such as real estate and stocks with small capitalization.
• Discontinuity refers to the risk that the market does not always lead to changes in market prices persist. Stock market crash in 2000 is a case in point.

• Credit risk is the possibility that the other party in the contract risk management can not meet its obligations. For example, the parties agree to exchange the euro versus the French into the Canadian dollar may fail to submit the euro on the date promised.

• regulatory risk is the risk arising from public authorities banned the use of a financial product for a particular purpose. For example, Kuala Lumpur stock exchange does not allow the use of shrot sales as a means of hedging against the decline in equity prices.

• Tax Risk is the risk that certain hedging transactions can not obtain the desired tax treatment. For example, treatment of foreign exchange losses as capital gains as ordinary income to be preferred.

• Risk is the chance that an accounting hedging transaction can not be recorded as part of the transaction hedged about. An example is when the advantage over a hedge against the purchase commitments are treated sebgaai "other income" rather than as a reduction of purchasing costs.

MANAGING FINANCIAL RISKS

The growth of risk management services that quickly shows that management can enhance shareholder value by controlling the financial risk. If the value of the company to match the present value of future cash flows, active management of potential risks can be justified by several reasons.

First, exposure management helped in stabilizing the company's cash flow expectations. Flow is more stable cash flows that can minimize earnings surprises thus increasing the present value of expected cash flows. Active exposure management allows companies to concentrate on the major business risks.

Lenders, employees and customers also benefit from exposure management. Finally, because of losses caused by price and interest rate risk of certain transferred to the customer in the form of higher prices, limiting exposure management of risks faced by consumers.

THE ROLE OF ACCOUNTING

Management accountants to help in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the effectiveness of the hedging program.

1. Identification of Market Risk

The basic framework is useful for identifying different types of market risk that could potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company's value and its competitors. And usually referred to as cube mapping risk. The term trigger value refers to the financial condition and performance items that affect the financial operations of the main value of a company. Market risks include the risk of foreign exchange rates and interest rates, and commodity price risk and eukuitas. The third dimension of the cube mapping risk, look at the possible relationship between market risk and trigger values ​​for each of the company's main competitor.

2. Management of Potential Risks

Problems of structuring the company to minimize impacts need information about potential exchange rate against foreign exchange risks faced. Potential foreign exchange risk arises when the foreign exchange rate changes also change the net asset value, earnings and cash flows of a company. Traditional accounting measurement of the potential foreign exchange risk is centered on two types of potential risks: translation and transactions.

Potential Risk of Translation

Translational gauge potential risk of exchange rate changes impact on the domestic currency equivalent value of assets and liabilities denominated in foreign currency held by the company. For example, a U.S. holding company that operates a fully owned subsidiary in Ecuador (the functional currency of U.S. dollars) to change the dollar value of net monetary assets in Ecuador if the U.S. exchange rate changes relative to the dollar. Assets or liabilities denominated in foreign currency exchange rate against potential risks if a change in the exchange rate led to an equivalent value in the currency of the parent company changed.
Excess of assets exposed to liability risk exposure (ie items in foreign currencies are translated based on the present exchange rate) led to the position of net assets are exposed. This potential is called the potential positive risks. Devaluation of foreign currencies relative to the reporting currency translation losses caused. Revaluation of foreign currency translation profits. Conversely, if the company has a net liability position or potential exposure to downside risk if liabilities exceed assets exposed exposed. Devaluation of foreign currency translation gains cause. Revaluation of foreign currency translation losses caused.

3. Define and calculate the risk of translational

The term (risk) the risk of having a variety of definitions. Risks associated with possible events or circumstances that may threaten the achievement of organizational goals and objectives. (1978) suggested a definition of risk as follows:

Risk is the chance of loss (risk is the chance of loss).

Chance of loss related to an exposure (openness) against possible losses. In statistical science, chance is used to indicate the degree of probability will be the emergence of certain situations. Most of the authors reject this definition because there is a difference between the level of risk with the loss. In the case of 100% chance of loss, meaning that the risk of loss is definitely no.

- Risk is the possibility of loss (risk is the possibility of loss). Term possibility means that the probability of an event is between zero and one. However, this definition is less suitable for use in quantitative analysis.

- Risk is uncertainty (risk is the uncertainty). Uncertainty can be both subjective and objective. Subjective uncertainty is an individual assessment of the risk situation based on knowledge and attitude of the individual concerned. Objective uncertainty is explained in the following two definitions of risk.

- Risk is the dispersion of actual from expected results (risk is the spread of actual results from expected results).

Statisticians define risk as the degree of deviation of something of value around a central position or around point average.

The risk is believed to be unavoidable. With regard to the public sector which demands transparency and performance improvements with limited funds, the risks faced by government agencies will be growing and increasing. Therefore, an understanding of risk than ever to be able to determine priorities and program strategies in the achievement of organizational goals.

Risk can be reduced and even eliminated through risk management. The role of risk management is expected to anticipate the rapidly changing environment, developing corporate governance, to optimize the preparation of strategic management, securing resources and assets of the organization, and reduce the reactive decision making from top management.

4. Define and calculate the risk of the transaction

Operational risk management is an integral part of bank risk management. Risks caused by and associated with business activities should be identified, assessed and measured and mitigated and controlled by the bank board. Management of those risks is intended to minimize potential losses and potential threats to the bank's reputation.
Different nature of operational risk with credit risk and market risk because of losses caused by events that are exposed to operational risk can not always be measured. Loss may occur after a certain period for example, or indirectly through damage to the reputation or image of the bank.

 Definition of Gross Income (Gross Income)

Gross profit is defined as net interest income (interest income minus interest expense) income plus net non-interest (operating income minus interest expenses beyond the outside interest).
Gross profit should be:

1. gross of fees (eg for unpaid interest);

2. gross of operating expenses include the costs paid to outsourcing service providers; (As opposed to the fees paid for services that are outsourced, the income received by banks that provide outsourcing services, should be included in the classification of gross profit).
3. does not include profit / loss realized from the sale of securities included in the banking book; (gains / losses can be realized from the securities that are classified as 'held to maturity and' available for sale, which are characteristics included in the banking book, also excluded from the definition of gross income), and

4. excluding extraordinary items (extraordinary) or irregular, and the income derived from insurance.

5. Knowing the differences in accounting risk and economic risk

Market risk is the risk of loss arising from unexpected changes in currency rates, credit, commodities, and equities. For example: A company in Sweden that issue new shares for domestic investors might view as the market risk exposure to rising stock prices. The price increase is not unexpected separation is not desirable if the company issuing the shares should be issued a number of shares less to obtain the same amount of cash by delaying the issuance of stock for a while. On the other hand, a Swedish investor will look at the risk of a possible decline in equity prices. If stock prices dropped significantly in the short term, investors would be better to wait a bit before making a purchase.

Actively hedge against the potential financial risks are not generally accepted among financial managers around the world. Some thought that keuangansecara management alone will not able to increase the value of the company and that company better manage its core business risks and allowed himself to be exposed by some (if not, all) financial risk.
forecasting foreign exchange rates is something that is not useful. You can not predict how the market, so you should not try. Because, disebuah world with freely fluctuating exchange rates, forex market can be said to be efficient. Current market exchange rate (ie the forward exchange rate) menunjukkna the consensus of all players on the foreign exchange market in the future. The information is generally available immediately realized in foreign currency exchange rate now. Thus, the information is not very valuable in predicting future exchange rate. In this condition, changes in foreign currency exchange rate is a random response to new information or unexpected events. Forward exchange rate is the best estimate available for exchange in the future. Random changes in exchange rates on foreign currency exchange rate reflects the differences of opinion among market. Influence on the management accountant is an accountant must develop systems that collect and process information and accurate kompherensif the variables related to exchange rate changes, the financial manager must also understand the consequences of peramalannya.

6. Knowing the exchange rate hedging strategies and accounting treatment required

The main objective of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities, and equities. The risk of price volatility faced is called market risk. There is market risk in various forms.
Although the volatility of prices or rates, management accountants need to consider other risks:
(1) liquidity risk arises because not all products can be traded independently of management,

(2) market discontinuities, refers to the risk that the market does not always lead to price changes gradually,

(3) credit risk, the possibility that the other party in the contract risk management can not meet its obligations,

(4) regulatory risks, the risks arising from public authorities banned the use of a financial product for a particular purpose,

WHY IS MANAGING FINANCIAL RISKS

First, exposure management helped in stabilizing the company's cash flow expectations. Active exposure management allows companies to concentrate on the major business risks. The providers of shareholders, employees, and customers also benefit from exposure management. Lenders generally have a lower risk tolerance than the shareholders, thereby limiting the exposure of companies to balance the interests of shareholders and bondholders.

THE ROLE OF ACCOUNTING

Management accounting plays an important role in the process of risk management. They assist in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the hedging program.

The basic framework is useful for identifying different types of market risk can potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company's value and its competitors. The trigger value refers to the financial condition and operating performance items that affect the main financial value of a company. Market risks include the risk of foreign exchange rates and interest rates, and commodity and equity price risk. State the source of the purchase currency depreciates in value relative to currencies domnestik State, then these changes can lead to domestic competitors able to sell at lower prices, is referred to as the risk of facing currency competitive. Management accountants have to enter a function such that the probability associated with a series of output values ​​of each trigger. Another role played by accountants in the process of risk management involves balancing the quantification process relating to the alternative risk response strategies. Foreign exchange risk is one of the most common form of risk and will be faced by multinational companies. In the world of floating exchange rates, risk management include: (1) anticipation of exchange rate movements, (2) measurement of exchange rate risk faced by the company, (3) design of appropriate protection strategies, and (4) the manufacture of internal risk management controls. Financial managers must have information about the possible direction, timing, and magnitude of changes in exchange rates and to develop adequate defensive measures more efficiently and effectively.

ACCOUNTING TREATMENT

FASB issued FAS No. 133, which were clarified by FAS 149 in April 2003, to provide a single, comprehensive approach to accounting for derivatives and hedging transactions. Basic provisions of this standard are:

- All derivative instruments be recorded on the balance sheet as assets and liabilities,
- Gains and losses from changes in fair value of derivative instruments Would not assets or liabilities,
- The hedge must be highly effective in order to deserve a special accounting treatment, ie gains or losses on hedge instruments niai exactly offset gains and losses should be something that protected the

- Hedging relationships must be documented in full for the benefit of the report pemvaca
- Profit or keruhian of net investment in foreign currency initially recorded in other comprehensive income

- Gains or losses on hedges of future cash flows are uncertain, such estimates of export sales, are initially recognized as part of comprehensive income.

Although the rules guiding the FASB and IASB issued has a lot to clarify the recognition and pengukuan derivatives, there are still some problems. The first relates to fair value. The complexity of financial reporting have also increased if the hedge is deemed ineffective to offset foreign exchange risk.

7. Understanding of accounting and control problems, related to risk management of foreign exchange

Running a business in a global environment requires management to change its perspective. There are many common aspects of the business on a local and global scale. However, some of which are different. Companies operating in the country of origin and other states may find that running a good business practice in the country of origin was not applicable in other countries. Much of this difference is related to the business environment is the environment of culture, law, politics, and economics of each country.

In the world of global business requires management accountants to handle finances and daily business operations. Good practice, education, and stay abreast of the changes is important for an accountant. However, the task of the management accountant international company is more complex due to the continuous changes occur in global business. Because the main task of the management accountant is to provide relevant information to management and to be able to follow developments applicable, the management accountant should read various books and articles on business information systems, marketing, management, politics, and economics. In addition, management accountants must be familiar with accounting regulations of the country where it operates.