When a foreign-based company decides to expand into the United States, they are eager to grab a share of the lucrative American marketplace. To infiltrate the U.S. market, they open a sales office or a U.S. division, moving an operations team from headquarters or hiring employees in the U.S.
Forging new territory, the fledging team must establish all the back office functions and handle U.S. government compliance for the foreign subsidiary. That’s a lot to expect from employees who are either new to the United States or new to the company and whose primary goal is to generate a revenue stream back to HQ.
Because of this burden, more international corporations are now turning to U.S.-based outsourced accounting firms as a one-stop shop to set up back office processes and provide advanced bookkeeping and management accounting for their U.S. subsidiaries.
This decision to outsource accounting in the U.S. can ensure that sales people focus on sales, not back office distractions.
Know the Difference: CPA versus CAS
A foreign company coming to America may not realize that not all certified public accountants (CPAs) in the U.S. are set up to provide the sophisticated accounting services required by a subsidiary.
Unless they have a Client Accounting Services (CAS) division, CPAs in the states, typically, provide bookkeepers to process the financial accounting, while the accountant oversees the tax and audit compliance.
As a result, most CPAs in the U.S. are simply not set up to provide the complex accounting requirements of a foreign subsidiary, such as revenue recognition, consolidated accounting, intercompany transactions and foreign currency conversion.
When looking for an outsourced bookkeeping and accounting service in the U.S., a foreign corporation should identify one that provides a dedicated team of a bookkeeper, a staff accountant, and a controller/accounting manager.
This team of accounting experts can meet all of the subsidiary’s accounting and business technology needs in the states, as well as the accounting requirements of the home office.
As a corporation based outside of the U.S., here are some of the key services your subsidiary may obtain from an outsourced accounting services firm partnership.
Registering Your Foreign Corporation in the U.S.
To register a foreign subsidiary, U.S. law requires that a foreign corporation incorporates as a domestic corporation in one state of the United States. Based on the type of business and geographical location of the office, the CPA firm can coordinate the subsidiary’s incorporation to ensure the right tax structure and to choose the state in which to incorporate where corporate law is well defined.
For subsidiaries operating on the U.S. east coast, the best state to incorporate in is Delaware; on the west coast, the most corporate-friendly place is Las Vegas, NV.
Because they are familiar with local, state and federal taxes, the CPA firm can structure a subsidiary corporation to incur fewer taxes based on its product or service. For instance, if the business wants to exploit a new trademark, the subsidiary would be incorporated in Delaware, which doesn't have a trademark tax.
During the onboarding process, an advanced outsourced accounting service can set up all of the subsidiary’s back office technology into what’s called a Smart Back Office – where a business’s accounting and human resources functions are integrated and automated.
The back office functions that can be automated through Cloud technology can include bill payment, time and expense management, payroll, billing, and collections. Through QuickBooks or similar accounting software, the outsourced accounting team will design and optimize the subsidiary’s accounting system to standardize with the parent company.
The subsidiary’s accounting system will be designed to produce the specific financial statements that the parent company’s controller needs to consolidate files and incorporate them into the company’s corporate accounting system.
The accounting team can set up the chart of accounts to mirror that of the parent company and create memorized reports to ensure standardized, monthly reporting of assets, liabilities, equity, income, expenses and cash flows.
With direction from the client’s CPA, the accounting team can also design the subsidiary’s accounting system to agree with the International Financial Reporting Standards (IFRS) as reporting standards and reporting systems are different in other countries from that in the United States.
Regardless of whether the foreign corporate accounting department uses QuickBooks, People Soft, Oracle or NetSuite enterprise class accounting systems, the accounting team will make sure that the subsidiary’s reports integrate with the headquarters’ accounting system.
Monthly Closing Process - Intercompany Transactions
When working with a U.S. subsidiary, an outsourced accounting service will ask the parent company’s CFO for authorization to work directly with the subsidiary to confirm intercompany transactions. By not having to go through the parent company, the U.S. accounting team can avoid a potentially time-consuming step in the revenue recognition process.
This is an important best practice as foreign headquarters often impose early closing deadlines on subsidiaries. The outsourced team can, correspondingly, provide an expedited, disciplined month-end closing process.
Timely submission of consolidated reports to the parent company is often critical for tax compliance. The accounting provider can keep track of the subsidiary’s U.S. tax reporting, but foreign corporations also have to file a tax return for the subsidiary in their home country, which has different tax laws and deadlines.
Foreign Currency Transactions
The currency conversion from the U.S. dollar to the corporation’s home country currency may be handled by the U.S. accounting team, the client or the client’s CPA.
The conversion must include accounting for foreign currency transaction gains and losses due to foreign exchange rates Accounting for the currency exchange must follow Generally Accepted Accounting Principles, or GAAP rules, that are applicable whenever a company distributes its financial statements outside of the company.
Therefore, the exchange must be translated into the foreign corporation’s cash flows and equity and measured in the parent company’s consolidated statements.
Subsidiary Accounting Summary
A foreign corporation’s U.S. subsidiary needs a local accounting provider that can deal with complicated foreign transactions and the complex issues of the larger parent company. An outsourced bookkeeping, accounting and controller service can act as a local controller in the U.S. to provide that type of high-level accounting.
They can also facilitate the month-end closing process, consolidate the financial reporting and keep the home office accounting department happy.
GrowthForce provides U.S. subsidiaries of foreign corporations with a turnkey solution to bookkeeping, accounting, and management reporting. Our extensive experience with parent companies on every continent (besides Antarctica!) allows you to get set up quickly and ensure compliance with all U.S. federal and state regulations.
Our processes and procedures provide customized reporting that helps drive profitability for the subsidiary while providing reliable financials for the foreign corporation.
Our expertise in acting as the accounting department for the U.S. operations of international corporations eliminates the burden to the stateside team. This helps you to focus on sales and operations and penetrate the U.S. market.
We'll unleash the advanced power of QuickBooks and together with your CPA deliver GAAP and IFRS compliant financial reports based on your reporting requirements.