As a business unit within a large company, administrative costs such as legal, tax, audit, benefits, and cash flow can be heavily subsidized or even provided free of charge to the subsidiary. Alternatively, these services may be invoiced to the subsidiary as part of an allocation equal to a certain percentage of the subsidiary`s turnover or cost of sales. If these expenses are taken into account as part of an allocation method, they may significantly overestimate the actual costs of purchasing these services from third parties. Such allocations are often ways for the parent company to account for expenses at the head office level, but have little to do with the actual operation of the subsidiary. These activities may include costs associated with the maintenance of the Corporation`s head office and aircraft. It is not surprising that the use of legal finance leads to understanding and support. Companies that lack legal finance experience may fear it`s “harder” than sticking to the status quo — but in 2022, many legal teams can`t afford the status quo. In fact, legal finance is arguably not only easier to secure and use than those without experience might think, but it also has significant benefits that particularly benefit corporate legal departments. Where the cost of administrative support services is provided free of charge or heavily subsidised by the parent company, the subsidiary`s declared profits should be reduced by the actual cost of providing those services.
If the cost of these services is measured using a largely arbitrary allocation method, the subsidiary`s reported profits may be increased by the difference between the allocated costs and the actual costs of providing the services. Sweden has introduced registration fees for pesticides and other chemicals, as well as a tax on CFCs used to pay for inspections (OECD 1996). Belgium levies fees for the import and export of pesticides, radioactive substances and hazardous waste, which cover inspection and control costs (OECD (1998c)). Annual fees for pesticide use increase with pesticide toxicity, and fees for hazardous substances are based on an index that takes into account fire, explosion and toxicity risks. A pesticide registration fee has also been introduced in Finland (Speck (1998)). Malaysia uses a licensing system to reduce wastewater from the palm oil industry. Companies pay a non-refundable annual licence processing fee, which is reduced for plants developing pollution abatement technologies (World Bank (1997b)). But the wastewater charge should not be overcharged for significantly reducing emissions of water pollutants in Malaysia (Vincent and Ali (1997)). Canada covers all or part of its regulatory costs in some sectors through licence fees (OECD 1995b). Loan collection and settlement areas and a portion of legal fees represent risk-related expenses and their costs could be allocated to loans on the basis of relative risks.
It is unfortunate that some banks approve loans at low prices when they cannot or do not want to accurately allocate their cost base. These industries typically require significant capital investments in research, development, equipment, and plants. Industries with lower cost of capital include money centre banks, hospitals and healthcare facilities, energy companies, real estate investment trusts (REITs), reinsurers, retail and food companies, and utilities (general and water companies). These businesses may need less equipment or benefit from very stable cash flows. If a bank cannot allocate costs, it does not distinguish between the cost of lending to borrowers, which requires little investment in resources, and the cost of lending to borrowers, which requires significant analysis and monitoring. As a result, commercial lenders have generally understood the need to reduce costs and rethink the lending process to improve efficiency, recognizing that the market will not allow a premium for ineffectiveness. While these costs typically represent only a fraction of these financing revenues, it is important for companies to pay attention to them because there is a specific accounting policy for these types of costs that they must follow in order to properly account for them under U.S. GAAP. Some of these guides can be complex depending on the type of financing, so I have some helpful tips for you. First, track all costs incurred as part of the financing transaction.
You want to make sure you have a complete list of costs. Some startups find a Microsoft Excel spreadsheet to be effective, while others use their accounting system like QuickBooks, and others find hiring an external consultant to be the best way to track an account for these costs. Second, identify or mark costs that are progressively and directly related to funding. If you do, the most important thing to keep in mind is that these are the costs that wouldn`t be incurred otherwise. So, ask yourself, if the funding hadn`t happened, I would have paid those costs? If the answer is no, it is likely that the costs are progressively and directly linked to financing and are therefore considered issuance costs. For example, if a SAAS founder determines that he or she would have paid the printing fees associated with the funding, they are considered expense costs. One thing to consider when deciding to finance capital projects with equity or debt is the potential for tax savings by taking on debt, as interest costs can reduce a company`s taxable income and, therefore, its income tax. It is also possible that your answer to this question is a yes and no, which means that part of the cost of the costs you pay is directly related to financing and the other part is not. For example, a pharmaceutical company has issued a syndicated loan to several lenders, and a portion of the fees paid by the principal creditor represents remuneration for services associated with issuing the debt to other participating lenders. These costs can be considered as issuance costs, so you should also mark them, as you may need to make an allocation here and only consider the portion directly related to funding as issuance costs.
Please note that salaries, rent and other employee period costs should be recorded as expenses. Integrate costs attributed to departments or units into the central service cost allocation plan.