International Accounting Dounik Chap 002
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Transcript of International Accounting Dounik Chap 002
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
WORLDWIDE ACCOUNTING DIVERSITYWORLDWIDE ACCOUNTING DIVERSITY
Chapter 2Chapter 2
2-2
Worldwide Accounting Diversity
Chapter Topics Evidence of accounting diversity Reasons for accounting diversity Problems caused by accounting diversity Accounting clusters The influence of culture on financial reporting The reason for international differences in reporting Further evidence of accounting diversity
2-3
Worldwide Accounting Diversity
Learning Objectives
1. Provide evidence of the diversity that exists in accounting internationally.
2. Explain the problems caused by accounting diversity.
3. Describe the major environmental factors that influence national accounting systems and lead to accounting diversity.
2-4
Worldwide Accounting Diversity
Learning Objectives
4. Present a judgmental classification of countries by financial reporting system.
5. Discuss the influence that culture is thought to have on financial reporting.
6. Describe a simplified model of the reasons for international differences in financial reporting.
7.Categorize accounting differences internationally and provide examples of each type of difference.
2-5
What is Worldwide Accounting Diversity?
Worldwide Accounting DiversityDifferences in accounting and financial reportingrules between countries. For example:
Accounting for Goodwill U.S. -- goodwill is not amortized, but is written
down only if impaired. Japan and Korea – goodwill is amortized over
its useful life not to exceed twenty years.Learning Objective 1
2-6
What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity
Asset revaluation U.S. -- upward revaluation of fixed assets is not
generally allowed. European Union publicly traded companies are
free to choose between two different methods for valuing their assets.
Learning Objective 1
2-7
What is Worldwide Accounting Diversity?
Worldwide Accounting DiversityInflation Accounting U.S. (and many other countries) -- financial
statements are not adjusted for inflation. Latin American countries -- experience
significant inflation, so financial statements are adjusted for changes caused by inflation.
Learning Objective 1
2-8
Evidence of Diversity in International Accounting
Additional evidence of differences in accounting between countriesForm 20-F Required by the SEC for companies using non-
U.S. GAAP Reconciles net income and stockholders’ equity from the other GAAP to U.S. GAAP
Learning Objective 1
2-9
Problems Caused by Accounting Diversity
Consolidated financial statements U.S. MNEs often have subsidiaries in a large
number of countries. Accounting records in local GAAP and local
currency are rolled-up (i.e., consolidated) into U.S. GAAP.
Require conversion from local to U.S. GAAP Require translation from the local to U.S.
currencyLearning Objective 2
2-10
Problems Caused by Accounting Diversity
Difficulties with access to foreign capital markets Companies often need to go outside their home
country in order to access financing. Raising foreign capital often requires
reconciliation to comply with different accounting rules or needs of investors and creditors.
Learning Objective 2
2-11
Problems Caused by Accounting Diversity
Non-comparability of financial statements Accounting rules often differ between countries. International investors need to make their own
reconciliations or adjustments to financial statements.
International investors also must face differing levels of disclosure, quality of accounting standards, and quality of auditing.
Learning Objective 2
2-12
Environmental Factors Leading to Accounting Diversity
Legal systems -- Common law Has relatively fewer statutes and more
interpretation by courts to apply laws to specific situations
Leads to the creation of precedents or case law Found most often in Great Britain and other
English-speaking countries The source of accounting rules tends to be non-
governmental organizations.Learning Objective 3
2-13
Environmental Factors Leading to Accounting Diversity
Legal systems -- Code law Characterized by relatively more statutes Found more often in non English-speaking
countries Accounting rules in these countries tend to be
legislated (i.e., the source is the government). Less specific, so other sources needed to
provide guidance
Learning Objective 3
2-14
Environmental Factors Leading to Accounting Diversity
Taxation U.S. -- taxable income and book income are
generally quite different. Germany -- rules governing taxable and book
income tend to be the same, which generally results in more conservative accounting.
Deferred taxes are less of an issue in code law countries.
Learning Objective 3
2-15
Environmental Factors Leading to Accounting Diversity
Providers of financing In many countries major sources of capital are
families, banks, and the government. Accounting and disclosure in those countries
tend to be less important. In the U.S. and UK the providers of financing
are diverse shareholders, so accounting and disclosure are more important.
Learning Objective 3
2-16
Environmental Factors Leading to Accounting Diversity
Inflation Some countries have historically high rates of
inflation. Accounting in these countries often requires
adjustments to offset the impact of inflation. This is common in Latin American countries. Given extended periods of low inflation in the
U.S., inflation accounting is not required.
Learning Objective 3
2-17
Environmental Factors Leading to Accounting Diversity
Political and economic ties These linkages tend to make information sharing
easier. Nations that share ties often have similar
accounting systems, such as France and former colonies in western Africa.
Correlation of factors In summary, correlations exist among these factors. Code law countries tend to link taxation to
accounting statements and are less reliant on shareholder financing.
Learning Objective 3
2-18
Financial Reporting System Classification
Accounting Clusters Environmental factors related to accountingdiversity have been used to identify three broadbased clusters:
Fair presentation / full disclosure model Oriented towards the information needs of
investors and creditors Most descriptive of the U.K. and U.S.
Learning Objective 4
2-19
Financial Reporting System Classification
Accounting Clusters
Legal compliance model Accounting heavily influenced by tax rules and
needs of government Commonly found in continental Europe and
other code law countries such as Japan Banks are primary source of financing.
Learning Objective 4
2-20
Financial Reporting System Classification
Accounting Clusters
Inflation-adjusted model Similar to the legal compliance approach Is distinguished by the requirement for
adjustments to mitigate the effects of inflation As such, found mostly in South America
Learning Objective 4
2-21
Financial Reporting System Classification
Nobes’ judgmental classification Focuses on fair presentation / full disclosure
and legal compliance clusters Considers primary needs of information users Considers primary source of accounting rules Classifies countries into six different groups
Learning Objective 4
2-22
The Influence of Culture on Financial Reporting
Culture is also widely considered to influence financial reporting systems.
Hofstede’s five cultural dimensions is the most commonly used scheme to discuss cultural influences.
Learning Objective 5
2-23
The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions Individualism (vs. Collectivism) Power Distance Uncertainty Avoidance Masculinity Long-term Orientation
Learning Objective 5
2-24
The Influence of Culture on Financial Reporting
Hofstede’s Cultural DimensionsIndividualism (vs. Collectivism) Preference for a loosely knit social fabric Collectivism is represented by a tightly knit
social fabric.
Learning Objective 5
2-25
The Influence of Culture on Financial Reporting
Hofstede’s Cultural DimensionsPower Distance -- Level of acceptance ofunequally distributed power within and across thesociety’s institutions and organizationsUncertainty Avoidance – Degree to whichmembers of a society feel threatened by uncertainor unknown situations
Learning Objective 5
2-26
The Influence of Culture on Financial Reporting
Hofstede’s Cultural DimensionsMasculinity – Emphasis on traditional masculinevalues of performance and achievement vs.feminine values of relationship, caring andnurturingLong-term Orientation – The extent to which thesociety values persistence, thrift, observing orderand respect for tradition
Learning Objective 5
2-27
The Influence of Culture on Financial Reporting
Gray’s Accounting Values Professionalism vs. Statutory Control Uniformity vs. Flexibility Conservatism vs. Optimism Secrecy vs. Transparency
Learning Objective 5
2-28
The Influence of Culture on Financial Reporting
Gray’s Accounting ValuesProfessionalism vs. Statutory Control Professionalism is reflected by individual
professional judgment and self-regulation of the profession.
Statutory control focuses on legal compliance and legislative control of the profession.
The former is more indicative of the U.K. and U.S. and the latter more so with continental Europe.
Learning Objective 5
2-29
The Influence of Culture on Financial Reporting
Gray’s Accounting ValuesUniformity vs. Flexibility Uniformity indicates preference for standardized
accounting methods. Flexibility is reflected in the varying of
accounting practices for differences between companies.
U.K. and U.S. approaches are examples of flexibility.
Learning Objective 5
2-30
The Influence of Culture on Financial Reporting
Gray’s Accounting ValuesConservatism vs. Optimism Conservatism indicates preference for caution
and prudence. Optimism tends more toward fair presentation. Germany has traditionally reflected a strong
tendency toward conservatism.
Learning Objective 5
2-31
The Influence of Culture on Financial Reporting
Gray’s Accounting ValuesSecrecy vs. Transparency Secrecy reflects a preference for minimal
information disclosure. Transparency reflects openness and full
disclosure. Countries with predominantly family-owned and
bank-financed firms tend toward secrecy.
Learning Objective 5
2-32
A Model to Explain International Differences in Financial Reporting
Nobes’ model Describes international differences as a function
of culture and the system of financing Culture influences the development of the
system of financing which influences the development of accounting.
Uses two classifications, A and B
Learning Objective 6
2-33
A Model to Explain International Differences in Financial Reporting
Class A Accounting Descriptive of Anglo-Saxon countries Strong outside shareholder equity-financing Optimism Transparency
Learning Objective 6
2-34
A Model to Explain International Differences in Financial Reporting
Class B Accounting Descriptive of continental Europe Less widespread outside shareholder equity-
financing Conservatism Secrecy
Learning Objective 6
2-35
Further Evidence of Accounting Diversity
Additional differences between countries Different financial statement formats Level of detail in financial statements varies
between countries. Terminology, level of disclosure, and rules
governing recognition and measurement Different financial statements included in the
annual report
Learning Objective 7