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

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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

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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.

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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.

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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

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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

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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.


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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


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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

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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.


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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.


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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

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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


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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.


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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.


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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.


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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.


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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.


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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.


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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


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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


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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.


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Hofstede’s Cultural Dimensions Individualism (vs. Collectivism) Power Distance Uncertainty Avoidance Masculinity Long-term Orientation


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Hofstede’s Cultural DimensionsIndividualism (vs. Collectivism) Preference for a loosely knit social fabric Collectivism is represented by a tightly knit

social fabric.


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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


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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


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Gray’s Accounting Values Professionalism vs. Statutory Control Uniformity vs. Flexibility Conservatism vs. Optimism Secrecy vs. Transparency


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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.


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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.


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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.


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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.


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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


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Class A Accounting Descriptive of Anglo-Saxon countries Strong outside shareholder equity-financing Optimism Transparency


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Class B Accounting Descriptive of continental Europe Less widespread outside shareholder equity-

financing Conservatism Secrecy


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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


international accounting dounik chap 002

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