McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

2-2

earning Objectives
. Provide evidence of the diversity that exists in
accounting internationally.
. Explain the problems caused by accounting diversity.
. Describe the major environmental factors that
influence national accounting systems and lead to
accounting diversity.

2-3

L
earning Objectives
4
. Describe 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.
2-4

W
orldwide Accounting Diversity
D
ifferences in accounting and financial reporting rules between
countries. For example:

A
ccounting for Goodwill
U

.S. -- goodwill is not amortized, but is written down only if

impaired.
J

apan and Korea goodwill is amortized over its useful life not
to exceed twenty years.

Learning Objective 1
2-5

orldwide Accounting Diversity

sset revaluation
.S. -- upward revaluation of fixed assets is not
generally allowed.
uropean Union publicly traded companies are free
to choose between two different methods for valuing
their assets.
Learning Objective 1
2-6

orldwide Accounting Diversity

nflation Accounting
.S. (and many other countries) -- financial
statements are not adjusted for inflation.
atin American countries -- experience significant
inflation, so financial statements are adjusted for
changes caused by inflation.
Learning Objective 1
2-7

Additional evidence of differences in

accounting between countries
Form 20-F
Required

by the SEC for companies using non-U.S.

GAAP (unless they use IFRS).
Reconciles net income and stockholders equity
from the other GAAP to U.S. GAAP.

Learning Objective 1
2-8

C
onsolidated financial statements

.S. MNEs often have subsidiaries in a large number of

countries.

ccounting records in local GAAP and local currency are

rolled-up (i.e., consolidated) into U.S. GAAP.

equire conversion from local to U.S. GAAP.

equire translation from the local to U.S. currency.

Learning Objective 2
2-9

ifficulties with access to foreign capital

Markets
ompanies often need to go outside their home
country in order to access financing.
aising foreign capital often requires reconciliation
to comply with different accounting rules or needs
of investors and creditors.

Learning Objective 2
2-10

Non-comparability of financial
statements
Accounting rules often
International investors

differ between countries.

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
2-11

Lack of high-quality accounting

information
Lack

of disclosuresi.e., lack of transparency.

2-12

L
egal systems -- Common law
F

ewer statutesmore court interpretation.

L

eads to the creation of precedents or case law.

F

ound most often in Great Britain and other Englishspeaking countries.

T

he source of accounting rules tends to be nongovernmental organizations.

Learning Objective 3
2-13

L
egal systems -- Code law

haracterized by relatively more statutes .

ound more often in non-English-speaking countries.

ccounting rules in these countries tend to be legislated

(i.e., the source is the government).

ess specific, so other sources needed to provide

guidance.

Learning Objective 3
2-14

axation
.S. -- taxable income and book income are generally
quite different.
ermany -- rules governing taxable and book income
tend to be the same, which generally results in more
conservative accounting.
eferred taxes are less of an issue in code law countries.

Learning Objective 3
2-15

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 U.K. the providers of financing are
diverse shareholders, so accounting and disclosure
are more important.

Learning Objective 3
2-16

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

olitical and economic ties

hese linkages tend to make information sharing easier.
ations that share ties often have similar accounting systems,
such as France and former colonies in western Africa.

orrelation of factors
n summary, correlations exist among these factors.
ode law countries tend to link taxation to accounting
statements and are less reliant on shareholder financing.

P
T
N

C
I
C

Learning Objective 3
2-18

Accounting Clusters
Environmental factors related to accounting
diversity have been used to identify three broad
based 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

A
ccounting Clusters
L
egal compliance model
A

ccounting heavily influenced by tax rules and needs of

government.
C

ommonly found in continental Europe and other code law

countries such as Japan.
B

anks are primary source of financing.

Learning Objective 4
2-20

A
ccounting Clusters
I
nflation-adjusted model
S

imilar to the legal compliance approach.

I

s distinguished by the requirement for adjustments to

mitigate the effects of inflation.
A

s such, found mostly in South America.

Learning Objective 4
2-21

obes judgmental classification

hows how accounting systems in 14 developed
countries relate to each other.
lassified by influences of government, economics,
taxes, legal systems and business practices.

Learning Objective 4
2-22

Culture is also widely considered to influence

financial reporting systems.
Hofstedes five cultural dimensions is the most
commonly used scheme to discuss cultural
influences.

Learning Objective 5
2-23

H
ofstedes Cultural Dimensions
I

ndividualism (vs. Collectivism)

P

ower Distance
U

ncertainty Avoidance
M

asculinity
L

ong-term Orientation

Learning Objective 5
2-24

ofstedes Cultural Dimensions

ndividualism (vs. Collectivism)
reference for a loosely knit social fabric.
ollectivism represented by a tightly knit social fabric.

Learning Objective 5
2-25

ofstedes Cultural Dimensions

ower Distance -- Level of acceptance of unequally
distributed power within and across the societys
institutions and organizations.
ncertainty Avoidance Degree to which members
of a society feel threatened by uncertain or
unknown situations.

Learning Objective 5
2-26

ofstedes Cultural Dimensions

asculinity Emphasis on traditional masculine
values of performance and achievement vs. feminine
values of relationship, caring and nurturing.
ong-term Orientation The extent to which the
society values persistence, thrift, observing order and
respect for tradition.

Learning Objective 5
2-27

rays Accounting Values

rofessionalism vs. Statutory Control
niformity vs. Flexibility
onservatism vs. Optimism
ecrecy vs. Transparency

Learning Objective 5
2-28

Gr
ays Accounting Values
Pr
ofessionalism vs. Statutory Control
Pr

ofessionalism is reflected by individual professional judgment

and self-regulation of the profession.
S

tatutory control focuses on legal compliance and legislative

control of the profession.
T

he former is more indicative of the U.K. and U.S. and the latter
more so with continental Europe.

Learning Objective 5
2-29

Gra
ys Accounting Values
Uni
formity vs. Flexibility
Uni

formity indicates preference for standardized accounting

methods.
Fle

xibility 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

G
rays Accounting Values
C
onservatism vs. Optimism
C

onservatism indicates preference for caution and prudence.

O

ptimism tends more toward fair presentation.

G

ermany has traditionally reflected a strong tendency toward

conservatism.

Learning Objective 5
2-31

Gr
ays Accounting Values
Se
crecy vs. Transparency
S

ecrecy reflects a preference for minimal information disclosure.

Tr
ansparency reflects openness and full disclosure.
C
ountries with predominantly family-owned and bank-financed
firms tend toward secrecy.

Learning Objective 5
2-32

obes model
escribes international differences as a function of
culture and the system of financing.
ulture influences the development of the system of
financing which influences the development of
accounting.
ses two classifications -- A and B.

Learning Objective 6
2-33

C
lass A Accounting
D

escriptive of Anglo-Saxon countries.

S

trong outside shareholder equity-financing.

O

ptimism.
T

ransparency.

Learning Objective 6
2-34

lass B Accounting
escriptive of continental Europe.
ess widespread outside shareholder equity-financing.
onservatism.
ecrecy.

Learning Objective 6
2-35

A
dditional differences between countries
D

ifferent financial statement formats.

L

evel of detail in financial statements varies between

countries.
T

erminology, level of disclosure, and rules governing

recognition and measurement.
D

ifferent financial statements included in the annual report.

Learning Objective 7
2-36