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4-1 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Financial Accounting Theory Craig Deegan Chapter 4 International.

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Presentation on theme: "4-1 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Financial Accounting Theory Craig Deegan Chapter 4 International."— Presentation transcript:

1 4-1 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Financial Accounting Theory Craig Deegan Chapter 4 International accounting Slides written by Craig Deegan

2 4-2 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Learning objectives In this chapter you will be introduced to: –an appreciation that there are many differences between some countries in the accounting policies and practices adopted –various explanations about why countries adopt particular accounting practices in preference to others –some of the arguments that suggest that it is appropriate that there are international differences in accounting practices –the background to recent actions by the IASB and FASB to further standardise international accounting

3 4-3 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Learning objectives (cont.) –what is meant by the terms harmonisation and standardisation as they apply to international accounting –some of the perceived benefits of standardising accounting practices on an international scale –some of the obstacles to harmonisation and standardisation, and the criticisms that efforts to harmonise and standardise accounting internationally have attracted

4 4-4 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Evidence of international differences in accounting Although many countries now adopt IFRS, if we go back a few years and apply different countries former accounting rules to the same transactions we can find significant differences in profits and net assets (consider Accounting Headline 4.1, p.108) The (sometimes significant) differences in accounting profits have been used by many parties to justify the ongoing efforts of the IASB to standardise international accounting But do we really need to standardise accounting on an international basis because of these differences, and if we do, what are some of the costs and benefits? This lecture covers these issues

5 4-5 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Standardisation versus harmonisation In relation to international accounting, two terms that are commonly used are standardisation and harmonisation We can define harmonisation as a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation Standardisation, by contrast, appears to imply the imposition of a more rigid and narrow set of rules (than harmonisation) Therefore, the term harmonisation appears to allow more flexibility than standardisation What is happening through the efforts of the IASB is a process of standardisation

6 4-6 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Does it really matter if different countries use different accounting methods? Many varied views about the costs and benefits of international standardisation Some perceived benefits would include: –international investors are better able to understand the financial performance and position of local companies –tied to the above point, there is an expectation that standardisation will facilitate greater capital inflows –also tied to the above point, standardisation will make it easier for local companies to list on foreign stock exchanges

7 4-7 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Does it really matter if different countries use different accounting methods? (cont) –companies listed on several stock exchanges would only need to produce one set of financial statements and this will have implications for cost savings –the accounting and auditing staff employed by international organisations will be better able to move to other member companies –there will be cost savings in the accounting-standard setting functionrather than individual companies duplicating the efforts of others, the majority of functions of the standard-setting process will be centralised at the IASB

8 4-8 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Does it really matter if different countries use different accounting methods? (cont) –a perception that IFRS will lead to more accurate, comprehensive and timely financial statement information, relative to the information that would have been generated from the national accounting standards they replaced –to the extent that the resulting financial information would not be available from other sources, this should lead to more-informed valuations in the equity markets, and hence lower the risks faced by investors

9 4-9 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e But obviously it is very difficult to quantify any benefits associated with international standardisation There is very little empirical research or theory that actually provides evidence of the advantages or disadvantages of uniform accounting rules nationally, or internationally. For example, whilst the FRC in Australia said that real benefits would flow from Australia adopting IFRS there is no quantifiable evidence of such benefits Whether the benefits of adopting IFRS are shared by a majority of corporations within a country, or whether the benefits are confined to larger multi- national corporations, is a matter of conjecture.

10 4-10 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Objectives of IASB The body at the centre of international standardisation is the IASB –It seeks to formulate and publish accounting standards and to promote their worldwide acceptance –It seeks to work on the improvement and standardisation of regulations, accounting standards and procedures –The IASB does not appear to believe that the many reasons provided as to why different nations should have different accounting standards (e.g. tied to differences in culture, religion and so forth) outweigh the benefits of international standardisation (we will consider some arguments against international standardisation shortly)

11 4-11 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e International Accounting Standards Board (IASB) (cont.) The Institute of Chartered Accountants of England and Wales, the Canadian Institute of Chartered Accountants and the American Institute of Certified Public Accountants initially established an Accountants International Study Group in 1967. The Accountants International Study Group then formed the basis for the establishment of the IASC in 1973 The IASB replaced the IASC in 2001 Australia decided in the mid-1990s to harmonise its standards with those of the IASC But then in 2002, a decision was made by the Financial Reporting Council that Australia would adopt standards released by the IASB IFRS still not accepted by the US SEC for US domestic companies, however the US FASB and the IASB are currently working on a convergence project which might ultimately see the US adopt IFRS

12 4-12 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e International Accounting Standards Board (IASB) (cont.) The FRCs decision that Australia would adopt IFRS created a great deal of work for organisations in that they had to make quite significant changes to their accounting practices The adoption of IAS/IFRS required companies to write off a great deal of assetsparticularly intangible assets Was it all worth the effort?

13 4-13 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e The United States role in the international standardisation of accounting One notable exception to the global adoption of IFRS is the US Within the US, accounting standards are developed by the FASB The SEC has the power to override the standards developed by the FASB US was traditionally strong in its resolve not to adopt IFRS but this resolve diminished in the light of collapses such as Enron US standards are considered to be more rules-based whereas IFRS are more principles-based A belief grew that principles-based standards may be more effective in reducing accounting fraud

14 4-14 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Somewhat obviously, the IASB was seeking to standardise practice. However, there are a number of reasons why the standardisation of accounting standards will not necessarily lead to standardisation of accounting practice (there is a difference). Hence, consistent with Nobes (2006), we would argue that the study of international differences in accounting practice (and the reasons and motivations therefore) will remain an important area of research despite the ongoing standardisation efforts of the IASB. Does the international standardisation of accounting standards necessarily lead to the international standardisation of accounting practice? (cont.)

15 4-15 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Does the international standardisation of accounting standards necessarily lead to the international standardisation of accounting practice? (cont.) Reasons why international differences in accounting practice will survive beyond the introduction of IFRS would include: –Differences in taxation systems Tax driven accounting choices, which are domestic, might flow through to IFRS statements –Differences in economic and political influences on financial reporting Powerful local economic and political forces determine how managers, auditors, courts regulators and other parties influence the implementation of rules. These forces have exerted a substantial influence on financial reporting practice historically, and are unlikely to suddenly cease doing so, IFRS or no IFRS (Ball, 2006).

16 4-16 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Reasons why international differences will survive beyond the introduction of IFRS would include (cont.) –Modifications made to IFRS at a national level the IASB has no ability to enforce the application of its accounting standards in countries that have made the decision to adopt IFRS. This is a key limitation. Regulatory bodies in particular countries may take the decision to modify a particular IFRS before it is released (for example, the EU in relation to their acceptance of IFRS 39).

17 4-17 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Reasons why international differences will survive beyond the introduction of IFRS would include (cont.) –Differences in implementation, monitoring and enforcement Unless there is international consistency in the implementation of accounting standards and subsequent enforcement mechanisms then we cannot expect accounting practices to be uniform despite the actions of the IASB. Investors might be misled into believing that IFRS adoption has created a consistency in international accounting practices. That is, the adoption of IFRS might (incorrectly) be construed as a signal that a country has improved its quality of reporting. In a sense, the adoption of IFRS brings a level of legitimacy to a country's financial reporting despite any limitations in the level of enforcement of the standards.

18 4-18 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e International differences in implementation and enforcement –Ball discussed the free rider problem associated with IFRS. If a 'symbol of legitimacy' - such as IFRS - can be acquired at low cost then some countries with low accounting proficiency will make the choice to adopt IFRS because of the reputational benefits such a choice may generate. Such a choice will have costly implications for countries with higher levels of accounting proficiency and who put in place appropriate implementation, monitoring and enforcement mechanisms.

19 4-19 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e So is a belief in the international standardisation of accounting practice realistic? Given the arguments just provided we might question the belief that the global adoption of IFRS will lead to consistency in international accounting practices. There will arguably continue to be international differences in accounting practice and such differences will continue to provide an interesting area of research for accounting academics. However, at a more fundamental level, is it really a good idea that there should be global consistency in accounting practice anyway? Is it appropriate to have a global one-size-fits-all approach to financial reporting when there are international differences: –in the nature of capital, labour and product markets; –in monitoring and enforcement mechanisms; –in economic and political influence; and, –differences in cultures? The next part of this lecture explores various reasons why, in the absence of globalisation efforts such as those being undertaken by the IASB, we would expect to find international differences in accounting practices

20 4-20 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e International financial accounting models Historically there have been two main models of financial accounting adopted internationally Anglo-American model –strongly influenced by professional accounting bodies rather than government, emphasises importance of capital markets, emphasises true and fair, considerations of economic substance over legal form Continental European Model –relatively small input from accounting profession, little reliance on qualitative true and fair, strong reliance on government

21 4-21 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Reasons for international accounting differences Underlying laws and political systems Tax systems Level of education Level of economic development Nature of business ownership and financing system

22 4-22 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Reasons for international accounting differences (cont.) Colonial inheritance Taxation Culture History Language Religion

23 4-23 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e The effect of culture on accounting systems Differences in national cultures has been used by many researchers to explain why, prior to the efforts of the IASB, there were fundamental differences between nations accounting practices (although, keep in mind the previous discussion that suggests that the global use of IFRS will not necessarily standardise accounting practice) Culture impacts on legal systems, tax systems and the way businesses are formed and financed etc. Previously used to explain differences in social systems Culture can be defined as … an expression of norms, values and customs which reflect typical behavioural characteristics (Takatera & Yamamoto 1987)

24 4-24 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e The effect of culture on accounting systems (cont.) Culture reserved for societies as a whole or nations Subculture used for the level of an organisation, profession or family International differences in accounting systems may be explained by a framework incorporating culture

25 4-25 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Hofstedes cultural dimensions Four underlying societal dimensions along which countries could be positioned –Individualism versus Collectivism –Large versus Small Power Distance –Strong versus Weak Uncertainty Avoidance –Masculinity versus Femininity The value systems of accountants will be derived from and related to societal values Without the intervention of organisations such as the IASB, these societal values will in turn impact on the development of accounting standards at a national level

26 4-26 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Individualism versus Collectivism Addresses degree of interdependence a society maintains among individuals –Individualism refers to a preference for a loosely knit social framework wherein individuals care for themselves and their immediate families –Collectivism stands for a tightly knit social framework where relatives, clan or other in-group look after each other

27 4-27 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Power Distance Power Distance is the extent to which members of a society accept that power in institutions and organisations is distributed unequally –Large Power Distance societies accept a hierarchical order in which everyone has a place –Small Power Distance societies strive for power equalisation

28 4-28 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Uncertainty Avoidance The degree to which the members of a society feel uncomfortable with uncertainty and ambiguity –Strong Uncertainty Avoidance societies maintain rigid codes of belief and behaviour –Weak Uncertainty Avoidance societies maintain a more relaxed atmosphere where practice counts more than principles

29 4-29 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Masculinity versus Femininity Addresses the way in which a society allocates social roles –Masculinity stands for a preference for achievement, heroism, assertiveness and material success –Femininity stands for a preference for relationships, modesty, caring for the weak, and quality of life

30 4-30 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Societal dimensions and accounting subculture The value systems of accountants are derived from related societal values The values of the accounting subculture will in turn impact on the development of the respective accounting systems at a national level –should accounting systems be developed in a one-size- fits-all approach?

31 4-31 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Grays accounting values Gray developed four accounting values deemed to relate to the accounting subculture, with the intention of linking them to Hofstedes four societal values –professionalism versus statutory control –uniformity versus flexibility –conservatism versus optimism –secrecy versus transparency

32 4-32 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Grays hypotheses H1: The higher a country ranks in terms of Individualism and the lower it ranks in terms of Uncertainty Avoidance and Power Distance, the more likely it is to rank highly in terms of Professionalism H2: The higher a country ranks in terms of Uncertainty Avoidance and Power Distance and the lower it ranks in terms of Individualism, then the more likely it is to rank highly in terms of Uniformity

33 4-33 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Grays hypotheses (cont.) H3: The higher a country ranks in terms of Uncertainty Avoidance and the lower it ranks in terms of Individualism and Masculinity, then the more likely it is to rank highly in terms of Conservatism H4: The higher a country ranks in terms of Uncertainty Avoidance and Power Distance and the lower it ranks in terms of Individualism and Masculinity, then the more likely it is to rank highly in terms of Secrecy

34 4-34 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Grays hypotheses (cont.) Gray further hypothesised relationships between accounting values and: –the authority and enforcement of accounting systems –the measurement and disclosure characteristics of accounting systems

35 4-35 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Other research using Hofstedes cultural dimensions Zarzeski (1996) –used Hofstedes dimensions to explain corporate disclosure –entities with a higher international profile tend to be less secretive –local enterprises are more likely to disclose information commensurate with the secrecy of their culture than are international enterprises

36 4-36 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Other research using Hofstedes cultural dimensions (cont.) Perera (1989) –used Hofstedes cultural dimensions and Grays accounting subcultural value dimensions to explain differences in the accounting practices of European and Anglo-American countries Baydoun and Willett (1995) –investigated the use of the French United Accounting System in Lebanon Chand and White (2007) –explored various cultural attributes within the Fijian society to determine whether the recent adoption of IFRS within the Fijian context made sense. Their view was that rules-based standards would be more appropriate than the principles- based standards that have been developed by the IASB.

37 4-37 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e The effect of religion on accounting systems Another factor that has been used to explain differences in accounting is religion Religion transcends national boundaries Impacts on global harmonisation of accounting standards Hamid, Craig and Clarke (1993) examined how Islamic cultures have failed to embrace Western accounting practices –compliance with Islamic beliefs can affect the structure of business and finance –many Western accounting practices are incompatible with Islamic principles –relevance of IASB standards to such cultures?

38 4-38 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e The effect of religion on accounting systems (cont.) Religion can affect how people do business and how they make decisions, for example –Islam precludes debt financing and prohibits payment of interest –the Western objective of financial reporting of rational economic decision making (refer to the conceptual frameworks discussed in Chapter 5) may not be a relevant objective in some societies

39 4-39 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Legal systems Another factor that will cause international differences in accounting is the legal system in operation Legal systems can be broadly divided into common law and Roman law systems –in Roman Law systems the law tends to be very detailed –in Common Law systemswhich is how Australia can be classifiedlaw typically evolves from the ruling of judges In Common Law countries accounting practices tend to rely relatively heavily on professional judgment

40 4-40 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Business ownership and financing system Another factor is the business ownership and financing system At a country level the financing system is relevant to the purpose of financial reporting Three types of financing systems –capital market-based (e.g. United Kingdom and United States) –credit-based system: governmental (e.g. France and Japan) –credit-based system: financial institutions (e.g. Germany)

41 4-41 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Business ownership and financing system (cont.) Systems relying on equity markets will have greater demand for public disclosures Credit-based systems more concerned with the protection of creditors Colonial inheritance also a major explanatory factor

42 4-42 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Taxation systems Differences in accounting methods internationally have also been linked to differences in taxation systems Where there are insider systems of finance (common in continental European countries) financial accounting practices have typically been linked to taxation law

43 4-43 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Impact of international agencies Various international agencies have also had an affect on the accounting systems used within particular countries Examples of institutions or bodies which can impact on a countrys accounting policies are –multinational companies –international accounting firms –large monetary organisations e.g. World Bank

44 4-44 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e So there are many forces working against international standardisation Hence, to this point we can see that there are many explanations for international differences Given the many factors that explain why international differences in accounting will, or perhaps should exist, then how logical are efforts towards international standardisation? Do we think that the efforts of the IASB are likely to succeed in the long-run? Will diverse countries with different cultures, religions, finance systems and so forth start to question a one- size-fits-all approach emanating from London? Time will tell …


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