International accounting Chapter 2: Causes and examples of international differences

Learning objective: discuss the degree to which international cultural differences might explain accounting differences; outline the two main types of legal system to be found in the Western world and how these are related to accounting differences; explain how the predominant methods of financing of companies can differ internationally and how this may affect the purpose and nature of accounting; illustrate the linkages between taxation and financial reporting, and show how these are stronger in some countries than in others; outline the relationships between international accounting variations and differences in the accountancy profession;

.. Learning objective: synthesize all the above relationships to begin to explain international differences in financial reporting; outline various ways in which accounting under German national rules is more conservative than that under UK rules; explain the difference between a provision and a reserve, and show how the definition of provision is wider in some countries than in others; outline the main valuation bases used for assets in major countries; and summarize the international differences in formats of financial statements.

Why should we want to know how and why accounting develops?

DEVELOPMENT factors have a significant influence on accounting development. 1. Culture 2. Legal System. 3. Sources of Finance. 4. Taxation. 5. Political and Economic Ties 6. Inflation 7. Level of Economic Development 8. Educational Level

Culture Culture in any country contains the most basic values that an individual may hold. It affects the way that individuals would like their society to be structured and how they interact with its substructure. Accounting may be seen as one of those substructures.

Culture (1) individualism versus collectivism, (2) Large versus small power distance, (3)Strong versus weak uncertainty avoidance, and (4) Masculinity versus femininity.

framework linking culture and accounting. Professionalism vs. statutory control Uniformity vs. flexibility Conservatism vs. optimism Secrecy vs. transparency

Countries differences The picture shows clear ‘Arab’ and ‘Anglo’ clusters, but less cohesive clusters in East Asia or among ‘Latin’ countries. Chand et al. (2012) show how different cultures in the same country can affect accounting judgements; they study Australian students with Chinese backgrounds and those with Anglo-Celtic backgrounds.

Legal Systems: Common Law vs. Code Law Accounting The main difference between the two systems is that in common law countries, case law — in the form of published judicial opinions — is of primary importance, whereas in civil law systems, codified statutes predominate. 

Legal Systems: Common Law vs. Code Law Accounting For example, that companies in common law countries have higher levels of disclosures. Bushman and Piotroski (2006) examine the greater incentives to report losses quickly in common law countries

Legal Systems: Common Law vs. Code Law Accounting common law countries is characterized as oriented toward “fair presentation,” transparency and full disclosure, and a separation between financial and tax accounting. Stock markets dominate as a source of finance, and financial reporting is aimed at the information needs of outside investors. Setting accounting standards tends to be a private sector activity, and the accounting profession plays an important role. Common law accounting is often called “Anglo-Saxon,” “British-American,” or “micro based.”

.. Legal Systems: Common Law vs. Code Law Accounting code law countries is characterized as legalistic in orientation, opaque with low disclosure, and an alignment between financial and tax accounting. Banks or governments (“insiders”) dominate as a source of finance, and financial reporting is aimed at creditor protection. Setting accounting standards tends to be a public sector activity, with relatively less influence by the accounting profession.

Providers of finance A proposed grouping of countries into types by financial system has been formalized by Zysman (1983) as follows: ● capital market systems (e.g. United Kingdom, United States); ● credit-based governmental systems (e.g. France, Japan); ● credit-based financial institution systems (e.g. Germany).

Taxation the tax/reporting connection, and the treatment of deferred tax. For example, for tax purposes, impairments are only allowed if they are expected to be long lasting. Also, long-term provisions should be discounted.

Taxation Without disconnection, companies could choose their taxable income by choosing whether to use IFRS or domestic accounting rules. Differences between a company’s tax base and its financial reporting lead to the accounting topic of deferred tax.

Other external influences Economic ties financial crises, Enron, black Monday The adoption of, or convergence with, the standards of IASB. For example, the EU has made these standards compulsory for the consolidated statements of listed companies. The level of inflation. In most of continental Europe and Japan, accounting has been the servant of the state (e.g. for tax collection). In the Anglo-Saxon world, theory was traditionally of little importance in accounting practice

The profession The lack of a substantial body of private shareholders and public companies in some countries means that the need for auditors is much smaller than it is in the United Kingdom or the United States.

Some examples of differences conservatism, provisions, measurement of assets, and formats of financial statements.