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

2. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

3. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

5. 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
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6. 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
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7. 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 function—rather than individual companies duplicating the efforts of others, the majority of functions of the standard-setting process will be centralised at the IASB
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8. 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
Copyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e
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9. 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.
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10. 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)
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11. 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
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12. International Accounting Standards Board (IASB) (cont.)
The FRC’s 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 assets—particularly intangible assets
Was it all worth the effort?
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13. 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’
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14. Somewhat obviously, the IASB was seeking to standardise practice.
Does the international standardisation of accounting standards necessarily lead to the international standardisation of accounting practice? (cont.)
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.
Copyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

15. 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).
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16. 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).
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17. 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.
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18. 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.
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19. 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
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20. 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
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21. 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
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22. Reasons for international accounting differences (cont.)
Colonial inheritance
Taxation
Culture
History
Language
Religion
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23. 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 nation’s 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)
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24. 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
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25. Hofstede’s 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
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26. 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
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27. 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
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28. 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
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29. 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
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30. 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?
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31. Gray’s accounting values
Gray developed four accounting values deemed to relate to the accounting subculture, with the intention of linking them to Hofstede’s four societal values
professionalism versus statutory control
uniformity versus flexibility
conservatism versus optimism
secrecy versus transparency
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32. Gray’s 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
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33. Gray’s 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
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34. Gray’s 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
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35. Other research using Hofstede’s cultural dimensions
Zarzeski (1996)
used Hofstede’s 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
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36. Other research using Hofstede’s cultural dimensions (cont.)
Perera (1989)
used Hofstede’s cultural dimensions and Gray’s 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.
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37. 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?
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38. 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
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39. 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 systems—which is how Australia can be classified—law typically evolves from the ruling of judges
In Common Law countries accounting practices tend to rely relatively heavily on professional judgment
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40. 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)
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41. 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
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42. 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
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43. 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 country’s accounting policies are
multinational companies
international accounting firms
large monetary organisations e.g. World Bank
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44. 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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