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© The McGraw-Hill Companies, Inc., 2004
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McGraw-Hill/Irwin
Chapter Eleven
Worldwide Worldwide Accounting Accounting
Diversity and Diversity and International International
StandardsStandards
© The McGraw-Hill Companies, Inc., 2004
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Examples of International Accounting Diversity
Dutch companies report assets at
current replacement cost.
Dutch companies report assets at
current replacement cost.
German companies
amortize goodwill as a reduction of owners’ equity.
German companies
amortize goodwill as a reduction of owners’ equity.
Canada and France allow capitalization of R&D costs.
Canada and France allow capitalization of R&D costs.
© The McGraw-Hill Companies, Inc., 2004
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Magnitude of Accounting Diversity
2/3 of foreign companies report
material differences when compared to
GAAP.
2/3 of foreign companies report
material differences when compared to
GAAP.
Over 90% of British companies reported lower net income under US
GAAP.
Over 90% of British companies reported lower net income under US
GAAP.
60% of British companies
reported higher equity under US
GAAP.
60% of British companies
reported higher equity under US
GAAP.
Results of a 1993 SEC survey on the significance of the
differences between GAAP and non-
GAAP countries.
Results of a 1993 SEC survey on the significance of the
differences between GAAP and non-
GAAP countries.
© The McGraw-Hill Companies, Inc., 2004
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McGraw-Hill/Irwin
Reasons for Accounting Diversity
Legal System
Legal System
Taxation
Taxation
Providers of
Financing
Providers of
Financing
InflationInflation
Political & Economic Systems
Political & Economic Systems
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Problems Caused By Diverse Accounting Standards
Problem Subs use the
standards for the country where they are located.
To gain access to a country’s capital market, financial statements must be in accordance with local standards.
Statements are not comparable.
Solution The parent must
adjust the subs’ statements to be in accord with GAAP.
The parent must restate their own statements in accord with local standards.
Statements must be re-stated in common standards.
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Accounting Clusters
One classification scheme identifies four major accounting models. British-American Continental South American Mixed economy
Nobes’ micro-based/macro-based model.
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Exh. 11.3Hypothetical Classification of
Accounting Systems
B u s in e ssE co n om ics,
T h e o ry
B u s in e ssp ra c tice
p ra g m a tic,B rit ish o rig in
M ic ro -b a sed
C o n tine n ta l:G o v 't, T a x,
L e g a l
G o ve rn m e ntE co n o m ics
M a c ro -b a sed
D e ve lo p edW e s te rn
C o u n tries
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Major Deviations From GAAP
Depreciation and amortization
Deferred or capitalized costs
Deferred taxes Pension costs Foreign currency
translation
Depreciation and amortization
Deferred or capitalized costs
Deferred taxes Pension costs Foreign currency
translation
Gain/loss on disposal of assets
Business combinations Extraordinary Items,
discontinued operations, and accounting changes
Employee compensation Investments in
associated entities
Gain/loss on disposal of assets
Business combinations Extraordinary Items,
discontinued operations, and accounting changes
Employee compensation Investments in
associated entities
10 Accounting Issues Most Commonly Requiring Adjustment
© The McGraw-Hill Companies, Inc., 2004
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International Harmonization
The process of reducing differences in financial reporting practices across countries.
European Union The Fourth Directive (1978) The Seventh Directive (1983)
International Accounting Standards Committee
International Organization of Securities Commissions
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European Union
1957 – European Economic Community (now called European Union) established free trade among member countries.
EU issues “Directives” to assist with harmonizing accounting across member countries 1978 – 4th Directive deals with valuation 1983 – 7th Directive deals with preparation
of consolidated financial statements.
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European Union – Examples of Changes in Germany
Required inclusion of notes to the financial
statements.
Required inclusion of notes to the financial
statements.
Inclusion of foreign subsidiaries in
consolidated financial statements.
Inclusion of foreign subsidiaries in
consolidated financial statements.
Elimination of unrealized
intercompany losses on consolidation.
Elimination of unrealized
intercompany losses on consolidation.
Use of equity method for investments in
associated companies.
Use of equity method for investments in
associated companies.
Accrual of deferred taxes and pension
obligations.
Accrual of deferred taxes and pension
obligations.
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European Union – Unaddressed Differences Between Countries
Lease Accounting
Lease Accounting
Accounting Changes
Accounting Changes
Foreign Currency
Translation
Foreign Currency
Translation
Income TaxesIncome Taxes
ContingenciesContingencies
Long-term Construction
Contracts
Long-term Construction
Contracts
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International Accounting Standards Committee (IASC)
Established 1973 Includes over 140 accounting bodies,
representing over 100 nations. The U.S. is represented by the AICPA and
IMA Standards produced by a 14-member
board. Requires 11 of 14 members to issue a
standard. 39 International Accounting Standards
(IAS’s) issued as of January 2000.
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International Accounting Standards Committee (IASC)
Very few countries have formally adopted the IAS’s as the national
practice.
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The IOSCO Agreement
In 1987, partnered with the IASC’s Comparability Project.
Helped to rewrite IAS’s to eliminate unnecessary alternatives.
The goal is to help make it easier for foreign companies to use IAS’s when
reporting on different exchanges.
International Organization of Securities Commissions (IOSCO)
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Support of Securities Exchange Regulators
Since 1994, reconciliation to U.S. GAAP is not required for foreign registrants using IAS’s for:
Statement of cash flows.Amortization of goodwill.Translation of financial statements of subsidiaries in highly inflationary economies.
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Support of Securities Exchange Regulators
Number PercentSimilar approach and guidance 56 26%Similar approach, but different guidance 79 36%Different approach 56 26%Alternative approaches permitted 27 12%
218 100%
In 1996, the FASB compare GAAP to IASC standards.Significant differences were found.
© The McGraw-Hill Companies, Inc., 2004
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Accounting PrinciplesUnited Kingdom
The Companies Acts (1989) Legal foundation for accounting. Requires a “true and fair view” of a
company’s operating results and financial position.
Professional accountants are called Chartered Accountants.
The Accounting Standards Board (ASB) was established in 1990. Replaced the Accounting Standards
Committee
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Accounting PrinciplesGermany
Accounting principles set by the legislature. The Third Book of the Commercial Code
(Handelsgesetzbuch). It is generally believed that strict
adherence to the law provides a “true and fair view”.
A professional accountant carries the designation “Wirtschaftsprufer”. Requires passing an exam and 6 years
of experience.
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Accounting PrinciplesGermany
German accounting is greatly influenced by German banks.
A Statement of Fixed Assets is often produced in addition to the other common statements.
Income Statement is produced on one of two formats: Cost of Sales Approach Type-of-Cost Approach
Current and noncurrent designations are generally not used.
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Accounting PrinciplesJapan
Basic accounting principles are set by the government. Some rules are set by the
Japanese Commercial Code. The Business Accounting
Deliberation Council provides additional accounting rules in the Financial Accounting Standards for Business Enterprises.
CPA’s in Japan are members of the JICPA.
© The McGraw-Hill Companies, Inc., 2004
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Accounting PrinciplesJapan
Financial statements required include: Balance sheet. Income statement. Proposal of appropriation of
profit or disposition of loss. Business report.
Extensive cash flow information is required in supplemental disclosures.
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Specific Accounting ProblemsReported Value of Assets
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Specific Accounting ProblemsConsolidation Accounting
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Specific Accounting ProblemsAccounting for Goodwill
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Specific Accounting ProblemsTranslation of Foreign Currency Financial Statements
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Specific Accounting ProblemsInventory Valuation
© The McGraw-Hill Companies, Inc., 2004
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When the ad said, When the ad said, ““Job with a hot Job with a hot
future!future!”, this isn’t ”, this isn’t exactly what I exactly what I
expected.expected.
End of Chapter 11
