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International Accountingand Multinational Enterprises

Comparative International Financial Accounting

Chapter Three

Learning objectives: 1. Discuss different ways to identify and classify

accounting systems internationally 2. Examine the key dimensions of national culture and

how they influence behavior in work 3. Identify accounting values that influence comparative

accounting 4. Show how cultural values and accounting values

related to each other in the development of accounting standards and practices worldwide

5. Compare accounting systems in the Anglo-American, Nordic, German, Latin, and Asian countries

CHAPTER OUTLINE 1. Purposes of International Classification

2. Classification of Accounting and Reporting Systems The Deductive Approach The Inductive Approach

3. Cultural Influences on Accounting Development

4. Culture, Societal Values, and Accounting

(1) Structural Elements of Culture that Affect Business Individualism versus Collectivism Large versus Small Power Distance Strong versus Weak Uncertainty Avoidance Masculinity versus Femininity

(2)Accounting Values Uniformity versus Flexibility Conservatism versus Optimism Secrecy versus Transparency

(3) Accounting Values and International Classification

CHAPTER OUTLINE

5. Comparative Accounting Systems

6. Anglo-American Accounting

(1) United States

A. Influences on Accounting Development

(2) United Kingdom

A.. Influences on Accounting Development

7. Nordic Accounting

(1) The Netherlands

A. Influences on Accounting Development (2) Sweden A. Influences on Accounting Development

CHAPTER OUTLINE8. Germanic Accounting

(1) Germany A. Influences on Accounting Development (2) Switzerland A. Influences on Accounting Development9. Latin Accounting

(1) France A. Influences on Accounting Development (2) Italy A. Influences on Accounting Development (3) Brazil A. Influences on Accounting Development10. Asian Accounting

(1) China A. Influences on Accounting Development (2) Japan A. Influences on Accounting Development11. Summary

Introduction

A growing awareness that global environmental factors affect accounting development. Also recognition that systematically different patterns of accounting behavior may apply to groups of countries.

Identification and classification of these different systems can help describe, analyze, and predict accounting system development.

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I. Purposes of International Classification A. To sharpen description, analysis, prediction B. To help describe and compare different national

systems in order to better understand them; and to learn 1. The extent to which national systems are

similar/dissimilar 2. The pattern of development of systems--potential for

change 3. The reasons why some systems dominate others C. To assess prospects for harmonization D. To help national policy makers determine what to do E. To help developing countries choose appropriate

systems F. To help MNEs overcome problems of establishing

control systems

Classification of Accounting and Reporting Systems

1. Deductive Approach (Gerhard Mueller): Macroeconomic pattern - Accounting development follows national economic policies. (I.e. Sweden, France, Germany).

2. Microeconomic Pattern: Accounting is viewed as a part of business economics with accounting principles derived from economic analysis (I.e Netherlands).

3. Independent Discipline: Accounting viewed as a service function derived from business practice (I.e. United States, United Kingdom).

4. Uniform Accounting Pattern: Accounting viewed as efficient means of administration and control. Common in centrally-controlled economies: (I.e. Germany, France, Sweden). 2

1.Deductive Approach The goals of the corporation usually follows

national economic policies.

Accounting income might be smoothed to promote economic and business stability.

Social responsibility accounting developed to meet macroeconomic concerns.

2. Microeconomic Pattern:

A fundamental orientation exists toward individual economic entities.

Accounting concepts are derived from economic analysis.

A fundamental concept is concerned with the maintenance in real terms of the monetary capital invested in the corporation.

Replacement –value accounting as used by some companies in the Netherlands is often assumed to fit the microeconomic approach.

Developments in segmental reporting and the disclosure of employee costs, pensions, long-term commitments.

3. Independent Discipline: A deep respect for professional judgment. Accounting is considered to be capable of

developing its own conceptual framework, derived on a piecemeal basis from its own successful business practices.

Income is a pragmatic measure that seems useful in practice.

Full and fair disclosure is a GAAP that has evolved over the years.

4. Uniform Accounting Pattern: A more scientific approach to accounting is

adopted whereby a uniform approach to measurement and disclosure and presentation.

Presentation will promote ease of use and a measure of control for all types of businesses by all kinds of users including mangers, governments, and tax authorities.

Centrally planned economies as well as other countries with a strong governments involvement in economic planning.

Muller’s contributions: He recognized a wider set of influences, such as legal

system, political system, and social climate as relevant to accounting development.

He categorized business environments, which he then linked to different types of accounting systems. Such as (1) Economic development; (2) business complexity; (3)legal systems; and (4) political and social climates, and identified 10 groupings, and pointed out that different business environments need different accounting systems.

Muller’s environmental analysis was adapted and extended by Nobes (1983).

Nobes

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Adapted and extended Mueller’s concepts, Used a hierarchical classification scheme and

evolutionary approach to identification of measurement practices in western nations,

Basic distinction between macro and micro economic systems:

-Further desegregations were developed under each system to provide increased discrimination,

Recent updating to reflect strong and weak equity markets and shareholder orientations.

Nine factors were identified as those likely to predict which countries would be grouped together

(P 39: figure 3.1)

Inductive Approach Identification of accounting patterns begins with analysis of

individual accounting practices. Using this Approach, Nair and Frank identified five measurement

groupings using Price-Waterhouse (PW) data:

1. British Commonwealth

2. Latin American

3. Continental European

4. United States

5. Chile

They made a empirical distinction between measurement and disclosure practices because there were considered to have different patterns of development.

Their results suffered from lack of reliability and relevance of PW’s data.

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Cultural Influences on Accounting Development The role of culture in accounting systems has

been largely ignored in the past but this is changing.

Culture is an essential element for understanding social systems.

Gray proposed incorporating cultural factors in a framework to explain and predict international differences in accounting systems and identify international development patterns of accounting systems. 5

Culture, Societal Values, and Accounting

Flexibility versus uniformity are most relevant to professional versus statutory authority,

Combining these relationships allows for relevant culture areas to be hypothesized,

Accounting values most relevant to measurement practices and the extent of information disclosure are the conservatism and secrecy dimensions,

These factors can be combined and culture areas hypothesized,

Classification of countries by culture area can provide a means for further assessing the relationship between culture and accounting systems.

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Comparative Accounting Systems:Anglo-American Accounting

United States Accounting based on U.K. traditions, Securities markets a dominant influence, SEC recognizes the authority of FASB, FASB uses an open approach to standard

setting, and U.S. accounting system is probably most

comprehensive in the world.7

Comparative Accounting Systems:Anglo-American Accounting (Cont.)

United Kingdom Importance of company law, Profession is self-regulated through accounting

standards board (ASB) guided by Financial Reporting Control (FRC), and

Primacy given to information needs investors.

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Comparative Accounting Systems:Nordic Accounting

The Netherlands Company law and accounting profession are

major influences, Government role is minimal, Overriding criterion are “generally acceptable

accounting principles,” and Novel Feature -- Interested parties may

complain to the Court of Justice if financial statements do not comply with the law. 9

Comparative Accounting Systems:Nordic Accounting (Cont.)

Sweden Accounting strongly influenced by legal and tax

requirements, the profession (FAR), and stock exchanges,

Government has a strong role (BFN) to accomplish macroeconomic planning and to make policy,

Accounting Council is new standard setting body, and

Traditionally, information preference was given to creditors and the government -- Now a shift to investors.

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Comparative Accounting Systems:Germanic Accounting

Germanic Accounting Differs significantly from Anglo-American and Nordic,

and Company and/ or tax laws govern accounting practice.

Germany Company law and tax laws predominate, Accounting practice must follow tax laws, Accounting profession is small and lacks influence, Stock market is small but growing in influence, and Information needs of creditors and tax authorities take

precedence. 11

Comparative Accounting Systems:Germanic Accounting (Cont.)

Switzerland Swiss accounting is among the most conservative and

secretive in the world, Accounting practice is dominated by company law and

tax regulations, Accounting profession is small, Legal requirements relating to accounting are minimal

and secret reserves are allowed, Accounting rules are conservative and focus on the needs

of creditors, and New laws are changing accounting information

orientation and presentation to benefit shareholders.12

Comparative Accounting Systems:Latin Accounting

France Company law predominates, A standardized code of accounting provides

uniformity of practice, Tax law is also a major influence and override

accounting rules, Accounting profession is small and lacks status, The stock market is small, and Information preference to tax authorities and

creditors. 13

Comparative Accounting Systems:Latin Accounting

Brazil Government, Company Law, and Tax Regulations

predominate, Information needs of creditors and tax authorities

predominate -- changing to include shareholders, and Accounting profession not well developed.

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Comparative Accounting Systems:Asian Accounting

Asian countries quite distinct from all other groupings,

Many have strong colonial histories.

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China: Accounting rules are strongly influenced by the government

and Communist Party; The accounting law of the People’s Republic established

general principals concerning nature and rule of accounting (1985, revised 1993);

The People’s Republic State Council issued Financial Accounting and Reporting Rules (FARR): Represent new era in Chinese accounting, Based on market approach, Fund accounting has been abolished, and Users of information beyond government are now

recognized; Government has led reforms along with accounting

organizations.

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Comparative Accounting Systems: Asian Accounting

Japan: Government is the major accounting influence; Commercial code, securities and exchange law, and

corporation tax law are also influential; Government institutions are directly involved in standard

setting: Ministries of Finance and Justice have joint

jurisdiction, Dual jurisdiction results in lack of unified approach;

Accounting profession is small and lacks influence; “Secretive” approach is common;

(Continued next slide) 17

Comparative Accounting Systems:Asian Accounting (Cont.)

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Comparative Accounting Systems:Asian Accounting (Cont.)

Japan (Cont.): Many companies provide courtesy financial

statement translations; Creditors and tax authorities have information

preference; Immediate write-off is widely accepted; and Capitalization and amortization is allowed to

varying degrees.