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

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

Financial Accounting TheoryCraig Deegan

Chapter 4

International accounting

Slides written by Craig Deegan


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


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


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


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


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


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


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


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.


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)


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


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?


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’


• 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.)


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).


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).


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.


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.


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


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


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


Reasons for international accounting differences (cont.)

• Colonial inheritance• Taxation• Culture• History• Language• Religion


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)


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


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


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


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


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


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


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?


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


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


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


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


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


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.


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?


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


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


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)


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


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


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


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 …

Documents

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