International Accounting – AYN424

SEMESTER TWO, 2013- WEEK 6:HARMONISATION AND

TRANSITION IN EUROPE (CONT’D): ACCOUNTING RULES

AND PRACTICES - GERMANY, FRANCE AND UNITED

KINGDOM CASES

How Can Investors Determine Which Company in Which Industry in Which Country is the “Best” Investment?

Is the UK Happy to be a Member of the European Union?

2

Cameron issues threat to quit EU

Reminder For Group Projects - The Anglo Saxon Classification Includes Not Only Countries Like the United Kingdom, Australia and Canada etc. But Also the Nordic Countries

3

https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html

5

Helpful Links: World Bank – Country Profiles and CIA World Fact Book + Europa Site http://europa.eu/about-eu/countries/

6

Lecture Five (cont’d)

7

LECTURE FIVE (CONT’D) HARMONISATION AND

TRANSITION IN EUROPE: POLAND, RUSSIA

AND CZECH REPUBLIC CASES STUDIES (CONT’D) – FROM SLIDE 46 - Transition

in Central and Eastern Europe (cont’d)

Lecture Six - Chapter Fourteen– An Introduction to the

Accounting Rules and Practices in Europe – France, Germany

and the United Kingdom and a Discussion on What Accounting

Rules Non-Listed Companies Comply With Given That IFRS

Normally Only Applies to Listed Companies Within Nations

8

So What Are the Development Factors of France, Germany and the United Kingdom and What Cultural Dimensions and Accounting Values Will Then Result From These Factors?

Remember That The Power/Usefulness of the Hofstede and Gray Research is That They are PREDICTIVE and EXPLANATORY Models

9

Development Factors

UK US Germany Mexico China Japan

Sources of Finance

Legal System

Taxation

Political and Economic Ties

Inflation

Level of Economic Development

Educational Level

Once Your Know a Country’s Development Factors, Then You Can PREDICT the Nation’s Cultural Dimensions

- Hofstede’s Model - (Week Two – Lectures)

Once You Know a Country’s Cultural Dimensions, Then You Can PREDICT the Nation’s Accounting ValuesAccounting Values - Gray’s Model – (Week Three – Lectures)

11

12

Once You Have Made a

Prediction Using the

Models Then You Can

Verify the Accuracy of

Your Predictions

by Investigation

…

So…Let’s Investigate Whether Our Predictions in Relation to the Business and Accounting Values of Germany, France and the UK Can Be Confirmed.

We do this by Looking at the Information Available on the Business and Accounting Practices that are Currently Applicable in These Countries as Set Out in Your Text to See If These Practices and Polices are Consistent With Our Predictions!!!

What Information Will You Be Using to Continue Your Investigations in Your Project? 14

Lecture Six Objectives

• Using the Key Development Factors of France, Germany and the United Kingdom and the Hofstede and Gray Models, Predict the Cultural Dimension and the Accounting Values of Each of the Three Countries.

• Outline the Current Accounting Rules and Practices for Business Enterprises in France, Germany and the United Kingdom - Are These Rules and Practices As Predicted Using the Cultural Classification Models? If Yes, What Does This Mean for the Success of the IFRS Process?

• Identify which Groups/Government Agencies Develop and Control the Accounting Rules and Practices in France, Germany and the United Kingdom – Is This As Predicted?

• Explain Why the Accounting Rules and Practices Differ Between France, Germany and the United Kingdom – Is This As Predicted?

• Explain Why the Accounting Rules and Practices Differ between Listed and Non-Listed Companies in France, Germany and the United Kingdom

• Summarise and Discuss the Main Legal Forms of Business Enterprise in France, Germany and the United Kingdom – Is This as Predicted?

15

Introduction

As Discussed in Previous Lectures, Only Listed Companies in the EU Have to Compulsorily Apply IFRS When Preparing Their Consolidated (Group) Financial Statements

This Lecture Material Identifies the Different Accounting Rules and Practices in Place in France, Germany and the United Kingdom and How These Rules Then Impact on Both Listed and Unlisted Companies.

One of the Fundamental Reasons for Differences in the Accounting Practices Across France, Germany and the United Kingdom Results from the Different Key Sources of Finance and Then the Legal System of Code Versus Common Law Which Has Been Developed in Each Country To Support the Providers of Finance

These Three Countries Comprise EU’s Largest Economies and Stock Markets – and they have influenced Law and Practice Elsewhere in the EU and Around the World

16

120 countries have adopted ifrssome are in transition

the rest will follow

17

18

19

France

20

Refer to Borker Article – Referenced Above – Table VI – IFRS FAVOURABLE

ACCOUNTING VALUES

What Development Factors, Cultural Dimensions and Accounting Values Would You PREDICT For France, Germany and the United Kingdom – Would They Be The Same – Why/Why Not?

FRANCE -Year of EU entry: Founding member (1952)

• Capital city: Paris

• Total area: 550 000 km²

• Population: 64.3 million

• Currency: Member of the eurozone since 1999 (€)

• France is the largest country in the EU, stretching from the North Sea to the Mediterranean. The landscape is diverse, with mountains in the east and south, including the Alpine peak of Mont Blanc (4 810 m) which is western Europe's highest point. Lowland France consists of four river basins, the Seine in the north, the Loire and the Garonne flowing westwards and the Rhône, which flows from Lake Geneva to the Mediterranean Sea.

21

http://europa.eu/about-eu/countries/member-countries/france/index_en.htm

• France (cont’d) - The president of the Republic has an important political role. He chairs the meetings of the Council of Ministers (cabinet), and retains overall responsibility in key areas of foreign affairs and defence. The day-to-day running of the country is in the hands of the prime minister. The president is elected by direct popular vote for a period of five years.

• The parliament consists of a National Assembly, directly elected every five years, and a Senate whose members are chosen by an electoral college.

• France has an advanced industrial economy and an efficient farm sector. Main activities include automobile manufacture, aerospace, information technology, electronics, chemicals and pharmaceuticals and fashion.

22

http://europa.eu/about-eu/countries/member-countries/france/index_en.htm

23

But What Version of IFRS Does

France Actually Use for its Listed Companies?

24

Reminder From Lecture Four - Chapter Five of Nobes and Parker – Reference Text: Part 5.2.2. – Adoption by Jurisdictions – The OBJECTIVE OF The IASB IS TO ENSURE THAT ALL THE OPERATIONS OF MNE ANYWHERE IN THE WORLD ALL USE EXACTLY THE SAME VERSION OF IFRS - THAT IS THEY SHOULD ALL BE USING THE IFRS RELEASED BY THE IASB WITHOUT CHANGES.

• THIS IS THE ULTIMATE IDEAL POSITION!!! - Adoption of IFRS by changing the law to require the use of IFRS only – usually for the consolidated (group) accounts of listed companies – HOWEVER, this has been the approach of only a very few jurisdictions……….WHY????

• For example, this approach was adopted by Israel and South Africa.

• Other ‘adoptions’ – such as those of the EU, Australia and Canada – are more complicated as we discussed in Lecture Four.

25

Chapter Five Text: Part 5.2.2. – Adoption by Jurisdictions (Cont’d)• In the EU, it was thought to be legally and politically

unacceptable to impose IFRS on companies, given that IFRS is issued in English only and that the IASB frequently changes the content of the IFRS.

• In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards.

• Consequently, the EU Regulation 1606 of 2002 refers to ‘IFRS as endorsed by the EU’ – BUT THIS ONLY APPLIES TO LISTED COMPANIES

SO...What Does FRANCE Do In Terms of IFRS Compliance for Other Enterprises? IAS Plus and France

EU countries have the option to:

• Require or permit IFRSs for unlisted companies.

• Require or permit IFRSs in parent company (unconsolidated) financial statements.

• Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007.

• Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.

26

The Powerful Influence of the State/Government on French Accounting

• The State has been a major influence on French accounting since at least the late seventeenth century.

• Colbert’s Ordonnance de Commerce of 1673 during the Reign of Louis XIV formed the basis for the Napoleonic Code (Code de Commerce) of 1807.

• The Code spread throughout continental Europe and beyond – e.g. To China and Japan

• The influence of the State was particularly strong from 1946 to 1983 but has since weakened under the impact of external factors such as the company law harmonisation program of the EU and the impact of increasingly global capital markets dominated by Anglo Saxon countries and in particular by the US.

• In spite of these Western influences however, the influence of taxation is still strong on accounting rules and practices – because...???

27

The Powerful Influence of the State/Government on French Accounting (Cont’d)

• The net result of the accounting reforms within France from 1946 – 2010 + - as set out on p. 331 of Chapter 14, has been to produce a dualism in French accounting between the financial statements of individual business enterprises and those of larger multi-national, groups of companies.

• Group accounting has specialised rules since it became compulsory in France in 1987

• Thus, French accountants were already prepared, to some degree, for the fact that IFRS would only apply to consolidated or group statements.

28

The Powerful Influence of the State/Government on French Accounting (Cont’d)

•The French rules on accounting evolve from two sources:

• the French State – ministerial orders and decrees etc.; and

• the EU – Directives and Regulations and a range of private sources – such as the National Accounting Council

29

French - Accounting Rules for Individual Companies – Not Listed on a Stock Exchange

• The most distinctive part of French accounting regulation is the national accounting plan – which is administered Autorite des Normes Compatables (ANC) – and is a very detailed manual on valuation and measurement rules and model financial statements etc.

• Tax laws play an important role in the preparation of financial statements for all enterprises in France – as the rules for measuring reported accounting profit (to the stock exchanges) do not differ markedly to those for measuring taxable income.

30

French - Accounting Rules for Individual Companies – Not Listed on a Stock Exchange

•Professional accountancy firms developed later in France than in the UK or the US and the French Accounting Professional Body – the Order des Experts Compatibles (OEC) is smaller and weaker and less autonomous than the ICAEW in the UK and has never been responsible for standard setting.

31

32

Germany

33

Refer to Borker Article – Referenced Above – Table VI – IFRS FAVOURABLE

ACCOUNTING VALUES

What Development Factors, Cultural Dimensions and Accounting Values Would You PREDICT For France, Germany and the United Kingdom – Would They Be The Same – Why/Why Not?

Germany

Background

• European Union’s largest country, population 83 million

• West Germany and East Germany established in 1949, were reunified in 1990.

• Historically, banks have been primary source of finance via both loans and equity.

• Since reunification, the economy has been affected by internationalization.

34

Germany’s accounting systems are still heavily influenced by the Commercial code and tax laws which are the main sources of accounting rules.

Traditionally, Germany has also not used a system of independent institutional oversight – such as independent auditors or professional bodies.

35

Germany

• German companies increasingly listing on foreign exchanges, e.g., New York Stock Exchange.

• Most common business forms are Aktiengesellschaft (AG) and Gesellschaft mit beschrankter Haftung (GMBH).

• AG are publicly traded/GMBH are non-publicly traded

• Historically had significant influence on accounting systems in a number of other countries – e.g. Japan’s commercial code is modeled on Germany’s. 36

Revenue in Euro20.9 Billion

GermanyAccounting Profession

• Profession has traditionally been less influential than in U.S./U.K.

• Auditing is dominant part of profession (WHY?) and certified auditors title of Wirtschaftprufer (WP) was created in 1931

• Institut der Wirtschaftprufer similar to the AICPA

• Obtaining WP title is extremely rigorous

• Wirtschaftpruferkammer (WPK) is a state-sponsored group that oversees auditing profession.

37

38

But What Version of IFRS Does Germany Actually Use for its Listed Companies?

39

REMEMBER OUR EARLIER DISCUSSIONS !!! Chapter Five Text: Part 5.2.2. – Adoption by Jurisdictions (Cont’d)

• In the EU, it was thought to be legally and politically unacceptable to impose IFRS on companies, given that IFRS is issued in English only and that the IASB frequently changes the content of the IFRS.

• In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards.

• Consequently, the EU Regulation 1606 of 2002 refers to ‘IFRS as endorsed by the EU’

SO...What Does GERMANY Do In Terms of IFRS Compliance for Other Enterprises? IAS Plus and Germany

EU countries have the option to:

• Require or permit IFRSs for unlisted companies.

• Require or permit IFRSs in parent company (unconsolidated) financial statements.

• Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007.

• Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.

40

41

Germany

Accounting Regulation

• Commercial code and tax laws are main sources of accounting rules.

• Traditionally has not used a system of independent institutional oversight

• Stock exchange rules have less influence than in U.S.

• Prudence (conservatism) is fundamental-recognition of revenues only when realized, losses when they appear possible.

• Began change away from creditor orientation in 1960s towards shareholder orientation

• Starting in the 1980s, EU directives began having major influence.

42

GermanyAccounting Principles and Practices• Historical cost attribute for measuring tangible assets is strictly adhered to.

• Traditional focus on creditor protection is at odds with the true and fair view concept.

• Importance of tax laws which requires expenses to be deducted from accounting income if they are to be tax deductible.

• Differences between accounting and tax income are minimal – why would the German government force this one set of accounts restriction on their listed companies? Historically, who was the major shareholder?

• So…how do these accounting principles and practices compare to those of the UK and the US and what do any differences mean in terms of comparability? What impact are these accounting differences likely to have on the investment markets?

43

Germany

Accounting Principles and Practices (cont’d)

• Conservatism has been used to resist labor’s wage demands – what does this really mean? – refer to lecture discussions and examples of how major business transactions are recorded.

• Standards allow for income smoothing, frequently accomplished via early recognition of losses.

• EU fourth directive requires true and fair view, but Germans have a unique interpretation of the concept.

• Commitment to globalization reflected in rule that allows public companies to use IFRS for consolidated statements.

• Main intention of German Accounting Law Modernization Act is conformity with IFRS

44

German Accounting Rules for Individual Companies – Not Listed on a Stock Exchange

• Most German Rules on Accounting For Unlisted Companies are Made by the German State – which require that annual financial statements be prepared according to the principles of orderly bookkeeping as set out in German Commercial Code

• To the Extent That These Principles are Not Set Out in the Code, They Must Be Deduced From It and From the Tax Legislation

• Tax law and Federal Fiscal Court Decision Are In Practice Major sources of Accounting Rules for Unlisted Companies.

45

German Accounting Rules for Individual Companies – Not Listed on a Stock Exchange

(cont’d)

• The ‘Authoritative Principle’ in Germany Requires that Tax Statements Must Conform As Closely as Possible to Commercial Financial Statements

• Tax Authorities in Germany Are Generally Opposed To Allowing Accounting Rules Over Which They Have No Influence

• The Influence of the Auditing Profession Has Grown in Recent Years, But It is Still Weak – the German Auditing Body was Formed in 1931 – It is Smaller Than the UK and French Bodies and its Membership Is Voluntary.

46

United Kingdom

What is Your Prediction for the Accounting Values Adopted by the United Kingdom Given the Key Development Factors of the UK and using Hofstede’s and Gray Classification Models?

47

48

Refer to Borker Article – Referenced Above – Table VI – IFRS FAVOURABLE

ACCOUNTING VALUES

What Development Factors, Cultural Dimensions and Accounting Values Would You PREDICT For France, Germany and the United Kingdom – Would They Be The Same – Why/Why Not?

United Kingdom (cont’d)General Background:

• Population of about 60 million, comprised of England, Northern Ireland, Scotland, and Wales

• Among the five countries in this chapter, its financial structure is closest to the U.S.

• 15,000 Private Limited Companies (PLCs) with about 2,500 of these listed on the London Stock Exchange.

49

Hofstede’s Cultural Dimensions – United Kingdom

50

• World’s first association of professional accountants, The Society of Accountants in Edinburgh, established in 1853

• Six professional chartered bodies coordinated through Consultative Committee of Accountancy Bodies (CCAB)

• The profession developed in response to the needs of industry and has influenced the development of professions in a number of other countries.

• The Institute of Chartered Accountants in England and Wales – a world leader in the Accounting and Finance Profession – see attached slides + Note the Global Accounting Alliance

• Compared to the U.S. the certification requirements focus more on work experience and less on university education.

51

United Kingdom (cont’d): Accounting Profession

52

53

United Kingdom (cont’d): Accounting Regulation FOCUSES ON LISTED COMPANIES AND ACCOUNTABILITY BY THE MNE DIRECTORS TO THE INVESTORS

The Companies Act, accounting pronouncements, and stock exchange rules comprise accounting regulation.

Similar to the U.S., and unlike Germany and Japan, tax rules do not significantly influence financial reporting – i.e. there are two different sets of accounting records – one set of reports is prepared based on the accounting rules in the accounting standards – while the other set of accounts is prepared using the tax laws – tax is only paid on the taxable income that results from the tax laws

54

United Kingdom (cont’d): Accounting Regulation FOCUSES ON LISTED COMPANIES AND ACCOUNTABILITY BY THE MNE DIRECTORS TO THE INVESTORS (cont’d)

Standard-setters have historically taken a principles-based approach using a statement of principles as a conceptual framework.

Has not historically had a strong, regulatory type agency, but recent scandals have led to increased regulation.

55

United Kingdom (cont’d)

Accounting Principles and Practices

A primary objective of accounting is to support an effective capital market.The true and fair view principle is paramount…but what does this mean?True and fair view override requires that companies not comply with standards that would result in misleading financial statements.Professional judgment is essential additional component to true and fair view.

56

United Kingdom (cont’d) – These are the ACTUAL Regulations in Place in the UK

• UK Companies Reporting Requirements Include:

Balance Sheet and Profit and Loss Account

Cash Flow Statement

Statement of Accounting Policies and Notes to Financial Statements

Auditors’ Report

Directors’ Report

57

United Kingdom (cont’d) - These are the ACTUAL Regulations in Place in the UK (cont’d)

Accounting regulation and enforcement• Companies Act• Broad financial reporting framework

• Financial Reporting Council oversees:• Accounting Standards Board• Issues Financial Reporting Standards (FRSs)• UITF clarifies FRSs

• Auditing Practices Board• Issues auditing standards

• Financial Reporting Review Panel• Enforces compliance with FRSs

• Professional Oversight Board• Oversees auditing profession• Audit Inspection Unit• Monitors the audit of listed companies

• Accountancy Investigation and Discipline Board• Investigates and disciplines accountants for professional misconduct

• Unusual features of British accounting• True and fair override

58

How Well Does the UK Regulatory Framework Match the ‘Perfect’ Quality of Information Supplied Model – Required by the IFRS Process?

United Kingdom (cont’d)• Summary Overview: (Note: Combination of Gray’s

and Hofstede’s Classification Models Used)

Legacy of British accountingFirst country to develop an accountancy professionFair presentation (true and fair view)Exported British accounting around the world

Accounting in the UK developed as an independent discipline, pragmatically responding to the needs and practices of business – company law requirements are important, however, accountants continue to retain considerable amounts of flexibility in the application of professional judgment 60

ICAEW FormationMay 11, 1880 (1880-05-11) (132 years ago)

61

But What Impact Has Being a

Member of the European Union Had on British Accounting? That is, What

Version of IFRS Does the United

Kingdom Actually Use for its Listed Companies - ?

62

63

Remember Earlier Discussion! - Chapter Five Text: Part 5.2.2. – Adoption by Jurisdictions (Cont’d)• In the EU, it was thought to be legally and politically

unacceptable to impose IFRS on companies, given that IFRS is issued in English only and that the IASB frequently changes the content of the IFRS.

• In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards.

• Consequently, the EU Regulation 1606 of 2002 refers to ‘IFRS as endorsed by the EU’

United Kingdom - Accounting Rules for Individual Companies – Not Listed on a Stock Exchange

• The basic requirement of the Companies Act 2006, as applicable to individual companies, is that companies must prepare either a balance sheet and a profit and loss account that comply with the detailed regulations under the Act OR statements that comply with EU-Endorsed IFRS.

• The former accounts are termed ‘Companies Act Individual Accounts”; the latter are known as ‘IAS Individual Accounts’.

64

United Kingdom - Accounting Rules for Individual Companies – Not Listed on a Stock Exchange (cont’d)

• The Accounting Standards Board in the UK has been following a policy of converging accounting standards, for al companies, and for both individual, financial companies and groups, with IFRS.

• The differences between IFRS and UK GAAP are limited given, as we discussed earlier, the early influence of the UK on international standards.

65