International Accounting Chapter 15 International Accounting

International accounting International context of accounting now a central feature Various catalysts: globalization international trade/MNEs/financial markets technology IASB and FASB now envisaging possibility of a single global accounting regime harmonization/convergence Chapter 15 © Philip O’Regan 2016

Accounting blocs For historical, commercial, social and cultural reasons accounting practice varies However, possible to identify 4 blocs: Anglo-American Continental European Islamic Marxist Significant variations between, within these Chapter 15 © Philip O’Regan 2016

European accounting Common origin in Italian double-entry Governance cultures: less emphasis on stock market small family-based businesses predominate less developed accounting profession legalistic accounting perspective Result is that financial reporting function less developed than Anglo-American model Chapter 15 © Philip O’Regan 2016

Germany Dominance of prudence and conservatism principles as a result of economic history Subordination of accounting to tax law Result is legalistic, conservative accounting system Relative unimportance of stock market and accounting profession Chapter 15 © Philip O’Regan 2016

Germany ctd. B/S constructed on conservative value basis aimed at government and creditors not primarily for decision-making purposes Handelsbilanz: commercial balance sheet designed to calculate profits figure that can be distributed, without compromising creditors Steuerbilanz: tax balance sheet under Massgeblichkeits principle, tax accounts based primarily on Handelsbilanz IFRS represents major catalyst Chapter 15 © Philip O’Regan 2016

German corporate governance Traditionally firms seek funds from banks, not stock market Therefore, ownership structure much tighter fewer owners supervisory board with representatives of most significant investors cross-investment Experience of larger entities, e.g., Daimler-Benz, demonstrates limitations of this model Chapter 15 © Philip O’Regan 2016

Recent developments Governance regime limiting German companies EU and IFRS as catalysts Structures beginning to change broader shareholder base growth of Frankfurt Stock Exchange application of IFRS Growing importance of accounting profession Cromme Code of Corporate Governance retains supervisory board may impact Anglo-American Model Impact of events at Volkswagen? Chapter 15 © Philip O’Regan 2016

France Shares some common historical experiences with Germany e.g., legacy of Italian double-entry method Nevertheless, shows some significant accounting independence central role of State in formulating practice tightly regulated: Plan Comptable General subordination of accounting to legislation Chapter 15 © Philip O’Regan 2016

French corporate governance As in Germany, a strong stock market culture does not exist Ownership structure unique state ownership of many enterprises many small family-owned businesses cross-ownership strong influence of banks Impact of IFRS is considerable Chapter 15 © Philip O’Regan 2016

Recent developments Corporate governance regime limiting French firms EU/IFRS acting as catalysts Changes beginning to emerge stronger stock exchange – Paris Bourse companies now reporting on internal controls state divesting from some larger entities accounting profession becoming proactive Vienot/Bouton Reports strengthen role of independent directors/diversity Updated governance code 2013 “comply or explain” Chapter 15 © Philip O’Regan 2016

Harmonization & convergence Greater awareness of international issues: stronger financial markets/globalization/MNEs Standardization: “uniform reporting rules” too ambitious/inappropriate? Harmonization: “reduction of reporting differences” attainable goal? Convergence FASB/IASB: equivalence road map SEC making concessions on US GAAP reconciliations Mixed results: leasing, revenue recognition Chapter 15 © Philip O’Regan 2016

Summary Different accounting cultures exist Anglo-American / Continental European significant common origins important differences Anglo-American seen as more mature EU anxious to retain European aspect Convergence “project” results mixed Chapter 15 © Philip O’Regan 2016