International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Chapter 3: Comparative Accounting: Europe Choi/Meek, 6/e

Learning Objectives Understand how financial reporting is regulated and enforced in five European countries: France, Germany, the Czech Republic, the Netherlands, and the U.K. Describe the key similarities and differences between the accounting systems of these five countries. Identify the use of International Financial Reporting Standards at the levels of the individual company and the consolidated financial statements in these five countries. Describe the audit-oversight mechanisms in these five countries. Choi/Meek, 6/e

IFRS in the European Union Starting in 2005, all EU-listed companies must follow IFRS in their consolidated financial statements. Generally, IFRS consolidated statements are permitted for non-listed companies. Requirements for individual company financial statements vary – IFRS may be required, allowed, or prohibited. Choi/Meek, 6/e

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IFRS (contin) IFRS are based on fair presentation principles IFRS may be overridden in rare circumstances to achieve fair presentation Accounting measurements Business combinations – purchase accounting Goodwill – annual impairments test Investments in associates – equity method Translation of financial statements of foreign operations – functional currency concept Assets valued at historical cost or fair value Research costs – expensed; development costs – capitalized LIFO not allowed Finance leases – capitalized; operating leases – expensed Provisions – recognized when probable and estimable Deferred taxes – recognized in full, using the liability method, for temporary differences between the carrying amount and tax base Choi/Meek, 6/e

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France Overview “The Plan” – national uniform chart of accounts (national accounting code) Objectives and principles of financial reporting Definitions of elements Recognition and valuation rules Standardized chart of accounts Model financial statements Other influences on French accounting rules Commercial legislation (Code de Commerce) Tax laws Choi/Meek, 6/e

France (contin) Accounting regulation and enforcement CNC – National Accounting Board Keeps plan current Makes rulings and recommendations on accounting issues CRC – Accounting Regulation Committee Converts CNC rulings and recommendations into binding regulations AMF – Financial Markets Authority Supervises securities markets OEC – Institute of Public Accountants Represents the accounting profession Members prepare financial statements, and provide tax, information systems, and management advisory services CNCC – National Institute of Statutory Auditors Members audit and give an opinion on financial statements Must report criminal acts to the High Council of External Auditors Substantial overlap in OEC and CNCC membership Statutory auditors not allowed to provide accounting services to the same client AMF oversees audits of listed companies, but relies on a committee of the CNCC to conduct audit-quality reviews Choi/Meek, 6/e

France (contin) Unusual features of French financial reporting Must report results of environmental activities Reports aimed at preventing bankruptcies Social report Choi/Meek, 6/e

Germany Overview Creditor protection Influence of tax law Conservative balance sheet valuations Reserves as protection against unforeseen risks and insolvency Accounting is designed to compute a prudent income amount that leaves creditors unharmed after distributions are made to owners Influence of tax law Determination principle: taxable income is determined by what is booked in a company’s financial records Reliance on statutes and court decisions Choi/Meek, 6/e

Germany (contin) Accounting regulation and enforcement German Commercial Code (HGB) Applies to all business entities German Accounting Standards Board Develops recommendations for consolidated financial statements Financial Reporting Enforcement Panel Enforces compliance with German financial reporting requirements and IFRS by listed companies Chamber of Accountants Oversees WPs (“enterprise examiners”) Unusual features of German financial reporting Auditor’s private report to board of directors and supervisory board on company’s future prospects Choi/Meek, 6/e

Czech Republic Overview Accounting regulation and enforcement Accounting changed directions several times in 20th century, reflecting the country’s political history Until end of World War II – German influences After World War II – Soviet influences After 1989 – EU influences (market orientation) Accounting regulation and enforcement Ministry of Finance Oversees Commercial Code (modeled on German commercial law) Oversees Accountancy Act (based on EU directives) Chamber of Auditors Oversees auditors Unusual features of Czech financial reporting Form over substance still applies in some cases Still implementing accounting practices consistent with EU directives and IFRS Choi/Meek, 6/e

The Netherlands Overview Accounting paradoxes Permissive requirements, but high professional practice standards Code law country whose accounting is oriented toward fair presentation Fair presentation orientation developed without a strong stock market Other influences on Dutch accounting U.K. and U.S. as much as continental European countries Accounting profession Business economics (microeconomics) IASB Choi/Meek, 6/e

The Netherlands (contin) Accounting regulation and enforcement Company law – Act on Annual Financial Statements Dutch Accounting Standards Board Develops guidelines on generally acceptable accounting standards Enterprise Chamber Enforces compliance with accounting requirements NIvRA Oversees auditing profession Unusual features of Dutch financial reporting Financial statements may be in Dutch, French, German, or English Other than consolidated financial statements of Dutch listed companies, financial statements may be based on Dutch guidelines, IFRS, or a combination Flexible accounting measurements Current values are permitted for tangible assets Opportunities for income smoothing Choi/Meek, 6/e

United Kingdom Overview Legacy of British accounting First country to develop an accountancy profession Fair presentation (true and fair view) Exported British accounting around the world Choi/Meek, 6/e

United Kingdom (contin) 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 Choi/Meek, 6/e

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Other Chapter Exhibits Choi/Meek, 6/e

Other Chapter Exhibits (contin) Choi/Meek, 6/e

Other Chapter Exhibits (contin) Choi/Meek, 6/e