1. International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
Chapter 3: Comparative Accounting: Europe
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2. 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.
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3. 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.
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5. 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
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7. 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
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8. 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
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9. France (contin) Unusual features of French financial reporting
Must report results of environmental activities
Reports aimed at preventing bankruptcies
Social report
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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18. Other Chapter Exhibits
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19. Other Chapter Exhibits (contin)
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20. Other Chapter Exhibits (contin)
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