1. Worldwide Accounting Diversity
Chapter 2
Worldwide Accounting Diversity

2. Worldwide Accounting Diversity
Chapter Topics
Indicators of worldwide accounting diversity.
Problems caused by worldwide accounting diversity.
Environmental factors leading to accounting diversity.
Classification schemes of national accounting systems.
The effects of culture on accounting.
International differences in accounting practice.

3. Worldwide Accounting Diversity
Learning Objectives
1. Provide evidence of the diversity that exists in accounting internationally.
2. Explain the problems caused by accounting diversity.
3. Describe the major environmental factors that influence national accounting systems and lead to accounting diversity.

4. Worldwide Accounting Diversity
Learning Objectives
4. Present a judgmental classification of countries by financial reporting system.
5. Discuss the influence that culture is thought to have on financial reporting.
6. Describe a simplified model of the reasons for international differences in financial reporting.
7. Categorize accounting differences internationally and provide examples of each type of difference.

5. What is Worldwide Accounting Diversity?
Differences in accounting and financial reporting
rules between countries. For example:
Accounting for Goodwill
U.S. -- goodwill is an asset on the purchaser’s books.
Germany – goodwill is often subtracted from stockholders’ equity on the purchaser’s books.
Learning Objective 1

6. What is Worldwide Accounting Diversity?
Asset revaluation
U.S. -- upward revaluation of fixed assets is not generally allowed.
Mexico, Chile, and The Netherlands upward revaluations are allowed and sometimes required.
Learning Objective 1

7. What is Worldwide Accounting Diversity?
Inflation Accounting
U.S. (and many other countries) -- financial statements are not adjusted for inflation.
Latin American countries -- experience significant inflation, financial statements are adjusted for changes caused by inflation.
Learning Objective 1

8. Evidence of Diversity in International Accounting
Additional evidence of differences in
accounting between countries
Form 20-F
Required by the SEC for companies using non-U.S. GAAP.
Reconciles net income and stockholders’ equity from the other GAAP to U.S. GAAP.
Learning Objective 1

9. Problems Caused by Accounting Diversity
Consolidated financial statements
U.S. MNEs often have subsidiaries in a large number of countries.
Accounting records in local GAAP and local currency are rolled-up (i.e., consolidated) into U.S. GAAP.
Require conversion from local to U.S. GAAP.
Require translation from the local to U.S. currency.
Learning Objective 2

10. Problems Caused by Accounting Diversity
Difficulties with access to foreign capital
markets
Companies often need to go outside their home country in order to access financing.
Raising foreign capital often requires reconciliation to comply with different accounting rules or needs of investors and creditors.
Learning Objective 2

11. Problems Caused by Accounting Diversity
Non-comparability of financial
statements
Accounting rules often differ between countries.
International investors need to make their own reconciliations or adjustments to financial statements.
International investors also must face differing levels of disclosure, quality of accounting standards, and quality of auditing.
Learning Objective 2

12. Environmental Factors Leading to Accounting Diversity
Legal systems -- Common law
Has relatively fewer statutes and more interpretation by courts to apply laws to specific situations.
Leads to the creation of precedents or case law.
Found most often in Great Britain and other English-speaking countries.
In these countries, the source of accounting rules tends to be non-governmental organizations.
Learning Objective 3

13. Environmental Factors Leading to Accounting Diversity
Legal systems -- Code law
Characterized by relatively more statutes or code law.
Found more often in non English-speaking countries.
Accounting rules in these countries tend to be legislated (i.e., the source is the government).
Learning Objective 3

14. Environmental Factors Leading to Accounting Diversity
Taxation
U.S. -- taxable income and book income are generally quite different.
Germany -- rules governing taxable and book income tend to be the same, which generally results in more conservative accounting.
Learning Objective 3

15. Environmental Factors Leading to Accounting Diversity
Providers of financing
In many countries major sources of capital are families, banks, and the government.
Accounting and disclosure in those countries tend to be less important.
In the U.S. and UK the providers of financing are diverse shareholders, so accounting and disclosure are more important.
Learning Objective 3

16. Environmental Factors Leading to Accounting Diversity
Inflation
Some countries have historically high rates of inflation.
Accounting in these countries often requires adjustments to offset the impact of inflation.
This is common in Latin American countries.
Given extended periods of low inflation in the U.S., inflation accounting is not required.
Learning Objective 3

17. Environmental Factors Leading to Accounting Diversity
Political and economic ties
These linkages tend to make information sharing easier.
Nations that share ties often have similar accounting systems.
Correlation of factors
In summary, correlations exist among these factors.
Code law countries tend to have accounting rules based on tax rules, and providers of financing with close ties to the company (i.e., family, banks, government).
Learning Objective 3

18. Financial Reporting System Classification
Accounting Clusters
Environmental factors related to accounting
diversity have been used to identify three broad
based clusters:
Fair presentation / full disclosure
Gives primacy to the information needs of investors.
Most descriptive of the UK and U.S.
Learning Objective 4

19. Financial Reporting System Classification
Accounting Clusters
Legal compliance
Accounting heavily influenced by tax rules and needs of government.
Commonly found in continental Europe.
Learning Objective 4

20. Financial Reporting System Classification
Accounting Clusters
Inflation-adjusted
Similar to the legal compliance approach.
Is distinguished by the requirement for adjustments to mitigate the effects of inflation.
Learning Objective 4

21. Financial Reporting System Classification
Nobes’ judgmental classification
Focuses on fair presentation / full disclosure and legal compliance clusters.
Considers primary needs of information users.
Considers primary source of accounting rules.
Classifies countries into six different groups.
Learning Objective 4

22. The Influence of Culture on Financial Reporting
Culture is also widely considered to influence financial reporting systems.
Hofstede’s five cultural dimensions is the most commonly used scheme to discuss cultural influences.
Learning Objective 5

23. The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Individualism (vs. Collectivism)
Power Distance
Uncertainty Avoidance
Masculinity
Long-term Orientation
Learning Objective 5

24. The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Individualism (vs. Collectivism)
Degree of interdependence among individuals in a society.
More interdependence equates to less individualism (more collectivism).
Learning Objective 5

25. The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Power Distance -- Level of acceptance of
unequally distributed power within and across the
society’s institutions and organizations.
Uncertainty Avoidance – Degree to which
members of a society feel threatened by uncertain
or unknown situations.
Learning Objective 5

26. The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Masculinity – Emphasis on traditional masculine
values of performance and achievement vs.
feminine values of relationship, caring and
nurturing.
Long-term Orientation – The extent to which the
society values persistence, thrift, observing order
and respect for tradition.
Learning Objective 5

27. The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Professionalism vs. Statutory Control
Uniformity vs. Flexibility
Conservatism vs. Optimism
Secrecy vs. Transparency
Learning Objective 5

28. The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Professionalism vs. Statutory Control
Professionalism is reflected by individual professional judgment and self-regulation of the profession.
Statutory control focuses on legal compliance and legislative control of the profession.
The former is more indicative of the UK and U.S. and the latter more so with continental Europe.
Learning Objective 5

29. The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Uniformity vs. Flexibility
Uniformity indicates preference for standardized accounting methods.
Flexibility is reflected in the varying of accounting practices for differences between companies.
UK and U.S. approaches are examples of flexibility.
Learning Objective 5

30. The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Conservatism vs. Optimism
Conservatism indicates preference for caution and prudence.
Optimism tends more toward fair presentation.
Germany has traditionally reflected a strong tendency toward conservatism.
Learning Objective 5

31. The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Secrecy vs. Transparency
Secrecy reflects a preference for minimal information disclosure.
Transparency reflects openness and full disclosure.
Countries with predominantly family-owned and bank financed firms tend toward secrecy.
Learning Objective 5

32. A Model to Explain International Differences in Financial Reporting
Nobes’ model
Describes international differences as a function of culture and the system of financing.
Culture influences the development of the system of financing which influences the development of accounting.
Uses two classifications, A and B.
Learning Objective 6

33. A Model to Explain International Differences in Financial Reporting
Class A Accounting
Descriptive of Anglo-Saxon countries.
Strong outside shareholder equity-financing.
Optimism.
Transparency.
Learning Objective 6

34. A Model to Explain International Differences in Financial Reporting
Class B Accounting
Descriptive of continental Europe.
Less widespread outside shareholder equity-financing.
Conservatism.
Secrecy.
Learning Objective 6

35. Further Evidence of Accounting Diversity
Additional differences between countries
Different financial statement formats.
Level of detail in financial statements varies between countries.
Terminology, level of disclosure, and rules governing recognition and measurement.
Different financial statements included in the annual report.
Learning Objective 7