1. International Business, Diversity and Comparative Accounting

2. International Business
All business transactions that involve two or more countries
Reasons
Expand sales due to excess capacity or small domestic markets
Gain access to production factors including
Raw materials
Cheaper labor
Knowledge
Protect domestic markets
Protect foreign markets

3. Forms of International Involvement
Exports and Imports
Largest Importers and exporters - U.S., China, Germany, Japan, France, U.K., Netherlands
Tennessee Trade
Strategic Alliances -
Licensing agreements
Franchising
Joint Ventures
Foreign Direct Investment
Portfolio Investment

4. Characteristics of National Economies
Gross Domestic Product (GDP) –
Value of new goods and services produced within a country (produced by its citizens and non-residents)
GDP per capita –
Crude measure of the standard of living in a country; ratio of that country’s GDP to its population.

5. Gross Domestic Product per Capita (est. 2013)
Qatar $102,100
United States (14th) $52,800
Canada $43,100
Germany $39,500
United Kingdom $37,300
Japan $37,100
Russia $18,100
Mexico $15,600
China $ 9,800

6. Gross Domestic Product (GDP) (est. 2013)
U.S. – $16.72 trillion (319 million population)
China - $13.39 trillion (1.4 billion population)
India – $4.99 trillion (1.2 billion population)
Japan - $4.73 trillion (127 million population)
Germany - $3.23 trillion (81 million population)
Russia – $2.55 trillion (143 million population)
Brazil - $2.42 trillion (203 million population)
U.K. - $2.38 trillion (64 million population)
France - $2.28 trillion (66 million population)

7. Global Corporate Strategy
Polycentric attitude
All operating policies and procedures must be adjusted to the local environment
Accounting is more decentralized.
Ethnocentric attitude
Everything the multinational enterprise does in the home country can be transferred to the foreign country, in spite of the environmental differences
Accounting is more centralized.

8. Accounting Diversity Differences exist everywhere!
Language
Currency
Terminology
Reports required – group/parent
Report formats
Measurement practices
Disclosure practices
Level of detail
Relevance of statements
Balance sheet more important
Income sheet more important

9. Reasons for Accounting Diversity
Accounting reflects characteristics of its national environment
Environmental variables influence and help explain why business is conducted differently in different countries
Cultural relativism: the rationality of any behavior should be judged in terms of its own cultural context

10. Environmental Influences
Legal system
Civil versus common law
Rules based or judgment/precedent oriented
How it affects accounting regulation
Standard setting in public or private sector
Accounting Profession
How influential the profession is in the business world
Formalization of accounting standards
Economics
Providers of Financing
Banks and family members versus public debt and equity
Degree of capital market development
Institutional versus individual investors

11. Environmental Influences
Taxation
Requirements that financial income must equal taxable income
Inflation
Must be accounted for if it is a problem
Will influence financial reporting if present
Political and Economic Ties
Political systems
Central planning versus private enterprise
Accounting regulation
Enforcement of standards

12. Environmental Influences
International factors
Trade Influences
Colonial influences
Regional trade blocs
Social climate
Attitudes toward work, management, employee involvement, wealth, religion
Value systems and attitudes often measured by Hofstede’s Cultural values
Study conducted in 1980s
Looked at the structural elements of culture that affect behavior in work
Evaluated values of IBM employees in 50 countries

13. Cultural Influences - Hofstede’s Studies
Basic Value Systems
Individualism vs. Collectivism
Power Distance (Large vs. Small)
Uncertainty Avoidance (Strong vs. weak)
Masculinity vs. Femininity
Short-term vs. Long-term orientation

14. Hofstede’s Cultural Variables
Country US
Canada UK
Mexico
Japan
Germany
Individualism/
Collectivism 1 4 3 32 22 15
Large Power Distance 38 39 42 5 33
Strong Uncertainty Avoidance 43 41 47 18 7 29
Masculinity vs. Femininity 24 9 6
Short-term /Long-term orientation 14 17
N/A 11

15. Cultural Influences Gray’s Accounting Values
Professionalism vs. statutory control
Uniformity vs. flexibility
Conservatism vs. optimism
Secrecy vs. transparency
Figure Conservatism and secrecy
Next slide (Flexibility and professionalism)
There is support for culture as an influential factor in the development of accounting.

18. Divisions of International Classifications
More-developed Latin - France, Italy, Brazil, Spain
Less-developed Latin – Mexico, Chile, Venezuela
More-developed Asian - Japan
Less-developed Asian – Indonesia, Pakistan, India
Near Eastern – Arab countries, Greece, Turkey, Iran
African – East Africa, West Africa
Asian Colonial – Hong Kong, Singapore
Germanic – Germany, Austria, Israel and Switzerland
Anglo-American - U.S., U.K., Canada, Australia
Nordic – Netherlands, Denmark, Finland, Sweden

19. Comparisons for Six Countries – Environmental Influences
Legal
Std. Setting
Financing
Tax Rules
Political
Germany
Civil Code
Private/Public
Debt
Tax=book
E.U.
U.K.
Common
Private
Equity
Minimal
Canada
NAFTA
U.S.
Mexico
Both
Japan
Trade

20. Extent of Disclosure
Disclosure internationally tends to be limited in these areas:
Segments
Asset valuation
Foreign operations
Interim statements
Reserves
Globalization of capital markets tends to enhance disclosure as companies attempt to attract investors.

21. Extent of Disclosure
Largest multinationals set trends in disclosing information and tend to voluntarily disclose more information
Disclosure varies by industry
Companies from common law countries tend to disclose more information than civil code countries.
Corruption decreased the likelihood of disclosure.
European companies disclose a lot of nonfinancial information; especially environmental and employee information

22. Disclosure Regulation
New York Stock Exchange requires the most financial disclosures; London Stock Exchange second, Swiss Stock Exchange least disclosures (due to secrecy).
More developed stock exchanges tend to require more financial disclosures

23. Timeliness Timeliness is one aspect of the relevance of information.
Filing deadlines differ.
The U.S. and Canada are the most timely whereas continental European countries are the least.
Few other countries demand quarterly reporting besides the U.S. and Canada.
IAS 34 only requires interim reporting but does not state frequency.
There is very little investors can do to overcome these problems.

24. American Depositary Receipts (ADRs)
American equivalent of shares of stock in a foreign company.
1 ADR share may equal 2-10 shares of the foreign company’s domestic stock.
The amount is determined to equate stock exchange values.