1. Accounting 6570 Comparative Accounting

2. Comparisons Language Currency Professional Accountancy Bodies Accounting Standard Setting Bodies Environmental Factors –Economic Factors Predominant type of financing Influence of tax rules on accounting reporting –Political Factors –Socio-cultural Factors Legal Systems

3. Comparisons Language –U.S., Canada, UK – English –Germany – German –Japan – Japanese –Mexico – Spanish Currency –U.S. dollar, Canadian dollar, U.K. pound, Germany uses the euro, Japan yen, and Mexican peso

4. Comparisons Professional Accountancy Bodies –U.S. – AICPA (over 330,000 members) –Canada – CICA (over 50,000 members) –U.K. – Institute of Chartered Accountants (over 97,000 members) –Germany – Institut der Wirtschaftsprufer (around 20,000) –Japan – Japanese Institute of CPAs (around 24,000) –Mexico – Mexican Institute of Public Accountants (MIPA)

5. Comparisons Standard Setting Bodies –U.S. – Financial Accounting Standards Board (FASB) Private –Canada – Accounting Standards Board (ASB) Private –U.K. – Accounting Standards Board (ASB) Private –Germany – German Accounting Standards Board (GASB) Private but public tax laws dominate financial reporting –Japan – Accounting Standards Board of Japan (ASBJ) Private but highly influenced by public Business Accounting Deliberation Council of the public Ministry of Finance –Mexico – Mexican Institute of Public Accountants (MIPA) Private

6. Environmental Factors Economics –Predominant type of financing (see handout) –Influence of tax rules on accounting reporting (see handout) Political factors –Germany, U.K. – influenced by E.U. –Canada, U.S., Mexico – influenced by NAFTA –Trade ties – Japan –Internationalization – more internationalized, more accounting

7. Environmental Factors Socio-cultural factors –Hofstede’s variables –Religion –Attitudes toward work and wealth Legal systems (civil code versus common law) –Common law – U.S., U.K., Canada –Civil code – Germany, Japan, Mexico

8. Major Differences in Financial Reporting Measurement Practices –Methods of Measurement –Goodwill –Consolidation –Deferred taxes –Long-term leases –Discretionary reserves –Construction accounting –Foreign currency translation

9. Major Differences in Financial Reporting Measurement Practices –Depreciation –LIFO Inventory valuation –Research and development –Revaluation of fixed assets Disclosure issues –Segmental reporting Interim reporting

10. Differences in Financial Statements Required statements Format of statements Group accounts Parent only statements Relevance of statements –Balance sheet more important –Income sheet more important

11. Analysis of Foreign Financial Statements Foreign portfolio investment Investors can diversify away some risk by investing internationally. While stock returns in many countries are positively correlated with U.S. returns, these correlations are far from perfect. International investors, including managers of international mutual funds, rely on foreign financial statements.

12. Data Accessibility Relative to the U.S., financial information is difficult to obtain in many countries. While databases of foreign financial statements do exist, these can contain errors and present information in a variety of formats. These databases also do not contain complete disclosure notes. Another approach is to obtain a copy of the foreign company’s annual report. Often websites have financial statements.

13. Language Since English is the language of business, companies in many foreign countries produce convenience translations of their financial statements in English. Some international companies do not produce financial statements in English. The financial statement user could hire a translator or develop foreign language capability.

14. Currency Many international companies produce their financial statements in a currency other than the U.S. dollar. These can be converted to U.S. dollars by translating all balances at the exchange rate at the end of the current year. In order to avoid distortions, the current exchange rate should be used for all previous years. Analysis using ratios is not distorted by different currencies.

15. Terminology Differences in terminology exist between countries using the same language. For example, sales in the U.S. is normally called turnover in the UK. In cases of convenience translations, sometimes these include terminology unfamiliar to English speakers. Knowledge of the business and accounting environment can help alleviate some of these problems.

16. Format Some format differences are not problematic because the information is given, just in a different place. However, other format differences are a problem because the information is not provided. It is common in Europe to not provide cost of goods sold. This prevents an analyst from determining gross margin percentage and inventory turnover.

17. Format German and other continental European companies often do not distinguish between current and noncurrent liabilities. This makes it difficult or impossible to compute a current ratio. At least one Chinese company does not present sales as a separate item. This would hinder analysis of top-line growth.

18. Extent of Disclosure Disclosure internationally tends to be limited compared to the U.S. where full disclosure is fundamental. Some of the most serious disclosure limitations are information on segments, asset valuation, foreign operations, interim statements, and reserves. Lack of disclosure contributes to the significance of format problems. Globalization of capital markets tends to enhance disclosure as companies attempt to attract investors.

19. Extent of Disclosure Largest MNEs set trends in disclosing information Larger companies tended to voluntarily disclose more information Disclosure varies by industry Companies from common law countries tended 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

20. 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

21. Timeliness Timeliness is one aspect of the relevance of information. This varies significantly internationally since filing deadlines differ from country to country. Among developed countries, the U.S. and Canada are the most timely whereas continental Europe is the least. Requirements about the frequency of information also vary internationally from quarterly to annual reporting with the U.S. and Canada requiring quarterly reporting and few other countries demanding quarterly. IAS 34 only requires interim reporting but does not state frequency. There is very little investors can do to overcome these problems.

22. International Ratio Analysis Differences in culture and economic environments have an impact on the relevance of ratios. A study of companies in Japan, Korea, and the U.S. found significant differences due to business environment. For example, Japanese and Korean companies borrow much more on a short-term basis than U.S. companies, leading to lower current ratios.

23. International Ratio Analysis Debt ratios also tend to be higher in Japan and Korea because of the sources of financing. Lower profit margins in Japan, relative to U.S., can be partly explained by those companies focus on market share as opposed to profits. In summary, an investor needs to be aware of these differences and not forgo potentially profitable investments.

24. Restating Foreign Financial Statements to U.S. GAAP Form 20-F Foreign companies that file non-U.S. GAAP financial statements with the SEC are required to complete a Form 20-F. The Form 20-F reconciles net income and stockholders’ equity to U.S. GAAP (Only net income in Canada) However, there is no requirement to reconcile assets and liabilities. In essence, this represents a partial restatement from foreign GAAP to U.S. GAAP. Those using IFRS no longer have to reconcile as of 2007 (about 150 companies out of around 1,200).

25. Restating Foreign Financial Statements to U.S. GAAP Form 20-F Some ratios, such as return on equity, can be computed as if under U.S. GAAP. Most other ratios, cannot be computed as if under U.S. GAAP. The analyst can overcome this by performing the restatement of financial statement items.

26. 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.