1. Chapter 6: Comparative Accounting

2. Chapter Topics
Accounting environment, profession, regulation, practices/principles and differences in national accounting practices with IFRS in:
China
Germany
Japan
Mexico
United Kingdom

3. Learning Objectives
Describe some aspects of the environment in which accounting operates in five countries: China, Germany, Japan, Mexico, and the United Kingdom
Explain the nature of the accounting profession in the selected countries
Discuss the mechanisms in place for regulating accounting and financial reporting in the selected countries
Examine some of the accounting principles and practices used by companies in these countries

4. Learning Objectives
Identify the areas where national accounting practices in these countries differ from International Financial Reporting Standards (IFRS)

5. PEOPLE’S REPUBLIC OF CHINA (PRC)
Background
World’s largest country with population of 1.34 billion(2008)
People’s Republic of China (PRC) established in 1949
Politically:
Communist, one-party state
Economically:
Until the 1980s, all firms state-owned
Currently in transformation to socialist market economy
World’s second largest economy (in terms of GDP) and fastest growing among large economies, and is largest recipient of FDI

6. PEOPLE’S REPUBLIC OF CHINA (PRC)
Background
First securities regulations adopted in1984
Two major stock exchanges:
Shanghai and Shenzhen established in1990 and1991
Government controls capital market via:
Chinese Security Regulatory Commission (CSRC) similar to SEC
Domestic companies list four types of shares:
A, B, C, H
Market characterized by speculation, high share turnover

7. PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Profession
Profession less prestigious than in U.S./U.K
Accounting and auditing have developed separately
Chinese Institute of Certified Public Accountants (CICPA) and Chinese Association of Certified Practicing Auditors (CACPA) merged in1998
Economic reform and the large number of joint ventures with foreign companies has led to emergence of the audit profession
In October 2007, the ICAEW in the UK and CICPA set up a joint project for cooperation between the accounting professions in the two countries

8. PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Profession
Most domestic Chinese accounting firms are “hooked up” to a government-sponsoring body, although the government has encouraged independence
“Guanxi” or tight, close-knit networks
Common way of doing business, but may collide ethically for accountants

9. PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Regulation
Government continues to act as accounting regulator
Recent activity is focused on harmonizing variety of domestic systems which vary by industry
Committed to converging with IFRS, spurred by desired membership in World Trade Organization (WTO)
Audits of financial statements widely required
Death penalty in an accounting fraud case suggests that it is taken very seriously
Ministry of Finance (MoF) in similar role as FASB
MoF has issued several pronouncements to achieve harmony

10. PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Principles and Practices
Computation of taxable income is of primary importance
Conservatism is criticized as a method by which owners can understate income and justify low wages
Lack of conservatism is still a major difference with IFRS
Lack of accounting infrastructure contributes to the gap between accounting principles and practices
Accounting System for Business Enterprises (ASBE) is followed by over 500,000 firms, including all listed companies

11. PEOPLE’S REPUBLIC OF CHINA (PRC)
Differences with IFRS
Property, plant, and equipment:
Historical cost, whereas IAS16 permits revaluations
Asset impairments:
Chinese standards are silent, whereas IAS 36 requires impairment test and recognition of loss
Pre-operating expenses deferred, then expensed when operations begin, whereas, under IAS 38, expense immediately
Business combinations:
No specific rules, whereas IAS 22 specifically discusses accounting for business combinations

12. Germany
Background
European Union’s largest country, population 82.2 million
West Germany and East Germany established in 1949, were reunified in 1990
Historically, banks have been primary source of finance via both loans and equity
Since reunification, the economy has been affected by internationalization
German companies increasingly listing on foreign exchanges, e.g., New York Stock Exchange
Most common business forms are Aktiengesellschaft (AG) and Gesellschaft mit beschrankter Haftung (GMBH)

13. Germany Background AG are publicly traded/GMBH are non-publicly traded
Historically had significant influence on accounting systems in a number of other countries
Japan’s commercial code is modeled on Germany’s commercial code

14. Germany Accounting Profession
Profession has traditionally been less influential than in U.S./U.K
Auditing is dominant part of profession and certified auditors title of Wirtschaftsprufer (WP) was created in 1931
Institut der Wirtschaftsprufer similar to the AICPA
Obtaining WP title is extremely rigorous
Wirtschaftspruferkammer (WPK) is a state-sponsored group that oversees auditing profession

15. Germany Accounting Regulation
Commercial code and tax laws are main sources of accounting rules
Traditionally has not used a system of independent institutional oversight
Stock exchange rules have less influence than in U.S
Prudence (conservatism) is fundamental:
Recognition of revenues only when realized
losses when they appear possible
Began change away from creditor orientation in 1960s towards shareholder orientation
As of 2009 the German Accounting Standards Board (GASB) worked on IASB projects relating to the financial crisis

16. Germany Accounting Principles and Practices
Historical cost attribute for measuring tangible assets is strictly adhered to
Traditional focus on creditor protection is at odds with the true and fair view concept
Importance of tax laws led to the reverse authoritative principle
Requires expenses to be deducted from accounting income if they are to be tax deductible
Differences between accounting and tax income are minimal, thereby reducing need for deferred taxes

17. Germany Accounting Principles and Practices
In contrast to China, conservatism has been used to resist labor’s wage demands
Standards allow for income smoothing, frequently accomplished via early recognition of losses
EU fourth directive requires true and fair view, but Germans have a unique interpretation of the concept
Commitment to globalization reflected in rule that allows public companies to use IFRS for consolidated statements
Main intention of German Accounting Law Modernization Act is conformity with IFRS
In August 2010, only about 10 German companies were listed on the NYSE due to NYSE overregulation

18. Germany Differences with IFRS Goodwill:
Deducted immediately against equity, whereas, under IFRS 3, accounted for as an indefinite life intangible asset
Internally generated intangibles:
Not recognized, whereas, under IAS 38, recognized as an asset under some conditions
Leases:
Accounting uses tax rules, with capitalization rare, whereas IAS17 criteria result in more frequent capitalization
Accounting for subsidiaries:
Allow exclusion of dissimilar subsidiaries, which are consolidated under IAS 27

19. Japan
Background
Population million, world’s third largest economy
Banks are primary source of finance via both loans and equity, and cross-corporate equity ownership is also common
Keiretsu (and predecessor Zaibatsu) emphasize close business ties and reflect cultural value of collectivism
1990s recession led to an increase in Japanese firms’ attempts to obtain capital internationally

20. Japan Accounting Profession
Certified Public Accountants Law (1948) established the profession
JICPA is one of the nine founding members of the IASC
Profession is significantly less influential than in U.S./U.K. and is also much smaller in numbers than U.S
Obtaining CPA title is extremely rigorous, as in Germany
Low status within Japanese society vs. engineers and scientists
Collectivism leads to lack of trust of auditors
Tax advising is a much larger, separate, profession

21. Japan Accounting Regulation Government influences accounting via:
Commercial Code, Corporate Income Tax Law and Securities and Exchange Law
Similar to Germany, strong creditor orientation and accounting rules closely tied to tax rules
“Big Bang” financial reforms are leading to harmonization with international standards
These reforms included requirements for consolidation and fair value accounting for tradable securities
Business Accounting Principles issued by Ministry of Finance consist of 7 guidelines (the equivalent of a conceptual framework)

22. Japan Accounting Regulation
In December 2009, Japan Financial Services Agency (FSA) permitted domestic use of IFRS and established framework for voluntary adoption of IFRS starting with fiscal years ending on or after March 31, 2010

23. Japan Accounting Principles and Practices
In contrast to U.S., net income is less a measure of performance and seen more as funds available for dividends
Since providers of financing tend to be close to the firm, there has historically been little pressure for disclosure
Lack of disclosure is apparent in segment reporting
2007 Tokyo Agreement goals to eliminate all Japanese GAAP and IFRS differences by June 2011 (except major new IFRS developed after 2011

24. Japan Differences with IFRS Revaluation of Land: Pre-operating costs:
Allowed, but updating not required, whereas, under IFRS16, revaluations require regular updating
Pre-operating costs:
Capitalization is allowed, whereas, under IAS 38, expensed immediately
Construction contracts:
Completed contract method is allowed, whereas IAS11 essentially requires percentage-of-completion
Provisions:
Allows for provisions prior to actual obligation, whereas IAS 37 only allows for present obligations based on past transaction

25. Mexico Background History of significant inflation:
Government control of business is partially blamed
Significant changes in1990s, including privatization of state-owned firms and NAFTA
Historically, most businesses family-owned--even the very large:
Prefer to raise capital via debt vs. equity
Gradually changing
Mexico’s one stock exchange, the Bolsa Mexicana de Valores, is privately-owned
Represents one of the largest U.S. trading partners (three-quarters of Mexico’s imports, more than 80% of her exports, and 60% of all FDI)

26. Mexico Accounting Profession
The Asociacion de Contadores Publicos, first professional accountant organization, established in 1917
This group was succeeded by the Mexican Institute of Public Accountants (MIPA) in 1964
MIPA establishes accounting and auditing principles
In order to practice public accounting in Mexico, one needs a “professional diploma”
Contador Publico Certificado (CPC) is equivalent of U.S. CPA:
Can have reciprocal privileges in U.S. and Canada based on passing certain exams

27. Mexico Accounting Regulation
The Mexican Securities Law (1975), was amended in 1993 to comply with NAFTA issues
Accounting standards, grounded in a conceptual framework:
Have four classes of Bulletins, A, B, C, and D, and, with few exceptions, are similar to U.S. GAAP
Fairness-oriented vs. legal compliance
Corporate tax rules require a report in accordance with Mexican GAAP audited in accordance with Mexican GAAS
Enforcement mechanisms (e.g. for insider trading) not effective

28. Mexico Accounting Principles and Practices
Mexican GAAP heavily influenced by U.S. GAAP
Due to NAFTA, geographical proximity, and comprehensiveness of U.S. GAAP
Despite international influences, Mexico’s Bulletin B-10 on inflation accounting shows how harmonized accounting may not be appropriate for all circumstances
In November 2008, the Mexico Securities and Exchange Commission announced that all companies listed on the Mexican Stock Exchange will be required to use IFRS in 2012

29. Mexico Accounting Principles and Practices
Bulletin B-10, Recognition of the Effects of Inflation, reflects a major difference to U.S. GAAP
Nonmonetary assets and liabilities to be restated for purchasing power changes of the peso
Inventory can be restated using current replacement costs
Recognition in income (generally) of the gain or loss from the net monetary position, asset or liability
In line with IAS 29, Mexico has given up on inflation accounting recently, due to low rate of inflation

30. Mexico Differences with IFRS Statement of cash flows:
Statement of changes in financial position required, whereas IAS 7 requires a statement of cash flows
Inflation Accounting:
Requires inflation adjustments regardless of inflation rate, whereas IAS 29 required only for hyperinflationary countries
Negative Goodwill:
Recorded as a deferred credit and amortized over a period of up to five years, whereas IFRS 3 requires immediate recognition of gain

31. United Kingdom Background
Population of about 62 million, comprised of England, Northern Ireland, Scotland, and Wales
Among the five countries in this chapter, its financial structure is closest to the U.S
15,000 Private Limited Companies (PLCs) with about 2,500 of these listed on the London Stock Exchange

32. United Kingdom Accounting Profession
World’s first association of professional accountants:
The Society of Accountants in Edinburgh, established in 1853
Six professional chartered bodies coordinated through Consultative Committee of Accountancy Bodies (CCAB)
The profession developed in response to the needs of industry and has influenced the development of professions in a number of other countries
Compared to the U.S. the certification requirements focus more on work experience and less on university education

33. United Kingdom Accounting Regulation
The Companies Act, accounting pronouncements, and stock exchange rules comprise accounting regulation
Similar to the U.S., and unlike Germany and Japan, tax rules do not significantly influence financial reporting
Standard-setters have historically taken a principles-based approach using a statement of principles as a conceptual framework
Has not historically had a strong, SEC type agency, but recent scandals have led to increased regulation

34. United Kingdom Accounting Regulation
The Financial Reporting Council (FRC) annual report for 2008/ key themes for 2009/2010 would be to influence:
Market participants to high standards of reporting and governance
Legislators and standard-setters to encourage proportionate and principles-based approach in furtherance of the first goal
International regulatory authorities to encourage effective cooperation

35. United Kingdom Accounting Principles and Practices
A primary objective of accounting is to support an effective capital market
The true and fair view principle is paramount
True and fair view override requires that companies not comply with standards that would result in misleading financial statements
Professional judgment is essential additional component to true and fair view
Financial Reporting Review Panel 2010 annual report says there has been continuous improvement in the general quality of IFRS financial reporting

36. United Kingdom Differences with IFRS Goodwill:
Amortization allowed, whereas IFRS 3 prohibits amortization and requires an annual impairment test
Related party disclosures:
Requires disclosure of related party names, whereas IAS 24 requires disclosure by type, not name, of related party
Revaluation gains/losses:
Generally not taken to income statement, whereas IAS 40 requires gains and losses to affect net income

37. End of Chapter 6