1. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Chapter 2 International accounting differences

2. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Contents Origin of national differences Differences in accounting systems Characteristics and differences in national GAAP Country classification National Differences: more recent evolutions National differences: do they still play a role in an era of globalized accounting

3. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Learning objectives Describe and explain how the following elements influenced the development of financial reporting and the existing accounting systems in a country: – provision of finance – the legal system – the system of taxation – cultural values

4. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Learning objectives (cont’d) Explain and appraise the influence of cultural values on accounting values Explain how different systems of accounting regulation could develop Describe the purpose of country classification exercises Appraise whether these country classification exercises are still relevant today

5. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA International accounting differences obstruct financial communication between countries

6. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Origin of national differences Provision of finance Existing legal system Link between accounting and taxation Cultural differences

7. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA

8. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Provision of finance: consequences In shareholder countries accounting information provides information to investors In credit-oriented countries creditors, families and the state receive private information about the financial situation of the company; external financial reporting is less developed

9. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA

10. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Existing legal system: consequences In common law countries more principles - based accounting standards In code law countries more detailed legal rules that govern accounting

11. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA

12. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Relationship between accounting and taxation Dependence leads to tax biased accounting information Independence leads to accounting information which represents more the underlying economic situation

13. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black Structural Elements of Culture Hofstede – 4 Underlying societal dimensions –Individualism –Power Distance –Uncertainty Avoidance –Masculinity Hofstede and Bond – 5 th dimension –Short v. Longterm Orientation: Confucion Dynamism

14. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Hofstede’s Societal Dimensions Individualism versus Collectivism –People’s self-concept: “I” or “we” : U.S. v Europe? Large versus Small Power Distance –How a society handles power inequalities among people / organizations – distributed unequally. Large power distance: accept hierarchical structure Small power distance: strive for me equality Masculinity – preference for achievement, heroism, assertiveness, material success Feminism: preference for relationships, modesty, caring –Allocation of social roles (not biological) to the sexes

15. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Hofstede’s Societal Dimensions - Continued Strong v. Weak Uncertainty Avoidance –Degree to which society is OK with ambiguity –Strong: demand uniformity, intolerant of deviation –Weak: more relaxed, practice > principle, deviance from norm OK Short v. Long-term Orientation: Confusion Dynamism –ST: respect for tradition, social obligations regardless of cost / quick results –LT: adaptation of traditions to meet modern needs / thrifty sparing approach to resources

16. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Accounting Values v. Societal Values – Gray (1988) Professionalism versus statutory control – preference for individual professional judgment / self regulation Uniformity versus flexibility –Preference for enforcement of uniform practices Conservatism versus optimism –Preference for cautious approach / less risky approach to measurement. Secrecy versus transparency –Preference for confidentiality v. transparency

17. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Professionalism versus Statutory Control Accountants are perceived to have independent attitudes throughout the world Public regulation or self regulation –U.K. – rely on judgment of accountant –France and Germany – implement detailed legal requirements Link to societal value dimensions – Professionalism –Individualism –Weak uncertainty avoidance –Small power distance –Masculinity –Short-term orientation

18. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Uniformity versus Flexibility Uniform accounting plan and imposition of tax rules for measurement purposes –France and Spain Facilitate national planning Pursue macroeconomic goals Intertemporal consistency and some degree of intercompany comparability b/c of flexibility –U.S. and U.K. Link to societal value dimensions – Uniformity –Strong uncertainty avoidance –Collectivism –Large power distance

19. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Authority and Enforcement

20. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Conservatism versus Optimism Conservatism seen as a fundamental value –Strongly conservative Japan, France, Germany, Switzerland –Less conservative U.S., U.K., the Netherlands – though changing post Sarbanes Oxley - Link to societal value dimensions – Conservatism –Strong uncertainty avoidance –Long-term orientation –Collectivism –Femininity Sarbanes Oxley – impact: authority enforcement / Measurement disclosure figures 2.5 / 2.6

21. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Secrecy versus Transparency Stems from management and accountants Closely related to conservatism –Secrecy relates to disclosure –Conservatism relates to measurement Secrecy –High – Japan, France, Germany, Switzerland –Low – U.S. and U.K. Link to societal value dimensions – Secrecy –Strong uncertainty avoidance –High power distance –Collectivism –Femininity

22. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black Accounting Values and Societal Values

23. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA National differences lead to differences in accounting systems and differences in national accounting standards

24. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Accounting Values and International Classification Accounting values most relevant to professional or statutory authority and enforcement –Professionalism and Uniformity Both concerned with regulation and degree of enforcement or conformity Accounting values most relevant to measurement and disclosure –Conservatism and secrecy Country groupings –Optimistic and transparent –Conservative and secretive

25. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA International Pressures for Accounting Change Growing international interdependencies Harmonization of the regulatory framework internationally Centrally planned economies embraces market-oriented approach –Former U.S.S.R., Eastern Europe, China New opportunities for international investment, joint ventures, and alliances

26. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Economic Groupings and International Organizations European Union –Promotes economic integration/harmonization UN –World Bank –International Monetary Fund –UN conference on Trade and Development –World Trade Organisation OECD –Foster international economic and social development in industrialized countries “Code of Conduct” for MNEs

27. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Impact of MNEs and Globalization Cultural and social Employment and consumption patterns –Significantly influenced Pressure for more accountability Environmental impact

28. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Impact of MNEs and Globalization OECD, EU, IOSCO work for harmonization and internationalization of securities markets IASB and the International Federation of Accountants (IFAC) –Professional organizations involved in harmonization

29. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Types of accounting regulation In a shareholder oriented country characterized by a common law system, the accounting standard setting process is often in the hands of a private standard setter In a creditor oriented country characterized by a code law system, the accounting standard setting process is often in the hands of the government

30. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Differences in the organization of the accounting profession In shareholder oriented countries the accounting profession developed earlier Nowadays stricter regulation worldwide (e.g. EU, US= PCAOB) of the audit profession, tries to wipe out national differences to a certain extent

31. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA

32. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Characteristics and differences in national GAAP Shareholder orientation versus stakeholder orientation Fairness versus legality Conservatism versus accruals Uniformity, accounting plans and formats Consolidated accounts Deferred taxation

33. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Research on accounting diversity in the eighties Country classification attempts based on observed differences

34. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Criteria used as discriminating variables Type of user of the published accounts of listed companies Degree to which law or standards prescribe in detail and exclude judgement Importance of tax rules in measurement Conservatism/prudence Strictness of application of historical cost

35. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Criteria used as discriminating variables (cont’d) Susceptibility to replacement cost adjustments in main or supplementary accounts Consolidation practices Ability to be generous with provisions and to smooth income Uniformity between companies in application of rules

36. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA

37. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA National differences: more recent evolutions Research in the nineties and in the 21st century tries to explain differences in accounting quality between countries through the analysis of institutional differences observed between countries Major findings of the research is that accounting quality is still influenced by domestic institutional variables

38. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA High quality accounting information Definition (Ball & Shivakumar, 2002) Financial reporting quality relates to the usefulness of financial statements for contracting, monitoring, valuing and other decision making by investors, creditors, managers and all other contracting parties within the firm

39. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA High quality GAAP versus low quality GAAP Low quality GAAP allows management to report results when they want to report those results High quality GAAP provides less discretion for such practices

40. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA

41. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA High quality accounting information is a function of the quality of the GAAP and of the quality of the implementation of that GAAP

42. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA The implementation of the GAAP How GAAP is implemented is influenced by national characteristics such as the degree of investor protection, the degree of enforcement of financial accounting standards, risk of litigation and the legal system.

43. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Recent research in relation to the accounting quality of IFRS accounts in the EU E.g. (Daske et al. 2008; Armstrong et al. 2010; Barth et al. 2008) –Positive capital market reactions mainly in common law countries –A country’s institutional environment still influences accounting quality Impact of IFRS difficult to single out, a number of countries also change governance regimes and enforcement systems

44. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Conclusion: national differences still play a role! National differences influence the implementation of the accounting standards in a country – also in the case of compulsory compliance with IFRS