Worldwide Accounting Diversity: Internationalschol Hanoinationaluniversity H TP: /is - Vnu.Edu - VN

INTERNATIONALSCHOL
HaNoiNationalUniversity
h tp:/is.vnu.edu.vn/
CHAPTER 2:
WORLDWIDE ACCOUNTING
DIVERSITY
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN
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. Describe 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.
INTERNATIONALSCHOL
1. What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity

Differences in accounting and financial reporting rules between
countries. For example, historically:
- Asset revaluation
• U.S – reported carrying value of PPE should not be greater than
historical cost (upward revaluation is not generally allowed)
• Europe – companies may choose to report assets at either
historical cost or fair values on the balance sheet
- Accounting for R&D cost
• US & Japan – expense off immediately
• Cananda, France and Vietnam – development costs might be
capitalized as an intangible asset when certain conditions are
met.
LO 1 INTERNATIONALSCHOL
1. What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity

- Accounting for Goodwill
• U.S. -- goodwill is not amortized, but is written down only if impaired.
• Japan, Korea and Vietnam – goodwill is amortized over its useful life
in accordance with each country’s regulation.
- Inflation Accounting
• U.S. (and many other countries) -- financial statements are not
adjusted for inflation.
• Latin American countries -- experience significant inflation, so financial
statements are adjusted for changes caused by inflation.
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 2. Problems Caused by Accounting Diversity
(1) Lack of comparability of financial statements

• Accounting rules often differ between countries. Thus, the levels of
disclosure, quality of accounting standards, and quality of auditing also
vary between countries.
• It is very difficult if not impossible for a international investor to
directly compare the financial statements of companies in different
countries for making investment and lending decisions.
• Eg: In 2009, Braskem SA, a Brazilian company, made 13 adjustments
to its Brazilian GAAP net income to report net income on a U.S GAAP
basis. These adjustments caused Brazilian GAAP income of 767.8
million Brazilian reals (BRL) to decrease 70% to 232.7 million BRL
under U.S GAAP.
2. Problems Caused by Accounting Diversity
(2) Preparation of Consolidated financial statements

• MNEs often have subsidiaries in a large number of countries. Eg.
General Motors Corporation has subsidiaries in more than 50 countries
around the world.
• To prepare Consolidated financial statements in US, two procedures
must be conducted:
− Conversion from local GAAP to U.S. GAAP.
− Translation from the local to U.S. currency.
(3) Difficulties with access to foreign capital markets

• A number of companies want to obtain capital by selling stock or
borrowing money in a foreign country.
• To cross-list in foreign capital markets, a company must present a set
of financial statements prepared in accordance with the accounting
standards in the country in which the capital is being obtained.
• Eg: to have stock traded in U.S, foreign companies must either
prepare FSs using U.S GAAP or provide a reconciliation of local
GAAP net income and stockholder’s equity to U.S GAAP. => costly:
German automaker Daimler –Benz estimated to spend $60mil to
initially prepare U.S GAAP financial statement for a NYSE listing in
1993.
(4) Lack of high-quality accounting information

• Lack of high quality accounting standards—i.e., lack of transparency in
some parts of the world.
• This in turn, contributes to:
− Deficient internal controls and imprudent risk management practices
of the corporations.
− Inadequate risk assessment by investors and creditors.
INTERNATIONALSCHOL
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 3. Environmental Factors Leading to
Accounting Diversity
Why do financial reporting practices differ across
countries?
(1) Legal systems
(2) Taxation
(3) Providers of financing
(4) Inflation
(5) Political and Economic Ties
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 3. Environmental Factors Leading to
(1) Legal systems
2 major types of legal systems: common law and code law (civil law)
Common law Code law
Countries England and other English- non-English-speaking
speaking countries countries
Statutes Fewer statutes — more court relatively more statutes
interpretation. Leads to the
creation of precedents or case law
Source of Specific accounting rules are Accounting rules are
accounting established by non-governmental legislated and passed by the
rules organizations. government.
Detail A non-legislative organization will Less specific, so other
develop much more detailed sources needed to provide
accounting standards. guidance, eg. Tax law,
opinions of auditing
LO 3
profession,INTERNA
etc.TIONALSCHOL
3. Environmental Factors Leading to
(2) Taxation
• In some countries, published FSs form the basis for taxation, whereas in
other countries, FSs are adjusted for tax purpose and submitted.
• U.S. – tax rules and accounting rules are generally quite different.
Eg. U.S companies are allowed to use accelerated depreciation for tax
purposes and straight-line depreciation in the financial statements.
• Germany – tax rules and accounting rules tend to be the same
(congruency principle).
Eg. To minimize taxable income, accelerated depreciation should be
taken for both tax and accounting purposes in accordance with
congruency principle.
• Deferred taxes are less of an issue in code law countries.
(3) Providers of financing

• Major providers of financing for enterprises: families, banks, government,
and shareholders.
• In countries in which company financing is dominated by families, banks
and government: Accounting and disclosure tend to be less important.
• In countries in which company financing is dominated by diverse
shareholders (Eg: U.S. and U.K): Accounting and disclosure are more
important.
4. 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. Eg. Throughout the 1980s
and 1990s, the average annual rate of inflation rate in Mexico was
approximately 50%.
5. Political and economic ties
• Through political and economic linkages, accounting rules have been
conveyed from one countries to another.
• For example: France and former colonies in western Africa.
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 3. Environmental Factors Leading to Accounting
Diversity
6. National culture:
• Hofstede's five cultural dimensions: is the most commonly used
scheme to discuss cultural influences.
− Individualism vs Collectivism: degree to which people in a society are
integrated into groups.
− Power Distance: Level of acceptance of unequally distributed power
within and across the society’s institutions and organizations.
− Uncertainty Avoidance: a society's tolerance for ambiguity
− Masculinity vs femininity: masculinity is defined as "a preference in
society for achievement, heroism, assertiveness and material rewards
for success". Its counterpart represents "a preference for cooperation,
modesty, caring for the weak and quality of life".
− Long-term vs Short-term Orientation: The extent to which the society
values persistence, thrift, observing order and respect for tradition.
3. Environmental Factors Leading to Accounting
Diversity
6. National culture
• Gray’s Accounting Values
Four widely recognized accounting values that can be used to define a
country’s accounting subculture:
− Professionalism vs Statutory Control
− Uniformity vs. Flexibility
− Conservatism vs. Optimism
− Secrecy vs. Transparency
Diversity

− Professionalism vs. Statutory Control
+ Professionalism shows a preference for 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 U.K. and U.S. and the latter
more so with continental Europe.
− Uniformity vs Flexibility
+ Uniformity indicates preference for standardized accounting method
+ Flexibility is reflected in the varying of accounting practices for
differences between companies.
+ U.K. and U.S. approaches are examples of flexibility.
Diversity
− 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.
− 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.
Diversity
Gray argued that national culture values (5 culture dimensions identified by
Hofstede) affect accounting values (4 accounting values identified by Gray), as
shown in table below:
Besides, he develop a framework that identifies mechanism through which

culture influences the development of corporate reporting systems on a
national
LO 5 level (Read more in textbook) INTERNATIONALSCHOL
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 4. Financial Reporting System Classification
There are clusters of countries that share common accounting orientation and
practices. One classification scheme identified 3 major accounting models:
(1) Fair presentation / full disclosure model
• Oriented towards the information needs of investors and creditors.
• Most descriptive of the U.K. and U.S and other English speaking countries (common
law)
(2) Legal compliance model
• Accounting is legalistic, heavily influenced by tax rules and needs of government.
• Commonly found in continental Europe and other code law countries such as
Japan.
• Banks are primary source of financing.
(3) Inflation-adjusted model
• Similar to the legal compliance approach.
• Is distinguished by the requirement for adjustments to mitigate the effects of
inflation
• Mostly
LO 4 found in South America. INTERNATIONALSCHOL
5. A simplified 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 financing system in a country, which in turn
influences the accounting system.
• Nobles divides financial reporting systems into 2 classes: A and B.
Class AAccounting
• Some cultures lead to strong outside shareholder equity-financing
(financing mainly by diverse shareholder).
• This type of financing system lead to an accounting practices that is
more optimistic, more transparent and differs from tax rules.
• Example: UK, New Zealand, …
Class B Accounting
• Some cultures lead to weak outside shareholder equity-financing
(financing mainly by families, banks, government).
• This type of financing system lead to an accounting practices that is
more conservative, less transparent and more closely follows tax rules.
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 6. 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.
Problem solving 1
• Gray’s secrecy hypothesis

- High secrecy = High PD , High UA, Low IND, Low MASC, high LTO
- Low secrecy = Low PD, Low UA, High IND, High MASC, Low LTO
INTERNATIONALSCHOL

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INTERNATIONALSCHOL

Worldwide Accounting Diversity

Worldwide Accounting Diversity

(1) Lack of comparability of financial statements

(2) Preparation of Consolidated financial statements

(3) Difficulties with access to foreign capital markets

(4) Lack of high-quality accounting information

(3) Providers of financing

• Gray’s Accounting Values

Besides, he develop a framework that identifies mechanism through which

• Nobles divides financial reporting systems into 2 classes: A and B.

Additional differences between countries

• Gray’s secrecy hypothesis

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