Professional Documents
Culture Documents
Chap 006
Chap 006
Comparative Accounting
Chapter Topics
Accounting environment, profession, regulation, principles/
practices, and differences with IFRS in
•China
•Germany
•Japan
•Mexico
•United Kingdom
6-2
Learning Objectives
1. Describe some aspects of the environment in which
accounting operates in five countries: China, Germany,
Japan, Mexico, and the United Kingdom.
6-3
Learning Objectives
4. Examine some of the accounting principles and practices
used by companies in these countries.
6-4
Background
World’s largest country with population of over 1.3 billion.
Learning Objective 1
6-5
Background
First securities regulations adopted in 1984.
Learning Objective 1
6-6
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 in 1998.
Economic reform and the large number of joint ventures
with foreigners has led to emergence of the audit
profession.
Learning Objective 2
6-7
Accounting Profession
In October 2007, the ICAEW (Institute of Chartered
Accountants in England and Wales) and CICPA launched a
joint project for cooperation between the professional
bodies in the two countries.
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, is common way of
doing business, but may collide ethically for accountants.
Learning Objective 2
6-8
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.
Learning Objective 3
6-9
Accounting Principles and Practice
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 practice.
Accounting System for Business Enterprises (ASBE) is
followed by over 500,000 firms, including all listed
companies.
Learning Objective 4
6-10
Differences with IFRS
Property, plant, and equipment -- historical cost, whereas
IAS 16 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.
Learning Objective 5
6-11
Background
European Union’s largest country, population 83 million.
Learning Objective 1
6-12
Background
German companies increasingly listing on foreign
exchanges, e.g., New York Stock Exchange.
Learning Objective 1
6-13
Accounting Profession
Profession has traditionally been less influential than in
U.S./U.K.
Learning Objective 2
6-14
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.
Learning Objective 3
6-15
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 which 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.
Learning Objective 4
6-16
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.
Learning Objective 4
6-17
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 IAS 17 criteria result in more frequent
capitalization.
Accounting for subsidiaries – allow exclusion of dissimilar
subsidiaries, which are consolidated under IAS 27.
Learning Objective 5
6-18
Background
Population 127 million, world’s third largest economy.
Learning Objective 1
6-19
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.
Learning Objective 2
6-20
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).
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.
Learning Objective 3
6-21
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.
Learning Objective 4
6-22
Differences with IFRS
Revaluation of Land – allowed, but updating not required,
whereas, under IFRS 16, revaluations require regular
updating.
Pre-operating costs – capitalization is allowed, whereas,
under IAS 38, expensed immediately.
Construction contracts – completed contract method is
allowed, whereas IAS 11 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.
Learning Objective 5
6-23
Background
History of significant inflation-- government control of business
is partially blamed for this.
Significant changes in 1990s, 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—but gradually
changing.
Mexico’s one stock exchange, the Bolsa Mexicana de Valores, is
privately-owned.
Represents one of the largest U.S. trading partners (75% of
Mexico’s imports, more than 80% of her exports, and 60% of all
FDI).
Learning Objective 1
6-24
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
and can have reciprocal privileges in U.S. and Canada based
on passing certain exams.
Learning Objective 2
6-25
Accounting Regulation
The Mexican Securities Law (1975), was amended in 1993 to
comply with NAFTA issues.
Learning Objective 3
6-26
Accounting Principles and Practices
Mexican GAAP heavily influenced by U.S. GAAP due to
NAFTA, geographical proximity, and comprehensiveness of
U.S. GAAP.
Learning Objective 4
6-27
Accounting Principles and Practices
Bulletin B-10, Recognition of the Effects of Inflation, reflects a
major difference to U.S. GAAP.
Learning Objective 4
6-28
Differences with IFRS
Statement of cash flows – statement of changes in financial
position required, whereas IAS 7 requires a statement of
cash flows.
Learning Objective 5
6-29
Background
Population of about 62 million, comprised of England,
Northern Ireland, Scotland, and Wales.
Learning Objective 1
6-30
Accounting Profession
World’s first association of professional accountants, The
Society of Accountants in Edinburgh, established in 1853.
Learning Objective 2
6-31
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.
Learning Objective 3
6-32
Accounting Regulation
The Financial Reporting Council (FRC) annual report for
2008/2009-- 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
Learning Objective 3
6-33
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.
Learning Objective 4
6-34
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.
Learning Objective 5
6-35