CHAPTER 2:

WORLDWIDE ACCOUNTING
DIVERSITY


WORLDWIDE ACCOUNTING DIVERSITY
Chapter Topics

Evidence of accounting diversity.
Reasons for accounting diversity.
Problems caused by accounting diversity.
Accounting clusters.
The influence of culture on financial reporting.
The reason for international differences in reporting.
Further evidence of accounting diversity.
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.

LEARNING OBJECTIVES
What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity
Differences in accounting and financial reporting rules
between countries. For example:

Accounting for Goodwill
U.S. -- goodwill is not amortized, but is written down only
if impaired.
Japan and Korea goodwill is amortized over its useful
life not to exceed twenty years.

Learning Objective 1
What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity

Asset revaluation

U.S. -- upward revaluation of fixed assets is not
generally allowed.
European Union publicly traded companies are free
to choose between two different methods for valuing
their assets.

Learning Objective 1
What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity

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.

Learning Objective 1
Evidence of Diversity in International Accounting
Additional evidence of differences in accounting
between countries

Form 20-F

Required by the SEC for companies using non-U.S.
GAAP (unless they use IFRS).
Reconciles net income and stockholders equity from the
other GAAP to U.S. GAAP.

Learning Objective 1
Problems Caused by Accounting Diversity
Consolidated financial statements

U.S. MNEs often have subsidiaries in a large number
of countries.
Accounting records in local GAAP and local currency
are rolled-up (i.e., consolidated) into U.S. GAAP.
Require conversion from local to U.S. GAAP.
Require translation from the local to U.S. currency.

Learning Objective 2
Problems Caused by Accounting Diversity
Difficulties with access to foreign capital Markets
Companies often need to go outside their home
country in order to access financing.
Raising foreign capital often requires reconciliation to
comply with different accounting rules or needs of
investors and creditors.

Learning Objective 2
Problems Caused by Accounting Diversity
Non-comparability of financial statements

Accounting rules often differ between countries.
International investors need to make their own
reconciliations or adjustments to financial statements.
International investors also must face differing levels of
disclosure, quality of accounting standards, and quality
of auditing.


Learning Objective 2
Problems Caused by Accounting Diversity
Lack of high-quality accounting information

Lack of disclosuresi.e., lack of transparency.

Environmental Factors Leading to
Accounting Diversity
1. Legal systems -- Common law

Fewer statutesmore court interpretation.
Leads to the creation of precedents or case law.
Found most often in Great Britain and other English-
speaking countries.
The source of accounting rules tends to be non-
governmental organizations.

Learning Objective 3
Environmental Factors Leading to
Accounting Diversity
1. Legal systems -- Code law

Characterized by relatively more statutes .
Found more often in non-English-speaking countries.
Accounting rules in these countries tend to be legislated
(i.e., the source is the government).
Less specific, so other sources needed to provide
guidance.


Learning Objective 3
2. Taxation

U.S. -- taxable income and book income are generally
quite different.
Germany -- rules governing taxable and book income
tend to be the same, which generally results in more
conservative accounting.
Deferred taxes are less of an issue in code law
countries.

Learning Objective 3
Environmental Factors Leading to
Accounting Diversity
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.
Given extended periods of low inflation in the U.S.,
inflation accounting is not required.
Learning Objective 3
Environmental Factors Leading to
Accounting Diversity
3. Providers of financing

In many countries major sources of capital are families,
banks, and the government.
Accounting and disclosure in those countries tend to be
less important.
In the U.S. and U.K. the providers of financing are
diverse shareholders, so accounting and disclosure are
more important.

Learning Objective 3
Environmental Factors Leading to
Accounting Diversity
5. Political and economic ties

These linkages tend to make information sharing
easier.
Nations that share ties often have similar accounting
systems, such as France and former colonies in
western Africa.

Correlation of factors

In summary, correlations exist among these factors.
Code law countries tend to link taxation to accounting
statements and are less reliant on shareholder
financing.
Learning Objective 3
Environmental Factors Leading to
Accounting Diversity
Financial Reporting System Classification
Accounting Clusters

Environmental factors related to accounting diversity have
been used to identify three broad based clusters:

Fair presentation / full disclosure model
Oriented towards the information needs of investors and
creditors.
Most descriptive of the U.K. and U.S.

Learning Objective 4
Financial Reporting System Classification
Accounting Clusters

Legal compliance model

Accounting 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.

Learning Objective 4
Financial Reporting System Classification
Accounting Clusters

Inflation-adjusted model
Similar to the legal compliance approach.
Is distinguished by the requirement for adjustments to
mitigate the effects of inflation.
As such, found mostly in South America.

Learning Objective 4
Financial Reporting System Classification
Nobes judgmental classification

Shows how accounting systems in 14 developed
countries relate to each other.
Classified by influences of government, economics,
taxes, legal systems and business practices.

Learning Objective 4
The Influence of Culture on Financial Reporting
Culture is also widely considered to influence financial
reporting systems.
Hofstede s five cultural dimensions is the most
commonly used scheme to discuss cultural influences.

Learning Objective 5
The Influence of Culture on Financial Reporting
Hofstedes Cultural Dimensions

Individualism (vs. Collectivism)
Power Distance
Uncertainty Avoidance
Masculinity
Long-term Orientation

Learning Objective 5
The Influence of Culture on Financial Reporting
Hofstedes Cultural Dimensions

Individualism (vs. Collectivism)

Preference for a loosely knit social fabric.
Collectivism represented by a tightly knit social fabric.


Learning Objective 5
The Influence of Culture on Financial Reporting
Hofstedes Cultural Dimensions

Power Distance -- Level of acceptance of unequally
distributed power within and across the society s
institutions and organizations.

Uncertainty Avoidance Degree to which members of
a society feel threatened by uncertain or unknown
situations.


Learning Objective 5
The Influence of Culture on Financial Reporting
Hofstedes Cultural Dimensions

Masculinity Emphasis on traditional masculine
values of performance and achievement vs. feminine
values of relationship, caring and nurturing.

Long-term Orientation The extent to which the
society values persistence, thrift, observing order and
respect for tradition.



Learning Objective 5
The Influence of Culture on Financial
Reporting
Grays Accounting Values

Professionalism vs. Statutory Control
Uniformity vs. Flexibility
Conservatism vs. Optimism
Secrecy vs. Transparency

Learning Objective 5
The Influence of Culture on Financial Reporting
Grays Accounting Values

Professionalism vs. Statutory Control

Professionalism is reflected by 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.


Learning Objective 5
The Influence of Culture on Financial Reporting
Grays Accounting Values

Uniformity vs. Flexibility
Uniformity indicates preference for standardized
accounting methods.
Flexibility is reflected in the varying of accounting
practices for differences between companies.
U.K. and U.S. approaches are examples of flexibility.

Learning Objective 5
The Influence of Culture on Financial
Reporting
Grays Accounting Values

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.

Learning Objective 5
The Influence of Culture on Financial Reporting
Grays Accounting Values

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.

Learning Objective 5
A 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 development of the system of
financing which influences the development of
accounting.
Uses two classifications -- A and B.

Learning Objective 6
Class A Accounting

Descriptive of Anglo-Saxon countries.
Strong outside shareholder equity-financing.
Optimism.
Transparency.
Learning Objective 6
A Model to Explain International Differences
in Financial Reporting
Class B Accounting

Descriptive of continental Europe.
Less widespread outside shareholder equity-
financing.
Conservatism.
Secrecy.

Learning Objective 6
A Model to Explain International Differences
in Financial Reporting
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.

Learning Objective 7