Accounting 3357
International Accounting
Group Lecture/Report Assignment
Summer I, 2018
Instuctions
Each group will be required to lecture, and prepare a report, on the following topic: Accounting
System(s) in a Foreign Country.
Each group will select a country of choice. The following countries are recommended because the
textbook contains excellent information about these countries: Australia, China, France, Germany,
Japan, United Kingdom, U.S.A. (Canada cannot be chosen.) Countries will be assigned to groups on a
‘first-come, first-serve’ basis
The lecture will be approximately 35-40 minutes. The format of the lecture is totally at the discretion of
the group. Groups can use ‘powerpoints’, the whiteboard, or simply students’ lecture skills.
Topics to include about the country should/may include, but is not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
History of accounting in the country
Cultural differences (from Canadian culture) affecting accounting and accounting systems.
Political environment and legal system and differences (from Canadian culture) affecting
accounting and accounting systems
Standard setting bodies
Types of business entities and the information needs of various users of the financial
information
Different accounting systems used by different types of business organizations (eg.
Multinational corporation, privately held corporation, non-consolidated entity, partnership)
Presentation options of financial information (eg. Balance sheets, income statement formats)
Differences from IFRS if applicable
Political effect on accounting standards
Accounting profession
Examples of financial statements from selected company highlighting unique accounting
differences from Canadian GAAP.
A file has been included in Brightspace containing a list of pages in the text referring to specific selected
countries. This list may help the group locate material about their selected country.
The instructor will announce to the groups the dates that they will be expected to give the lecture.
Also, again note that a report will be submitted on the day of the lecture. The report will be graded on,
among other considerations, content, professionalism, personal interpretations of the information
provided, grammar, and organization. The report should be typed, and no more than 10 typed pages.
Grades will not be given for the length of the report. If a group can submit a well-presented report of
only three pages, for example, then they can expect a good grade.
WHEN DETERMINING THE GRADE FOR THE REPORT, POINTS WILL BE DEDUCTED IF STUDENTS SIMPLY
READ FROM A SCRIPT DURING THE LECTURE.
Now in its tenth edition, Comparative International Accounting by Nobes and Parker is renowned for
its depth of discussion and comprehensive coverage of the international dimensions of financial
accounting and reporting.
Comparative International Accounting has been extensively revised for the many changes in international
accounting since the last edition.
New to this edition are:
An additional chapter on how the practice of IFRS
•
can vary within a country and between countries
Updated case studies and an increased number of
•
real-world examples
New information on pension accounting, auditing
•
standards and IFRS 8
Increased coverage of China and of small and
•
medium enterprises (SMEs)
•
Contributions from a diverse group of international
practitioners and academics, which are updated
every two years to incorporate the latest
developments in the field
Christopher Nobes is Professor of Accounting at Royal Holloway, University of London. From 1993 to 2001 he was
a representative on the board of the International Accounting Standards Committee.
Robert Parker is Emeritus Professor of Accounting at the University of Exeter, UK. He was formerly editor of the
journal, Accounting and Business Research.
Both authors have received the American Accounting Association’s award of ‘outstanding international accounting
educator’.
Revised resources for lecturers are available to download at www.pearsoned.co.uk/nobes.
an imprint of
CVR_NOBE4767_10_SE_CVR.indd 1
Front cover image: © Getty Images/Iconica
Comparative
International Accounting
It uncovers the conceptual and contextual foundations of the increasingly used International
Financial Reporting Standards (IFRS) and contrasts them with US generally accepted accounting
principles (GAAP). Nobes and Parker examine the key issues inherent in the subject, such as transition,
harmonization and political lobbying, and the international differences that remain. They also look at the
special accounting problems of multinational companies.
Tenth
Edition
Christopher Nobes and Robert Parker
Comparative
International
Accounting
Tenth Edition
Nobes
Parker
www.pearson-books.com
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COMPARATIVE
INTERNATIONAL ACCOUNTING
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We work with leading authors to develop the strongest
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Tenth Edition
COMPARATIVE
INTERNATIONAL
ACCOUNTING
Christopher Nobes
and
Robert Parker
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Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First edition published in Great Britain under the Philip Allan imprint 1981
Second edition published 1985
Third edition published under the Prentice Hall imprint 1991
Fourth edition published 1995
Fifth edition published under the Prentice Hall imprint 1998
Sixth edition published 2000
Seventh edition published 2002
Eighth edition published 2004
Ninth edition published 2006
Tenth edition published 2008
© Prentice Hall Europe 1991, 1995, 1998
© Pearson Education Limited 2000, 2002, 2004, 2006, 2008
Chapter 18 © John Flower 2002, 2004, 2006, 2008
The rights of Christopher Nobes and Robert Parker to be identified as authors
of this work have been asserted by them in accordance with the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without either the prior written permission of the
publisher or a licence permitting restricted copying in the United Kingdom issued by
the Copyright Licensing Agency Ltd, 6–10 Kirby Street, London EC1N 8TS.
ISBN: 978-0-273-71476-7
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Comparative international accounting / [edited by] Christopher Nobes
and Robert Parker. – 10th ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-273-71476-7 (alk. paper) 1. Comparative accounting.
I. Nobes, Christopher. II. Parker, R. H. (Robert Henry)
HF5625.C74 2008
657— dc22
2008007524
10 9 8 7 6 5
12 11 10 09
4
3
2
Typeset in 9.5/12.5pt Stone Serif by 35
Printed by Ashford Colour Press Ltd., Gosport
The publisher’s policy is to use paper manufactured from sustainable forests.
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Brief contents
Contributors
Preface
xvi
xviii
Part I SETTING THE SCENE
1
2
3
4
Introduction
Causes and examples of international differences
International classification of financial reporting
International harmonization
3
24
51
74
Part II FINANCIAL REPORTING BY LISTED GROUPS
5
6
7
8
9
10
The context of financial reporting by listed groups
The requirements of International Financial Reporting Standards
Different versions of IFRS practice
Financial reporting in the United States
Enforcement of Financial Reporting Standards
Political lobbying on Accounting Standards – US, UK and
international experience
101
117
145
157
189
206
Part III HARMONIZATION AND TRANSITION IN EUROPE
AND EAST ASIA
11
12
Harmonization and transition in Europe
Harmonization and transition in East Asia
237
257
Part IV FINANCIAL REPORTING BY INDIVIDUAL COMPANIES
13
14
15
The context of financial reporting by individual companies
Making accounting rules for non-listed business enterprises in Europe
Accounting rules and practices of individual companies in Europe
285
293
314
Part V MAJOR ISSUES IN FINANCIAL REPORTING BY MNEs
16
Key financial reporting topics
343
v
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Brief contents
17
18
19
Consolidation
Foreign currency translation
Segment reporting
368
384
427
Part VI ANALYSIS AND MANAGEMENT ISSUES
20
21
22
23
International financial analysis
International auditing
International aspects of corporate income taxes
Managerial accounting
Glossary of abbreviations
Suggested answers to some of the end-of-chapter questions
Author index
Subject index
457
481
510
531
558
563
583
587
Supporting resources
Visit www.pearsoned.co.uk/nobes to find valuable
online resources
For instructors
I
Complete, downloadable Instructor’s Manual,
Convenience. Simplicity. Success.
including answers to the end of chapter questions
in the text, additional questions for further study and multiple choice questions
(with answers).
I
PowerPoint slides of the figures and tables in the book that can be downloaded
and used as OHTs
For more information please contact your local Pearson Education sales representative
or visit www.pearsoned.co.uk/nobes.
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Contents
Contributors
xvi
xviii
Preface
Part I SETTING THE SCENE
1 Introduction
Contents
Objectives
1.1
1.2
1.3
1.4
1.5
Differences in financial reporting
The global environment of accounting
The nature and growth of MNEs
Comparative and international aspects of accounting
Structure of this book
Summary
References
Useful websites
Questions
2 Causes and examples of international differences
3
3
3
4
5
12
15
18
21
21
22
22
24
Contents
Objectives
24
24
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
25
25
28
29
33
35
36
37
38
Introduction
Culture
Legal systems
Providers of finance
Taxation
Other external influences
The profession
Conclusion on the causes of international differences
Some examples of differences
Summary
References
Questions
46
47
50
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Contents
3 International classification of financial reporting
51
Contents
Objectives
51
52
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
52
53
53
55
56
60
66
67
69
69
Introduction
The nature of classification
Classifications by social scientists
Classifications in accounting
Extrinsic classifications
Intrinsic classifications: 1970s and 1980s
Developments related to the Nobes classification
Further intrinsic classification
Is there an Anglo-Saxon group?
A taxonomy of accounting classifications
Summary
References
Questions
4 International harmonization
70
71
73
74
Contents
Objectives
74
74
4.1
4.2
4.3
4.4
4.5
75
76
78
87
91
Introduction
Reasons for, obstacles to and measurement of harmonization
The International Accounting Standards Committee
Other international bodies
The International Accounting Standards Board
Summary
References
Useful websites
Questions
94
95
97
98
Part II FINANCIAL REPORTING BY LISTED GROUPS
5 The context of financial reporting by listed groups
101
Contents
Objectives
101
101
5.1
5.2
5.3
5.4
5.5
5.6
101
102
105
106
108
110
Introduction
IFRS in the EU
Adoption of, and convergence with, IFRS
Foreign listing and foreign investing
Reconciliations from national rules to US GAAP and IFRS
High-level IFRS/US differences
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Contents
5.7
5.8
Reconciliations from IFRS to US GAAP
Convergence of IFRS and US GAAP
Summary
References
Useful websites
Questions
6 The requirements of International Financial
Reporting Standards
111
113
114
115
116
116
117
Contents
Objectives
117
118
6.1
6.2
6.3
6.4
6.5
6.6
118
118
125
128
130
131
Introduction
The conceptual framework and some basic standards
Assets
Liabilities
Group accounting
Disclosures
Summary
References
Further reading
Useful websites
Questions
Appendix 6.1 An outline of the content of International
Financial Reporting Standards
7 Different versions of IFRS practice
132
132
133
133
133
134
145
Contents
Objectives
145
145
7.1
7.2
7.3
7.4
145
146
148
154
Introduction
Motivations for different IFRS practice
Scope for different IFRS practice
Conclusion
Summary
References
Questions
8 Financial reporting in the United States
155
155
156
157
Contents
Objectives
157
158
8.1
8.2
158
159
Introduction
Regulatory framework
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Contents
8.3
8.4
8.5
8.6
8.7
8.8
8.9
Accounting standard-setters
The conceptual framework
Contents of annual reports
Accounting principles
Consolidation
Audit
Differences from IFRS
Summary
References
Further reading
Useful websites
Questions
9 Enforcement of Financial Reporting Standards
163
166
169
174
181
183
184
186
186
187
188
188
189
Contents
Objectives
189
189
9.1
9.2
9.3
9.4
9.5
189
190
194
195
201
Introduction
Modes and models of enforcement
United States
European Union
Australia
Summary
References
Useful websites
Questions
10 Political lobbying on Accounting Standards – US,
UK and international experience
202
202
204
205
206
Contents
Objectives
206
206
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
207
208
210
220
224
228
229
231
Introduction
Motivations for political lobbying
Political lobbying up to 1990
US political lobbying from 1990
Political lobbying of the IASC/IASB
Preparer attempts to control the accounting standard-setter
Political lobbying of the FASB’s convergence with the IASB
Some concluding remarks
Summary
References
Useful websites
Questions
231
232
234
234
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Contents
Part III HARMONIZATION AND TRANSITION IN EUROPE
AND EAST ASIA
11 Harmonization and transition in Europe
237
Contents
Objectives
237
237
11.1 Introduction
11.2 Harmonization within the European Union
11.3 Transition in Central and Eastern Europe
238
238
244
Summary
References
Useful websites
Questions
253
253
256
256
12 Harmonization and transition in East Asia
257
Contents
Objectives
257
257
12.1 Introduction
12.2 Japan
12.3 China
258
258
272
Summary
References
Further reading
Useful websites
Questions
Appendix 12.1 ASBE Standards
277
278
280
280
280
282
Part IV FINANCIAL REPORTING BY INDIVIDUAL COMPANIES
13 The context of financial reporting by
individual companies
285
Contents
Objectives
285
285
13.1 Introduction
13.2 Outline of differences between national rules and
IFRS or US GAAP
13.3 The survival of national rules
13.4 Financial reporting, tax and distribution
13.5 Special rules for small or unlisted companies
285
Summary
References
292
292
286
286
289
290
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Contents
Useful websites
Questions
14 Making accounting rules for non-listed business
enterprises in Europe
292
292
293
Contents
Objectives
293
293
14.1 Introduction
14.2 Who makes accounting rules?
14.3 Which business enterprises are subject to accounting rules?
293
294
303
Summary
References
Further reading
Useful websites
Questions
Appendix 14.1 Contents of the Plan comptable général
Appendix 14.2 Financial accounting chart of accounts
307
308
309
310
311
312
313
15 Accounting rules and practices of individual
companies in Europe
314
Contents
Objectives
314
314
15.1
15.2
15.3
15.4
314
315
319
324
Introduction
France
Germany
United Kingdom
Summary
References
Further reading
Useful websites
Questions
Appendix 15.1 Formats for French financial statements
Appendix 15.2 Formats for German financial statements
Appendix 15.3 Formats for British financial statements
326
326
327
327
327
328
333
336
Part V MAJOR ISSUES IN FINANCIAL REPORTING BY MNEs
16 Key financial reporting topics
343
Contents
Objectives
343
343
16.1 Introduction
344
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Contents
16.2
16.3
16.4
16.5
16.6
16.7
16.8
16.9
Recognition of intangible assets
Asset measurement
Financial instruments
Provisions
Employee benefits
Deferred tax
Revenue recognition
Comprehensive income
Summary
References
Questions
17 Consolidation
344
345
347
350
354
358
362
364
365
366
366
368
Contents
Objectives
368
368
17.1
17.2
17.3
17.4
17.5
17.6
17.7
369
369
370
371
375
376
377
Introduction
Rate of adoption
The concept of a ‘group’
Harmonization from the 1970s onwards
Definitions of group companies
Publication requirements and practices
Techniques of consolidation
Summary
References
Further reading
Questions
18 Foreign currency translation
381
382
382
382
384
Contents
Objectives
384
385
18.1
18.2
18.3
18.4
18.5
18.6
18.7
18.8
18.9
18.10
18.11
385
389
395
398
401
406
409
411
413
419
423
Introduction
Translation of transactions
Introduction to the translation of financial statements
The US initiative
The temporal method versus the closing rate method
FAS 52
IAS 21
Translation of comprehensive income
Accounting for translation gains and losses
Research findings
An alternative to exchange rates?
Summary
References
423
424
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Contents
Further reading
Questions
19 Segment reporting
425
425
427
Contents
Objectives
427
427
19.1
19.2
19.3
19.4
427
432
433
443
What is segment reporting?
The need for segment information
Disclosure regulations
Evidence on the benefits of segment reporting
Summary
References
Questions
450
451
453
Part VI ANALYSIS AND MANAGEMENT ISSUES
20 International financial analysis
457
Contents
Objectives
457
457
20.1
20.2
20.3
20.4
20.5
458
458
463
470
474
Introduction
Understanding differences in accounting
Disclosure practices in international financial reporting
Interpreting financial statements
Financial analysis and the capital market
Summary
References
Useful websites
Questions
21 International auditing
477
478
480
480
481
Contents
Objectives
481
481
21.1
21.2
21.3
21.4
482
484
489
495
Introduction
Reasons for the internationalization of auditing
Promulgating international standards
The international audit process
Summary
References
Further reading
Useful websites
Questions
507
508
508
508
509
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Contents
22 International aspects of corporate income taxes
510
Contents
Objectives
510
510
22.1
22.2
22.3
22.4
22.5
22.6
511
513
517
518
519
525
Introduction
Tax bases
International tax planning
Transfer pricing
Tax systems
Harmonization
Summary
References
Further reading
Useful websites
Questions
23 Managerial accounting
527
527
529
529
529
531
Contents
Objectives
531
531
23.1
23.2
23.3
23.4
23.5
23.6
23.7
532
533
535
539
540
549
551
Introduction
The balanced scorecard as an overview tool
Currency and control
Variances and foreign exchange
Culture and management accounting
Control and performance
Looking forward
Summary
References
Questions
553
554
557
Glossary of abbreviations
558
Suggested answers to some of the end-of-chapter questions
563
Author index
583
Subject index
587
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Contributors
Co-editor, author of Chapters 2, 3, 4, 5, 6, 7, 8, 12, 13, 16 and 22, and co-author of
Chapter 17
Christopher Nobes Professor of Accounting at Royal Holloway College, University of London. He has also taught in Australia, Italy, the Netherlands, New Zealand,
Scotland, Spain and the United States. He is currently a visiting professor at the
Norwegian School of Management. He was the 2002 ‘Outstanding International
Accounting Educator’ of the American Accounting Association. He was a member
of the Accounting Standards Committee of the United Kingdom and Ireland from
1986 to 1990, and a UK representative on the Board of the International Accounting
Standards Committee from 1993 to 2001. He is vice-chairman of the accounting
committee of the Fédération des Experts Comptables Européens.
Co-editor, author of Chapters 1, 9, 11, 14 and 15, and co-author of Chapter 17
Robert Parker Emeritus Professor of Accounting at the University of Exeter and
former professorial fellow of the Institute of Chartered Accountants of Scotland.
He has also practised or taught in Nigeria, Australia, France and Scotland and was
editor or joint editor of Accounting and Business Research from 1975 to 1993. He was
the British Accounting Association’s ‘Distinguished Academic of the Year’ in 1997,
and the 2003 ‘Outstanding International Accounting Educator’ of the American
Accounting Association.
Authors of other chapters
Jan Buisman IFRS Senior Technical Partner for PricewaterhouseCoopers in
Sweden and partner in the firm’s Global Corporate Reporting Group. He was formerly the Netherlands representative on the International Auditing Practices
Committee, and chairman of Royal NIVRA’s Auditing Standards Board. He is now
chairman of the Accounting Practices Committee of FAR in Sweden. (Co-author of
Chapter 21)
John Flower Formerly, Director of the Centre for Research in European Accounting (Brussels), and earlier with the Commission of the European Communities and
Professor of Accounting at the University of Bristol. He now lives in Germany.
(Chapter 18)
Graham Gilmour Senior Manager in the Global Corporate Reporting Group of
PricewaterhouseCoopers. (Co-author of Chapter 21)
Stuart McLeay Professor of Treasury at the University of Wales, Bangor. Formerly,
he worked as a chartered accountant in Germany, France and Italy, and was a financial analyst at the European Investment Bank. Co-editor of the ICAEW European
Financial Reporting series. (Chapter 20)
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Contributors
Clare B. Roberts Professor of Accounting at the University of Aberdeen Business
School. (Chapter 19)
Stephen Salter Associate Professor and Director of the Center for Global Competitiveness at the University of Cincinnati. Formerly, he was a partner at Ernst &
Young Management Consultants. (Chapter 23)
Stephen A. Zeff Herbert S. Autrey Professor of Accounting at Rice University.
(Chapter 10)
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Preface
Purpose
Comparative International Accounting is intended to be a comprehensive and coherent text on international financial reporting. It is primarily designed for undergraduate and postgraduate courses in comparative and international aspects of
accounting. We believe that a proper understanding requires broad overviews (as in
Part I), but that these must be supported by detailed information on real countries
and companies (as in Parts II to IV) and across-the-board comparisons of major
topics (as in Parts V and VI).
This book was first published in 1981. This present edition (the tenth) is a complete updating of the ninth edition which constituted the most extensive revision
that we had ever made. One chapter (7) has been added: an examination of the possible motivations and opportunities for different national versions of IFRS practice.
A revised manual for teachers and lecturers is available from http://www.
pearsoned.co.uk/nobes. It contains several numerical questions and a selection of
multiple-choice questions. Suggested answers are provided for all of these and for
the questions in the text. In addition, there is now an extensive set of PowerPoint
slides.
Authors
In writing and editing this book, we have tried to gain from the experience of those
with local knowledge. This is reflected in the nature of those we thank below for
advice and in our list of contributors. For example, the original chapter on North
America was co-authored by a Briton who had been assistant research director of
the US Financial Accounting Standards Board; his knowledge of US accounting was
thus interpreted through and for non-US readers. The amended version is by one of
the editors, who has taught in several US universities. This seems the most likely
way to highlight differences and to avoid missing important points through overfamiliarity. The chapter on political lobbying has been written by Stephen Zeff, an
American who is widely acknowledged as having the best overview of historical and
international accounting developments. Other contributors presently live or work
in Germany, in Sweden and in the United States.
Structure
Part I sets the scene for a study of comparative international financial reporting.
Many countries are considered simultaneously in the introductory chapter and
when examining the causes of the major areas of difference (Chapter 2). It is then
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Preface
possible to try to put accounting systems into groups (Chapter 3) and to take the
obvious next step by discussing the purposes and progress of international harmonization of accounting (Chapter 4).
All this material in Part I can act as preparation for the other parts of the book.
Part I can, however, be fully understood only by those who become well-informed
about the contents of the rest of the book, and readers should go back later to
Part I as a summary of the whole.
Part II examines financial reporting by listed groups. In much of the world
this means, at least for consolidated statements, using the rules of either the
International Accounting Standards Board or the United States. In addition to an
overview and chapters on these two ‘systems’ of accounting, Part II also contains
a chapter on whether national versions of IFRS exist, one on enforcement of
accounting regulations, and one on political lobbying.
Part III contains two chapters that examine the processes of harmonization and
transition as applied in the EU and East Asia. Part IV concerns the financial reporting of individual companies, where large international differences remain. There
are three chapters: context, regulatory styles, and accounting differences.
Part V examines, broadly and comparatively, particular major financial reporting
topics: key non-consolidation issues, consolidation, foreign currency translation
and segment reporting. Part VI considers four issues of international analysis and
management: international financial analysis, international auditing, international
aspects of corporate income taxes, and managerial accounting.
At the end of the book, there is a glossary of abbreviations relevant to international accounting, suggested answers to some chapter questions, and two indexes
(by author and by subject).
Publisher’s acknowledgements
We are grateful to the following for permission to reproduce copyright material:
Table 1.4: United Nations Conference on Trade and Development (UNCTAD) (2007)
World Investment Report 2007: Transnational Companies, Exractive Industries and
Development. Geneva, UNCTAD. Copyright © United Nations 2007; Table 1.8:
United Nations Conference on Trade and Development (UNCTAD) (2007) World
Investment Report 2007: Transnational Companies, Exractive Industries and Development. Geneva, UNCTAD. Copyright © United Nations 2007; Table 2.3: Source of
data: Datastream. Reproduced by kind permission of Jon Tucker and David Bence
of Bristol Business School; Figure 3.1: American Accounting Association (1977)
Accounting Review, Supplement to Vol. 52, 1977, p. 99. Copyright © 1977 American
Accounting Association. Reproduced with permission; Figure 3.2: Puxty, A.G.,
Willmott, H.C., Cooper, D.J. and Lowe, A.E. (1987) ‘Modes of regulation in
advanced capitalism: locating accountancy in four countries’, Accounting,
Organizations and Society, Vol. 12, No. 3, p. 283. Reproduced with permission of
Elsevier; Table 3.1: Nair, R.D. and Frank, W.G. (1980) ‘The impact of disclosure
and measurement practices on international accounting classifications’, Accounting
Review, Vol. 55, No. 3, p. 429. Reproduced with permission of the American
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Accounting Association; Table 5.3: Adapted from BASF (2005) BASF Annual Report
2004, pp. 92, 93, BASF SA, Ludwigshafen, Germany. Reproduced with permission;
Table 5.6: Extracted from the Bayer AG (2007) Bayer AG Annual Report 2006, Bayer
AG, Leverkusen, Germany. Reproduced with permission; Table 5.8: Adapted from
the Degussa AG (2005) Degussa AG Annual Report 2004, Degussa AG, Düsseldorf,
Germany. Reproduced with permission; Tables 7.1, 7.2 and 7.3: Nobes, C.W. (2006)
‘The survival of international differences under IFRS: towards a research agenda’,
Accounting and Business Research, Vol. 36, No. 3. Reproduced with permission; Table
8.2: American Institute of Certified Public Accountants (AICPA) (2006) Accounting
Trends and Techniques (issued annually). AICPA, Jersey City, New Jersey, p. 133.
Copyright © 2006 by the American Institute of Certified Public Accountants, Inc.
All rights reserved. Reprinted with permission; Table 8.3: American Institute of
Certified Public Accountants (2006) Accounting Trends and Techniques (issued annually). AICPA, Jersey City, New Jersey, p. 295. Copyright © 2006 by the American
Institute of Certified Public Accountants, Inc. All rights reserved. Reprinted with
permission; Table 8.4: American Institute of Certified Public Accountants (2006)
Accounting Trends and Techniques (issued annually). AICPA, Jersey City, New Jersey,
p. 273. Copyright © 2006 by the American Institute of Certified Public Accountants,
Inc. All rights reserved. Reprinted with permission; Table 8.5: American Institute of
Certified Public Accountants (2006) Accounting Trends and Techniques (issued annually). AICPA, Jersey City, New Jersey, p. 278. Copyright © 2006 by the American
Institute of Certified Public Accountants, Inc. All rights reserved. Reprinted with
permission; Table 8.8: American Institute of Certified Public Accountants (2006)
Accounting Trends and Techniques (issued annually). AICPA, Jersey City, New Jersey,
p. 153. Copyright © 2006 by the American Institute of Certified Public Accountants,
Inc. All rights reserved. Reprinted with permission; Table 13.1: Adapted from BASF
(2005) BASF Annual Report 2004, pp. 92, 93, BASF SA, Ludwigshafen, Germany.
Reproduced with permission; Table 13.2: Bayer AG (2005) Bayer AG Annual Report
2004, Bayer AG, Leverkusen, Germany, pp. 74–84. Reproduced with permission;
Figure 16.2: Adapted from FEE (1995) ‘A classification of non-state pension
schemes’ in Survey of Pensions and Other Retirement Benefits in EU and non-EU
Countries, Routledge, London. Reproduced with permission of the Taylor & Francis
Group, Ltd; Table 19.2: Honda (2007) Honda Annual Report 2006, Honda, Tokyo,
Japan, p. 63. Reproduced with permission; Table 20.4: The Volvo Group (2005) The
Volvo Group Financial Report, 2004, AB Volvo, Goteborg, Sweden. Reproduced with
permission; Table 23.1: Landry, S., Chan, W. and Jalbert, T. (2002) Balanced scorecard for multinationals, Journal of Corporate Accounting and Finance, p. 38. Copyright
© 2002 John Wiley & Sons. Reprinted by permission; Table 23.4: Derived from
Harrison, G. and McKinnon, J. (1999) ‘Cross-cultural research in management control systems design: A review of the current state’, Accounting, Organizations and
Society, Vol. 24, p. 486 where full references to cited papers are given. Reproduced
with permission from Elsevier.
In some instances we have been unable to trace the owners of copyright material,
and we would appreciate any information that would enable us to do so.
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Other acknowledgements
In the various editions of this book, we have received great help and much useful
advice from many distinguished colleagues in addition to our contributors. We
especially thank Sally Aisbitt (deceased); Dr Ataur Rahman Belal, Aston Business
School, Aston University; Andrew Brown of Ernst & Young; John Carchrae of the
Ontario Securities Commission; Terry Cooke of the University of Exeter; John
Denman and Peter Martin of the Canadian Institute of Chartered Accountants;
Brigitte Eierle of Regensburg University; Maria Frosig, Niels Brock Copenhagen
Business School, Denmark; Michel Glautier of ESSEC; Dr Jing Hui Liu, University of
Adelaide, Australia; Horst Kaminski, formerly of the Institut der Wirtschaftsprüfer;
Jan Klaassen of the Free University, Amsterdam; Yannick Lemarchand of the
University of Nantes; Ken Lemke of the University of Alberta; Klaus Macharzina of
the University of Hohenheim; Malcolm Miller and Richard Morris of the University
of New South Wales; Geoff Mitchell, formerly of Barclays Bank; Jules Muis of
the European Commission; Ng Eng Juan of Nanyang Technological University of
Singapore; Graham Peirson of Monash University; Jacques Richard of the University
of Paris Dauphine; Alan Richardson of York University, Toronto; Alan Roberts of
the University of Rennes; Paul Rutteman, formerly of EFRAG; Etsuo Sawa, formerly
of the Japanese Institute of Certified Public Accountants; Hein Schreuder, formerly
of the State University of Limburg; Marek Schroeder of the University of
Birmingham; Patricia Sucher, formerly of Royal Holloway, University of London;
Lorena Tan, formerly of Price Waterhouse, Singapore; Ann Tarca of the University
of Western Australia; Peter van der Zanden, formerly of Moret Ernst & Young and
the University of Tilburg; Gerald Vergeer of Moret Ernst & Young; and Ruud
Vergoossen of Royal NIVRA and the Free University of Amsterdam; Dr Yap Kim Len,
HELP University College, Malaysia. We are also grateful for the help of many secretaries over the years.
Despite the efforts of all these worthies, errors and obscurities will remain, for
which we are culpable jointly and severally.
Christopher Nobes
Robert Parker
Universities of London
and Exeter
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Part I
SETTING THE SCENE
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CONTENTS
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Introduction
Robert Parker
1.1
1.2
1.3
1.4
1.5
OBJECTIVES
Page 3
Differences in financial reporting
The global environment of accounting
1.2.1 Accounting and world politics
1.2.2 Economic globalization, international trade and foreign direct investment
1.2.3 Globalization of stock markets
1.2.4 Patterns of share ownership
1.2.5 International monetary system
The nature and growth of MNEs
Comparative and international aspects of accounting
Structure of this book
1.5.1 An outline
1.5.2 Setting the scene (Part I)
1.5.3 Financial reporting by listed groups (Part II)
1.5.4 Harmonization and transition in Europe and East Asia (Part III)
1.5.5 Financial reporting by individual companies (Part IV)
1.5.6 Major issues in financial reporting by MNEs (Part V)
1.5.7 Analysis and management issues (Part VI)
Summary
References
Useful websites
Questions
After reading this chapter, you should be able to:
l
explain why international differences in financial reporting persist, in spite of the
adoption of international financial reporting standards (IFRS) by the member states
of the European Union and some other important countries;
l
illustrate the ways in which accounting has been influenced by world politics, the
growth of international trade and foreign direct investment, the globalization of
stock markets, varying patterns of share ownership, and the international monetary
system;
l
outline the nature and growth of multinational enterprises (MNEs);
l
explain the historical, comparative and harmonization reasons for studying
comparative international accounting.
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1.1 Differences in financial reporting
Differences in financial reporting are the norm. If a number of accountants from
different countries, or even one country, are given a set of transactions from which
to prepare financial statements, they will not produce identical statements. There
are several reasons for this. Although all accountants will follow a set of rules,
whether implicit or explicit, no set of rules covers every eventuality or is prescriptive to the minutest detail. Thus there is always room for professional judgement,
a judgement that will depend in part on the accountants’ environments (e.g.
whether or not they see the tax authorities as the main users of the statements).
Moreover, the accounting rules themselves may differ not just between countries
but also within countries. In particular the rules for company groups may differ
from the rules for individual companies. Multinational enterprises (MNEs) which
operate as company groups in more than one country may find inter-country differences particularly irksome.
Awareness of these differences has led in recent decades to impressive attempts to
reduce them, in particular, by the International Accounting Standards Board (IASB),
which issues International Financial Reporting Standards (IFRS), and by the European
Union (EU), which has issued Directives and Regulations on accounting and financial
reporting. The importance of American stock markets has meant that US generally
accepted accounting principles (GAAP), the most detailed and best known of all
national sets of rules, have greatly influenced rule-making worldwide. The work of
all these regulatory agencies has certainly led to a lessening of international differences but, as this book will show, many still remain and some will always remain.
An example of the differences that can, and continue, to arise is provided by the
record of GlaxoSmithKline (GSK) and its predecessor GlaxoWellcome (GW) since
1995. GW merged with SmithKlineBeecham. It is listed in New York as well as on
the London Stock Exchange, and in accordance with requirements of the US
Securities and Exchange Commission (SEC) provides a reconciliation to US GAAP
of its earnings and shareholders’ equity as measured under UK rules (from 2005
onwards under IFRS). The differences as disclosed in Tables 1.1 and 1.2 are startling.
Data from other such reconciliations are given later in this book. Not all are as
extreme as those of GSK, but it is clear that the differences can be very large and
that no easy rule-of-thumb adjustment procedure can be used. One reason for this
is that the differences depend not only on the differences between two or more
sets of rules, but also on the choices allowed to companies within those rules. The
adoption by listed companies within the EU of IFRS from 2005 onwards, and greater
convergence between those standards and US GAAP, has reduced, but not removed,
these differences.
Understanding why there have been differences in financial reporting in the
past, why they continue in the present, and will not disappear in the future, is one
of the main themes of comparative international accounting. In the next two sections of this chapter we look at the global environment of accounting and financial
reporting, and in particular at the nature and growth of multinational enterprises.
We then explore in more depth the reasons for studying comparative international
accounting. In the last section we explain the structure of the book.
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Chapter 1
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Table 1.1 GlaxoSmithKline reconciliations of earnings to US GAAP
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
UK
IFRS
US
Difference
(% change)
£m
£m
£m
%
4,816
5,498
296
979
952
1,010
913
(5,228)
(143)
503
2,420
2,732
3,336
4,465
−59
−51
−49
− 45
−50
–227
–105
–87
–46
–36
−31
–19
717
1,997
1,850
1,836
1,811
4,106
3,053
3,915
4,484
4,302
Table 1.2 GlaxoSmithKline reconciliations of shareholders’ equity to US GAAP
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
UK
IFRS
US
Difference
(% change)
£m
£m
£m
%
7,570
9,648
8,168
8,153
7,882
8,007
7,230
44,995
40,107
34,992
34,116
34,042
34,282
34,653
+8,876
+566
+328
+196
+130
+499
+443
+ 432
+574
+ 475
+353
+259
91
1,225
1,843
2,702
3,142
7,517
7,390
6,581
5,059
5,925
1.2 The global environment of accounting
Accounting is a technology which is practised within varying political, economic
and social contexts. These have always been international as well as national,
but since at least the last quarter of the twentieth century, the globalization of
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Setting the scene
accounting rules and practices has become so important that narrowly national
views of accounting and financial reporting can no longer be sustained.
Of particular contextual importance are:
l
major political issues, such as the dominance of the United States and the expansion of the European Union;
l
economic globalization, including the liberalization of, and dramatic increases in,
international trade and foreign direct investment;
l
the emergence of global financial markets;
l
patterns of share ownership, including the influence of privatization;
l
changes in the international monetary system;
l
the growth of multinational enterprises (MNEs).
These developments are interrelated and all have affected financial reporting and
the transfer of accounting technology from one country to another. They are now
examined in turn.
1.2.1
Accounting and world politics
Important political events since the end of the Second World War in 1945 have
included: the emergence of the United States and the Soviet Union as the world’s
two superpowers, followed by the collapse of Soviet power at the end of the 1980s;
the break-up of the British and continental European overseas empires; and the
creation of the European Union, which has expanded from its original core of six
countries to include, among others, the UK and eventually many former communist countries. More detail on the consequences that these events have had for
accounting is given in later chapters. The following illustrations may suffice for the
moment:
l
US ideas on accounting and financial reporting have been for many decades, and
remain, the most influential in the world. The collapse of the US energy trading
company, Enron, in 2001 and the demise of its auditor, Andersen, had repercussions in all major economies.
l
The development of international accounting standards (at first of little interest
in the US) owes more to accountants from former member countries of the
British Empire than to any other source. The IASC and its successor are based in
London; the driving force behind the foundation of the IASC, Lord Benson, was
a British accountant born in South Africa.
l
Accounting in developing countries is still strongly influenced by the former
colonial powers. Former British colonies tend to have Institutes of Chartered
Accountants (set up after the independence of these countries, not before),
Companies Acts and private sector accounting standard-setting bodies. Former
French colonies tend to have detailed governmental instructions, on everything
from double entry to published financial statements, that are set out in national
accounting plans and commercial codes.
l
Accounting throughout Europe has been greatly influenced by the harmonization programme of the EU, especially its Directives on accounting and, more
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Chapter 1
Introduction
recently, its adoption of IFRS for the consolidated financial statements of listed
companies.
l
1.2.2
The collapse of communism in Central and Eastern Europe led to a transformation of accounting and auditing in many former communist countries. The
reunification of Germany put strains on the German economy such that large
German companies needed to raise capital outside Germany and to change their
financial reporting in order to be able to do so.
Economic globalization, international trade and foreign direct
investment
A notable feature of the world economy since the Second World War has been the
globalization of economic activity. This has meant the spreading round the world
not just of goods and services but also of people, technologies and concepts. The
number of professionally qualified accountants has greatly increased. Member
bodies of the International Federation of Accountants (IFAC) currently have well
over two million members. Accountants in all major countries have been exposed
to rules, practices and ideas previously alien to them.
Much has been written about globalization and from many different and contrasting points of view. One attractive approach is the ‘globalization index’ published annually in the journal Foreign Policy. This attempts to quantify the concept
by ranking countries in terms of their degree of globalization. The components of
the index are: political engagement (measured, inter alia, by memberships of international organizations); technological connectivity (measured by internet use);
personal contact (measured, inter alia, by travel and tourism and telephone traffic);
and economic integration (measured, inter alia, by international trade and foreign
direct investment). The compilers of the index acknowledge that not everything can
be quantified; for example, they do not include cultural exchanges. The ranking of
countries varies from year to year but the most globalized countries according to
the index are small open economies such as Singapore, Switzerland and Ireland.
Small size is not the only factor, however, and the Top 20 typically also include
the US, the UK and Germany. A possible inference from the rankings is that
measures of globalization are affected by national boundaries. How different would
the list be if the EU were one country and/or the states of the US were treated as
separate countries?
From the point of view of financial reporting, the two most important aspects of
globalization are international trade and foreign direct investment (FDI) (i.e. equity
interest in a foreign enterprise held with the intention of acquiring control or
significant influence). Table 1.3 illustrates one measure of the liberalization and
growth of international trade: merchandise exports as a percentage of gross domestic
product (GDP). Worldwide, the percentage has more than trebled since the end of
the Second World War. The importance of international trade to member states
of the EU is particularly apparent; much of this is intra-EU trade. At the regional
level, economic integration and freer trade have been encouraged through the EU
and through institutions such as the North American Free Trade Area (NAFTA) (the
US, Canada and Mexico). The liberalization has also been due to the dismantling of
trade barriers through ‘rounds’ of talks under the aegis of the General Agreement on
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Table 1.3 Merchandise exports as a percentage of gross domestic product at
1990 prices (selected countries, 1950–98)
France
Germany
Netherlands
United Kingdom
Spain
United States
Mexico
Brazil
China
India
Japan
World
1950
1973
1998
7.7
6.2
12.2
11.3
3.0
3.0
3.0
3.9
2.6
2.9
2.2
5.5
15.2
23.8
40.7
14.0
5.0
4.9
1.9
2.5
1.5
2.0
7.7
10.5
28.7
38.9
61.2
25.0
23.5
10.1
10.7
5.4
4.9
2.4
13.4
17.2
Source: Maddison, A. (2001) The World Economy: A Millennial Perspective. Organisation for Economic Co-operation
and Development (OECD), Paris.
Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO).
One area in which trade is insufficiently liberalized is agricultural products, leading
to the criticism that liberalization has benefited developed rather than developing
countries. For a discussion of both the positive and negative aspects of international
trade, see Finn (1996).
The importance of foreign direct investment is illustrated in Table 1.4, which
ranks the 10 leading MNEs by the size of their foreign assets. It also shows the
Table 1.4 World’s top ten non-financial multinationals ranked by foreign assets,
2004
Company
Country Industry
Foreign
Assets
(US $bn)
General Electric
Vodaphone
Ford Motor
General Motors
BP
Exxon Mobil
Royal Dutch/Shell
Toyota Motor
Total
France Telecom
US
UK
US
US
UK
US
NL/UK
Japan
France
France
449
248
180
174
155
135
130
123
97
86
Electrical
Telecoms
Motors
Motors
Oil
Oil
Oil
Motors
Oil
Telecoms
% that is foreign of
Assets
Sales
Employees
TNI
60
96
59
36
80
69
67
53
86
65
37
85
42
31
81
70
64
60
81
41
46
80
46
35
83
50
84
36
56
40
48
87
49
34
81
63
72
49
74
49
Note: TNI = transnationality index, calculated as an average of the assets, sales and employees percentages.
Source: United Nations Conference on Trade and Development (UNCTAD) (2007) World Investment Report 2007:
Transnational Companies, Extractive Industries and Development. Geneva, UNCTAD. Copyright © United Nations
2007. Reproduced with permission.
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Chapter 1
Introduction
percentages of their assets, sales and employees that are foreign, and a simple
transnationality index (TNI), calculated as the average of the percentages. The home
countries of these MNEs are the US (4 MNEs), France (2), the UK (2), Japan (1)
and the Netherlands/UK (1). The industries represented are electrical equipment,
telecommunications, motor vehicles and oil. Two UK companies, Vodafone and BP,
have the highest transnationality indices.
1.2.3
Globalization of stock markets
At the same time as international trade and FDI have increased, capital markets
have become increasingly globalized. This has been made possible by the deregulation of the leading national financial markets (e.g. the ‘Big Bang’ on the London
Stock Exchange in 1986); the speed of financial innovation (involving new trading
techniques and new financial instruments of sometimes bewildering complexity);
dramatic advances in the electronic technology of communications; and growing
links between domestic and world financial markets. Table 1.5 lists the countries
where there are stock exchanges with more than 250 domestic listed companies
and also a market capitalization (excluding investment funds) of more than
$800 billion.
Table 1.5 Major stock exchanges, April 2007
Market
capitalization
of domestic
equities ($bn)
Market
capitalization
as % of United
Kingdom
Country
Exchange
Domestic
listed
companies
Europe and Africa
–
Germany
South Africa
Switzerland
United Kingdom
Euronext
Deutsche Börse
Johannesburg
Swiss exchanges
London
956
658
345
256
2,603
2,229
1,022
807
1,342
3,961
56
26
20
34
100
São Paulo
Toronto
NASDAQ
New York
362
3,832
2,788
1,795
845
1,823
4,061
16,112
21
46
102
406
Hong Kong
Bombay (Mumbai)
Tokyo
Korean
Australian
1,177
4,826
2,396
1,695
1,777
1,821
932
4,653
905
1,282
46
23
117
23
32
The Americas
Brazil
Canada
United States
Asia-Pacific
China
India
Japan
Korea
Australia
Sources: World Federation of Exchanges; Euronext.
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Precise measures of the internationalization of the world’s stock markets are hard
to construct. Two crude measures are cross-border listings and the extent to which
companies translate their annual reports into other languages for the benefit of
foreign investors. For example, French companies are listed on stock exchanges
in Australia, Belgium, Canada, Germany, Luxembourg, the Netherlands, Spain,
Sweden, Switzerland, the UK and the US (Gélard, 2001, pages 1038–9). Table 1.6
shows the extent of listing by foreign companies on eight of the world’s major stock
exchanges. In absolute terms, the largest number of foreign listings is on the New
York stock exchange; in percentage terms, Switzerland has the most foreign listings.
The lack of foreign listings in Tokyo (the world’s second largest stock exchange) and
Toronto is very apparent. Davis et al. (2003) examine the international nature of
stock markets from the nineteenth century onwards, and chart the rise in listing
requirements on the London, Berlin, Paris and New York exchanges.
Some companies publish their annual reports in more than one language. The
most important reason for this is the need for large MNEs to raise money and have
their shares traded in the US and the UK. This explains why English is the most
common secondary reporting language. Other reasons for using more than one language are that the MNE is based in a country with more than one official language,
that the MNE has headquarters in more than one country or that it has substantial
commercial operations in several countries. For example, the Finnish telecommunications company, Nokia, publishes its annual report and financial statements
not only in Finnish and Swedish (the two official languages of Finland) but also in
English. The Business Review section of the report is also available in French,
German, Italian, Portuguese, Spanish, Chinese and Japanese (Parker, 2001b). The
translation of annual reports is further discussed in Chapter 20. Evans (2004) discusses the problems of translating accounting terms from one language to another.
A more sophisticated measure of internationalization is the extent to which stock
markets have become ‘integrated’, in the sense that securities are priced according
to international rather than domestic factors (Wheatley, 1988). Froot and Dabora
(1999) show that domestic factors are still important even for such Anglo-Dutch
‘twin’ stocks as Unilever NV/PLC.
Table 1.6 Foreign company listings on eight major stock exchanges, April 2007
Euronext (France, Netherlands, Belgium, Portugal)
Germany
London
NASDAQ
New York
Switzerland
Toronto
Tokyo
No.
As % of total
listings
246
101
648
326
447
89
54
26
20
13
20
10
20
26
1
1
Source: World Federation of Exchanges.
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Chapter 1
Introduction
National stock exchange regulators not only operate in their domestic markets
but are also, through the international bodies to which they belong, such as the
International Organization of Securities Commissions (IOSCO) and the Committee
of European Securities Regulators (CESR), playing increasingly important roles in
the internationalization of accounting rules (see Chapters 4 and 11).
1.2.4
Patterns of share ownership
The globalization of stock markets does not mean uniformity of investor behaviour
around the world. Patterns and trends in share ownership differ markedly from
country to country. The nature of the investors in listed companies has implications
for styles of financial reporting. The greater the split between the owners and managers of these companies, the greater the need for publicly available and independently audited financial statements. La Porta et al. (1999) distinguish companies
whose shares are widely held from those that are family controlled, state controlled,
controlled by a widely held financial corporation, or controlled by a widely held
non-financial corporation. According to their data, which cover 27 countries (not
including China, India and Eastern Europe) in the mid-1990s, 36 per cent of the
companies in the world were widely held, 30 per cent were family controlled
and 18 per cent were state controlled. The countries whose largest 20 companies
were most (60 per cent or more) widely held were, in descending order, the UK,
Japan, the US, Australia, Ireland, Canada, France and Switzerland. The countries
whose largest 20 companies were most (60 per cent or more) family controlled
were Mexico, Hong Kong and Argentina. The countries with companies with most
(35 per cent or more) state control were Austria, Singapore, Israel, Italy, Finland and
Norway. The countries with companies held 15 per cent or more by a widely-held
financial corporation were Belgium, Germany, Portugal and Sweden.
More up-to-date data is available from surveys of share ownership. These show
different trends in different countries. In the US the percentage of persons investing in shares directly or through mutual funds (known as unit trusts in the UK) rose
from 19 per cent in 1983 to 37 per cent in 1992 to 50 per cent in 2002 (Investment
Company Institute, 2002). By contrast, in the UK the equivalent percentages were
26 per cent in 1990, 20 per cent in 1998 and 16 per cent in 2002 and 2004.
Continuing trends in the UK have been the growth of shareholdings by foreign
investors (12 per cent in 1990, 28 per cent in 1998, 33 per cent in 2004) and by
financial institutions such as pension funds and insurance companies (33 per cent
in 2004, down from a peak of 52 per cent in 1991 as holdings by foreign investors
increased) (National Statistics, 2005).
Privatization , i.e. the selling-off of state-owned businesses, has greatly expanded
the private sector in many countries. In the UK, for example, the privatization of
public utilities and other publicly owned enterprises from the 1980s onwards
brought several very large organizations within the ambit of company law and
accounting standards. In the short run this increased the number of shares held by
persons, but many of them later sold out and some companies have deliberately
tried to reduce the number of their small shareholders. Privatization has opened
companies up to foreign ownership, thus stimulating the growth of FDI, and facilitating their expansion into foreign markets. Privatization has been most dramatic
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in the former communist countries of Central and Eastern Europe. In some cases,
notably in Russia, privatization has transferred the ownership of large companies
from the state to a small group of so-called ‘oligarchs’.
1.2.5
International monetary system
From 1945 to 1972, the international monetary system under the Bretton Woods
Agreement was based on fixed exchange rates with periodic devaluations. From
1973, major currencies have floated against each other and exchange rates have
been very volatile (as illustrated in Table 18.1). Within the EU, however, most
national currencies, with the notable exception of the pound sterling, were replaced
by a single currency, the euro, in 1999. Accounting standard-setters have been
much concerned with hedging activities and other transactions in foreign currency.
There is discussion of these issues in Chapters 16 and 18.
1.3 The nature and growth of MNEs
MNEs may be broadly defined as those companies that produce a good or a service
in two or more countries. ‘MNE’ is an economic category not a legal one. The size
of most MNEs is such that they need to raise external finance and hence to be incorporated companies listed on stock exchanges. As listed companies (i.e. whose shares
are publicly traded), their financial reporting is subject to special regulations that are
discussed at length in Part II of this book. The existence of MNEs brought a new
dimension to areas such as auditing, which already existed at the domestic level (see
Chapter 21). Issues such as the translation of the financial statements of foreign subsidiaries for the preparation of consolidated statements (see Chapter 18) are peculiar
to multinational companies. Most of the world’s MNEs produce consolidated financial statements in accordance with either US GAAP, IFRS or approximations thereto.
The above definition of MNEs is broad enough to include early fourteenthcentury enterprises such as the Gallerani company, a Sienese firm of merchants
that had branches in London and elsewhere and whose surviving accounts provide
one of the earliest extant examples of double entry (Nobes, 1982). From the late
sixteenth century onwards, chartered land and trading companies – notably the
English, Dutch and French East India Companies – were early examples of ‘resourceseeking’ MNEs, i.e. those whose object is to gain access to natural resources that are
not available in the home country. The origins of the modern MNE are to be found
in the period 1870 to 1914, when European people and European investment were
exported on a large scale to the rest of the world and when the United States
emerged as an industrial power. On the eve of the First World War, the stock of
accumulated FDI was greatest in, by order of magnitude, the United Kingdom, the
United States, Germany, France and the Netherlands. Two world wars decreased
the relative economic importance of European countries and increased that of the
United States. Table 1.7 shows how the rankings changed from 1914 to 2005. After
the Second World War, the United States became, as it remains, the world’s largest
exporter of FDI. More recently, however, European-based multinationals have
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Chapter 1
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Table 1.7 Percentage shares of estimated stock of accumulated foreign direct
investment by country of origin, 1914–2005 (%)
United Kingdom
United States
Germany
France
Netherlands
Other Western Europe
Japan
Rest of world
1914
1938
1980
1990
2000
2005
45
14
14
11
5
5
–
6
100
40
28
1
9
10
3
–
9
100
15
42
8
5
8
9
4
9
100
13
24
8
6
6
16
11
16
100
14
20
8
7
5
22
4
20
100
12
19
9
8
6
17
4
25
100
Sources: Based on Dunning (1992) and UNCTC (2006).
regained some of their relative importance and both US and European MNEs were
challenged, at least for a time, by those of Japan. All these countries are major
recipients of FDI as well as providers of it.
MNEs can be classified according to their major activity. Most nineteenth-century and earlier multinationals were ‘resource-seeking’. In the twentieth century
other types have developed. Some MNEs are ‘market-seeking’, i.e. they establish
subsidiaries whose main function is to produce goods to supply the markets of the
countries in which they are located. Other MNEs are ‘efficiency-seeking’, i.e. each
subsidiary specializes in a small part of a much wider product range, or in discrete
stages in the production of a particular product. Manufacturing MNEs have also
developed subsidiaries that specialize in trade and distribution, or in providing services such as insurance, banking or finance. Some MNEs, such as the larger banks and
accountancy firms, provide services on a global basis. Improvements in technology
have led to the creation of overseas subsidiaries specializing in information transfer.
The extent to which the production of goods and services has been internationalized varies between countries and industries. The United States has the world’s
highest absolute value of FDI, but the size of its economy is such that investment
overseas is relatively less important for the United States than for many European countries, although it is higher in percentage terms than that of Japan (see
Table 1.8). Table 1.9 demonstrates the extent to which the headquarters of the
largest MNEs are located in the US, Japan and the European Union.
Economists and others have sought to explain why MNEs exist. The most
favoured explanation is Dunning’s eclectic paradigm, which states that the propensity for firms of a particular country to engage in, or to increase, overseas production is determined by three interrelated conditions. These are the extent to which
the enterprises possess, or can gain privileged access to, assets that provide them
with a competitive advantage over local firms; the extent to which relative transactions costs make it appropriate for the enterprises to use such advantages
themselves rather than to license or franchise them to other firms; and the extent
to which relevant costs and government policies push enterprises towards locating
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Table 1.8 Accumulated stock of outward foreign direct investment as percentage
of GDP in 2005 (selected countries)
Country
%
Norway
Switzerland
Belgium
Netherlands
Sweden
United Kingdom
France
Canada
Germany
Italy
United States
Japan
World
123
107
104
103
57
56
41
35
35
17
16
9
24
Source: United Nations Conference on Trade and Development (UNCTAD) (2007) World Investment Report 2007:
Transnational Companies, Extractive Industries and Development. Geneva, UNCTAD. Copyright © United Nations
2007. Reproduced with permission.
Table 1.9 Share of the world’s top 500 MNEs by revenues, 2005
United States
France
United Kingdom
Germany
Netherlands
Italy
Spain
Sweden
Belgium
Finland
Denmark
UK/Netherlands
Belgium/Netherlands
Ireland
Luxembourg
Total EU
Japan
China
Canada
Switzerland
South Korea
Australia
India
Brazil
Mexico
Russia
Taiwan
Norway
Other countries (one each)
170
38
38
35
14
10
9
6
4
2
2
1
1
1
1
162
70
20
14
12
12
8
6
4
5
5
3
2
7
500
Source: Fortune Global 500, 2006.
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Chapter 1
Introduction
production overseas rather than towards meeting demand by exports from the
home country. An important consequence of the growth of multinational enterprise is that much of the world’s trade takes place within firms as well as between
countries. The prices at which the transactions take place are internal transfer
prices, which are often not the same as open market prices. This has important
implications, for taxation, management control, and the relationships between
MNEs and their host countries. These matters are considered further in Chapters 22
and 23.
The rise of the MNE is one of the main factors responsible for the internationalization of the accountancy profession. Accountancy firms have followed their
clients around the world, setting up new offices overseas and/or merging with
overseas firms. The audit of MNEs is considered further in Chapter 21.
1.4 Comparative and international aspects of accounting
Given the global context set out above, there are clearly strong arguments for studying international accounting. Moreover, there are at least three reasons why a comparative approach is appropriate. First, it serves as a reminder that the US and other
Anglo-Saxon1 countries are not the only contributors to accounting as it is practised
today. Secondly, it demonstrates that the preparers, users and regulators of financial reports in different countries can learn from each others’ ideas and experiences.
Thirdly, it explains why the international harmonization of accounting has been
deemed desirable but has proved difficult to achieve (Parker, 1983). These three
reasons are now looked at in more detail.
Historically, a number of countries have made important contributions to the
development of accounting. The Romans had forms of bookkeeping and the calculation of profit, although not double entry. In the Muslim world, while Christian
Europe was in the Dark Ages, developments in arithmetic and bookkeeping paved
the way for later progress. In the fourteenth and fifteenth centuries, the Italian city
states were the leaders in commerce, and therefore in accounting. The ‘Italian
method’ of bookkeeping by double entry spread first to the rest of Europe and eventually round the whole world. One lasting result of this dominance is the number
of accounting and financial words in English and other languages that are of Italian
origin. Some examples in English are bank, capital, cash, debit, credit, folio, imprest
and journal.
In the nineteenth century, Britain took the lead in accounting matters, to be
followed in the twentieth century by the United States. As a result, English has
become established as the world’s language of accounting (Parker, 2000 and 2001a).
Table 1.10, which gives details of some members of IFAC, shows, inter alia, that
the modern accountancy profession developed first in Scotland and England. The
table also shows that some countries (e.g. Australia, Canada and the UK) have more
1
This expression is used in this book with its common European meaning, i.e. the UK, the US and other mainly
English-speaking countries such as Canada, Australia and New Zealand.
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Table 1.10 Age and size of some members of IFAC
Country
Body
Founding date∗
Approx. members
2006 (000s)
Australia
CPA Australia
1952 (1886)
112
Institute of Chartered Accountants in Australia
1928 (1885)
43
Brazil
Conselho Federal de Contabilidade
1946
Canada
Canadian Institute of Chartered
Accountants
1902 (1880)
71
Certified General Accountants Association of
Canada (CGAA-Canada)
1913
42
Society of Management Accountants of
Canada (CMA-Canada)
1919
37
Chinese Institute of Certified
Public Accountants
1988
142+
France
Ordre des Experts Comptables
1942
18
Germany
Institut der Wirtschaftsprüfer
1932
13
India
Institute of Chartered Accountants of India
1949
131
Japan
Japanese Institute of Certified
Public Accountants
1948 (1927)
17∗∗
Koninklijk Nederlands Instituut van
Registeraccountants
1967 (1895)
13
Institute of Chartered Accountants of New
Zealand
1909 (1894)
29
Institute of Chartered Accountants in England
and Wales
1880 (1870)
128
Institute of Chartered Accountants of Scotland
1951 (1854)
17
Association of Chartered Certified Accountants
1939 (1891)
115
Chartered Institute of Management
Accountants
1919
70
Institute of Chartered Accountants in Ireland
1888
13
American Institute of Certified
Public Accountants
1887
330
China
Netherlands
New Zealand
United Kingdom
and Ireland
United States
194
Notes: ∗Dates of earliest predecessor bodies in brackets. The names of some of the bodies have changed from time to time.
∗∗Excluding junior CPAs.
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than one important accountancy body. A multiplicity of bodies has been the norm
in Anglo-Saxon countries. The largest body is the American Institute of Certified
Public Accountants.
Table 1.10 does not show rates of growth; the Chinese Institute of Certified
Public Accountants has grown in recent years to become the third largest in the
world. The table also does not show the extent to which bodies have worldwide and
not just national membership. Two UK-based bodies, the ACCA and the CIMA,
have been notably active and successful in this regard. A look at the table also suggests that some countries have far more accountants per head of population than
others: compare, for example, France (population 60 million; accountants 18,000)
and New Zealand (population 4 million; accountants 29,000). Of course, comparisons such as these depend in part on how the term ‘accountant’ is defined in each
country. There is further discussion of the accountancy profession in Chapter 2.
Table 1.11 demonstrates the overwhelmingly British and American origins of the
largest international accountancy firms. Accounting techniques, institutions and
concepts have been imported and exported around the world. Britain, for example,
has not only imported double entry from Italy and exported professional accountancy to the rest of the world, but has also exported the concept of a true and fair
view, first to the other countries of the British Commonwealth and, more recently,
to the other member states of the European Union (Parker, 1989; Nobes, 1993).
The concepts and practices of management accounting throughout the industrialized world owe much to American initiatives. In the second half of the twentieth
century, Japan contributed to management accounting and control. Carnegie and
Napier (2002) make a persuasive case for the study of comparative international
accounting history.
The second reason for taking a comparative approach is that it allows one to
learn from both the achievements and failures of others and to avoid the perils of
accounting ethnocentrism. It is possible for a country to improve its own accounting by observing how other countries react to problems that, especially in industrialized nations, may not differ markedly from those of the observer’s home country.
It is also possible to examine whether, where accounting methods differ, the
differences are justified by differences in the economic, legal and social environment and are not merely the accidents of history. Such accidents may not impede
harmonization (see Section 2.6), whereas more fundamental differences are likely
to be much more difficult to deal with.
Table 1.11 Leading international accountancy firms, 2008
Main countries of origin
Deloitte
UK, USA, Canada, Japan
Ernst & Young
USA, UK
KPMG
Netherlands, UK, USA, Germany
PricewaterhouseCoopers
UK, USA
Note: The names given above are those of the international firms. National firms may have different names.
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A feature of recent decades has been the extent to which countries have been
willing to adopt and adapt accounting methods and institutions from other countries. Examples will be found in many of the chapters of this book. The UK accepted
continental European ideas about greater uniformity in the layout of financial
statements. France and Germany accepted US and UK approaches to consolidated
statements. The Netherlands accepted a much greater degree of regulation of company accounting and auditing than previously. France and Australia set up their
own versions of the US Securities and Exchange Commission (SEC). Germany,
where enforcement of accounting standards had been weak, is trying a compromise
between the SEC and the UK Financial Reporting Review Panel. Even the US, shaken
by accounting scandals from 2001 onwards, is showing itself willing to consider the
virtues of the principles approach to accounting standard-setting espoused in the
UK and by the IASB.
The third reason for taking a comparative approach is better to understand
harmonization, a process that has grown steadily in importance since the 1970s.
The arguments for and against are considered in Chapter 4. At this point it may be
noted that, as is demonstrated in Part V of this book, major problems such as lease
accounting, consolidation accounting and foreign currency translation have been
tackled in different countries in significantly different ways, although a pattern may
sometimes be discerned. Solutions devised by the Financial Accounting Standards
Board (FASB) in the US – the world’s most powerful national accounting standardsetting body – have been very influential but have not always been accepted. Indeed,
one reason for the acceptance by many countries and companies of international
standards is that they are not US GAAP. On the other hand they are sufficiently
close to US GAAP to be acceptable to most stock-exchange regulators.
The growing strength of the IASB and the adoption of its standards by the EU
(in part in order to prevent EU-based MNEs adopting US GAAP) can be seen as a
process of regulatory competition (Esty and Geradin, 2001), with the IASB and the
FASB competing in a ‘race to the top’. The process of harmonization within the EU
meant that all the major countries had their own regulatory solutions challenged
and had to accept compromises of both a technical and a political nature. It is clear
that any attempt to harmonize financial reporting touches on wider issues than
accounting. In Chapter 2 we look at some of the underlying reasons for the differences that exist. Before that, we explain the structure of this book.
1.5 Structure of this book
1.5.1
An outline
The book is divided into six parts. Part I sets the context, covering the causes and
nature of differences in financial reporting, classification of accounting systems,
and an introduction to international harmonization. Part II deals with financial
reporting by listed groups, which is dominated worldwide by IFRS and US GAAP
and the competition between them. Part III looks at the problems of harmonization
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and transition in Europe (both West and East) and in East Asia, with particular
reference to Japan and China. Part IV covers the financial reporting (particularly
that by individual legal enterprises) that continues to be governed by sets of
national rules, some of which differ considerably from IFRS and US GAAP. Part V
examines some major technical accounting issues faced by MNEs. Part VI examines
some analysis and management issues.
The chapters in the six parts of the book are described in more detail below.
1.5.2
Setting the scene (Part I)
The adoption of IFRS by the 27 member states of the European Union and the
convergence of IFRS and US GAAP, both formally agreed in 2002, have not removed
the differences in financial reporting among countries. This is partly because IFRS
is used in many countries only for consolidated statements, and partly because
different national versions of IFRS practice exist. The causes and nature of these
differences are discussed in Chapter 2. Several writers on international accounting
have attempted classifications of financial reporting. These are discussed and evaluated in Chapter 3. Most classifications have been of countries, which are explicitly
or implicitly assumed to have homogeneous financial reporting. More recently the
emphasis has shifted to ‘accounting systems’, in recognition of the fact that countries (and even companies) can use more than one type of accounting. In this
book we discuss differences between countries, between systems and between companies. This examination of international differences and patterns in them leads to
Chapter 4, which discusses international harmonization, explaining why and how
the need for this has grown in recent decades. We particularly look at the extent
to which it has been met by the establishment of an International Accounting
Standards Committee (IASC) and its successor the International Accounting
Standards Board (IASB).
1.5.3
Financial reporting by listed groups (Part II)
Chapter 5 follows on from the material of Chapter 4 by exploring the relationship between international and national standards, including ‘competition’ and
‘convergence’ between IFRS and the most influential set of national standards, US
GAAP. The requirements of IFRS are summarized in Chapter 6, first in terms of
topics (conceptual framework, assets, liabilities, group accounting, disclosures) and
secondly in the numerical order of extant standards. Chapter 7 examines the
possible motives and opportunities for different national versions of IFRS practice.
Chapter 8 describes and analyzes corporate financial reporting and its environment
in the US, including a comparison of US rules with international rules. Chapter 9
discusses how the application of IFRS and US GAAP to the financial statements of
listed groups is governed and enforced in the US, in leading member states of the
EU (UK, France and Germany), and in other important countries such as Australia.
The setting and enforcement of accounting rules is in part a political issue, and
Chapter 10 therefore examines the politicization of accounting and particularly
political lobbying by preparers of financial statements.
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1.5.4
Harmonization and transition in Europe and East Asia (Part III)
Chapter 11 looks at the attempts that have been made to harmonize the great
variety of financial reporting that exists within the EU, as part of a more general aim
of eliminating economic barriers. The chapter explains the initial difficulties of reconciling Continental European and Anglo-Saxon approaches, and the more recent
problems of the accession to the EU of many economies which have had to make a
transition from communist to market-based accounting. Chapter 12 compares and
contrasts financial reporting in the two major economies of East Asia: Japan and
China. Both have been and still are subjected to a variety of outside influences, but
both retain their own special national characteristics.
1.5.5
Financial reporting by individual companies (Part IV)
Financial reporting by individual business enterprises is much more diverse than
that of listed company groups. Chapter 13 explains why this is the case, with special emphasis on the information needs of tax authorities and the determination
of distributable profit. Chapter 14 analyzes the different ways of rule-making that
have evolved (accounting plans, legal codes, statutes, standards) and assesses their
usefulness. Chapter 15 explains how the accounting rules applicable to individual
business enterprises may differ from IFRS or US GAAP, with particular reference to
France, Germany and the UK.
1.5.6
Major issues in financial reporting by MNEs (Part V)
Accounting standards are always in a state of change and those contained within
IFRS and US GAAP are no exception. It is never sufficient merely to learn the
detailed content of standards at a particular date. All standards are compromises
and this is especially so when they have to be agreed at an international level.
Chapter 16 examines eight key financial reporting topics: recognition of intangible
assets, asset measurement, financial instruments, provisions, employee benefits,
deferred tax revenue recognition and comprehensive income. The chapter shows
how the valuation rules in the standards do not fit into a consistent conceptual
framework and discusses the differences between IFRS and US GAAP from a conceptual perspective. Chapters 17 to 19 examine three problems which relate especially
to MNEs: consolidated financial statements, foreign currency translation and segment reporting, with comparisons of the solutions arrived at in IFRS and US GAAP.
1.5.7
Analysis and management issues (Part VI)
Chapter 20 examines the problems faced by non-domestic readers and analysts of
financial reports, problems that for listed groups have been lessened but not removed
by the increasing use of IFRS and US GAAP. Chapter 21 explains how auditing has
been internationalized, with particular reference to the role of MNEs, international
capital markets, international accounting firms and IFRS. It looks at international
standards on auditing (ISAs), the international audit process in practice, and the
audit expectations gap in an international context. Chapter 22 discusses international
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Chapter 1
Introduction
aspects of corporate income taxes, including the relationship between taxable
income and accounting income, international tax planning, tax systems, and the
harmonization of taxation. Chapter 23 concludes the book by examining managerial accounting within MNEs, with particular reference to the problems of operating
with different currencies and coping with differences in national cultures.
SUMMARY
References
l
The scale of international differences in corporate financial reporting remains
large, despite the adoption of IFRS for listed companies within the EU and
elsewhere.
l
Financial reporting since the Second World War has taken place within a global
context which has been characterized by: vast changes in world politics; dramatic
growth in international trade and foreign direct investment (FDI); the globalization of stock markets; varying patterns of share ownership; an unstable international monetary system; and the rise of MNEs, which are the main exporters
and importers of FDI and a major factor in the internationalization of the
accountancy profession.
l
Historically several countries have made important contributions to the development of accounting and financial reporting.
l
The comparison of accounting rules and practices between countries is a strong
antidote to accounting ethnocentrism. Successful innovations in one country are
being copied in others.
l
Harmonization is taking place at both regional and international levels.
l
This book is arranged into six parts: setting the scene; financial reporting by listed
groups; harmonization and transition; financial reporting by individual companies;
major issues for MNEs; and analysis and management.
Carnegie, G.D. and Napier, C.J. (2002) ‘Exploring comparative international accounting
history’, Accounting, Auditing & Accountability Journal, Vol. 15, No. 5.
Davis, L., Neal, L. and White, E.N. (2003) ‘How it all began: the rise of listing requirements
on the London, Berlin, Paris, and New York Stock Exchanges’, International Journal of
Accounting, Vol. 38, No. 2.
Dunning, J.H. (1992) Multinational Enterprises and the Global Economy, Addison-Wesley,
Wokingham.
Esty, D.C. and Geradin, D. (eds) (2001) Regulatory Competition and Economic Integration, Oxford
University Press, Oxford.
Evans, L. (2004) ‘Language, translation and the problem of international accounting communication’, Accounting, Auditing & Accountability Journal, Vol. 17, No. 2.
Finn, D. (1996) Just Trading. On the Ethics and Economics of International Trade, Abingdon Press,
Nashville.
Froot, K.A. and Dabora, E.M. (1999) ‘How are stock prices affected by the location of trade?’
Journal of Financial Economics, August.
Gélard, G. (2001) ‘France – Individual Accounts’, in D. Ordelheide, and KPMG, Transnational
Accounting, Vol. 2, Palgrave Publishers, Basingstoke.
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Setting the scene
Investment Company Institute and the Securities Industry Association (2002) Equity
Ownership in America. 2002. Available at www.ici.org/stats.
La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (1999) ‘Corporate ownership around the
world’, Journal of Finance, April.
Maddison, A. (2001) The World Economy. A Millenial Perspective, OECD.
National Statistics (2005) Share Ownership. A Report on Ownership of Shares as at 31st December
2004. Available at www.statistics.gov.uk/StatBase.
Nobes, C.W. (1982) ‘The Gallerani account book of 1305–8’, Accounting Review, April.
Nobes, C.W. (1993) ‘The true and fair view requirement: impact on and of the Fourth
Directive’, Accounting and Business Research, Winter.
Parker, R.H. (1983) ‘Some international aspects of accounting’, in S.J. Gray (ed.), International
Accounting and Transnational Decision, Butterworths, London.
Parker, R.H. (1989) ‘Importing and exporting accounting: the British experience’, in A.G.
Hopwood (ed.), International Pressures for Accounting Change, Prentice Hall, London.
Parker, R.H. (2000) ‘Why English?’ Accountancy, August.
Parker, R.H. (2001a) ‘European languages of account’, European Accounting Review, Vol. 10,
No. 1.
Parker, R.H. (2001b) ‘Read with care’, Accountancy, June.
United Nations Center on Transnational Corporations (UNCTC) (2006) World Investment
Report.
Wheatley, S. (1988) ‘Some tests of international equity integration’, Journal of Financial
Economics, Vol. 21, No. 2.
Useful websites
Accounting Education
www.accountingeducation.com
British Accounting Association
www.baa.group.shef.ac.uk
European Accounting Association
www.eaa-online.org
International Accounting Standards Board
www.iasb.org
International Federation of Accountants
www.ifac.org
United Nations Conference on Trade and Development
www.unctad.org
World Bank
www.worldbank.org
World Federation of Exchanges
www.world-exchanges.org
World Trade Organization
www.wto.org
QUESTIONS
Suggested answers to the asterisked questions are given at the end of the book.
1.1∗ What effects have the major political events in the world since the end of the
Second World War had on accounting and financial reporting?
1.2∗ Why have the major accounting firms become ‘international’? From what
countries have they mainly originated? Why?
1.3 What major contributions to accounting and its terminology have been made
historically by the following countries: Italy, the United Kingdom, the United
States, Japan?
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Chapter 1
Introduction
1.4 Which are the top three developed countries in respect of each of:
(a) share of the world’s top 500 companies;
(b) number of qualified accountants;
(c) market capitalization of stock exchange?
Why is the answer not the same for all three questions?
1.5 What factors have made possible the ‘internationalization’ of the world’s stock
markets?
1.6 What factors have led to the establishment of multinational enterprises?
1.7 Which countries historically have been the home countries of MNEs? Are they the
same countries from which international accounting firms have originated?
1.8 Why are there more accountants per head of population in New Zealand than in
France?
1.9 Why are some EU companies listed on non-European (especially North American)
stock exchanges?
1.10 Why is English the leading language of international corporate financial reporting?
1.11 Access the website of GlaxoSmithKline (www.gsk.com) to explain the differences
disclosed in its annual reports between US GAAP and IFRS and UK GAAP from 2004
onwards. Could these differences (summarized in Tables 1.1 and 1.2) have been
smaller if the company had made other choices of options available within IFRS
and UK GAAP? Are the size of the differences influenced by the fact that GSK is a
pharmaceutical company?
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Causes and examples of
international differences
Christopher Nobes
CONTENTS
OBJECTIVES
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
Introduction
Culture
Legal systems
Providers of finance
Taxation
Other external influences
The profession
Conclusion on the causes of international differences
Some examples of differences
2.9.1 Conservatism and accruals
2.9.2 Provisions and reserves
2.9.3 Measurement of assets
2.9.4 Financial statement formats
Summary
References
Further reading
Questions
After reading this chapter, you should be able to:
l discuss the degree to which international cultural differences might explain
accounting differences;
l outline the two main types of legal system to be found in the Western world and
how these are related to accounting differences;
l explain how the predominant methods of financing of companies can differ
internationally and how this may affect the purpose and nature of accounting;
l illustrate the linkages between taxation and financial reporting, and show how
these are stronger in some countries than in others;
l outline the relationships between international accounting variations and differences
in the accountancy profession;
l synthesize all the above relationships to begin to explain international differences in
financial reporting;
l outline various ways in which accounting under German national rules is more
conservative than that under UK rules;
l explain the difference between a provision and a reserve, and show how the
definition of provision is wider in some countries than in others;
l outline the main valuation bases used for assets in major countries;
l summarize the international differences in formats of financial statements.
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Chapter 2
Causes and examples of international differences
2.1 Introduction
That there are major international differences in accounting practices is not obvious
to all accountants, let alone to non-accountants. The latter may see accounting as
synonymous with double entry, which is indeed similar universally. Much of this
book investigates the major differences in accounting. Some examples are given
in Section 2.9. As a prelude to this, we try to identify the likely causes of the differences. It is not possible to be sure that the factors discussed below cause them, but
a relationship can be established and reasonable deductions made.
A large list of possible causes of international differences can be found in the writings of previous researchers (e.g. Choi and Meek, 2005, Chapter 2; Radebaugh, Gray
and Black, 2006, Chapter 3). Some researchers have used their estimates of such causes
as a means of classifying countries by their accounting systems (see Chapter 3). Other
researchers have studied whether perceived differences in accounting practices correlate with perceived causal factors (e.g. Frank, 1979; Doupnik and Salter, 1995).
Before going further, it is also important to define ‘accounting’. In this context,
we mean published annual financial reporting by companies. To the extent that it
is useful to use a term such as ‘accounting system’, we mean the set of financial
reporting practices used by a particular company for an annual report. Different
companies in a country may use different accounting systems. The same applies
to different purposes. For example, in many EU countries, consolidated statements
are prepared using IFRS whereas unconsolidated statements use national rules. This
chapter investigates why and how national systems differ. However, the ideas here
can be used to explain why different countries might exhibit different styles of IFRS
practice, as explained further in Chapter 7.
Several factors that seem linked to the differences in accounting systems are now
examined. These are not necessarily causes of the differences; they might be results,
as will be discussed later.
2.2 Culture
Clearly, accounting is affected by its environment, including the culture of the
country in which it operates. Hofstede (1980) develops a model of culture as the
collective programming of the mind that distinguishes the members of one human
group from another. Hofstede argues that, much as a computer operating system
contains a set of rules that acts as a reference point and a set of constraints to
higher-level programs, so culture includes a set of societal values that drives
institutional form and practice. As Gray (1988, page 5) notes:
societal values are determined by ecological influences and modified by external factors
. . . In turn, societal values have institutional consequences in the form of the legal system,
political system, nature of capital markets, patterns of corporate ownership and so on.
Culture in any country contains the most basic values that an individual may
hold. It affects the way that individuals would like their society to be structured and
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Setting the scene
how they interact with its substructure. Accounting may be seen as one of those
substructures. As Gray (1988, page 5) explains:
the value systems or attitudes of accountants may be expected to be related to and derived
from societal values with special reference to work related values. Accounting ‘values’ will
in turn impact on accounting systems.
To get some idea of the basic cultural patterns of various countries, we turn again
to Hofstede. Based on a study of over 100,000 IBM employees in 39 countries,
Hofstede (1984, pages 83, 84) defined and scored the following four basic dimensions of culture, which can be summarized as follows:
1 Individualism versus collectivism. Individualism stands for a preference for a loosely
knit social framework in society wherein individuals are supposed to take care of
themselves and their immediate families only. The fundamental issue addressed
by this dimension is the degree of interdependence that a society maintains
among individuals.
2 Large versus small power distance. Power distance is the extent to which the members of a society accept that power in institutions and organizations is distributed
unequally. People in societies that have large power distance accept a hierarchical
order in which everybody has a place which needs no further justification. The
fundamental issue addressed by this dimension is how society handles inequalities
among people when they occur.
3 Strong versus weak uncertainty avoidance. Uncertainty avoidance is the degree
to which the members of a society feel uncomfortable with uncertainty and
ambiguity. This feeling leads them to beliefs promising certainty and to maintain
institutions protecting conformity. Strong uncertainty avoidance societies maintain rigid codes of belief and behaviour and are intolerant towards deviant persons and ideas. Weak uncertainty avoidance societies maintain a more relaxed
atmosphere in which practice counts more than principles and deviance is more
easily tolerated. A fundamental issue addressed by this dimension is how a society reacts to the fact that time runs only one way and that the future is unknown:
whether it tries to control the future or lets it happen.
4 Masculinity versus femininity. Masculinity stands for a preference in society for
achievement, heroism, assertiveness and material success. Its opposite, femininity, stands for a preference for relationships, modesty, caring for the weak, and
the quality of life.
Gray (1988) applies these cultural differences to explain international differences
in the behaviour of accountants and therefore in the nature of accounting practices.
For example, Gray suggests that a country with high uncertainty avoidance and low
individualism will be more likely to exhibit conservative measurement of income
and a preference to limit disclosure to those closely involved in the business. Conservatism is examined as an example of international differences later in this chapter.
Gray developed the following pairs of contrasting ‘accounting values’:
l
professionalism versus statutory control;
l
uniformity versus flexibility;
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Chapter 2
l
conservatism versus optimism;
l
secrecy versus transparency.
Causes and examples of international differences
The first two relate to authority and enforcement. Here Gray sees a clear contrast
between the ‘Anglo’ culture area on the one hand and Asian areas on the other. The
second two relate to measurement and disclosure. Gray contrasts the ‘Anglo’ and
the Latin and Germanic cultures.
This approach may well be particularly useful for examining such issues as international differences in the behaviour of auditors (e.g. Soeters and Schreuder, 1988).
However, for financial reporting, the measures of cultural attributes seem vague and
indirect, compared with the measurement of directly relevant elements of the external environment of accounting, such as legal systems or equity markets (see below).
Also, the cultural data may not be reliable in an accounting context. For example,
Hofstede classifies West African countries together, but they have very different
legal and accounting systems. Another problem arises from the fact that, for good
reasons, Hofstede looked at employees in a large multinational company. When
measuring cultural attributes, how does one cope with the fact that many employees
of multinationals in Abu Dhabi, Singapore, etc. come from other countries or from
particular minority populations? Baskerville (2003) suggests that it is dangerous to
equate nation with culture and that there are difficulties in trying to understand
a culture by means of numerical indices. However, Hofstede (2003) replies to the
criticisms.
Salter and Niswander (1995) tried to test Gray’s hypothesis for 29 countries but
met considerable difficulty in measuring several of Gray’s ‘accounting values’, so
that indirect measures were generally used. For example, the degree of uniformity
was partly measured by whether a country has common law or code law, but this is
not really a test of differences in accounting practices but a test of a possible cause
of them. For a more direct measure of uniformity, Gray’s hypothesis did not hold.
For conservatism, some hypothesized relationships held and others did not. The
most convincing support for an element of Gray’s hypothesis was that transpare...
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