Comparative Accounting

1
Chapter 5

• Comparative Accounting

2
Comparative Accounting

• Accounting environment, profession, regulation,
  principles/practices, and differences to IFRSs in
• Germany
• Japan
• United Kingdom
• Sweden
• China
• NOTE Textbook also covers Mexico

3
Germany

• Background
• European Unions largest country, population 83
  million.
• West Germany and East Germany established in
  1949, reunified in 1990.
• Historically, banks have been primary source of
  finance via both loans and equity.
• Since reunification, the economy has been
  affected by internationalization.

4
Germany

• Background
• German companies increasingly listing on foreign
  exchanges, e.g., New York Stock Exchange.
• Most common business forms are Aktiengesellschaft
  (AG) and Gesellschaft mit beschrankter Haftung
  (GMBH).
• AG are publicly traded/GMBH are non-publicly
  traded.
• Historically had significant influence on
  accounting systems in a number of other
  countries.
• Japans commercial code is modeled on Germanys.

5
Germany

• Culture
• Germany USA
• LTO 31 29
• Power distance 35 40
• Individualism 67 91
• Uncert Avoidance 65 46

6
Germany

• Indications
• Consensus building tendencies
• Predilection for investment safety
• Tendency for thrift, large savings and slow,
  steady progress
• Static, rigid, rule-based reporting systems

7
Germany

• Accounting Profession
• Profession has traditionally been less
  influential than in U.S./UK.
• Auditing is dominant part of profession,
  certified auditors title of Wirtschaftprufer (WP)
  was created in 1931.
• Institut der Wirtschaftprufer similar to the
  AICPA.
• Obtaining WP title is extremely rigorous.
• Wirtschaftpruferkammer (WPK) is state sponsored
  group that oversees auditing profession.

8
Germany

• Traditional Fundamental Characteristics of German
  GAAP
• Creditor Protection is paramount
• Tax law (massgeblichkeitsprinzip)
• Reliance on statutes and court decisions

9
Germany

• Accounting Regulation
• Commercial code and tax laws are main sources of
  accounting rules.
• Stock exchange rules have less influence than in
  U.S.
• Prudence is fundamental, recognition of revenues
  only when realized, losses when they appear
  possible.
• Began change away from creditor orientation in
  1960s.
• Starting in the 1980s, EU directives began having
  major influence.

10
Germany

• Accounting Principles and Practices
• Historical cost attribute for measuring tangible
  assets is adhered to.
• Traditional focus on creditor protection is at
  odds with the true and fair view concept.
• Importance of tax laws led to the reverse
  authoritative principle which requires expenses
  to be deducted from accounting income if they are
  to be tax deductible.

11
Germany

• Accounting Principles and Practices
• In contrast to China, conservatism has been used
  to resist labors wage demands.
• Standards allow for income smoothing, frequently
  accomplished via early recognition of losses.
• EU fourth directive requires true and fair view,
  but Germans have a unique interpretation of the
  concept.
• Commitment to globalization reflected in rule
  that allows public companies to use IFRS for
  consolidated statements.

12
German GAAP

• Goodwill is written off quickly- as little as 4
  years.
• Historical cost only
• RD expensed
• Provisions for future losses and expenses used
  heavily.

13
Germany

• Differences to IFRSs
• Goodwill deducted quickly, even immediately,
  against equity. Under IFRS 3, accounted for as an
  indefinite life intangible asset.
• Internally generated intangibles not
  recognized, under IAS 38, recognized as an asset
  under some conditions.
• Leases accounting uses tax rules with
  capitalization rare, IAS 17 criteria result in
  more frequent capitalization.
• Accounting for subsidiaries allow exclusion of
  dissimilar subsidiaries, which are consolidated
  under IAS 27.

14
Germany

• What factors best account for Germanys financial
  reporting practices?
• Macro/Micro?
• Code Law/ Common law?
• Inflation?
• Colonial/ Historical Influences?
• Cultural dimensions?
• Bank vs equity financing?

15
Japan

• Background
• Population 127 million, worlds third largest
  economy.
• Banks are primary source of finance via both
  loans and equity, cross-corporate equity
  ownership also common.
• Keiretsu (and predecessor Zaibatsu) emphasize
  close business ties and reflect cultural value of
  collectivism.
• 1990s recession led to and increase in Japanese
  firms attempts to obtain capital internationally.

16
Japan

• Culture
• Germany USA Japan
• LTO 31 29 80
• Power dist 35 40 54
• Ind 67 91 46
• UA 65 46 92

17
Japan

• Indications
• Dantai ishiki (group consciousness)
• Public duty, not individual rights is the highest
  value
• Loyalty to the master / deference to authority is
  the ethical foundation
• venture capital is an oxymoron in Japan- 50 of
  individuals total assets are in time deposits.
• Wakon yosai- Japanese spirit, western techniques

18
Japan

• Accounting Profession
• Certified Public Accountants Law (1948)
  established the profession.
• Profession is significantly less influential than
  in U.S./UK and is also much smaller in numbers
  than U.S.
• Obtaining CPA title extremely rigorous, like in
  Germany.
• Collectivism leads to lack of trust of auditors.
• Tax advising is a much larger, separate,
  profession.

19
Japan

• Accounting Regulation
• Government influences accounting via Commercial
  Code, Corporate Income Tax Law and Stock Exchange
  Law.
• Similar to Germany, strong creditor orientation
  and accounting rules closely tied to tax rules.
• Big Bang financial reforms are leading to
  harmonization with international standards.
• These reforms included requirements for
  consolidation and fair value accounting for
  tradable securities.

20
Japan

• Accounting Principles and Practices
• In contrast to U.S., net income is less a measure
  of performance and seen more as funds available
  for dividends.
• Since providers of financing tend to be close to
  the firm, there has historically been little
  pressure for disclosure.
• Lack of disclosure is apparent in segment
  reporting.
• In 2005, IASB and Accounting Standards Board of
  Japan agreed to work toward reducing differences.

21
Japanese GAAP

• Similar to Germany- goodwill written off quickly,
  provisions used heavily, historical cost only,
  RD expensed, etc.
• Recent changes statement of cash flow required,
  capitalized leases, extended consolidation of
  affiliates, full accrual of pension obligations,
  investments marked to market.

22
Japan

• Differences to IFRSs
• Revaluation of Land allowed but updating not
  required, under IFRS 16, revaluations require
  regular updating.
• Preoperating costs capitalization is allowed,
  under IAS 38, expensed immediately.
• Construction contracts completed contract
  method is allowed, IAS 11 essentially requires
  percentage-of-completion.
• Provisions allow for provisions, prior to
  actual obligation, IAS 37 only allows for present
  obligations.

23
In summary

• (Japanese) financial information is oriented
  towards the needs of other corporations,
  financial institutions, and the government rather
  then the individual stockholder (IJA 33, 1998)
• We dont give a hoot about things like return on
  equity (Chairman, Mitsubishi Heavy Industries)
• HOWEVER
• Things are slowly changing

24
United Kingdom

• Background
• Population of about 60 million, comprised of
  England, Northern Ireland, Scotland, and Wales.
• Among five countries in this chapter, its
  financial structure is closest to the U.S.
• 15,000 Private Limited Companies (PLCs) with
  about 2,500 of these listed on the London Stock
  Exchange.

25
United Kingdom

• Culture
• UK USA Japan
• LTO 25 29 80
• Power dist 35 40 54
• Ind 89 91 46
• UA 35 46 92

26
United Kingdom

• Indications
• Very similar to USA, but
• Slightly less conservative
• More tolerance for ambiguity

27
United Kingdom

• Accounting Profession
• Worlds first association of professional
  accountants, The Society of Accountants in
  Edinburgh established in 1853.
• The profession developed in response to the needs
  of industry and has influenced the development of
  professions in a number of other countries.
• Compared to the U.S. the certification
  requirements focus more on work experience and
  less on university education.

28
United Kingdom

• Accounting Regulation
• The Companies Act, accounting pronouncements, and
  stock exchange rules comprise accounting
  regulation.
• Similar to the U.S., and unlike Germany and
  Japan, tax rules do not significantly influence
  financial reporting.
• Standard-setters have historically taken a
  principles-based approach using a statement of
  principles as a conceptual framework.
• Has not historically had a strong, SEC type
  agency, but recent scandals have led to increased
  regulation.

29
United Kingdom

• Accounting Principles and Practices
• A primary objective of accounting is to support
  an effective capital market.
• The true and fair view principle is paramount.
• True and fair view override requires that
  companies not comply with standards that would
  result in misleading financial statements.

30
United Kingdom

• Differences to IFRSs
• Goodwill amortization allowed, IFRS 3 prohibits
  amortization and requires an annual impairment
  test.
• Related party disclosures requires disclosure
  of related party names, IAS 24 requires
  disclosure by type, not name, of related party.
• Revaluation gains/losses generally not taken to
  income statement, IAS 40 requires gains and
  losses to affect net income.

Learning Objective 5
31
Sweden-

• The interest in international accounting within
  Sweden seems to have increased over the last few
  years (EAR, 1993).
• Sweden, being a small country with several large
  international companies, has much to gain from
  harmonizing accounting standards with
  international practice, as far as the law permits
  (EAR, 1993)

32
Sweden-Historical Influences

• One of the oldest continuous democracies-carefully
  protects independence and neutrality (since
  1815).
• Traditionally strong advocate of world peace,
  non-violent conflict resolution, and
  international cooperation.
• Currency the Krona

33
Sweden-Historical

• Sweden joined the EU in 1995
• One of the lowest inflation rates in EU.
• Economy has done well, but unemployment is high
  and so are taxes. Half of voters get their income
  from the government.
• Traditional attitudes pragmatism, respect for
  technical expertise, global awareness mixed with
  realism concerning national constraints, and the
  desire for consensus.

34
Sweden-Historical

• Collectivist. 60-70 of GDP goes for public
  expenditures.
• Yet, paradoxically, long a bastion of individual
  freedom- personal convictions and morality given
  great leeway.

35
Sweden

• Culture
• Sweden USA Japan
• LTO 33 29 80
• Power dist 31 40 54
• Ind 71 91 46
• UA 29 46 92

36
Sweden-Cultural Influences

• Hofstedes scoring-
• Also high on femininity

37
Sweden-

• Indications
• Interplay between a strong tendency for
  individual preference and genuine, pervasive
  social conscience.
• Heavily influenced by macroeconomic policy and
  tax law but these are administered with emphasis
  of professional judgement.
• High tolerance for ambiguity and diversity
• De-emphasis on thrift and a desire for more
  immediate results.
• Social benefits very high so are taxes!

38
Sweden-Legal/Political Influences

• Corporations are viewed as public entities with
  social responsibilities.
• Income taxes are notoriously high (max85 most
  folks- 40-50).
• Tax and book accounting mostly agree.
• Foreign involvement in stock exchange is
  regulated but this is changing. Sweden is trying
  to open its markets.

39
Sweden-Business Environment

• Corporate Form Aktiebolag (AB)
• Swedish spheres resemble Japanese keiretsu.
• Only a few MNEs are listed in foreign markets.
  IASC-compatible standards, however, are being
  adopted more and more.
• High quality reporting from Companies such as
  Volvo have raised reporting standards nationally.
• Labor- Sweden is highly unionized.

40
Sweden-Reporting Structures and Characteristics

• Redovisningsradet (financial reporting council)
  makes standards. Consists of reps from accounting
  profession, industry and government.Compliance is
  voluntary.
• Primary objective of reporting- compliance,
  however, this is changing, especially for
  consolidated reporting.

41
Swedish GAAP

• Receivables must be recorded at what firm
  expects to collect.
• Inventories mainly FIFO, LCM
• Fixed assets can be written up. Usually SL
  depreciation but asset lives are short, by
  statute.
• Consolidation GoodwillYes- Purchase method,
  with goodwill written off over 5-20 years.
• Long term contracts Mostly completed contract.

42
Sweden-Changes

• Tax rates have been lowered.
• Numerous new European alliances.
• Social Democrat Party has lost significant
  support.
• Increasing support for IASC standards and opening
  of markets.
• Some major MNEs have moved elsewhere to avoid the
  tax problem. This has motivated country to
  increase the pace of change.

43
China

• Background prior to 1980
• Worlds largest country with population of over
  1.2 billion.
• Peoples Republic of China (PRC) established in
  1949.
• Politically Communist, one-party state.
• Economically Until the 1980s, all firms
  state-owned.

44
China

• Background- After 1980
• China begins major reforms aimed at permitting,
  within controlled boundaries, a market economy.
• Currently in transformation to market economy.
• Worlds fourth largest economy and fastest
  growing among large economies, largest recipient
  of FDI.

45
China

• Background- Securities markets
• First securities regulations adopted in 1984.
• Two major stock exchanges, Shanghai and Shenzhen
  established in 1990 and 1991.
• Government controls capital market via Chinese
  Security Regulatory Commission (CSRC) similar to
  SEC.
• Domestic companies list four types of shares A,
  B, C, H.
• Market characterized by speculation, high share
  turnover.

46
China

• Accounting Profession
• Profession less prestigious than in U.S./UK.
• Accounting and auditing have developed
  separately, but recently, CICPA and CACPA merged
  (1998).
• Economic reform and the large number of joint
  ventures with foreigners has led to emergence of
  audit profession.

Objective 2
47
China

• Accounting Regulation
• In 1992, China introduced ASBE. Before the ASBE,
  more than 40 uniform reporting systems were in
  use.
• Throughout the 1990s, the conceptual framework
  was actually used to create standards.

48
China

• Accounting Regulation (Cont.)
• Recent activity is focused on harmonizing variety
  of domestic systems which vary by industry.
• Committment to converging with IFRS, spurred by
  desired membership in World Trade Organization
  (WTO).
• Audits of financial statements now widely
  required.
• Death penalty in an accounting fraud case
  suggests that it is taken very seriously.
• Ministry of Finance (MoF) in similar role as
  FASB.

49
China

• Accounting Principles and Practice
• Computation of taxable income of primary
  importance.
• Conservatism criticized as a method by which
  owners can understate income and justify low
  wages. Lack of conservatism still a difference
  with IFRS.
• Lack of accounting infrastructure contributes to
  gap between accounting principles and practice.

50
Chinese GAAP

• Goodwill amortized over no more than 10 years.
• Historical cost only.
• RD is expensed

51
China

• Differences to IFRSs
• Property, plant, and equipment -- historical
  cost, IAS 16 permits revaluations.
• Borrowing costs for self-constructed assets
  require capitalization, IAS 23 allows
  capitalization or expensing.
• Asset impairments Chinese standards are silent,
  IAS 36 requires impairment test and recognition
  of loss.
• Preoperating expenses deferred, then expensed
  when operations begin, under IAS 38, expense
  immediately.

52
China

• What factors explain Chinas Financial reporting
  Practices?
• Macro/Micro?
• Code Law/ Common law?
• Inflation?
• Colonial/ Historical Influences?
• Cultural dimensions?
• Bank vs equity financing?