International Accounting and Multinational Enterprises

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International Accountingand Multinational
Enterprises

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Comparative International Financial Accounting
Chapter Three
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Learning objectives

• 1. Discuss different ways to identify and
  classify accounting systems internationally
• 2. Examine the key dimensions of national culture
  and how they influence behavior in work
• 3. Identify accounting values that influence
  comparative accounting
• 4. Show how cultural values and accounting values
  related to each other in the development of
  accounting standards and practices worldwide
• 5. Compare accounting systems in the
  Anglo-American, Nordic, German, Latin, and Asian
  countries

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CHAPTER OUTLINE

• 1. Purposes of International Classification
• 2. Classification of Accounting and Reporting
  Systems
• The Deductive Approach
• The Inductive Approach
• 3. Cultural Influences on Accounting Development
• 4. Culture, Societal Values, and Accounting
• (1) Structural Elements of Culture
  that Affect Business
• Individualism versus Collectivism
• Large versus Small Power Distance
• Strong versus Weak Uncertainty Avoidance
• Masculinity versus Femininity
• (2)Accounting Values
• Uniformity versus Flexibility
• Conservatism versus Optimism
• Secrecy versus Transparency
• (3) Accounting Values and International
  Classification

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CHAPTER OUTLINE

• 5. Comparative Accounting Systems
• 6. Anglo-American Accounting
• (1) United States
• A. Influences on Accounting Development
• (2) United Kingdom
• A.. Influences on Accounting Development
• 7. Nordic Accounting
• (1) The Netherlands
• A. Influences on Accounting Development
• (2) Sweden
• A. Influences on Accounting Development

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CHAPTER OUTLINE

• 8. Germanic Accounting
• (1) Germany
• A. Influences on Accounting Development
• (2) Switzerland
• A. Influences on Accounting Development
• 9. Latin Accounting
• (1) France
• A. Influences on Accounting Development
• (2) Italy
• A. Influences on Accounting Development
• (3) Brazil
• A. Influences on Accounting Development
• 10. Asian Accounting
• (1) China
• A. Influences on Accounting Development
• (2) Japan
• A. Influences on Accounting Development
• 11. Summary

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Introduction

• A growing awareness that global environmental
  factors affect accounting development. Also
  recognition that systematically different
  patterns of accounting behavior may apply to
  groups of countries.
• Identification and classification of these
  different systems can help describe, analyze, and
  predict accounting system development.

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I. Purposes of International Classification

• A. To sharpen description, analysis, prediction
• B. To help describe and compare different
  national systems in order to better understand
  them and to learn
• 1. The extent to which national systems are
  similar/dissimilar
• 2. The pattern of development of
  systems--potential for change
• 3. The reasons why some systems dominate others
• C. To assess prospects for harmonization
• D. To help national policy makers determine what
  to do
• E. To help developing countries choose
  appropriate systems
• F. To help MNEs overcome problems of
  establishing control systems

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Classification of Accounting and Reporting Systems

• 1. Deductive Approach (Gerhard Mueller)
  Macroeconomic pattern - Accounting development
  follows national economic policies. (I.e. Sweden,
  France, Germany).
• 2. Microeconomic Pattern Accounting is viewed
  as a part of business economics with accounting
  principles derived from economic analysis (I.e
  Netherlands).
• 3. Independent Discipline Accounting viewed as
  a service function derived from business practice
  (I.e. United States, United Kingdom).
• 4. Uniform Accounting Pattern Accounting
  viewed as efficient means of administration and
  control. Common in centrally-controlled
  economies (I.e. Germany, France, Sweden).

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1.Deductive Approach

• The goals of the corporation usually follows
  national economic policies.
• Accounting income might be smoothed to promote
  economic and business stability.
• Social responsibility accounting developed to
  meet macroeconomic concerns.

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2. Microeconomic Pattern

• A fundamental orientation exists toward
  individual economic entities.
• Accounting concepts are derived from economic
  analysis.
• A fundamental concept is concerned with the
  maintenance in real terms of the monetary capital
  invested in the corporation.
• Replacement value accounting as used by some
  companies in the Netherlands is often assumed to
  fit the microeconomic approach.
• Developments in segmental reporting and the
  disclosure of employee costs, pensions, long-term
  commitments.

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3. Independent Discipline

• A deep respect for professional judgment.
• Accounting is considered to be capable of
  developing its own conceptual framework, derived
  on a piecemeal basis from its own successful
  business practices.
• Income is a pragmatic measure that seems useful
  in practice.
• Full and fair disclosure is a GAAP that has
  evolved over the years.

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4. Uniform Accounting Pattern

• A more scientific approach to accounting is
  adopted whereby a uniform approach to measurement
  and disclosure and presentation.
• Presentation will promote ease of use and a
  measure of control for all types of businesses by
  all kinds of users including mangers,
  governments, and tax authorities.
• Centrally planned economies as well as other
  countries with a strong governments involvement
  in economic planning.

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Mullers contributions

• He recognized a wider set of influences, such as
  legal system, political system, and social
  climate as relevant to accounting development.
• He categorized business environments, which he
  then linked to different types of accounting
  systems. Such as (1) Economic development (2)
  business complexity (3)legal systems and (4)
  political and social climates, and identified 10
  groupings, and pointed out that different
  business environments need different accounting
  systems.
• Mullers environmental analysis was adapted and
  extended by Nobes (1983).

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Nobes

• Adapted and extended Muellers concepts,
• Used a hierarchical classification scheme and
  evolutionary approach to identification of
  measurement practices in western nations,
• Basic distinction between macro and micro
  economic systems
• -Further desegregations were developed under
  each system to provide increased discrimination,
• Recent updating to reflect strong and weak equity
  markets and shareholder orientations.
• Nine factors were identified as those likely to
  predict which countries would be grouped together
• (P 39 figure 3.1)

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Inductive Approach

• Identification of accounting patterns begins with
  analysis of individual accounting practices.
• Using this Approach, Nair and Frank identified
  five measurement groupings using Price-Waterhouse
  (PW) data
• 1. British Commonwealth
• 2. Latin American
• 3. Continental European
• 4. United States
• 5. Chile
• They made a empirical distinction between
  measurement and disclosure practices because
  there were considered to have different patterns
  of development.
• Their results suffered from lack of reliability
  and relevance of PWs data.

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Cultural Influences on Accounting Development

• The role of culture in accounting systems has
  been largely ignored in the past but this is
  changing.
• Culture is an essential element for understanding
  social systems.
• Gray proposed incorporating cultural factors in a
  framework to explain and predict international
  differences in accounting systems and identify
  international development patterns of accounting
  systems.

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Culture, Societal Values, and Accounting

• Flexibility versus uniformity are most relevant
  to professional versus statutory authority,
• Combining these relationships allows for relevant
  culture areas to be hypothesized,
• Accounting values most relevant to measurement
  practices and the extent of information
  disclosure are the conservatism and secrecy
  dimensions,
• These factors can be combined and culture areas
  hypothesized,
• Classification of countries by culture area can
  provide a means for further assessing the
  relationship between culture and accounting
  systems.

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Comparative Accounting SystemsAnglo-American
Accounting

• United States
• Accounting based on U.K. traditions,
• Securities markets a dominant influence,
• SEC recognizes the authority of FASB,
• FASB uses an open approach to standard setting,
  and
• U.S. accounting system is probably most
  comprehensive in the world.

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Comparative Accounting SystemsAnglo-American
Accounting (Cont.)

• United Kingdom
• Importance of company law,
• Profession is self-regulated through accounting
  standards board (ASB) guided by Financial
  Reporting Control (FRC), and
• Primacy given to information needs investors.

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Comparative Accounting SystemsNordic Accounting

• The Netherlands
• Company law and accounting profession are major
  influences,
• Government role is minimal,
• Overriding criterion are generally acceptable
  accounting principles, and
• Novel Feature -- Interested parties may complain
  to the Court of Justice if financial statements
  do not comply with the law.

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Comparative Accounting SystemsNordic Accounting
(Cont.)

• Sweden
• Accounting strongly influenced by legal and tax
  requirements, the profession (FAR), and stock
  exchanges,
• Government has a strong role (BFN) to accomplish
  macroeconomic planning and to make policy,
• Accounting Council is new standard setting body,
  and
• Traditionally, information preference was given
  to creditors and the government -- Now a shift
  to investors.

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Comparative Accounting SystemsGermanic
Accounting

• Germanic Accounting
• Differs significantly from Anglo-American and
  Nordic, and
• Company and/ or tax laws govern accounting
  practice.
• Germany
• Company law and tax laws predominate,
• Accounting practice must follow tax laws,
• Accounting profession is small and lacks
  influence,
• Stock market is small but growing in influence,
  and
• Information needs of creditors and tax
  authorities take precedence.

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Comparative Accounting SystemsGermanic
Accounting (Cont.)

• Switzerland
• Swiss accounting is among the most conservative
  and secretive in the world,
• Accounting practice is dominated by company law
  and tax regulations,
• Accounting profession is small,
• Legal requirements relating to accounting are
  minimal and secret reserves are allowed,
• Accounting rules are conservative and focus on
  the needs of creditors, and
• New laws are changing accounting information
  orientation and presentation to benefit
  shareholders.

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Comparative Accounting SystemsLatin Accounting

• France
• Company law predominates,
• A standardized code of accounting provides
  uniformity of practice,
• Tax law is also a major influence and override
  accounting rules,
• Accounting profession is small and lacks status,
• The stock market is small, and
• Information preference to tax authorities and
  creditors.

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Comparative Accounting SystemsLatin Accounting

• Brazil
• Government, Company Law, and Tax Regulations
  predominate,
• Information needs of creditors and tax
  authorities predominate -- changing to include
  shareholders, and
• Accounting profession not well developed.

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Comparative Accounting SystemsAsian Accounting

• Asian countries quite distinct from all other
  groupings,
• Many have strong colonial histories.

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Comparative Accounting Systems Asian Accounting

• China
• Accounting rules are strongly influenced by the
  government and Communist Party
• The accounting law of the Peoples Republic
  established general principals concerning nature
  and rule of accounting (1985, revised 1993)
• The Peoples Republic State Council issued
  Financial Accounting and Reporting Rules (FARR)
• Represent new era in Chinese accounting,
• Based on market approach,
• Fund accounting has been abolished, and
• Users of information beyond government are now
  recognized
• Government has led reforms along with accounting
  organizations.

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Comparative Accounting SystemsAsian Accounting
(Cont.)

• Japan
• Government is the major accounting influence
• Commercial code, securities and exchange law, and
  corporation tax law are also influential
• Government institutions are directly involved in
  standard setting
• Ministries of Finance and Justice have joint
  jurisdiction,
• Dual jurisdiction results in lack of unified
  approach
• Accounting profession is small and lacks
  influence
• Secretive approach is common
• (Continued next slide)

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Comparative Accounting SystemsAsian Accounting
(Cont.)

• Japan (Cont.)
• Many companies provide courtesy financial
  statement translations
• Creditors and tax authorities have information
  preference
• Immediate write-off is widely accepted and
• Capitalization and amortization is allowed to
  varying degrees.

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