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Chapter 7 Presentation Transcript

  • 1. GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS
    • Sidney J. Gray , University of New South Wales
    • Stephen B. Salter , University of Cincinnati
    • Lee H. Radebaugh , Brigham Young University
    • Slides Prepared by: Jennifer Anne Salter
  • 2. CHAPTER SEVEN
    • GLOBAL FINANCIAL STATEMENT ANALYSIS
  • 3. INTRODUCTION
    • A management approach to global financial statement analysis.
    • Take information from accounting systems to allow managers to meet strategies.
  • 4. ENVIRONMENTAL INFLUENCES ON FINANCIAL REPORTING
    • Influences on financial reporting and information disclosure practices:
      • Enterprise ownership;
      • Activities of enterprises;
      • Sources of finance;
      • Taxation;
      • Level of development & independence of the auditing and financial reporting profession;
  • 5. ENVIRONMENTAL INFLUENCES ON FINANCIAL REPORTING - Table 7.2
  • 6. ENVIRONMENTAL INFLUENCES ON FINANCIAL REPORTING Cont’d
      • Stage of economic growth & development;
      • Legal system;
      • Influence of culture;
      • International factors.
  • 7. CLASSIFICATION OF FINANCIAL REPORTING SYSTEMS (FRPs)
    • There have been many attempts to classify and explain why countries differ in their financial reporting practices.
    • Two models with difference perspectives are:
      • Nobes (1983)
      • Gray (1988)
  • 8. CLASSIFICATION OF FRS: The Nobes (1983) Model
    • Two basic classes of financial reporting systems:
      • Microeconomic (business oriented)system where key determinants are:
        • basic philosophy; historical origin
      • Macroeconomi c (government oriented) system:
        • taxation; economic management.
  • 9. CLASSIFICATION OF FRS: The Nobes (1983) Model
  • 10. CLASSIFICATION OF FRS: The Gray (1988) Model
    • A more comprehensive model based on Hofstede’s (1980) cultural dimensions and the institutions that arise from them.
    • Gray’s model has been empirically tested by Salter & Niswander (1995)
  • 11. CLASSIFICATION OF FRS: The Gray (1988) Model
    • Drawing on the work of Gray (1988) and Nobes (1983), two key parameters which define financial reporting systems are:
      • How systems are determined and enforced:
        • statutory control or professional means.
      • The measurement and disclosure characteristics of financial reporting systems.
  • 12. CLASSIFICATION OF FRS: Gray (1988) Accounting Cultural Values
  • 13. CLASSIFICATION OF FRS: Gray’s (1988) Dimensions
  • 14. CLASSIFICATION OF FRS: Gray’s (1988) Country CLassifications
  • 15. CLASSIFICATION OF FRS: Gray’s (1988) Country Classifications
  • 16. CLASSIFICATION OF FRS: Salter & Niswander (1995) and Gray (1988)
    • Integrating these two works we find:
      • Individualist societies (UK, USA) demand:
        • more disclosure,
        • a stronger independent audit profession to ensure rights of individual investor.
      • High uncertainty avoidant societies (Japan, Germany) demand:
        • uniform accounting rules passing through the legal system.
  • 17. CLASSIFICATION OF FRS: Salter & Niswander (1995) and Gray (1988)
    • Salter & Niswander add that:
      • Development of financial markets enhances power of auditors, encourages increased disclosure and a more optimistic view of income.
      • Higher tax rates reduce income and relative power of auditors.
  • 18. CLASSIFICATION OF FRS: Salter & Niswander (1995) and Gray (1988)
  • 19. MAJOR DIFFERENCES IN FINANCIAL REPORTING
    • Financial reporting issues that separate countries are:
      • Format
      • Measurement
      • Disclosure
  • 20. MAJOR DIFFERENCES IN FINANCIAL REPORTING - Format
    • Format includes statements used and what they contain.
    • Most countries have statements about income/expenses and assets/liabilities.
    • Less common are: statements of cash flows, changes in financial position, and retained earnings.
  • 21. MAJOR DIFFERENCES IN FINANCIAL REPORTING - Measurement
    • Major areas of diversity are:
      • depreciation
      • inventory measurement
      • retirement benefits
      • construction contracts
      • research and development
      • accounting for taxation
      • business combinations
  • 22. THE IMPACT OF ACCOUNTING DIFFERENCES
    • The subtleties of different sets of measurement rules can be seen by using Gray’s (1980) index of conservatism:
      • Conservatism is the extend to which, given the same basic accounting data , 2 companies would arrive at earnings numbers that are higher or lower.
  • 23. THE IMPACT OF ACCOUNTING DIFFERENCES - Index of Conservatism
    • Gray (1980) uses the following formula to measure relative conservatism:
      • Index of Conservatism = 1 - (RA - RD) / I RA I where:
        • RA = adjusted earnings under the GAAP of the country being used as a standard
        • RD = disclosed earnings under the national GAAP of the country whose conservatism is being assessed.
  • 24. THE IMPACT OF ACCOUNTING DIFFERENCES - Index of Conservatism
        • I RA I = the absolute value of adjusted earnings under the GAAP of the country being used as the standard.
      • Using the US as the base, and comparing US versus UK accounting principles, the formula can be translated as follows
        • Index of Conservatism = 1 - (US GAAP Earnings - UK GAAP Earnings) / I US GAAP Earnings I
  • 25. THE IMPACT OF ACCOUNTING DIFFERENCES - Index of Conservatism
    • An Index value greater than 1 means that UK GAAP earnings are less “conservative” (more optimistic) than a US GAAP.
  • 26. THE IMPACT OF ACCOUNTING DIFFERENCES - Index of Conservatism
    • Having established an overall index of conservatism, it is then possible to establish the relative effect of the various individual adjustments by constructing a partial index of “conservatism” using the formula:
      • 1 - (partial adjustment / US GAAP Earnings)
  • 27. THE IMPACT OF ACCOUNTING DIFFERENCES - Conservatism and the SEC Form 20F
    • Form 20F allows an opportunity to compare earnings resulting from any country’s accounting principles with those that would have resulted under US accounting principles.
      • Form 20F report to the SEC contains a reconciliation of foreign earnings with the earnings that would have reported under US GAAP
  • 28. THE IMPACT OF ACCOUNTING DIFFERENCES - Conservatism and the SEC Form 20F
      • Radebaugh and Gray (1997) have drawn up indices of conservatism for 8 countries
      • Continental European countries and Japan are more conservative than the US.
  • 29. Conservatism and the SEC Form 20F - Figure 7.5
  • 30. GLOBAL HARMONIZATION
    • While many organizations (UN, EU) have been concerned with harmonizing international differences in accounting and reporting, the most important body is the International Accounting Standards Committee (IASC).
  • 31. GLOBAL HARMONIZATION Cont’d
    • The main aim of the IASC has been to achieve a degree of comparability that will help investors make their decisions while reducing the costs of MNEs in preparing multiple sets of accounts and reports.
  • 32. Copyright Copyright Copyright 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
  • 33.