Factors explained

1. InternationalInternational
Differences inDifferences in
Financial AccountingFinancial Accounting

2. OverviewOverview
•Explain whatExplain what causescauses differencesdifferences
in reporting standards acrossin reporting standards across
countriescountries
• Identify the major differences inIdentify the major differences in
reporting standard acrossreporting standard across
countriescountries

3. Development of reportingDevelopment of reporting
standardsstandards
 Every nationEvery nation’s accounting standards and’s accounting standards and
practices result from a complex interactionpractices result from a complex interaction
of economic, historical, institutional, andof economic, historical, institutional, and
cultural factors.cultural factors.
 Diversity among nations is to be expected.Diversity among nations is to be expected.
 The following eight factors have significantThe following eight factors have significant
influence on accounting development.influence on accounting development.

4. Causes of differences inCauses of differences in
reporting standards…reporting standards…
1.1. Sources of financeSources of finance
2.2. Legal systemLegal system
3.3. TaxationTaxation
4.4. Political and economic tiesPolitical and economic ties
5.5. InflationInflation
6.6. Level of economic developmentLevel of economic development
7.7. Education levelEducation level
8.8. CultureCulture

5. Sources of FinanceSources of Finance
 There are three financial systemsThere are three financial systems::
1.1. Capital Market Systems(ex:US, UK)Capital Market Systems(ex:US, UK)
2.2. Credit-Based Governmental SystemsCredit-Based Governmental Systems
(ex:France, Japan)(ex:France, Japan)
3.3. Credit-Based Financial Institution SystemsCredit-Based Financial Institution Systems
(ex:Germany)(ex:Germany)

6. Sources of FinanceSources of Finance
 In countries with strong equity markets,In countries with strong equity markets,
such as the Us and UK, accounting profitssuch as the Us and UK, accounting profits
measure how well management is runningmeasure how well management is running
the company.the company.
 In credit-based systems, where banks areIn credit-based systems, where banks are
the dominant source of finance,the dominant source of finance,
accounting focuses on creditor protection.accounting focuses on creditor protection.
(Because financial institutions have direct(Because financial institutions have direct
access to any information they want, extensiveaccess to any information they want, extensive
public disclosures are not consideredpublic disclosures are not considered
necessary)necessary)

7. In common law countries like US, UK, Netherlands, Sweden,
Canada...
1.Rules are more flexible.
2.They(outsiders) don’t ask for extra information and they have
to rely on public information.
3.Funds are provided by shareholders.
4.Companies rely more on equity for financing their activities.
5.Financial statements have an investor/shareholder orientation.
6.Accounting shows a market function, so rules need to be
seperated from taxation. There’re 2 accounting rules: one for
financial reporting and one for the calculation of taxable income.
7.They(outsiders) don’t have access to internal information, they
are interested in comparing one company with another, so,
because of these reasons, there’s more need for auditors.

8. In code law countries like Germany, France, Belgium, Italy,
Japan...
In these countries,
1.Rules are more strict. They(insiders) exercise power.
2.They(insiders) ask for internal data about the financial
position of the company.
3.Banks are the major suppliers of funds and also
governments, founding families. They(banks or state)
appoint directors, obtain information and affect decisions.
4.Companies rely more on debt to finance their activities.
5.Financial statement have a creditor orientation.It means,
financial reporting used for protecting creditors and also
governments as tax collectors.
6.There is no great market demand for audited and also
published financial reporting.
7.Annual account is needed because of government’s need
for a calculation of taxable income. So that, taxes dominate
the account rules

9. The legal system of accounting principles plays
a significant role in the major causes of
differences among countries, over the years we
have seen two major types of legal systems
applied on accounting principles these are
common law and code law systems.
Legal SystemLegal System

10. Common Law vs Code Law
Common LawCommon Law
 This is a more flexibleThis is a more flexible
legal system regardinglegal system regarding
the rules and regulationsthe rules and regulations
set by the accountingset by the accounting
sector of the country.sector of the country.
 The accountingThe accounting
standards are determinedstandards are determined
by an independentby an independent
organization for exampleorganization for example
in America accountingin America accounting
standards are determinedstandards are determined
by……….by……….
Code LawCode Law
 The government plays aThe government plays a
significant role in settingsignificant role in setting
the accounting standardsthe accounting standards
and principlesand principles
 The governmentThe government
determines both tax lawsdetermines both tax laws
and account principlesand account principles
 Tax laws has a majorTax laws has a major
importance in code lawimportance in code law
system of lawsystem of law
 They have strict rules andThey have strict rules and
regulationsregulations

11. Common LawCommon Law SystemSystem
 Common law is founded in England in 1988.Common law is founded in England in 1988.
 Common law has no stable rule in common lowCommon law has no stable rule in common low
 Common law is flexibleCommon law is flexible
 In this system, there is no specified detail in low.In this system, there is no specified detail in low.
Instead accountants themselves establish theirInstead accountants themselves establish their
own accounting standards.own accounting standards.
 Accounting standards determined byAccounting standards determined by
independent institution not government.independent institution not government.

12. Code Law SystemCode Law System
 Which was found first 6th century andWhich was found first 6th century and
developed from the 12th century.developed from the 12th century.
 These rules based on morality and justiceThese rules based on morality and justice
and then become doctrine.and then become doctrine.
 It is really strict rules.It is really strict rules.
 Government has really authorityGovernment has really authority
 In this system company should prepareIn this system company should prepare
financial statement and it is important forfinancial statement and it is important for
government taxation systemgovernment taxation system

13. WESTERN LEGAL SYSTEMWESTERN LEGAL SYSTEM
COMMON LOWCOMMON LOW
 New ZealandNew Zealand
 AustraliaAustralia
 CanadaCanada
 United StatesUnited States
 IrelandIreland
 EnglandEngland
CODİFİED ROMAN LAWCODİFİED ROMAN LAW
 FranceFrance
 JapanJapan
 GermanyGermany
 SpainSpain
 PortugalPortugal
 ItalyItaly

14. Note: The laws of
Scotland, Israel, South
Africa, Quebec and the
Philippines elements of
both systems.

15. IN CONCLUSION:IN CONCLUSION:
Even if a countryEven if a country’ s regulatory system for’ s regulatory system for
accounting is affected by the nature of itsaccounting is affected by the nature of its
legal system, the accounting rules andlegal system, the accounting rules and
practices might be more affected by otherpractices might be more affected by other
issues. At the extreme, a country mightissues. At the extreme, a country might
adopt International Financial Reportingadopt International Financial Reporting
System (IFRS) for some or all purposes,System (IFRS) for some or all purposes,
irrespective of its legal system.irrespective of its legal system.

16. TaxationTaxation
In many countries, tax legislation effectivelyIn many countries, tax legislation effectively
determines accounting standards becausedetermines accounting standards because
companies must record revenues and expenses incompanies must record revenues and expenses in
their accounts to claim them for tax purposes. Intheir accounts to claim them for tax purposes. In
other words, financial and tax accounting are theother words, financial and tax accounting are the
same.same.
This is the case, for example, in Germany andThis is the case, for example, in Germany and
Sweden. In other countries, such as theSweden. In other countries, such as the
Netherlands, financial and tax accounting areNetherlands, financial and tax accounting are
seperate: Taxable profits are essentially financialseperate: Taxable profits are essentially financial
accounting profits adjusted for differences with theaccounting profits adjusted for differences with the
tax laws.tax laws.
Of course, even where financial and tax accountingOf course, even where financial and tax accounting
are seperate, tax legislation may occasionallyare seperate, tax legislation may occasionally
require the application of certain accountingrequire the application of certain accounting
principles. Last in, first out(LIFO) inventory valuationprinciples. Last in, first out(LIFO) inventory valuation
in the United States is an example.in the United States is an example.

17. Political and Economic TiesPolitical and Economic Ties
Accounting ideas and technology are transferred thruAccounting ideas and technology are transferred thru
conquest, commerce and similar forces.conquest, commerce and similar forces.
The United States for example imposed US-style ofThe United States for example imposed US-style of
accounting system regulatory to Japan after their attackaccounting system regulatory to Japan after their attack
on them during the second world war.on them during the second world war.
Also in many developing countries economies use anAlso in many developing countries economies use an
accounting system that was developed else whereaccounting system that was developed else where
because it is imposed on them e.g. India but in recentbecause it is imposed on them e.g. India but in recent
time we have seen that economic integration thru thetime we have seen that economic integration thru the
growth of international trade and capital flows which is agrowth of international trade and capital flows which is a
powerful motivator for the convergence of accountingpowerful motivator for the convergence of accounting
standards in individual countries around the world.standards in individual countries around the world.

18. InflationInflation
It distorts historical cost accounting byIt distorts historical cost accounting by
understanding assets values and relatedunderstanding assets values and related
expenses and overstating income,expenses and overstating income,
countries with high inflation often requirecountries with high inflation often require
that companies incorporate prices changethat companies incorporate prices change
into accounts e.g. in Mexico and someinto accounts e.g. in Mexico and some
south American countries use generalsouth American countries use general
price level accounting because of theirprice level accounting because of their
experiences in hyperinflation.experiences in hyperinflation.

19. Level of Economic DevelopmentLevel of Economic Development
This factor affects the type of businessThis factor affects the type of business
transactions conducted in an economy andtransactions conducted in an economy and
determines which one is most prevalent,determines which one is most prevalent,
transaction types determine accounting issuestransaction types determine accounting issues
faced in the country.faced in the country.
E.G. Stock-based executive compensationE.G. Stock-based executive compensation
makes little sense in economies withmakes little sense in economies with
underdeveloped capital markets. Accountingunderdeveloped capital markets. Accounting
issues such as valuing intangibles and humanissues such as valuing intangibles and human
resources are becoming more relevant in theresources are becoming more relevant in the
service economies of today.service economies of today.

20. Educational LevelEducational Level
 Highly sophisticated accounting standards andHighly sophisticated accounting standards and
practices are useless if they are misunderstoodpractices are useless if they are misunderstood
and misused.and misused.
 A complex technical report is meaninglessA complex technical report is meaningless
unless the reader understand accountingunless the reader understand accounting
 Professional accounting education is difficult toProfessional accounting education is difficult to
achieve where general educational levels areachieve where general educational levels are
low.low.
 A country must import accounting training orA country must import accounting training or
send its citizens elsewhere to get it, somethingsend its citizens elsewhere to get it, something
that China is now doing.that China is now doing.

21. CultureCulture
 Cultural variables underlie nationsCultural variables underlie nations’ legal’ legal
systems and other institutionalsystems and other institutional
arrangements.arrangements.
 Culture encompasses the values andCulture encompasses the values and
attitudes shared by a societyattitudes shared by a society
 IndividualismIndividualism
 Uncertainty avoidanceUncertainty avoidance
 Power distancePower distance
 MasculinityMasculinity

22. Cultural Dimensions &Cultural Dimensions &
Social ValuesSocial Values
Accounting Values
Cultural
Dimensions
Professionalism Uniformity Conservatism Secrecy
Individualism + - - -
Uncertainty
Avoidance
- + + +
Power
Distance
- + > +
Masculinity > > - -
+ direct relationship
- Inverse relationship
> No relationship

23. Differences in AccountingDifferences in Accounting
Environment…Environment…
 Major differences in reporting standardsMajor differences in reporting standards
across countries:across countries:
 Accounting regulation and EnforcementAccounting regulation and Enforcement
 Financial reportingFinancial reporting
 Accounting MeasurementsAccounting Measurements
 Countries using IFRS (Jamaica, UK, France, Germany)Countries using IFRS (Jamaica, UK, France, Germany)
 Countries not using IFRS (US, Japan)Countries not using IFRS (US, Japan)

24. ClassworkClasswork
 Discuss the financial accounting system ofDiscuss the financial accounting system of
1 IFRS and 1 non-IFRS country under the1 IFRS and 1 non-IFRS country under the
following headings:following headings:
1.1. Accounting regulation & EnforcementAccounting regulation & Enforcement
2.2. Financial reportingFinancial reporting
3.3. Accounting MeasurementsAccounting Measurements
 Use the table format attached. List 2Use the table format attached. List 2
similarities and 2 differences for each.similarities and 2 differences for each.

25. Company ComparisonCompany Comparison
Country IFRS
____________________
Non-IFRS
____________________
Accounting Regulation &
Enforcement
1.
2.
3.
4.
Financial Reporting 1.
2.
3.
4.
Accounting
Measurements
1.
2.
3.
4.