Chapter 2
International accounting
differences
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Contents
• Origin of national differences
• Differences in accounting systems
• Characteristics and differences in national GAAP
• Country classification
• National Differences: more recent evolutions
• National differences: do they still play a role in an era
of globalized accounting
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Learning objectives
• Describe and explain how the following elements
influenced the development of financial reporting and
the existing accounting systems in a country:
– provision of finance
– the legal system
– the system of taxation
– cultural values
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Learning objectives (cont’d)
• Explain and appraise the influence of cultural
values on accounting values
• Explain how different systems of accounting
regulation could develop
• Describe the purpose of country classification
exercises
• Appraise whether these country classification
exercises are still relevant today
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International accounting differences
obstruct financial communication
between countries
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Origin of national
differences
• Provision of finance
• Existing legal system
• Link between accounting and taxation
• Cultural differences
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Provision of finance:
consequences
• In shareholder countries accounting
information provides information to investors
• In credit-oriented countries creditors, families
and the state receive private information
about the financial situation of the company;
external financial reporting is less developed
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Existing legal system:
consequences
• In common law countries more principles
- based accounting standards
• In code law countries more detailed legal rules
that govern accounting
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Relationship between
accounting and taxation
• Dependence leads to tax biased accounting
information
• Independence leads to accounting information which
represents more the underlying economic situation
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Cultural differences
(Hofstede, 1984)
• Individualism versus collectivism
• Large versus small, power distance
• Strong versus weak, uncertainty avoidance
• Masculinity versus femininity
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Accounting values
(Gray, 1988)
• Professionalism versus statutory control
• Uniformity versus flexibility
• Conservatism versus optimism
• Secrecy versus transparency
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
National differences lead to
differences in accounting systems
and differences in national
accounting standards
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Types of accounting regulation
• In a shareholder oriented country characterized by a
common law system, the accounting standard setting
process is often in the hands of a private standard
setter
• In a creditor oriented country characterized by a code
law system, the accounting standard setting process
is often in the hands of the government
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Differences in the organization
of the accounting profession
• In shareholder oriented countries the accounting
profession developed earlier
• Nowadays stricter regulation worldwide (e.g. EU,
US= PCAOB) of the audit profession, tries to wipe
out national differences to a certain extent
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Characteristics and differences
in national GAAP
• Shareholder orientation versus stakeholder
orientation
• Fairness versus legality
• Conservatism versus accruals
• Uniformity, accounting plans and formats
• Consolidated accounts
• Deferred taxation
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Research on accounting
diversity in the eighties
Country classification attempts
based on observed differences
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Criteria used as
discriminating variables
• Type of user of the published accounts of listed
companies
• Degree to which law or standards prescribe in detail and
exclude judgement
• Importance of tax rules in measurement
• Conservatism/prudence
• Strictness of application of historical cost
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Criteria used as
discriminating variables
(cont’d)
• Susceptibility to replacement cost adjustments in main or
supplementary accounts
• Consolidation practices
• Ability to be generous with provisions and to smooth
income
• Uniformity between companies in application of rules
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
National differences:
more recent evolutions
• Research in the nineties and in the 21st
century tries to explain differences in
accounting quality between countries through
the analysis of institutional differences
observed between countries
• Major findings of the research is that
accounting quality is still influenced by
domestic institutional variables
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
High quality accounting
information
• Definition (Ball & Shivakumar, 2002)
• Financial reporting quality relates to the
usefulness of financial statements for
contracting, monitoring, valuing and other
decision making by investors, creditors,
managers and all other contracting parties
within the firm
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
High quality GAAP versus
low quality GAAP
• Low quality GAAP allows management to report
results when they want to report those results
• High quality GAAP provides less discretion for such
practices
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
High quality accounting
information is a function of the
quality of the GAAP and of the
quality of the implementation of
that GAAP
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The implementation of
the GAAP
How GAAP is implemented is influenced
by national characteristics such as the
degree of investor protection, the degree
of enforcement of financial accounting
standards, risk of litigation and the legal
system.
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Recent research in relation to
the accounting quality of
IFRS accounts in the EU
• E.g. (Daske et al. 2008; Armstrong et al. 2010; Barth et al. 2008)
– Positive capital market reactions mainly in common law countries
– A country’s institutional environment still influences accounting quality
• Impact of IFRS difficult to single out, a number of countries also change governance
regimes and enforcement systems
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Conclusion: national
differences
still play a role!
National differences influence the
implementation of the accounting
standards in a country – also in the
case of compulsory compliance with
IFRS
International Financial Reporting and Analysis, 5 th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
