PAS 3363: Accounting Theory & Practices

CHAPTER 8

International Accounting
 CHAPTER OVERVIEW
Diversity of International
Acc. Practices:
US, Germany, Japan

Reasons for International Acc.

International Convergence

2
PAS 3363: Accounting Theory & Practices
 INTRODUCTION
 Historically, there have been two main models of financial accounting
adopted internationally:
a) Anglo-American model
 strongly influenced by professional accounting bodies rather than
government, emphasises importance of capital markets, emphasises
true and fair, considerations of economic substance over legal form.
b) Continental European Model
 strong reliance on government, relatively small input from accounting
profession, little reliance on qualitative true and fair.
 International accounting is fascinating as it provides a number of unique
problems as well as putting many normal acc. issues into a different context.
 The convergence initiated by IASB as well as new economy presents
challenges & raises issues for consideration by international standard setters.

3
PAS 3363: Accounting Theory & Practices
 DIVERSITY OF INTERNATIONAL
ACC. PRACTICES
THE UNITED STATES
 There is substantial difference in the reporting & taxation requirements
 Objective of FS in the US is not for taxation purpose, but for investors,
creditors,& other resource providers.
 The accounting standards are derived within the private sector, the FASB,
and heavily influenced by AICPA.
 The key elements of financial reporting in the US:
 The US applied concepts of going concern, prudence & the material
 Historical cost measurement principle is strongly adhered – therefore,
land & building are not revalued
 Intangibles are treated purely as expenses
 Historical cost emphasis is diminishing – especially in the area of
financial instruments & long term contracts
 Quarterly reporting for all larger listed companies is required.
4
PAS 3363: Accounting Theory & Practices
 DIVERSITY OF INTERNATIONAL
ACC. PRACTICES
GERMANY
 Germany is a very bureaucratic and centralised approach to accounting
based largely around taxation requirements & creditor protection rather than
for investors and equity holders.
 Determinant of accounting practices is taxation requirements
 There is little/no difference between the tax accounts & the published FS
 The concept of ‘true and fair’ exists only in a legal taxation sense
 Germany does not have any financial accounting standards
 Accounting is thus dictated by legal requirements
 The key elements of financial reporting in Germany:
 Historical cost measurement principle dominates
 There is rarely any deferred income tax
 Financial instruments & leases are generally not capitalised
 Six monthly reports must be produced but these is also the taxation reports.
5
PAS 3363: Accounting Theory & Practices
 DIVERSITY OF INTERNATIONAL
ACC. PRACTICES
JAPAN
 Government plays a key role in accounting & its accounting standards are
drawn up by government
 Characteristics of Japanese business:
 The concept of keiretsu see inter-linking holding between co’s at a wide
range of levels & significant numbers of hierarchical in holding company.
 Domestic accounting in Japan has been slow to change
 Financial accounts are seen to be minimalist
 The key elements of financial reporting in Japan:
 Very centralised controlled acc.system which reflects cultural influences
 Lack of emphasis on audit
 Very ‘private’ view of the role of financial reporitng
 Although Japanese firms are listed overseas, this has led to only minor
change for domestic Japanese accounting.
6
PAS 3363: Accounting Theory & Practices
 DIVERSITY OF INTERNATIONAL
ACC. PRACTICES
SUMMARY
Different emphases on users, from equity holders to creditors to anybody with a
reasonable right to know
 Different standard setting regime, from fully government controlled
through private standards
 Generally a historic cost (particularly on land & building), but a wide range
of inventory valuation techniques
 Intangible are typically only recorded on acquisition & then must be written
off within a defined period at defined rates (internally generated intangible
are not shown in the balance sheet)
 The ‘true and fair’ concept, means different things in different countries
 Culture, legal tradition, political, and other social factors – drive the
financial reporting approach, and how it is interpreted

7
PAS 3363: Accounting Theory & Practices
 REASONS FOR INTERNATIONAL
ACC. DIFFERENCES
1) UNDERLING LAWS & POLITICAL SYSTEMS
 Legal system can be broadly divided into two systems:
– Roman Law systems: acc. practices tends to be very detailed
– Common Law system: acc. practices tend to rely relatively heavily on
professional judgment
 From democracy through the dictatorship, plus the differing interpretations
 Differences in these systems put on how acc. systems should be
formulated.

2) TAX SYSTEM
 Differences in accounting methods internationally have also been linked to
differences in taxation systems
 Difference taxation law have influence on the acc. methods such as tax
relief, marginal tax rate, tax compliance.
8
PAS 3363: Accounting Theory & Practices
 REASONS FOR INTERNATIONAL
ACC. DIFFERENCES
3) LEVEL OF ECONOMIC DEVELOPMENT
 The differences between central regulative approaches to a much laissez-
faire approach have different formulation of accounting systems.
 MNCs will frequently meet the US accounting standards requirements,
whereas local accounting will be virtually unregulated.

4) LANGUAGE
 Most countries where English is the main language, but other countries
used different languages such as China population are using Catholic.
 Therefore, language differences can influence accounting differences in
term of complexity, structure, or oversimplification.

9
PAS 3363: Accounting Theory & Practices
 REASONS FOR INTERNATIONAL
ACC. DIFFERENCES
5) NATURE OF BUSINESS OWNERSHIP & FINANCING SYSTEM
 At a country level, the financing system is relevant to the purpose of
financial reporting.
 Three types of financing systems
 capital market-based system (e.g. United Kingdom & United States)
 credit-based system: governmental (e.g. France & Japan)
 credit-based system: financial institutions (e.g. Germany)
 Systems relying on equity markets will have greater demand for public
disclosures
 Credit-based systems more concerned with the protection of creditors.

10
PAS 3363: Accounting Theory & Practices
 REASONS FOR INTERNATIONAL
ACC. DIFFERENCES
6) CULTURAL DIFFERENCES
 ‘Culture’ reserved for societies as a whole or nations. While ‘subculture’
used for the level of an organisation, profession or family.
 International differences in accounting systems may be explained by a
framework incorporating culture
 Cultural differences are reflected in the view & role of external audit, and
it appropriateness to society.
 For example, in the West, external audit is an accepted part of the check
& balances associated with accountability. Contrary, the role of external
audit is very limited in Japan.

11
PAS 3363: Accounting Theory & Practices
 REASONS FOR INTERNATIONAL
ACC. DIFFERENCES
7) RELIGION
 Religion across national boundaries impacts on global harmonisation of
accounting standards.
 Hamid, Craig and Clarke (1993) examined how Islamic cultures have
failed to embrace ‘Western’ accounting practices
 compliance with Islamic beliefs can affect the structure of business
 many Western acc. practices are incompatible with Islamic principles.
 Religion can affect how people do business and how they make decisions,
for example
 Islam precludes debt financing and prohibits payment of interest
 The Western objective of financial reporting of rational economic
decision making may not be a relevant objective in some societies
 Some countries will accept the Islamic acc. system such as Saudi Arabia,
while MNC in Europe are preferred conventional acc.
12
PAS 3363: Accounting Theory & Practices
 REASONS FOR INTERNATIONAL
ACC. DIFFERENCES
8) IMPACT OF MULTINATIONAL CORPORATIONS (MNC)
 The emergence of MNC need a global financial reporting language
especially with the current explosion in the use of ICT which clearly
revealed that nations around the world operate in a global village.
 MNC also must account for their operations around the world both in the
traditional sense and from the perspective of ongoing performance
appraisal, monitoring as well as strategic viewpoint.
 Benefits : Enable a sharing of practice skills & production
technologies
: Enables a sharing of quality assurance programs, ISO-type
accreditation requirements, and training programs
: Allow for an appreciation of differing social ethics
: Employees in the recipient countries learn the management
techniques of the most advance corporation
: MNC can ‘learn’ to adapt to different values & perspectives. 13
PAS 3363: Accounting Theory & Practices
 INTERNATIONAL CONVERGENCE
What does ‘CONVERGENCE’ mean?
 International “convergence” is a process with “adoption” as the end result.
 Convergence process could be enhanced through greater clarification of the
end result, i.e., the meaning of “adoption,” and by the development of a
more consistent & globally recognized measurement of international
convergence.
 The World Bank encountered similar diversity regarding the concept of
adoption. It found that the adoption of IFRSs could be categorized as:
 full adoption of IFRSs;
 full adoption of IFRSs, but with time lag;
 selective adoption of IFRSs; and
 national standards “based on” IFRSs.

14
PAS 3363: Accounting Theory & Practices
 FAST FACTS IN THE PROCESS OF
CONVERGENCE
 1995: IASC entered into an agreement with International Org. on Securities
Commission (IOSCO) on a mission to complete “comprehensive core set of
Standards” that could be used for cross-boarder & national listings.
 1997: Setting up of the Standards Interpretations Committee (SIC) to give
proper direction on how to interpret these standards.
 December 1999: IASC board has approved proposal to make changes in the
structure of the committee with a view to achieve global convergence.
 May 2000: IOSCO accepted 30 core International Accounting Standards (led
to the acceptance & recognition of the IASC as a worldwide standard setter).
 2001: Reformation of IASC to IASB. Consequently, IAS is now renamed as
International Financial Reporting Standards (IFRS).
 2001: The US Securities & Exchange Commission (SEC) suggested the
acceptance of IAS for use in cross-border listings in the US.
15
PAS 3363: Accounting Theory & Practices
 FAST FACTS IN THE PROCESS OF
CONVERGENCE
 October 2002: MOU was signed between the IASB & the FASB (Norwalk
agreement). the two major players in the accounting standards arena.
 12 March 2002: The last milestone in the process of convergence was done
on, when the European Parliament voted overwhelmingly in favor of the EU
Commission’s proposal that all EU listed companies must follow standards
issued by the IASB in their consolidated financial statements starting no later
than 2005.
 This decision also seems to have placed IAS firmly in the driver’s seat as
the eventual global standard.
 Canada, Australia, & a number of other countries have announced
intention to adopt IAS.
 United States also is evidencing interest in convergence of accounting
standards.
16
PAS 3363: Accounting Theory & Practices
 INTERNATIONAL ACC. STANDARDS BOARD
(IASB)
The IASB replaced the IASC in 2001 (the IASC was formed in 1973)/
IASB has 14 full-time members who have to sever their connections with other
organisations.
The objectives of IASB are:
 To formulate and publish accounting standards and to promote their worldwide
acceptance;
 To work on the improvement and standardisation of regulations, accounting
standards and procedures.
Aims of IASB:
 Short-term aim --- for national acc. standards & IASs to converge
 Long-term aim --- global uniformity: a single set of accounting standards for all
listed & economically significant business enterprises around the world.

4-17
17
PAS 3363: Accounting Theory & Practices
 BENEFITS OF INTERNATIONAL
CONVERGENCE
1) THE ECONOMY
 The convergence benefits the economy by increasing the growth of its
international business.
 It facilitates the maintenance of orderly and efficient capital markets.
 It encourages international investing and thereby leads to more FDI
flows to the country.
2) INVESTORS
 The FS prepared using a common set of accounting standards helps the
investors to better understand investment opportunities as opposed to
FS prepared using a different set of national accounting principles.
 The investors’ confidence would also be string if acc. standards used
are globally accepted.
 Convergence with IFRs contributes to investors understanding and
confidence in high quality FS.
19
PAS 3363: Accounting Theory & Practices
 BENEFITS OF INTERNATIONAL
CONVERGENCE
3) THE INDUSTRY
 The industry is able to raise capital from foreign markets at lower cost if
it can increase confidence in the minds of the foreign investors that their
FS comply with globally accepted acc. standards.
 The burden of financial reporting is lessened with the convergence of
acc. standards because it simplifies the process of preparing the
individual & group FS, thereby reduces the costs of preparing the FS
using different set of accounting standards
4) THE ACCOUNTING PROFESSIONALS
 The acc. Professionals able to sell their services as experts in different
parts of the world, and their mobility to work in different parts of the
world increases.
 They are able to quote IFRS to clients to give them backing for
recommending certain ways of reporting.
20
PAS 3363: Accounting Theory & Practices
 HOW TO OVERCOME
CONVERGENCE ISSUES?
GOVERNMENTS & REGULATORS
 Establish legal and regulatory environments that provide for compliance with
all the international standards, with no or very limited additional national
requirements.
 Establish efficient and effective enforcement mechanisms to increase the
consistency and quality of compliance with the international standards.
 Address concerns about the complexity and structure of the international
standards.
 Write standards in simple English that is understandable, clear, and capable
of translation and consistent application.
 In considering changes to the international standards, be aware of the cost
vs. the benefits of the proposed changes.
 Provide, or continue to provide, unlimited access to all authoritative
pronouncements and implementation guidance.
23
PAS 3363: Accounting Theory & Practices
 HOW TO OVERCOME
CONVERGENCE ISSUES?
NATIONAL STANDARD SETTERS
 Develop a formal international convergence strategy & obtain the
commitment of all stakeholders.
 Develop an active standard-setting agenda, which is aligned with that of the
international standard setters & aimed at eliminating existing differences
with the international standards.
 Establish a process, or enhance the existing process, to actively contribute
to the international standard-setting processes, including the development
of international standards for SME entities & accounting firms.

24
PAS 3363: Accounting Theory & Practices
 TUTORIAL QUESTIONS
January 2016 (Q5)
a) International accounting is fascinating as it provides a number of unique problems
as well as putting many normal accounting issues into a different context.
Required:
i. Discuss any 3 factors that have led to the growth in International Acc. (6
marks)
ii. Determine TWO (2) issues that caused by Foreign Direct Investment. (4
marks)
August 2015 (Q5)
b) In September 2002 the IASB and the FASB agreed to work together, in
consultation with other national & regional bodies, to remove the differences
between international standards & US GAAP.
Required:
i. Explain the IASB and FASB convergence project. (4 marks)
ii. Provide THREE (3) reasons why there are differences in accounting. (6 marks)
 
January 2015
ii. Explain two challenges that could generally be encountered by many countries
including Malaysia, in the process of convergence of acc. standards. (4 marks)25
PAS 3363: Accounting Theory & Practices