Chapter 16
International
accounting
Definitions of international
accounting
Weirich and others identify three
major concepts:
1. parent-foreign subsidiary
accounting or accounting for
subsidiaries
2. comparative international
accounting
3. universal or world accounting
World accounting
• Directs international accounting to the
formulation and study of a universally
accepted set of accounting principles
• Weirich and others define it as follows:
– ‘international accounting is
considered to be a universal system
that could be adopted in all countries.
A world-wide set of generally
accepted accounting principles
(GAAP) … would be established’
Concept of comparative or
international accounting
This concept involves:
• an awareness of the international
diversity in corporate accounting and
reporting principles
• an understanding of the accounting
principles and practices of individual
countries
• the ability to assess the impact of
diverse accounting practices on
financial reporting
A second concept of
international accounting
• This concept involves a descriptive and
informative approach
• Within this concept, international accounting
includes all varieties of principles, methods
and standards of accounting of all countries
• This concept includes a set of generally
accepted accounting principles established
for each country … no universal or perfect
set of principles would be expected to be
established
Parent-foreign subsidiary accounting
• This reduces international accounting to a process
of consolidating the accounts of the parent
company and its subsidiaries and translating
foreign currency into local currency
• The definition, from Weirich and others, is:
– ‘refers to the accounting practices of a parent
company and a foreign subsidiary. A reference
to a particular country or domicile is needed
under the concept for effective internal financial
reporting. The accountant is concerned mainly
with the translation and adjustment of the
subsidiary’s financial statement. Different
accounting problems arise … depending upon
which country is used as a reference for
translation and adjustment purposes’
Amenkhienan’s list of
concepts and theories
1. Universal or world theory
2. Multinational theory
3. Comparative theory
4. International transactions theory
5. Translation theory
Each of these theories provides some
grounds for the development of a
conceptual framework for international
accounting
Issues relevant to
international business
1.
2.
3.
4.
Private sector accounting
Comparative analysis:
a. national accounting, reporting and
auditing practice
b. national accounting theory
Policy at the international level
Accounting for multinational operations:
a. financial accounting
b. managerial accounting
Taxation
Issues relevant to international
business (cont’d)
Public sector accounting
1. Comparative analysis of national
systems
2. Accounting for government agencies and
public not-for-profit organisations
Differences in financial
reporting practices
1. Basis of presentation
2. Consolidation reporting practices
3. Business consolidations, the two most
common methods being:
a. the purchase method
b. the pooling-of-interests method
4. Minority ownership, two alternative
methods being:
a. the equity method
b. the cost method
Differences in financial reporting
practices (cont’d)
5.
6.
7.
8.
9.
Valuation of fixed assets
Goodwill
Inventory costing
Contingency reserve policy
Deferred income taxes, the different
methods being:
a. the deferral method
b. the liability method
Differences in financial reporting
practices (cont’d)
10.Pension disclosure
11.Research and development costs, these
practices including either:
a. capitalisation then amortisation, or
b. expensing
12.Foreign currency translation, these
methods including:
a. the non-current method
b. the monetary-non-monetary method
c. the current-rate method
d. the temporal method
Differences in financial reporting
practices (cont’d)
13.Long-term leases, methods being
either:
a. capitalise then amortise
b. expense
Determinants of national
differences
Mueller identifies four elements of
differentiation:
• state of economic development
• state of business complexity
• shade of political persuasion
• reliance on some particular system of
law
Mueller’s 10 distinct sets of
business environments
1. USA/Canada/the Netherlands
2. Australia and British Commonwealth (excluding
Canada)
3. Germany/Japan
4. Continental Europe (excluding Germany, the
Netherlands and Scandinavia)
5. Scandinavia
6. Israel/Mexico
7. South America
8. The developing nations of the Near and Far East
9. Africa
10.Communist nations
Environmental conditions
The following environmental conditions
are likely to affect the determination of
accounting standards:
1. cultural relativism
2. linguistic relativism
3. political and civic relativism
4. economic and demographic
relativism
5. legal and tax relativism
Harmonisation of accounting
standards
• The first step to harmonisation consists
of recognising national idiosyncrasies
and attempting to reconcile them with
other countries’ objectives
• The second step is to correct or
eliminate some of the barriers, in order
to achieve an acceptable degree of
harmonisation
Advantages of harmonisation
1. Many countries still lack adequate codified
standards. Internationally accepted standards
would eliminate set-up costs and allow them
to immediately become part of the
mainstream of accepted international
accounting standards
2. The growing internationalisation of the
world’s economies and the increasing
interdependency of nations in terms of
international trade and investment flows is a
major argument for some form of
internationally accepted standards
Advantages of harmonisation
(cont’d)
3. The need for companies to raise outside
capital given the insufficiency of retained
earnings to finance projects and the
availability of foreign loans has increased
the need for harmonisation
Limits to harmonisation
• Tax collections in all countries are a great
source of demand for accounting services.
Because the systems vary internationally, this
will lead to diversity in the accounting principles
and systems used
• Accounting policies are sometimes fashioned to
achieve either political or economic goals
compatible with the economic or political
system espoused by a given country
• Some obstacles are created by accountants
themselves through strict national licensing
requirements
Actors involved in harmonisation
• Accountants International Study Group:
– formed as a three-nation group to
study practices in the USA, the UK
and Canada
– terms of reference were to institute
comparative studies as to accounting
thought and practice in participating
countries, and to make reports
• The International Federation of
Accounting Committee was formed in
1976
The International Federation of
Accounting Committee (IFAC)
12-point program
1.
2.
3.
4.
Develop statements that would serve as
guidelines for international auditing
practices
Establish a suggested minimum code of
ethics to which it hoped member bodies
would subscribe
Determine the requirements and develop
programs for the professional education and
training of accountants
Evaluate, develop and report on financialmanagement and other managementaccounting techniques and procedures
The IFAC 12-point program (cont’d)
5.
6.
7.
8.
Collect, analyse, research and disseminate
information on the management of public
accounting practices to assist practitioners in
conducting their practices more effectively
Undertake other studies of value to accountants
such as (possibly) a study of the legal liability of
auditors
Foster closer relations with users of financial
statements, including preparers, trade unions,
financial institutions, industry, government and
others
Maintain close relations with regional bodies and
explore the potential for establishing other
regional bodies as well as for assisting in their
organisation and development
The IFAC 12-point program (cont’d)
9. Establish regular communication among
members of the IFAC and with other
interested organisations through the medium
of a newsletter
10. Organise and promote the exchange of
technical information, educational materials
and professional publications and other
literature
11. Organise and conduct an International
Congress of Accountants every five years
12. Seek to expand the membership of the IFAC
The International Accounting
Standards Committee (IASC)
• The IASC was founded in 1973, its objectives
being:
– to formulate and publish in the public interest
accounting standards to be observed in the
presentation of financial statements, and to
promote their worldwide acceptance and
observance
– to work generally for the improvement and
harmonisation of regulations, accounting
standards and procedures relating to the
presentation of financial statements
• Translates into a goal of developing a common
international approach to accounting standardssetting aimed at worldwide harmonisation
Non-compliance with IASC
standards
Sir Henry Benson has attributed
noncompliance to the following factors:
• some countries take the view that they
cannot require compliance locally until
they are satisfied that the standards are
internationally acceptable
• some countries see local legislation as
an obstacle to the introduction of
international standards
Non-compliance with IASC standards
(cont’d)
• some accounting bodies do not have
the power of discipline over their
members and therefore cannot
impose compliance with either
national or international standards
• some countries have not yet
overcome stubborn local resistance
from the business community
Group of Experts on
International Standards of
Accounting and Reporting
Created upon the recommendation of the
United Nations in 1976, with the following
objectives:
• to review the existing practice of reporting
by transnational corporations and
reporting requirements in different
countries
• to identify gaps in information in existing
corporate reporting and to examine the
feasibility of various proposals for
improved reporting
Group of Experts on International
Standards of Accounting and
Reporting (cont’d)
• to recommend a list of minimum items,
together with their definition, that should
be included in reports by transnational
corporations and their affiliates
Results of the Group of
Experts
• The Group issued a report that included a 34page list of recommended items to be
disclosed by the ‘enterprise as a whole’
• Following issuance, an Intergovernmental
Working Group of Experts on International
Standards of Accounting and Reporting was
formed with the objective of contributing to
the harmonisation of accounting standards
• International reaction was mixed: the USA
resigned its position on the Intergovernmental
Working Group in 1986
The Organization for
Economic Co-operation and
Development (OECD)
• The OECD includes 24 relatively
industrialised countries
• The OECD issued a Declaration on
International Investment and
Multinational Enterprises in 1976,
including a list of information that
should be disclosed
The European Union (EU)
• The EU has been active in achieving
regional harmonisation of accounting
principles through a series of directives
within the Treaty of Rome
• These directives are not as binding as
regulations, and leave the mode and
means of implementation to member
countries
Directives of the EU
The Fourth, Fifth and Seventh directives are
the most relevant to international accounting:
• the Fourth Directive deals with the annual
financial statements of public and private
companies, other than banks and insurance
companies
• the proposed Fifth Directive deals with the
structure, management and external audit of
limited-liability corporations
• the Seventh Directive addresses the issue of
consolidated financial statements and offers
some guidelines for more standardisation of
accounting reporting
Standard-setting strategies
for developing countries
Four strategies may be identified:
1. the evolutionary approach
2. the development through transfer of
accounting technology
3. the adoption of international accounting
standards
4. the development of accounting
standards based on analysis of
accounting principles and practices in
the advanced nations against the
backdrop of their underlying investment
The evolutionary approach
• Consists of an isolationist approach to
standard-setting whereby the
developing country defines its own
standard without any outside
interference or influences
• The learning process comes from local
experience, and it assumes that foreign
partners will adapt to its own
idiosyncratic rules
The transfer-of-technology
approach
• This approach may result from either the
operations and activities of international
accounting firms, multinationals and academicians
practising in the developing countries, or from
various international treaties and cooperative
arrangements calling for exchanges of information
and technology
• National goals combine with the social, political
and economic environment and general resources
and constraints to influence the overall economic
plan
Costs of transfer of
accounting technology
• Transfer of a wrong or inapplicable
technology
• Lack of appropriate infrastructure for the
correct application of the technology
• Increased dependence on outside experts
• Lack of incentives for developing local
standards
• Considerable loss of pride by some culture
groups
Adopting international
accounting standards
Adopting international accounting
standards consists of joining the IASC or
some other international standards body,
the rationale perhaps being to:
• reduce the setup and production costs of
accounting standards
• join the international harmonisation drive
• facilitate the growth of foreign
investment that may be needed
Adopting international accounting
standards (cont’d)
• enable the accounting profession to
emulate well-established professional
standards of behaviour and conduct
• legitimise professional status as a
fully-fledged member of the
international community
The situationist strategy
• Calls for a consideration of the
diagnostic factors that determine the
development of accounting in
developing countries
• Based on cultural relativism, linguistic
relativism and legal-and-tax relativism,
the accounting concepts and the
reporting-and-disclosure systems in any
given country rest on the varying
aspects of that country
Diversity of judgement
The diversity of judgement in an
international accounting context may
be examined by reference to:
1. cognitive relativism
2. cultural relativism
3. linguistic relativism
4. organisational-culture relativism
5. contractual relativism
Cognitive relativism in
accounting
• This approach assumes the presence of
a cognitive process that guides the
judgement/decision process
• All accounting and auditing phenomena
involve the cognitive use of a
knowledge structure or schema,
developed by individuals through
experience, learning and prior
knowledge
Cultural relativism in
accounting
• Again, this approach assumes the presence of a
cognitive process that guides the
judgement/decision process
• Individuals from different cultures may invoke
different knowledge structures or schema
when faced with an accounting or auditing
phenomenon
• This approach implies that accounting and
auditing knowledge is organised in a culturally
standardised and hence familiar eventsequence that tells the individual how to react
to a particular accounting and/or auditing
phenomenon
Linguistic relativism in
accounting
• This approach assumes the presence of
a linguistic process that guides the
judgement/decision process
• The basis of the linguistic-relativity
hypothesis in accounting is that the
characteristics of the accounting
language, lexical or grammatical
characteristics have a marked influence
on the cognitive processes preceding
the judgement/decision process in
accounting
Organisational-culture
relativism in accounting
• Organisational cultural efficiency requires the
sharing of frameworks, language and
referents that shape the schemata individuals
use when faced with an accounting and/or
auditing phenomenon
• This approach implies that the organisational
culture gives the individual faced with an
accounting and/or auditing phenomenon
categories, processing routines and schemas
that help solve the problems in the best
interests of the culture
Contractual relativism in
accounting
• According to this model, contracts define
permissible behaviour and actions that ultimately
determine the judgement/decision process in
accounting
• The importance of these contracts results from
the assumptions and implications inherent in the
four models of agency theory:
1. stewardship/accountability model
2. transaction-cost economies model
3. principal-agent model
4. positivist agency model
Judgement in international
accounting
The judgement/decision process in accounting and
auditing is determined by a cognitive process that
is itself uniquely shaped by:
• the national culture of the individual faced by
the accounting and/or auditing phenomenon
• the individual’s linguistic repertoire
• the organisational culture of the entity of which
the individual considers himself/herself a
dedicated and loyal member
• the covenants and requirements of the
contracts that bind the individual to a set of
norms and allegiances to the firm