International Accounting
and Multinational Enterprises
2016/3/23
Comparative International Financial
Accounting
Chapter Three
Learning objectives:
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1. Discuss different ways to identify and classify
accounting systems internationally
2. Examine the key dimensions of national culture and
how they influence behavior in work
3. Identify accounting values that influence comparative
accounting
4. Show how cultural values and accounting values
related to each other in the development of accounting
standards and practices worldwide
5. Compare accounting systems in the Anglo-American,
Nordic, German, Latin, and Asian countries
CHAPTER OUTLINE
1. Purposes of International Classification
2. Classification of Accounting and Reporting Systems
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The Deductive Approach
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The Inductive Approach
3. Cultural Influences on Accounting Development
4. Culture, Societal Values, and Accounting
(1) Structural Elements of Culture that Affect Business
Individualism versus Collectivism
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Large versus Small Power Distance
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Strong versus Weak Uncertainty Avoidance
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Masculinity versus Femininity
(2)Accounting Values
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Uniformity versus Flexibility
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Conservatism versus Optimism
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Secrecy versus Transparency
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(3)
Accounting Values and International Classification
CHAPTER OUTLINE
5. Comparative Accounting Systems
6. Anglo-American Accounting
(1) United States
A. Influences on Accounting Development
(2) United Kingdom
A.. Influences on Accounting Development
7. Nordic Accounting
(1) The Netherlands
A. Influences on Accounting Development
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(2) Sweden
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A. Influences on Accounting Development
CHAPTER OUTLINE
8. Germanic Accounting
(1) Germany
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A. Influences on Accounting Development
(2) Switzerland
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A. Influences on Accounting Development
9. Latin Accounting
(1) France
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A. Influences on Accounting Development
(2) Italy
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A. Influences on Accounting Development
(3) Brazil
A. Influences on Accounting Development
10. Asian Accounting
(1) China
A. Influences on Accounting Development
(2) Japan
A. Influences on Accounting Development
11. Summary
Introduction
A growing awareness that global environmental factors affect
accounting development. Also recognition that
systematically different patterns of accounting behavior may
apply to groups of countries.
Identification and classification of these different systems can
help describe, analyze, and predict accounting system
development.
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I. Purposes of International Classification
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A. To sharpen description, analysis, prediction
B. To help describe and compare different national
systems in order to better understand them; and to learn
1. The extent to which national systems are
similar/dissimilar
2. The pattern of development of systems--potential for
change
3. The reasons why some systems dominate others
C. To assess prospects for harmonization
D. To help national policy makers determine what to do
E. To help developing countries choose appropriate
systems
F. To help MNEs overcome problems of establishing
control systems
Classification of Accounting and
Reporting Systems
1. Deductive Approach (Gerhard Mueller): Macroeconomic pattern Accounting development follows national economic policies. (I.e.
Sweden, France, Germany).
2. Microeconomic Pattern: Accounting is viewed as a part of business
economics with accounting principles derived from economic
analysis (I.e Netherlands).
3. Independent Discipline: Accounting viewed as a service function
derived from business practice (I.e. United States, United Kingdom).
4. Uniform Accounting Pattern: Accounting viewed as efficient means
of administration and control. Common in centrally-controlled
economies: (I.e. Germany, France, Sweden).
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1.Deductive Approach
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The goals of the corporation usually follows
national economic policies.
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Accounting income might be smoothed to
promote economic and business stability.
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Social responsibility accounting developed to
meet macroeconomic concerns.
2. Microeconomic Pattern:
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A fundamental orientation exists toward individual
economic entities.
Accounting concepts are derived from economic
analysis.
A fundamental concept is concerned with the
maintenance in real terms of the monetary capital
invested in the corporation.
Replacement –value accounting as used by some
companies in the Netherlands is often assumed to fit the
microeconomic approach.
Developments in segmental reporting and the disclosure
of employee costs, pensions, long-term commitments.
3. Independent Discipline:
A deep respect for professional judgment.
 Accounting is considered to be capable of
developing its own conceptual framework,
derived on a piecemeal basis from its own
successful business practices.
 Income is a pragmatic measure that seems
useful in practice.
 Full and fair disclosure is a GAAP that has
evolved over the years.
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4. Uniform Accounting Pattern:
A more scientific approach to accounting is
adopted whereby a uniform approach to
measurement and disclosure and presentation.
 Presentation will promote ease of use and a
measure of control for all types of businesses by
all kinds of users including mangers,
governments, and tax authorities.
 Centrally planned economies as well as other
countries with a strong governments involvement
in economic planning.
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Muller’s contributions:
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He recognized a wider set of influences, such as legal
system, political system, and social climate as relevant to
accounting development.
He categorized business environments, which he then
linked to different types of accounting systems. Such as
(1) Economic development; (2) business complexity;
(3)legal systems; and (4) political and social climates, and
identified 10 groupings, and pointed out that different
business environments need different accounting systems.
Muller’s environmental analysis was adapted and
extended by Nobes (1983).
Nobes
Adapted and extended Mueller’s concepts,
 Used a hierarchical classification scheme and
evolutionary approach to identification of
measurement practices in western nations,
 Basic distinction between macro and micro
economic systems:
-Further desegregations were developed under each
system to provide increased discrimination,
 Recent updating to reflect strong and weak equity
markets and shareholder orientations.
 Nine factors were identified as those likely to
predict which countries would be grouped together
 (P 39: figure 3.1)
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Inductive Approach
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Identification of accounting patterns begins with analysis of
individual accounting practices.
Using this Approach, Nair and Frank identified five measurement
groupings using Price-Waterhouse (PW) data:
1. British Commonwealth
2. Latin American
3. Continental European
4. United States
5. Chile
They made a empirical distinction between measurement
and disclosure practices because there were considered to
have different patterns of development.
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Their results suffered from lack of reliability and relevance of PW’s
data.
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Cultural Influences on
Accounting Development
The role of culture in accounting systems has
been largely ignored in the past but this is
changing.
 Culture is an essential element for understanding
social systems.
 Gray proposed incorporating cultural factors in a
framework to explain and predict international
differences in accounting systems and identify
international development patterns of accounting
systems.
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Culture, Societal Values,
and Accounting
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Flexibility versus uniformity are most relevant to
professional versus statutory authority,
Combining these relationships allows for relevant culture
areas to be hypothesized,
Accounting values most relevant to measurement
practices and the extent of information disclosure are the
conservatism and secrecy dimensions,
These factors can be combined and culture areas
hypothesized,
Classification of countries by culture area can provide a
means for further assessing the relationship between
culture and accounting systems.
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Comparative Accounting Systems:
Anglo-American Accounting
United States
 Accounting based on U.K. traditions,
 Securities markets a dominant influence,
 SEC recognizes the authority of FASB,
 FASB uses an open approach to standard
setting, and
 U.S. accounting system is probably most
comprehensive in the world.
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Comparative Accounting Systems:
Anglo-American Accounting (Cont.)
United Kingdom
 Importance of company law,
 Profession is self-regulated through accounting
standards board (ASB) guided by Financial
Reporting Control (FRC), and
 Primacy given to information needs investors.
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Comparative Accounting Systems:
Nordic Accounting
The Netherlands
 Company law and accounting profession are
major influences,
 Government role is minimal,
 Overriding criterion are “generally acceptable
accounting principles,” and
 Novel Feature -- Interested parties may
complain to the Court of Justice if financial
statements do not comply with the law.
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Comparative Accounting Systems:
Nordic Accounting (Cont.)
Sweden
 Accounting strongly influenced by legal and tax
requirements, the profession (FAR), and stock
exchanges,
 Government has a strong role (BFN) to
accomplish macroeconomic planning and to
make policy,
 Accounting Council is new standard setting
body, and
 Traditionally, information preference was given
to creditors and the government -- Now a shift
to investors.
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Comparative Accounting Systems:
Germanic Accounting
Germanic Accounting
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Differs significantly from Anglo-American and Nordic,
and
Company and/ or tax laws govern accounting practice.
Germany
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Company law and tax laws predominate,
Accounting practice must follow tax laws,
Accounting profession is small and lacks influence,
Stock market is small but growing in influence, and
Information needs of creditors and tax authorities take
precedence.
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Comparative Accounting Systems:
Germanic Accounting (Cont.)
Switzerland
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Swiss accounting is among the most conservative and
secretive in the world,
Accounting practice is dominated by company law and
tax regulations,
Accounting profession is small,
Legal requirements relating to accounting are minimal
and secret reserves are allowed,
Accounting rules are conservative and focus on the needs
of creditors, and
New laws are changing accounting information
orientation and presentation to benefit shareholders.
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Comparative Accounting Systems:
Latin Accounting
France
 Company law predominates,
 A standardized code of accounting provides
uniformity of practice,
 Tax law is also a major influence and override
accounting rules,
 Accounting profession is small and lacks status,
 The stock market is small, and
 Information preference to tax authorities and creditors.
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Comparative Accounting Systems:
Latin Accounting
Brazil
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Government, Company Law, and Tax Regulations
predominate,
Information needs of creditors and tax authorities
predominate -- changing to include shareholders, and
Accounting profession not well developed.
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Comparative Accounting Systems:
Asian Accounting
Asian countries quite distinct
from all other groupings,
 Many have strong colonial
histories.
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Comparative Accounting Systems: Asian Accounting
China:
 Accounting rules are strongly influenced by the government
and Communist Party;
 The accounting law of the People’s Republic established
general principals concerning nature and rule of accounting
(1985, revised 1993);
 The People’s Republic State Council issued Financial
Accounting and Reporting Rules (FARR):
 Represent new era in Chinese accounting,
 Based on market approach,
 Fund accounting has been abolished, and
 Users of information beyond government are now
recognized;
 Government has led reforms along with accounting
organizations.
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Comparative Accounting Systems:
Asian Accounting (Cont.)
Japan:
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Government is the major accounting influence;
Commercial code, securities and exchange law, and
corporation tax law are also influential;
Government institutions are directly involved in standard
setting:
 Ministries of Finance and Justice have joint
jurisdiction,
 Dual jurisdiction results in lack of unified approach;
Accounting profession is small and lacks influence;
“Secretive” approach is common;
(Continued next slide)
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Comparative Accounting Systems:
Asian Accounting (Cont.)
Japan (Cont.):
 Many companies provide courtesy financial
statement translations;
 Creditors and tax authorities have information
preference;
 Immediate write-off is widely accepted; and
 Capitalization and amortization is allowed to
varying degrees.
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