Chapter 2:
Worldwide
Accounting
Diversity
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Learning Objectives
 Provide evidence of the diversity that exists in accounting
internationally
 Explain the problems caused by accounting diversity
 Describe the major environmental factors that influence national
accounting systems and lead to accounting diversity
 Describe a judgmental classification of countries by financial
reporting system
 Discuss the influence that culture is thought to have on financial
reporting
 Describe a simplified model of the reasons for international
differences in financial reporting
 Categorize accounting differences internationally and provide
examples of each type of difference
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Worldwide Accounting Diversity
 Nature of diversity in accounting
 Format
 Terminology
 Recognition rules
 Measurement rules
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Worldwide Accounting Diversity: Reasons
 Legal systems
 Common law
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Fewer statutes—more court interpretation
Creation of precedents or case laws
Great Britain and other English-speaking countries
Accounting law is detailed and specific
Sources are nonlegislative organizations
 Code law
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More statutes
Non-English-speaking countries
Legislated accounting rules
Accounting law is general
Other guidance required
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Worldwide Accounting Diversity: Reasons
 Basis for taxation
 Published financial statements
 Germany—same taxable income and book income
 Financial statements adjusted for tax purposes
 U.S.—different taxable income and book income
 Difference between tax and accounting income gives rise to
deferred income taxes
 Providers of financing
 Accounting and disclosure is less important where major
sources are families, banks, and the government
 Accounting and disclosure is more important where major
sources are diverse shareholders
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Worldwide Accounting Diversity: Reasons
 Inflation
 Some countries have historically high rates of inflation
 Necessitates adjustments to offset inflation
 Common in Latin American countries
 Political and economic ties affect how accounting rules are
conveyed
 Correlation of factors
 Common law countries have domestic listed companies relying
on equity for capital.
 Code law countries tend to link taxation to accounting
statements and rely less on financing provided by
shareholders
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Problems caused by Accounting Diversity
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Preparation of consolidated financial statements
Access to foreign capital markets
Comparability of financial statements
Lack of high-quality accounting information
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Preparation of Consolidated Financial Statements
 Problems due to:
 Local regulations
 Books In local currency
 Local accounting principles
 Requires:
 Considerable effort
 Additional cost
 Expertise in different country’s accounting standards
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Access to Foreign Capital Markets
 Requires financial statements as per local accounting
standards
 Considerable effort and cost involved
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Comparability of Financial Statements
 Lack of comparability between financial statements from
different countries
 This adversely affects:
 Investment decisions
 Lending decisions
 Performance analysis
 Foreign acquisition decisions
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Lack of High-Quality Accounting Information
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Lack of high-quality accounting standards
Inadequate risk assessment
Lack of appropriate disclosure requirements
Disclosure deficiencies
 Related-party transactions and off-balance-sheet financing
 High exposure to foreign exchange risk
 Investments in highly speculative assets
 Contingent liabilities guaranteeing foreign currency loans
 Loan loss provisions
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Accounting Clusters
 Accounting models
 The Fair Presentation/Full Disclosure Model (Anglo-Saxon or
Anglo-American model)
 Oriented toward the decision needs of large numbers of
investors and creditors
 Used in English-speaking countries influenced by the United
Kingdom or the United States
 The Legal Compliance Model (Continental European model)
 Legalistic
 Used to provide information for taxation and governmentplanning
 Used in Europe, Japan, and code law countries
 The Inflation-Adjusted Model
 Resembles the Continental European model
 Requires extensive use of adjustments for inflation
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Judgmental Classification of Financial Reporting
Systems
 Developed by Nobes
 Micro-based—Anglo-Saxon model
 Macro-uniform—Continental European model
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Micro-based accounting systems
 First sub-class influenced by
 Business economics
 Accounting theory
 Example: Netherlands
 Second sub-class influenced by
 Business practice
 Pragmatic
 Example: British-origin
 United Kingdom and United States dominated
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Macro-uniform accounting systems
 First sub-class:
 Aligned with national economic policies
 Example: Sweden
 Second sub-class:
 Continental: government, tax, legal
 Example: Continental European countries
 Law-based family: Germany, Japan
 Tax-based family: Southern European countries
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Exhibit—2.5 Nobes’s Judgmental Classification
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Influence of Culture on Financial Reporting
 Hofstede’s cultural dimensions
 Gray’s accounting values
 Religion and Accounting
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Hofstede’s cultural dimensions
 Four cultural dimensions
 Individualism (vs. collectivism)
 Preference for a loosely knit social fabric
 Power distance
 Acceptance of hierarchy and unequal power distribution
 Uncertainty avoidance
 Comfort level with uncertainty and ambiguity
 Masculinity
 Emphasis on masculine values vs. feminine values
 Long-term orientation
 Focus on fostering virtues oriented towards future rewards
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Gray’s Accounting Values
 Four widely recognized accounting values to describe a
country’s accounting subculture
 Professionalism vs. Statutory Control
 Uniformity vs. Flexibility
 Conservatism vs. Optimism
 Secrecy vs. Transparency
 Believes that national cultural values affect accounting
values
 Accounting values of conservatism and secrecy have the
greatest relevance
 Gray extended Hofstede’s model to understand how
culture influences the corporate reporting systems
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Exhibit—2.8 Framework for Accounting Systems
Development
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Religion and Accounting
 Religion defines
 National culture in many parts of the world
 It has significant effect on business practice
 Example: Banking companies under Shariah, the Islamic law
of human conduct derived from the Koran
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A Simplified Model to Explain Financial Reporting
International Differences
 Nobes’s model argues that international reporting differences
are due to different purposes
 Country’s financing system is considered most relevant factor to
determine the purpose of financial reporting
 Nobes divides reporting systems into two classes—A and B
 Class A
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Strong equity-outsider system
Less conservative
Extensive Disclosure
Accounting practice differs from tax rules
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Weak equity-outside shareholder financing
More conservative
Disclosure is not extensive
Accounting practice follows tax rules
 Class B
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Further Evidence of Accounting Diversity
 Categories based on accounting differences
 Financial statements included
 Financial statement formats
 Level of detail in financial statements
 Terminology
 Disclosure
 Recognition and measurement
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End of Chapter 2
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