Matakuliah
Tahun
: F0142 / Akuntansi Internasional
: 2006
Session 13
Cases
(Guidance Concept to Cases)
1
International Accounting Differences
and Financial Statement Analysis
• The key question
– How do differences in accounting affect
earnings and cash flow assessments?
• These assessments are important to
– Investors
– Corporations concerned with foreign direct
investment
• Many companies are listing on
international exchanges (London, New
York)
2
International Accounting Differences
and Financial Statement Analysis
• A tendency exists to looks at earnings
from a home country perspective
– This tendency may ignore accounting
differences
• A need exists to better understand foreign
accounting principles in the context in
which they are derived
• International comparability is important in
considering alternative investments
3
Major Differences in Accounting
Principles Around the World
• Inventory
measurement
– Generally based on
“lower of cost or
market” with market
defined as either
• Net realizable value
• Replacement cost
– LIFO is permitted for
tax purposes in U.S.
and Japan, but not in
the EU
• Construction
contracts
– Wide usage of
percentage-ofcompletion method
– Completed contract
method – Switzerland,
China, Japan
4
Major Differences in Accounting
Principles Around the World
• Measurement basis
used
– Historical cost is used
in the U.S., Brazil,
Switzerland, China,
and Japan.
– More flexible approach
with some
restatements to market
value or replacement
cost – U.K., Holland
• Depreciation
accounting
– Useful economic life
concept – U.S. and EU
– Accelerated methods –
France, Germany,
Switzerland, Japan
5
Major Differences in Accounting
Principles Around the World
• R&D costs
– Expensed immediately
in Anglo-American and
Germanic countries
– Brazil has a more
flexible approach
– Some countries allow
capitalizing the
borrowed cost of
assets
• Retirement benefits
– Generally accounted
for on the basis of
accrued and/or
projected benefits
payable to employees
– Pay-as-you-go
approach in Brazil and
China
6
Major Differences in Accounting
Principles Around the World
• Taxation
– Accounting income
strongly influenced by
the tax system in
France, Germany,
Brazil, Switzerland
• Business
Combinations
– Varies with allowance
of pooling-of-interests
– Purchase method is
generally required
– Goodwill is amortized
in Brazil, China, and
Japan
– Goodwill impairment
tests are used in U.S.,
U.K.
7
Major Differences in Accounting
Principles Around the World
• Intangibles
– Generally are capitalized and subject to
amortization or impairment tests
– Exception – Switzerland
• Foreign Currency Translation
– Choice between average or closing rate
– Generally flexible; actual or average rate
allowed
• Big Question: Do these differences
matter?
8
The Impact of U.S.-U.K. Accounting
Differences
Index of conservatism (Gray, 1980)
1 – [RA – RD / l RA l]
Where RA = adjusted earnings (or returns)
RD = disclosed earnings
Therefore,
1 – [U.S. GAAP Earnings – U.K. GAAP Earnings /
l U.S. GAAP Earnings l]
If index value > 1, U.K. GAAP earnings are less
“conservative”
If index value < 1, U.K. GAAP earnings are more
“conservative”
9
The Impact of U.S.-U.K. Accounting
Differences
Example 1
Example 2
U.K. earnings
U.K. earnings
£90 million
£110 million
U.S. earnings
U.S. earnings
£100 million
£100 million
Index
1 – [100-100]/100 = 1.1
Index
1 – [100-90]/100 = 0.9
10
The Impact of U.S.-U.K. Accounting
Differences
It is possible to establish the relative effect
of individual adjustments with partial
indices of adjustment
Partial index of “conservatism”
1 – [partial adjustment / l U.S. GAAP Earnings l ]
11
The Impact of U.S.-U.K. Accounting
Differences
Example
Millions of Pounds
U.K. GAAP earnings
Adjustments for U.S. GAAP:
Deferred taxation
Goodwill amortization
Adjusted earnings per U.S. GAAP
Overall index of ‘conservatism’
Partial index for deferred taxation
15/100] = 1.15
Partial index for goodwill
120
(15)
(5)
(100)
1.2
1 – [1 – [-5/100] = 1.05
12
The Impact of U.S.-U.K. Accounting
Differences
• Differences between methods are
illustrated in the Form 20-F report
• Form 20-F can be used to test how
conservative U.S. and U.K. GAAP are in
comparison with each other
• Form 20-F is reliable because it is
provided by the company itself
• Research findings show U.K. GAAP to be
less conservative
13
A Global Perspective on Earnings
Management
• How do Anglo-American earnings compare with
continental Europe and Japan?
• Continental Europe
– Gray (1980) compared French and German
companies to British companies
• Insert Exhibit 5.8, 5.9
• French and German earnings are more conservative
than British earnings
– Weetman and Gray (1991) found that
• Netherlands was less conservative that Sweden, U.K.
• Swedish methods were more conservative than U.S.
GAAP
14
A Global Perspective on Earnings
Management
• Japan
– Earnings are relatively understated compared to
the U.S. (33.9%, according to Aron (1991)
– Historically high PE ratios were deflated by
adjustments for reserves, consolidation
practices, depreciation, cross-holdings, and
differences in capitalization (Morgan Stanley)
– Higher levels of gearing (leverage) and shortterm payables are tolerated because of longterm relationships with bankers and suppliers
– Emphasis tends to be on long-term growth
rather than instant profitability
15
Factors Influencing Measurement
Differences
• U.S. and U.K.
– Stock market is the dominant influence
• Information needs of investors encourage a
more “optimistic” view of earnings and
higher share prices
–
–
–
–
Accounting principles are flexible
Accounting profession is independent
Tax rules have a limited influence
Cultural values motivate a less
conservative approach to measurement
16
Factors Influencing Measurement
Differences
• Continental Europe and Japan
– Taxation and sources of finance are influential
– Tradition of commercial codes and accounting
plans
– Tendency to report lower earnings for tax
purposes
17
Factors Influencing Measurement
Differences
• Continental Europe and Japan
– Users of financial information may be more
concerned with balance sheet information
• Black and White (2003) findings
– Balance sheet info is more informative in Germany, Japan
– Income statement is more relative in the U.S.
– Professional influence is low due to legal
requirements related to accounting
– Cultural values motivate a more conservative
approach
18
Six National Financial Accounting Systems
France
• Plan Comptable General (national accounting code) in
September 1947.
• A revised plan came into effect in 1957.
• A further revision in 1982 under the influence of the Fourth
Directive of The European Union (EU).
• In 1986 the plan was extended to implement the
requirements of the EU Seventh Directive on consolidated
financial statements, and it was further revised in 1999.
• The Plan Comptable General provides :
•
•
•
•
•
Objectives and principles of financial accounting and reporting
Definitions of assets, liabilities, shareholders’ equity, revenues and
expenses
Recognition and valuation rules.
A standardized chart of accounts
Model financial statements and rules for their presentation.
Six National Financial Accounting Systems
France
•
A feature of French accounting is :
–
–
•
dichotomy between individual company financial statements and those for the
consolidated group.
The law allows French companies to follow International Financial Reporting
Standards (IFRS) or US GAAP in their consolidated financial statements.
Major organizations are involved in setting standards :
–
–
–
–
–
–
Counseil National de la Comptabilite or CNC (National Accounting Board)
Counseil National de la Comptabilite or CNC (National Accounting Board)
Comite de la Reglementation Comptable or CRC (Accounting Regulation
Committee)
Autorite des Marches Financiers or AMF (Financial Markets Authority)
Ordre des Experts Comptables or OEC (Institute of Public Accountants)
Compagnie Nationale des Commissaires aux Comptes or CNCC (National
Institute of Statutory Auditors)
Six National Financial Accounting Systems
France
• French companies must report the following
–
–
–
–
–
Balance Sheet
Income Statement
Notes to Financial Statements
Directors’ Report
Auditor’s Report
• Listed companies must provide half yearly interim
reports and starting in 2003, the results of their
environmental activities. Information must be given on :
–
–
–
–
Auditor’s Report
Water, raw material and energy consumption, and actions
taken to improve energy efficiency
Activities to reduce pollution in the air, water, or ground,
including noise pollution and their costs, and
Amount of provisions for environmental risks.
Six National Financial Accounting Systems
Germany
• In 1965 Corporation Law moved the German
financial reporting system toward British American
ideas.
• The fourth, seventh and eighth EU directives all
entered German law through the Comprehensive
Accounting Act of December 19, 1985.
• The fundamental characteristic of German
accounting :
– Creditor protection as embodied in the commercial law
– The determination principle states that taxable income is determined
by whatever is booked in a firm’s financial records.
– Its reliance on statutes and court decisions
Six National Financial Accounting Systems
Germany
• The 1985 Accounting Act specifies the content and
format of financial statements, which include :
–
–
–
–
–
Balance Sheet
Income Statement
Notes
Management Report
Auditor’s Report
• A feature of the German financial reporting system
is a private report by the auditors to a company’s
managing board of directors and supervisory
board. The report comments on the company’s
future prospects and especially factors that may
threaten its survival
Six National Financial Accounting Systems
United States
• Accounting in the United States is regulated by
– A private sector body (FASB)
– A governmental agency (SEC)
• Generally Accepted Accounting Principles are
comprised of all financial accounting standards,
rules, and regulations that must be observed in
the preparation of financial report.
• The Sarbanes Oxley Act was signed into law in
2002, significantly expanding US requirements on
corporate governance, disclosure and reporting
and the regulation of the audit profession.
• Among its more important provisions is the
creation of the PCAOB, a new non profit
organization overseen by the SEC.
Six National Financial Accounting Systems
United States
• A typical annual financial report of a large US
corporation includes the following :
– Report of management
– Report of independent auditors
– Primary financial statements (income statement, balance
sheet, statement of cash flows, statement of
comprehensive income and statement of stockholders’
equity)
– Management discussion and analysis of results of
operations and financial condition
– Disclosure of accounting policies
– Notes to financial statements
– Five or ten year comparison of selected financial data
– Selected quarterly data
Summary of Significant Accounting
Practices
Items
Business Combination,
Purchase or Pooling
Goodwill
Affiliated Companies
Foreign Currency
Translation Current Rate
Method
Temporal Method
Asset Valuation
Depreciation Charges
France
Germany
Japan
Netherlands
UK
USA
Purchase
Purchase
Purchase
Purchase
Purchase
Purchase
Capitalize &
Amortize
Capitalize &
Amortize
Capitalize &
Amortize
Capitalize &
Amortize
Capitalize &
Amortize
Capitalize &
Impairment
tested
Equity Method
Equity Method
Equity Method
Equity Method
Equity Method
Equity Method
Autonomous
Subsidiaries
Autonomous
Subsidiaries
All
Subsidiaries
Autonomous
Subsidiaries
Autonomous
Subsidiaries
Autonomous
Subsidiaries
Integrated
Subsidiaries
Integrated
Subsidiaries
Not Used
Integrated
Subsidiaries
Integrated
Subsidiaries
Integrated
Subsidiaries
Historical &
Current Cost
Historical &
Current Cost
Historical Cost
Historical Cost
Historical Cost Historical Cost
Economic Based
Taxed Based
Taxed Based
Economic
Based
Economic Based
Economic
Based
Not Used
Not Used
Not Used
Not Used
Not Acceptable
Used
Finance Leases
Not Capitalized
Not
Capitalized
Capitalized
Capitalized
Capitalized
Capitalized
Deferred Taxes
Accrued
Accrued
Accrued
Accrued
Accrued
Accrued
Used
Used
No
Some
Some
No
LIFO Inventory Valuation
Reserves for Income
Smooting
26