GLOBAL ACCOUNTING AND CONTROL: A
MANAGERIAL EMPHASIS
 Sidney J. Gray, University of New South
Wales
 Stephen B. Salter, University of Cincinnati
 Lee H. Radebaugh, Brigham Young
University
 Slides Prepared by: Jennifer Anne Salter
Gray, Salter & Radebaugh
Chapter 7
CHAPTER SEVEN
GLOBAL FINANCIAL STATEMENT ANALYSIS
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INTRODUCTION
 A management approach to global
financial statement analysis.
 Take information from accounting systems
to allow managers to meet strategies.
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ENVIRONMENTAL INFLUENCES ON
FINANCIAL REPORTING
 Influences on financial reporting and
information disclosure practices:
•
•
•
•
•
Enterprise ownership;
Activities of enterprises;
Sources of finance;
Taxation;
Level of development & independence of the
auditing and financial reporting profession;
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ENVIRONMENTAL INFLUENCES ON
FINANCIAL REPORTING - Table 7.2
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ENVIRONMENTAL INFLUENCES ON
FINANCIAL REPORTING Cont’d
•
•
•
•
Stage of economic growth & development;
Legal system;
Influence of culture;
International factors.
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CLASSIFICATION OF FINANCIAL
REPORTING SYSTEMS (FRPs)
 There have been many attempts to classify
and explain why countries differ in their
financial reporting practices.
 Two models with difference perspectives
are:
• Nobes (1983)
• Gray (1988)
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CLASSIFICATION OF FRS:
The Nobes (1983) Model
 Two basic classes of financial reporting
systems:
• Microeconomic (business oriented)system
where key determinants are:
– basic philosophy; historical origin
• Macroeconomic (government oriented)
system:
– taxation; economic management.
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CLASSIFICATION OF FRS:
The Nobes (1983) Model
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CLASSIFICATION OF FRS:
The Gray (1988) Model
 A more comprehensive model based on
Hofstede’s (1980) cultural dimensions and
the institutions that arise from them.
 Gray’s model has been empirically tested
by Salter & Niswander (1995)
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CLASSIFICATION OF FRS:
The Gray (1988) Model
 Drawing on the work of Gray (1988) and
Nobes (1983), two key parameters which
define financial reporting systems are:
• How systems are determined and enforced:
– statutory control or professional means.
• The measurement and disclosure
characteristics of financial reporting systems.
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CLASSIFICATION OF FRS: Gray (1988)
Accounting Cultural Values
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CLASSIFICATION OF FRS:
Gray’s (1988) Dimensions
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CLASSIFICATION OF FRS:
Gray’s (1988) Country CLassifications
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CLASSIFICATION OF FRS:
Gray’s (1988) Country Classifications
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CLASSIFICATION OF FRS:
Salter & Niswander (1995) and Gray
(1988)
 Integrating these two works we find:
• Individualist societies (UK, USA) demand:
– more disclosure,
– a stronger independent audit profession to ensure
rights of individual investor.
• High uncertainty avoidant societies (Japan,
Germany) demand:
– uniform accounting rules passing through the legal
system.
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CLASSIFICATION OF FRS:
Salter & Niswander (1995) and Gray
(1988)
 Salter & Niswander add that:
• Development of financial markets enhances
power of auditors, encourages increased
disclosure and a more optimistic view of
income.
• Higher tax rates reduce income and relative
power of auditors.
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CLASSIFICATION OF FRS:
Salter & Niswander (1995) and Gray
(1988)
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MAJOR DIFFERENCES IN FINANCIAL
REPORTING
 Financial reporting issues that separate
countries are:
• Format
• Measurement
• Disclosure
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MAJOR DIFFERENCES IN FINANCIAL
REPORTING - Format
 Format includes statements used and what
they contain.
 Most countries have statements about
income/expenses and assets/liabilities.
 Less common are: statements of cash
flows, changes in financial position, and
retained earnings.
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MAJOR DIFFERENCES IN FINANCIAL
REPORTING - Measurement
 Major areas of diversity are:
•
•
•
•
•
•
•
depreciation
inventory measurement
retirement benefits
construction contracts
research and development
accounting for taxation
business combinations
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THE IMPACT OF ACCOUNTING
DIFFERENCES
 The subtleties of different sets of
measurement rules can be seen by using
Gray’s (1980) index of conservatism:
• Conservatism is the extend to which, given the
same basic accounting data, 2 companies
would arrive at earnings numbers that are
higher or lower.
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THE IMPACT OF ACCOUNTING
DIFFERENCES - Index of Conservatism
 Gray (1980) uses the following formula to
measure relative conservatism:
• Index of Conservatism = 1 - (RA - RD) / I RA I
where:
° RA = adjusted earnings under the GAAP of the
country being used as a standard
° RD = disclosed earnings under the national GAAP of
the country whose conservatism is being assessed.
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THE IMPACT OF ACCOUNTING
DIFFERENCES - Index of Conservatism
° I RA I = the absolute value of adjusted earnings
under the GAAP of the country being used as the
standard.
• Using the US as the base, and comparing US
versus UK accounting principles, the formula
can be translated as follows
– Index of Conservatism = 1 - (US GAAP Earnings - UK
GAAP Earnings) / I US GAAP Earnings I
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THE IMPACT OF ACCOUNTING
DIFFERENCES - Index of Conservatism
 An Index value greater than 1 means that UK
GAAP earnings are less “conservative”
(more optimistic) than a US GAAP.
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THE IMPACT OF ACCOUNTING
DIFFERENCES - Index of Conservatism
 Having established an overall index of
conservatism, it is then possible to
establish the relative effect of the various
individual adjustments by constructing a
partial index of “conservatism” using the
formula:
• 1 - (partial adjustment / US GAAP Earnings)
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THE IMPACT OF ACCOUNTING
DIFFERENCES - Conservatism and the
SEC Form 20F
 Form 20F allows an opportunity to compare
earnings resulting from any country’s
accounting principles with those that
would have resulted under US accounting
principles.
• Form 20F report to the SEC contains a
reconciliation of foreign earnings with the
earnings that would have reported under US
GAAP
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THE IMPACT OF ACCOUNTING
DIFFERENCES - Conservatism and the
SEC Form 20F
• Radebaugh and Gray (1997) have drawn up
indices of conservatism for 8 countries
• Continental European countries and Japan are
more conservative than the US.
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Conservatism and the SEC Form 20F Figure 7.5
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GLOBAL HARMONIZATION
 While many organizations (UN, EU) have
been concerned with harmonizing
international differences in accounting
and reporting, the most important body is
the International Accounting Standards
Committee (IASC).
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GLOBAL HARMONIZATION Cont’d
 The main aim of the IASC has been to
achieve a degree of comparability that will
help investors make their decisions while
reducing the costs of MNEs in preparing
multiple sets of accounts and reports.
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Copyright
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