Chapter 2
Worldwide Accounting
Diversity
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Worldwide Accounting Diversity
Chapter Topics
Indicators of worldwide accounting diversity.
Problems caused by worldwide accounting
diversity.
Environmental factors leading to accounting
diversity.
Classification schemes of national accounting
systems.
The effects of culture on accounting.
International differences in accounting practice.
2-2
Worldwide Accounting Diversity
Learning Objectives
1. Provide evidence of the diversity that exists in
accounting internationally.
2. Explain the problems caused by accounting
diversity.
3. Describe the major environmental factors that
influence national accounting systems and lead
to accounting diversity.
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1
Worldwide Accounting Diversity
Learning Objectives
4. Present a judgmental classification of countries
by financial reporting system.
5. Discuss the influence that culture is thought to
have on financial reporting.
6. Describe a simplified model of the reasons for
international differences in financial reporting.
7. Categorize accounting differences internationally
and provide examples of each type of difference.
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What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity
Differences in accounting and financial reporting
rules between countries. For example:
Accounting for Goodwill
U.S. -- goodwill is an asset on the purchaser’s
books.
Germany – goodwill is often subtracted from
stockholders’ equity on the purchaser’s books.
Learning Objective 1
2-5
What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity
Asset revaluation
U.S. -- upward revaluation of fixed assets is not
generally allowed.
Mexico, Chile, and The Netherlands upward
revaluations are allowed and sometimes
required.
Learning Objective 1
2-6
2
What is Worldwide Accounting Diversity?
Worldwide Accounting Diversity
Inflation Accounting
U.S. (and many other countries) -- financial
statements are not adjusted for inflation.
Latin American countries -- experience
significant inflation, financial statements are
adjusted for changes caused by inflation.
Learning Objective 1
2-7
Evidence of Diversity in International
Accounting
Additional evidence of differences in
accounting between countries
Form 20-F
Required by the SEC for companies using nonU.S. GAAP.
Reconciles net income and stockholders’ equity
from the other GAAP to U.S. GAAP.
Learning Objective 1
2-8
Problems Caused by Accounting Diversity
Consolidated financial statements
U.S. MNEs often have subsidiaries in a large
number of countries.
Accounting records in local GAAP and local
currency are rolled-up (i.e., consolidated) into
U.S. GAAP.
Require conversion from local to U.S. GAAP.
Require translation from the local to U.S.
currency.
Learning Objective 2
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3
Problems Caused by Accounting Diversity
Difficulties with access to foreign capital
markets
Companies often need to go outside their home
country in order to access financing.
Raising foreign capital often requires
reconciliation to comply with different accounting
rules or needs of investors and creditors.
Learning Objective 2
2-10
Problems Caused by Accounting Diversity
Non-comparability of financial
statements
Accounting rules often differ between countries.
International investors need to make their own
reconciliations or adjustments to financial
statements.
International investors also must face differing
levels of disclosure, quality of accounting
standards, and quality of auditing.
Learning Objective 2
2-11
Environmental Factors Leading to Accounting
Diversity
Legal systems -- Common law
Has relatively fewer statutes and more
interpretation by courts to apply laws to specific
situations.
Leads to the creation of precedents or case law.
Found most often in Great Britain and other
English-speaking countries.
In these countries, the source of accounting
rules tends to be non-governmental
organizations.
Learning Objective 3
2-12
4
Environmental Factors Leading to Accounting
Diversity
Legal systems -- Code law
Characterized by relatively more statutes or
code law.
Found more often in non English-speaking
countries.
Accounting rules in these countries tend to be
legislated (i.e., the source is the government).
Learning Objective 3
2-13
Environmental Factors Leading to Accounting
Diversity
Taxation
U.S. -- taxable income and book income are
generally quite different.
Germany -- rules governing taxable and book
income tend to be the same, which generally
results in more conservative accounting.
Learning Objective 3
2-14
Environmental Factors Leading to Accounting
Diversity
Providers of financing
In many countries major sources of capital are
families, banks, and the government.
Accounting and disclosure in those countries
tend to be less important.
In the U.S. and UK the providers of financing are
diverse shareholders, so accounting and
disclosure are more important.
Learning Objective 3
2-15
5
Environmental Factors Leading to Accounting
Diversity
Inflation
Some countries have historically high rates of
inflation.
Accounting in these countries often requires
adjustments to offset the impact of inflation.
This is common in Latin American countries.
Given extended periods of low inflation in the
U.S., inflation accounting is not required.
Learning Objective 3
2-16
Environmental Factors Leading to Accounting
Diversity
Political and economic ties
These linkages tend to make information sharing
easier.
Nations that share ties often have similar
accounting systems.
Correlation of factors
In summary, correlations exist among these
factors.
Code law countries tend to have accounting
rules based on tax rules, and providers of
financing with close ties to the company (i.e.,
family, banks, government).
Learning Objective 3
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Financial Reporting System Classification
Accounting Clusters
Environmental factors related to accounting
diversity have been used to identify three broad
based clusters:
Fair presentation / full disclosure
Gives primacy to the information needs of
investors.
Most descriptive of the UK and U.S.
Learning Objective 4
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6
Financial Reporting System Classification
Accounting Clusters
Legal compliance
Accounting heavily influenced by tax rules and
needs of government.
Commonly found in continental Europe.
Learning Objective 4
2-19
Financial Reporting System Classification
Accounting Clusters
Inflation-adjusted
Similar to the legal compliance approach.
Is distinguished by the requirement for
adjustments to mitigate the effects of inflation.
Learning Objective 4
2-20
Financial Reporting System Classification
Nobes’ judgmental classification
Focuses on fair presentation / full disclosure and
legal compliance clusters.
Considers primary needs of information users.
Considers primary source of accounting rules.
Classifies countries into six different groups.
Learning Objective 4
2-21
7
The Influence of Culture on Financial Reporting
Culture is also widely considered to influence
financial reporting systems.
Hofstede’s five cultural dimensions is the most
commonly used scheme to discuss cultural
influences.
Learning Objective 5
2-22
The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Individualism (vs. Collectivism)
Power Distance
Uncertainty Avoidance
Masculinity
Long-term Orientation
Learning Objective 5
2-23
The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Individualism (vs. Collectivism)
Degree of interdependence among individuals in
a society.
More interdependence equates to less
individualism (more collectivism).
Learning Objective 5
2-24
8
The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Power Distance -- Level of acceptance of
unequally distributed power within and across the
society’s institutions and organizations.
Uncertainty Avoidance – Degree to which
members of a society feel threatened by uncertain
or unknown situations.
Learning Objective 5
2-25
The Influence of Culture on Financial Reporting
Hofstede’s Cultural Dimensions
Masculinity – Emphasis on traditional masculine
values of performance and achievement vs.
feminine values of relationship, caring and
nurturing.
Long-term Orientation – The extent to which the
society values persistence, thrift, observing order
and respect for tradition.
Learning Objective 5
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The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Professionalism vs. Statutory Control
Uniformity vs. Flexibility
Conservatism vs. Optimism
Secrecy vs. Transparency
Learning Objective 5
2-27
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The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Professionalism vs. Statutory Control
Professionalism is reflected by individual
professional judgment and self-regulation of the
profession.
Statutory control focuses on legal compliance
and legislative control of the profession.
The former is more indicative of the UK and U.S.
and the latter more so with continental Europe.
Learning Objective 5
2-28
The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Uniformity vs. Flexibility
Uniformity indicates preference for standardized
accounting methods.
Flexibility is reflected in the varying of
accounting practices for differences between
companies.
UK and U.S. approaches are examples of
flexibility.
Learning Objective 5
2-29
The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Conservatism vs. Optimism
Conservatism indicates preference for caution
and prudence.
Optimism tends more toward fair presentation.
Germany has traditionally reflected a strong
tendency toward conservatism.
Learning Objective 5
2-30
10
The Influence of Culture on Financial Reporting
Gray’s Accounting Values
Secrecy vs. Transparency
Secrecy reflects a preference for minimal
information disclosure.
Transparency reflects openness and full
disclosure.
Countries with predominantly family-owned and
bank financed firms tend toward secrecy.
Learning Objective 5
2-31
A Model to Explain International Differences in
Financial Reporting
Nobes’ model
Describes international differences as a function
of culture and the system of financing.
Culture influences the development of the
system of financing which influences the
development of accounting.
Uses two classifications, A and B.
Learning Objective 6
2-32
A Model to Explain International Differences in
Financial Reporting
Class A Accounting
Descriptive of Anglo-Saxon countries.
Strong outside shareholder equity-financing.
Optimism.
Transparency.
Learning Objective 6
2-33
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A Model to Explain International Differences in
Financial Reporting
Class B Accounting
Descriptive of continental Europe.
Less widespread outside shareholder equityfinancing.
Conservatism.
Secrecy.
Learning Objective 6
2-34
Further Evidence of Accounting Diversity
Additional differences between countries
Different financial statement formats.
Level of detail in financial statements varies
between countries.
Terminology, level of disclosure, and rules
governing recognition and measurement.
Different financial statements included in the
annual report.
Learning Objective 7
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