Slide
11-1
Chapter Eleven
Worldwide
Accounting
Diversity and
International
Standards
McGraw-Hill/Irwin
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Slide
11-2
Examples of International
Accounting Diversity
Dutch companies
report assets at
current
replacement cost.
German
companies
amortize goodwill
as a reduction of
owners’ equity.
Canada and
France allow
capitalization
of R&D costs.
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Slide
11-3
Magnitude of Accounting Diversity
Results of a 1993
SEC survey on the
significance of the
differences between
GAAP and nonGAAP countries.
60% of British
companies
reported higher
equity under US
GAAP.
McGraw-Hill/Irwin
2/3 of foreign
companies report
material differences
when compared to
GAAP.
Over 90% of
British companies
reported lower net
income under US
GAAP.
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Slide
11-4
Reasons for Accounting Diversity
Legal
System
Taxatio
n
Inflation
Providers
of
Financing
McGraw-Hill/Irwin
Political &
Economic
Systems
© The McGraw-Hill Companies, Inc., 2004
Slide
11-5
Problems Caused By Diverse
Accounting Standards
Problem
Solution


Subs use the
standards for the
country where they
are located.
 To gain access to a
country’s capital
market, financial
statements must be
in accordance with
local standards.
 Statements are not
comparable.
McGraw-Hill/Irwin


The parent must
adjust the subs’
statements to be in
accord with GAAP.
The parent must
restate their own
statements in accord
with local standards.
Statements must be
re-stated in common
standards.
© The McGraw-Hill Companies, Inc., 2004
Slide
11-6
Accounting Clusters

One classification scheme
identifies four major
accounting models.
 British-American
 Continental
 South American
 Mixed economy

McGraw-Hill/Irwin
Nobes’ microbased/macro-based model.
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Slide
11-7
Hypothetical Classification of
Accounting Systems
Exh.
11.3
Developed
Western
Countries
Micro-based
Business
Economics,
Theory
McGraw-Hill/Irwin
Business
practice
pragmatic,
British origin
Macro-based
Continental:
Gov't, Tax,
Legal
Government
Economics
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Slide
11-8
Major Deviations From GAAP
10 Accounting Issues Most Commonly
Requiring Adjustment





McGraw-Hill/Irwin
Depreciation and
amortization
Deferred or
capitalized costs
Deferred taxes
Pension costs
Foreign currency
translation





Gain/loss on disposal of
assets
Business combinations
Extraordinary Items,
discontinued operations,
and accounting changes
Employee compensation
Investments in
associated entities
© The McGraw-Hill Companies, Inc., 2004
Slide
11-9
International Harmonization

The process of reducing
differences in financial
reporting practices across
countries.
 European Union
 The Fourth Directive (1978)
 The Seventh Directive (1983)

International Accounting
Standards Committee
 International Organization of
Securities Commissions
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Slide
11-10
European Union
1957 – European Economic
Community (now called European
Union) established free trade among
member countries.
 EU issues “Directives” to assist with
harmonizing accounting across
member countries

 1978 – 4th Directive deals with valuation
 1983 – 7th Directive deals with preparation
of consolidated financial statements.
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Slide
11-11
European Union – Examples of
Changes in Germany
Required inclusion of
notes to the financial
statements.
Elimination of
unrealized
intercompany losses
on consolidation.
Use of equity method
for investments in
associated
companies.
Accrual of deferred
taxes and pension
obligations.
Inclusion of foreign
subsidiaries in
consolidated financial
statements.
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Slide
11-12
European Union – Unaddressed
Differences Between Countries
Lease
Accounting
Income Taxes
Accounting
Changes
Foreign
Currency
Translation
Long-term
Construction
Contracts
Contingencies
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Slide
11-13
International Accounting
Standards Committee (IASC)

Established 1973
 Includes over 140 accounting bodies,
representing over 100 nations.
 The U.S. is represented by the AICPA and
IMA

Standards produced by a 14-member
board.
 Requires 11 of 14 members to issue a
standard.
 39 International Accounting Standards
(IAS’s) issued as of January 2000.
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Slide
11-14
International Accounting
Standards Committee (IASC)
Very few countries have formally
adopted the IAS’s as the national
practice.
IAS's as National
Requirement
Croatia
Cyprus
Kuwait
Latvia
Malaysia
Malta
Oman
Pakistan
Papua New TrinidadGuinea
Tobago
McGraw-Hill/Irwin
IAS's as Basis for National
Standard
Albania
Bangladesh
Barbados
Colombia
Jamaica
Jordan
Kenya
Poland
Sudan
Swaziland
Thailand
Uruguay
Zambia
Zimbabwe
© The McGraw-Hill Companies, Inc., 2004
Slide
11-15
The IOSCO Agreement
International Organization of
Securities Commissions (IOSCO)
In 1987, partnered with the IASC’s
Comparability Project.
Helped to rewrite IAS’s to eliminate
unnecessary alternatives.
The goal is to help make it easier for
foreign companies to use IAS’s when
reporting on different exchanges.
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Slide
11-16
Support of Securities Exchange
Regulators
Since 1994, reconciliation to U.S. GAAP is not
required for foreign registrants using IAS’s for:
Statement of cash flows.
Amortization of goodwill.
Translation of financial statements of subsidiaries in
highly inflationary economies.
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Slide
11-17
Support of Securities Exchange
Regulators
In
1996, the FASB compare GAAP to IASC standards.
Significant differences were found.
Number Percent
Similar approach and guidance
56
26%
Similar approach, but different guidance
79
36%
Different approach
56
26%
Alternative approaches permitted
27
12%
218
100%
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Slide
11-18
Accounting Principles
United Kingdom

The Companies Acts (1989)
 Legal foundation for accounting.
 Requires a “true and fair view” of a
company’s operating results and
financial position.


Professional accountants are
called Chartered Accountants.
The Accounting Standards
Board (ASB) was established in
1990.
 Replaced the Accounting Standards
Committee
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Slide
11-19
Accounting Principles
Germany

Accounting principles set by the
legislature.
 The Third Book of the Commercial Code
(Handelsgesetzbuch).
 It is generally believed that strict
adherence to the law provides a “true
and fair view”.

A professional accountant carries
the designation “Wirtschaftsprufer”.
 Requires passing an exam and 6 years
of experience.
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Slide
11-20
Accounting Principles
Germany

German accounting is greatly
influenced by German banks.
 A Statement of Fixed Assets is
often produced in addition to
the other common statements.
 Income Statement is produced
on one of two formats:
 Cost of Sales Approach
 Type-of-Cost Approach

McGraw-Hill/Irwin
Current and noncurrent
designations are generally not
used.
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Slide
11-21
Accounting Principles
Japan

Basic accounting principles
are set by the government.
 Some rules are set by the
Japanese Commercial Code.
 The Business Accounting
Deliberation Council provides
additional accounting rules in
the Financial Accounting
Standards for Business
Enterprises.

McGraw-Hill/Irwin
CPA’s in Japan are
members of the JICPA.
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Slide
11-22
Accounting Principles
Japan

Financial statements
required include:
 Balance sheet.
 Income statement.
 Proposal of appropriation of
profit or disposition of loss.
 Business report.

McGraw-Hill/Irwin
Extensive cash flow
information is required in
supplemental disclosures.
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Slide
11-23
Specific Accounting Problems
Reported Value of Assets
Country
United
Kingdom
France
Germany
Japan
Korea
Canada
Mexico
Brazil
McGraw-Hill/Irwin
Treatment
Generally, historical cost is used. Current cost can be
used for intangibles, fixed assets, and short-term
investments. Market value is used for long-term
Historical cost is the basis. PP&E and Inventory can be
revalued to current value. Increases in value are taxed, so
revaluations occur seldom.
Historical cost is the basis. Upward valuations are not
allowed.
Mirrors the U.S.
Historical cost. Revaluation to market value is allowed in
certain circumstances.
Historical cost is capitalized and amortized over the useful
life of the assets.
Reported initially at historical cost. Restated to current
values at the balance sheet date.
Public companies are allowed to use "units of constant
purchasing power".
© The McGraw-Hill Companies, Inc., 2004
Slide
11-24
Specific Accounting Problems
Consolidation Accounting
Country
United
Kingdom
France
Germany
Japan
Korea
Canada
Mexico
Brazil
McGraw-Hill/Irwin
Treatment
All subs consolidated unless 1 of 3 conditions is met.
Pooling of interests is allowed.
Control is assumed if 40% is owned and no other
stockholder owns more. Pooling of Interests is not
allowed. Insignificant and restricted-control subs need not
be consolidated.
All foreign subs are consolidated. Pooling of Interests is
allowed.
Rules not well developed. When appropriate, purchase
accounting is used.
Unaudited subs are supplemental info. Subs are recorded
using the cost method.
Consolidation is required for controlled subs.
All 50% owned subs are consolidated. Pooling of Interests
is not allowed.
Consolidation required is subs make up more than 30% of
parent's equity.
© The McGraw-Hill Companies, Inc., 2004
Slide
11-25
Specific Accounting Problems
Accounting for Goodwill
Country
United
Kingdom
France
Germany
Japan
Korea
Canada
Mexico
Brazil
McGraw-Hill/Irwin
Treatment
Goodwill is recorded and amortized over up to 20 years.
Goodwill is capitalized and amortized over 5 to 20 years.
No maximum under French law.
Goodwill is capitalized and amortized over 5 years.
Alternatively it can be written off to equity.
Goodwill charged directly to net income if insignificant. If
capitalized, amortize over up to 5 years.
Goodwill is an intangible asset that is amortized over a fiveyear period. Any portion not identified as Goodwill should
be expensed immediately.
Goodwill is capitalized and amortized over up to 40 years.
Goodwill is recognized and amortized over a "reasonable
period not to exceed 20 years."
Execess of cost over FMV is allocated to intangible assets
and Goodwill. Both items are amortized over different
useful lives.
© The McGraw-Hill Companies, Inc., 2004
Slide
11-26
Specific Accounting Problems
Translation of Foreign Currency Financial
Statements
Country
United
Kingdom
France
Germany
Japan
Korea
Canada
Mexico
Brazil
McGraw-Hill/Irwin
Treatment
Current rate method is generally used. Concept of
functional currency is not used. Very similar accounting to
the U.S. Translation adjustment is in equity.
No particular translation method is specified. Majority
practice is the current rate method. Translation adjustment
is in equity.
No method is specified in law. No apparent prevalent
practice. Translation adjustment is in equity.
Very different rules than the U.S. Translation adjustments
are recorded in assets or liabilities.
Current rate method is used.
Similar rules to U.S. Translation adjustment under the
Temporal method requires that adjustments related to longterm monetary items are amortized over the life of the item.
No regulations. Many companies follow SFAS 52.
Current rate method is used. Translation adjustments are
reported in the income statement.
© The McGraw-Hill Companies, Inc., 2004
Slide
11-27
Specific Accounting Problems
Inventory Valuation
Country
United
Kingdom
Treatment
Inventory is carried at lower of cost or NRV. FIFO and
average cost are used. LIFO not allowed for tax purposes.
France
Inventory is carried at lower of cost or NRV. FIFO and
average cost are the only methods allowed for reporting.
LIFO is allowed for consolidations.
Inventory carried at LCM. Specific ID is preferred.
Averaging is recommended. FIFO and LIFO are allowed.
Inventory carried at LCM. FIFO, LIFO, and average cost
are allowed.
Inventories are valued at LCM. Specific ID, FIFO, LIFO and
average cost are all allowed.
Inventory carried at LCM. FIFO, LIFO, and average cost
are allowed.
Inventory carried at lower of restated value and realizable
value.. FIFO, LIFO, and average cost are allowed.
FIFO, LIFO, average cost, and Specific ID are allowed.
Germany
Japan
Korea
Canada
Mexico
Brazil
McGraw-Hill/Irwin
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Slide
11-28
End of Chapter 11
When the ad said,
“Job with a hot
future!”, this isn’t
exactly what I
expected.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004