Financial Accounting Theory
Craig Deegan
Chapter 4
International accounting
Slides written by Craig Deegan and Michaela
Rankin
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Learning objectives
• In this chapter you will be introduced to
– an appreciation that there are many differences between
some countries in the accounting policies and practices
adopted
– various explanations about why countries adopt particular
accounting practices in preference to others
– some of the arguments that suggest that it is appropriate
that there are international differences in accounting
practices
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Learning objectives (cont.)
– what is meant by the terms harmonisation and
standardisation as they apply to international accounting
– some of the perceived benefits of standardising
accounting practices on an international scale
– some of the obstacles to harmonisation and
standardisation, and the criticisms that efforts to
harmonise and standardise accounting internationally
have attracted
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Evidence of international differences in
accounting
• When we apply different countries’ accounting
rules to the same transactions we can find
significant differences in profits and net assets
(consider Accounting Headline 4.1, p. 97)
• The sometimes significant differences in
accounting profits have been used by many parties
to justify the ongoing efforts of the IASB to
standardise international accounting
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International financial accounting models
• Historically there have been two main models of
financial accounting adopted internationally
• Anglo-American model
– strongly influenced by professional accounting bodies
rather than government, emphasises importance of
capital markets, emphasises true and fair, considerations
of economic substance over legal form
• Continental European Model
– relatively small input from accounting profession, little
reliance on qualitative true and fair, strong reliance on
government
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Reasons for international accounting
differences
•
•
•
•
•
Underlying laws and political systems
Tax systems
Level of education
Level of economic development
Nature of business ownership and financing
system
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Reasons for international accounting
differences (cont.)
•
•
•
•
•
•
Colonial inheritance
Taxation
Culture
History
Language
Religion
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The effect of culture on accounting
systems
• Impacts on legal systems, tax systems and the
way businesses are formed and financed etc.
• Previously used to explain differences in social
systems
• ‘… an expression of norms, values and customs
which reflect typical behavioural characteristics’
(Takatera & Yamamoto 1987)
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The effect of culture on accounting
systems (cont.)
• ‘Culture’ reserved for societies as a whole or
nations
• ‘Subculture’ used for the level of an organisation,
profession or family
• International differences in accounting systems
may be explained by a framework incorporating
culture
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Hofstede’s cultural dimensions
• Four underlying societal dimensions along which
countries could be positioned
–
–
–
–
Individualism versus Collectivism
Large versus Small Power Distance
Strong versus Weak Uncertainty Avoidance
Masculinity versus Femininity
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Individualism versus Collectivism
• Addresses degree of interdependence a society
maintains among individuals
– Individualism refers to a preference for a loosely knit
social framework wherein individuals care for themselves
and their immediate families
– Collectivism stands for a tightly knit social framework
where relatives, clan or other in-group look after each
other
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Power Distance
• Power Distance is the extent to which members of
a society accept that power in institutions and
organisations is distributed unequally
– Large Power Distance societies accept a hierarchical
order in which everyone has a place
– Small Power Distance societies strive for power
equalisation
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Uncertainty Avoidance
• The degree to which the members of a society feel
uncomfortable with uncertainty and ambiguity
– Strong Uncertainty Avoidance societies maintain rigid
codes of belief and behaviour
– Weak Uncertainty Avoidance societies maintain a more
relaxed atmosphere where practice counts more than
principles
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Masculinity versus Femininity
• Addresses the way in which a society allocates
social roles
– Masculinity stands for a preference for achievement,
heroism, assertiveness and material success
– Femininity stands for a preference for relationships,
modesty, caring for the weak, and quality of life
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Societal dimensions and accounting
subculture
• The value systems of accountants are derived
from related societal values
• The values of the accounting subculture will in turn
impact on the development of the respective
accounting systems at a national level
– should accounting systems be developed in a ‘one-sizefits-all’ approach?
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Gray’s accounting values
• Gray developed four accounting values deemed to
relate to the accounting subculture, with the
intention of linking them to Hofstede’s four societal
values
–
–
–
–
professionalism versus statutory control
uniformity versus flexibility
conservatism versus optimism
secrecy versus transparency
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Gray’s hypotheses
• H1: The higher a country ranks in terms of
Individualism and the lower it ranks in terms of
Uncertainty Avoidance and Power Distance, the
more likely it is to rank highly in terms of
Professionalism
• H2: The higher a country ranks in terms of
Uncertainty Avoidance and Power Distance and
the lower it ranks in terms of Individualism, then
the more likely it is to rank highly in terms of
Uniformity
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Gray’s hypotheses (cont.)
• H3: The higher a country ranks in terms of
Uncertainty Avoidance and the lower it ranks in
terms of Individualism and Masculinity, then the
more likely it is to rank highly in terms of
Conservatism
• H4: The higher a country ranks in terms of
Uncertainty Avoidance and Power Distance and
the lower it ranks in terms of Individualism and
Masculinity, then the more likely it is to rank highly
in terms of Secrecy
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Gray’s hypotheses (cont.)
• Gray further hypothesised relationships between
accounting values and
– the authority and enforcement of accounting systems
– the measurement and disclosure characteristics of
accounting systems
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Other research using Hofstede’s cultural
dimensions
• Zarzeski (1996)
– used Hofstede’s dimensions to explain corporate
disclosure
– entities with a higher international profile tend to be less
secretive
– local enterprises are more likely to disclose information
commensurate with the secrecy of their culture than are
international enterprises
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Other research using Hofstede’s cultural
dimensions (cont.)
• Perera (1989)
– used Hofstede’s cultural dimensions and Gray’s
accounting subcultural value dimensions to explain
differences in the accounting practices of European and
Anglo-American countries
• Baydoun and Willett (1995)
– investigated the use of the French United Accounting
System in Lebanon
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The effect of religion on accounting
systems
• Religion transcends national boundaries
• Impacts on global harmonisation of accounting
standards
• Hamid, Craig and Clarke (1993) examined how
Islamic cultures have failed to embrace ‘Western’
accounting practices
– compliance with Islamic beliefs can affect the structure of
business and finance
– many Western accounting practices are incompatible with
Islamic principles
– relevance of IASB standards to such cultures?
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The effect of religion on accounting
systems (cont.)
• Religion can affect how people do business and
how they make decisions, for example
– Islam precludes debt financing and prohibits payment of
interest
– the Western objective of financial reporting of rational
economic decision making (refer to the conceptual
frameworks discussed in Chapter 5) may not be a
relevant objective in some societies
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Legal systems
• Can be broadly divided into common law and
Roman law systems
– in Roman Law systems the law tends to be very detailed
– in Common Law systems—which is how Australia can be
classified—law typically evolves from the ruling of judges
• In Common Law countries accounting practices
tend to rely relatively heavily on professional
judgment
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Business ownership and financing system
• At a country level the financing system is relevant
to the purpose of financial reporting
• Three types of financing systems
– capital market-based (e.g. United Kingdom and United
States)
– credit-based system: governmental (e.g. France and
Japan)
– credit-based system: financial institutions (e.g. Germany)
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Business ownership and financing system
(cont.)
• Systems relying on equity markets will have
greater demand for public disclosures
• Credit-based systems more concerned with the
protection of creditors
• Colonial inheritance also a major explanatory
factor
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Taxation systems
• Differences in accounting methods internationally
have also been linked to differences in taxation
systems
• Where there are ‘insider systems of finance’
(common in continental European countries)
financial accounting practices have typically been
linked to taxation law
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Impact of international agencies
• Examples of institutions or bodies which can
impact on a country’s accounting policies are
– multinational companies
– international accounting firms
– large monetary organisations e.g. World Bank
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Approaching international differences
• Hence, to this point we can see that there are
many explanations for international differences
• Given the many factors that explain why
international differences in accounting will, or
perhaps should exist, then how logical are efforts
towards international standardisation?
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Reasons for harmonisation and
standardisation
• There is a difference between harmonisation and
standardisation
• Some arguments in support of standardisation
include
– international investors are better able to understand the
financial performance and position of local companies
– tied to the above point, there is an expectation that
standardisation will facilitate greater capital inflows
– also tied to the above point, standardisation will make it
easier for local companies to list on foreign stock
exchanges
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Reasons for harmonisation and
standardisation (cont.)
– companies listed on several stock exchanges would only
need to produce one set of financial statements and this
will have implications for cost savings
– the accounting and auditing staff employed by
international organisations will be better able to move to
other member companies
– there will be cost savings in the accounting-standard
setting function—rather than individual companies
duplicating the efforts of others, the majority of functions
of the standard-setting process will be centralised at the
IASB
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Obstacles to standardisation
• Effects on standard setting of different
–
–
–
–
business environments
legal systems
cultures; and
political environments in different countries
• IASs and IFRS are strongly Anglo-American
influenced
• Relevance of IAS/IFRS to some countries is
questioned
• Economic implications of adopting a ‘new’ set of
accounting standards
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International Accounting Standards Board
(IASB)
• The IASB replaced the IASC in 2001 (the IASC
was formed in 1973)
• IASB has 14 full-time members who have to sever
their connections with other organisations
• Australia decided in the mid-1990s to harmonise
its standards with those of the IASC
• In 2002 a decision was made by the Financial
Reporting Council that Australia would adopt
standards released by the IASB
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International Accounting Standards Board
(IASB) (cont.)
• The FRC’s decision created a great deal of work
for organisations in that they had to make quite
significant changes to their accounting practices
• The adoption of IAS/IFRS required companies to
write off a great deal of assets—particularly
intangible assets
• Worth the effort?
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Objectives of IASB
• To formulate and publish accounting standards
and to promote their worldwide acceptance
• To work on the improvement and standardisation
of regulations, accounting standards and
procedures
• The IASB does not appear to believe that the
many reasons provided as to why different nations
should have different accounting standards (e.g.
tied to differences in culture, religion and so forth)
outweigh the benefits of international
standardisation
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Aims of IASC/IASB
• Short-term aim—for national accounting standards
and IASs to converge
• Long-term aim of global uniformity—a single set of
accounting standards for all listed and
economically significant business enterprises
around the world
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International Organization of Securities
Commissions (IOSCO)
• Working with IASB, has assisted IAS/IFRS to
achieve widespread acceptance
• Developed a plan such that compliance with
IAS/IFRS will allow an organisation to have
securities listed in all global markets
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International Federation of Accounting
Committee (IFAC)
• Concentrates on international issues associated
with the practice of auditing and accounting
education
• Also issues associated with ethical conduct
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