Chapter Eleven

1
Chapter Eleven
Worldwide Accounting Diversity and International
Standards
2
Examples of International Accounting Diversity
German companies amortize goodwill as a reduction
of owners equity.
Dutch companies report assets at current
replacement cost.
Canada and France allow capitalization of RD
costs.
3
Magnitude of Accounting Diversity
Results of a 1993 SEC survey on the significance
of the differences between GAAP and non-GAAP
countries.
2/3 of foreign companies report material
differences when compared to GAAP.
Over 90 of British companies reported lower net
income under US GAAP.
60 of British companies reported higher equity
under US GAAP.
4
Reasons for Accounting Diversity
Taxation
Legal System
Inflation
Providers of Financing
Political Economic Systems
5
Problems Caused By Diverse Accounting Standards

• Problem
• Subs use the standards for the country where they
  are located.
• To gain access to a countrys capital market,
  financial statements must be in accordance with
  local standards.
• Statements are not comparable.

• Solution
• 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.

6
Accounting Clusters

• One classification scheme identifies four major
  accounting models.
• British-American
• Continental
• South American
• Mixed economy
• Nobes micro-based/macro-based model.

7
Hypothetical Classification of Accounting Systems
Exh. 11.3
8
Major Deviations From GAAP
10 Accounting Issues Most Commonly Requiring
Adjustment

• 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

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

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.

11
European Union Examples of Changes in Germany
Use of equity method for investments in
associated companies.
Required inclusion of notes to the financial
statements.
Elimination of unrealized intercompany losses on
consolidation.
Accrual of deferred taxes and pension obligations.
Inclusion of foreign subsidiaries in consolidated
financial statements.
12
European Union Unaddressed Differences Between
Countries
Lease Accounting
Income Taxes
Accounting Changes
Long-term Construction Contracts
Foreign Currency Translation
Contingencies
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 (IASs)
  issued as of January 2000.

14
International Accounting Standards Committee
(IASC)

• Very few countries have formally adopted the
  IASs as the national practice.

15
The IOSCO Agreement
International Organization of Securities
Commissions (IOSCO)
In 1987, partnered with the IASCs Comparability
Project.
Helped to rewrite IASs to eliminate unnecessary
alternatives.
The goal is to help make it easier for foreign
companies to use IASs when reporting on
different exchanges.
16
Support of Securities Exchange Regulators

• Since 1994, reconciliation to U.S. GAAP is not
  required for foreign registrants using IASs for
• Statement of cash flows.
• Amortization of goodwill.
• Translation of financial statements of
  subsidiaries in highly inflationary economies.

17
Support of Securities Exchange Regulators

• In 1996, the FASB compare GAAP to IASC standards.
• Significant differences were found.

18
Accounting PrinciplesUnited Kingdom

• The Companies Acts (1989)
• Legal foundation for accounting.
• Requires a true and fair view of a companys
  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

19
Accounting PrinciplesGermany

• 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.

20
Accounting PrinciplesGermany

• 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
• Current and noncurrent designations are generally
  not used.

21
Accounting PrinciplesJapan

• 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.
• CPAs in Japan are members of the JICPA.

22
Accounting PrinciplesJapan

• Financial statements required include
• Balance sheet.
• Income statement.
• Proposal of appropriation of profit or
  disposition of loss.
• Business report.
• Extensive cash flow information is required in
  supplemental disclosures.

23
Specific Accounting ProblemsReported Value of
Assets
24
Specific Accounting ProblemsConsolidation
Accounting
25
Specific Accounting ProblemsAccounting for
Goodwill
26
Specific Accounting ProblemsTranslation of
Foreign Currency Financial Statements
27
Specific Accounting ProblemsInventory Valuation
28
End of Chapter 11
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