GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS

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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

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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
Contd

• 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 Hofstedes
  (1980) cultural dimensions and the institutions
  that arise from them.
• Grays 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 Grays (1988) Dimensions
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CLASSIFICATION OF FRS Grays (1988) Country
CLassifications
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CLASSIFICATION OF FRS Grays (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 Grays (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 countrys 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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Partial Index

• Partial index of "conservatism" 1 (partial
  adjustment/US GAAP Earnings). The following is an
  example

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Partial Adjustment

• Item Million unless otherwise indicated
• UK GAAP earnings 120
• Adjustments to compute US GAAP earnings
• Deferred taxation (15)
• Goodwill amortisation (5)
• Adjusted earnings per US GAAP 100

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• Adjustments to compute US GAAP earnings
• Deferred taxation (15)
• Goodwill amortisation (5)
• Adjusted earnings per US GAAP 100
• Overall index of "conservatism" 1.2
• Partial Index - Deferred taxation 1-(-15/100)
  1.15
• Partial Index - Goodwill 1-(-5/100) 1.05

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Lets Look at a Real Life Scenario
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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 Contd

• 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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