Matakuliah: F0142 / Akuntansi Internasional

1
Session 13 Cases (Guidance Concept to Cases)

• Matakuliah F0142 / Akuntansi Internasional
• Tahun 2006

2
International Accounting Differences and
Financial Statement Analysis

• The key question
• How do differences in accounting affect earnings
  and cash flow assessments?
• These assessments are important to
• Investors
• Corporations concerned with foreign direct
  investment
• Many companies are listing on international
  exchanges (London, New York)

3
International Accounting Differences and
Financial Statement Analysis

• A tendency exists to looks at earnings from a
  home country perspective
• This tendency may ignore accounting differences
• A need exists to better understand foreign
  accounting principles in the context in which
  they are derived
• International comparability is important in
  considering alternative investments

4
Major Differences in Accounting Principles Around
the World

• Inventory measurement
• Generally based on lower of cost or market with
  market defined as either
• Net realizable value
• Replacement cost
• LIFO is permitted for tax purposes in U.S. and
  Japan, but not in the EU

• Construction contracts
• Wide usage of percentage-of-completion method
• Completed contract method Switzerland, China,
  Japan

5
Major Differences in Accounting Principles Around
the World

• Measurement basis used
• Historical cost is used in the U.S., Brazil,
  Switzerland, China, and Japan.
• More flexible approach with some restatements to
  market value or replacement cost U.K., Holland

• Depreciation accounting
• Useful economic life concept U.S. and EU
• Accelerated methods France, Germany,
  Switzerland, Japan

6
Major Differences in Accounting Principles Around
the World

• RD costs
• Expensed immediately in Anglo-American and
  Germanic countries
• Brazil has a more flexible approach
• Some countries allow capitalizing the borrowed
  cost of assets

• Retirement benefits
• Generally accounted for on the basis of accrued
  and/or projected benefits payable to employees
• Pay-as-you-go approach in Brazil and China

7
Major Differences in Accounting Principles Around
the World

• Taxation
• Accounting income strongly influenced by the tax
  system in France, Germany, Brazil, Switzerland

• Business Combinations
• Varies with allowance of pooling-of-interests
• Purchase method is generally required
• Goodwill is amortized in Brazil, China, and Japan
• Goodwill impairment tests are used in U.S., U.K.

8
Major Differences in Accounting Principles Around
the World

• Intangibles
• Generally are capitalized and subject to
  amortization or impairment tests
• Exception Switzerland
• Foreign Currency Translation
• Choice between average or closing rate
• Generally flexible actual or average rate
  allowed
• Big Question Do these differences matter?

9
The Impact of U.S.-U.K. Accounting Differences

• Index of conservatism (Gray, 1980)
• 1 RA RD / l RA l
• Where RA adjusted earnings (or returns)
• RD disclosed earnings
• Therefore,
• 1 U.S. GAAP Earnings U.K. GAAP Earnings /
• l U.S. GAAP Earnings l
• If index value gt 1, U.K. GAAP earnings are less
  conservative
• If index value lt 1, U.K. GAAP earnings are more
  conservative

10
The Impact of U.S.-U.K. Accounting Differences

• Example 1
• U.K. earnings
• 110 million
• U.S. earnings
• 100 million
• Index
• 1 100-100/100 1.1

• Example 2
• U.K. earnings
• 90 million
• U.S. earnings
• 100 million
• Index
• 1 100-90/100 0.9

11
The Impact of U.S.-U.K. Accounting Differences

• It is possible to establish the relative effect
  of individual adjustments with partial indices of
  adjustment
• Partial index of conservatism
• 1 partial adjustment / l U.S. GAAP Earnings l

12
The Impact of U.S.-U.K. Accounting Differences

• Example
• Millions of Pounds
• U.K. GAAP earnings 120
• Adjustments for U.S. GAAP
• Deferred taxation (15)
• Goodwill amortization (5)
• Adjusted earnings per U.S. GAAP (100)
• Overall index of conservatism 1.2
• Partial index for deferred taxation 1
  -15/100 1.15
• Partial index for goodwill 1 -5/100 1.05

13
The Impact of U.S.-U.K. Accounting Differences

• Differences between methods are illustrated in
  the Form 20-F report
• Form 20-F can be used to test how conservative
  U.S. and U.K. GAAP are in comparison with each
  other
• Form 20-F is reliable because it is provided by
  the company itself
• Research findings show U.K. GAAP to be less
  conservative

14
A Global Perspective on Earnings Management

• How do Anglo-American earnings compare with
  continental Europe and Japan?
• Continental Europe
• Gray (1980) compared French and German companies
  to British companies
• Insert Exhibit 5.8, 5.9
• French and German earnings are more conservative
  than British earnings
• Weetman and Gray (1991) found that
• Netherlands was less conservative that Sweden,
  U.K.
• Swedish methods were more conservative than U.S.
  GAAP

15
A Global Perspective on Earnings Management

• Japan
• Earnings are relatively understated compared to
  the U.S. (33.9, according to Aron (1991)
• Historically high PE ratios were deflated by
  adjustments for reserves, consolidation
  practices, depreciation, cross-holdings, and
  differences in capitalization (Morgan Stanley)
• Higher levels of gearing (leverage) and
  short-term payables are tolerated because of
  long-term relationships with bankers and
  suppliers
• Emphasis tends to be on long-term growth rather
  than instant profitability

16
Factors Influencing Measurement Differences

• U.S. and U.K.
• Stock market is the dominant influence
• Information needs of investors encourage a more
  optimistic view of earnings and higher share
  prices
• Accounting principles are flexible
• Accounting profession is independent
• Tax rules have a limited influence
• Cultural values motivate a less conservative
  approach to measurement

17
Factors Influencing Measurement Differences

• Continental Europe and Japan
• Taxation and sources of finance are influential
• Tradition of commercial codes and accounting
  plans
• Tendency to report lower earnings for tax purposes

18
Factors Influencing Measurement Differences

• Continental Europe and Japan
• Users of financial information may be more
  concerned with balance sheet information
• Black and White (2003) findings
• Balance sheet info is more informative in
  Germany, Japan
• Income statement is more relative in the U.S.
• Professional influence is low due to legal
  requirements related to accounting
• Cultural values motivate a more conservative
  approach

19
Six National Financial Accounting Systems

• France
• Plan Comptable General (national accounting code)
  in September 1947.
• A revised plan came into effect in 1957.
• A further revision in 1982 under the influence of
  the Fourth Directive of The European Union (EU).
• In 1986 the plan was extended to implement the
  requirements of the EU Seventh Directive on
  consolidated financial statements, and it was
  further revised in 1999.
• The Plan Comptable General provides
• Objectives and principles of financial accounting
  and reporting
• Definitions of assets, liabilities, shareholders
  equity, revenues and expenses
• Recognition and valuation rules.
• A standardized chart of accounts
• Model financial statements and rules for their
  presentation.

20
Six National Financial Accounting Systems

• France
• A feature of French accounting is
• dichotomy between individual company financial
  statements and those for the consolidated group.
• The law allows French companies to follow
  International Financial Reporting Standards
  (IFRS) or US GAAP in their consolidated financial
  statements.
• Major organizations are involved in setting
  standards
• Counseil National de la Comptabilite or CNC
  (National Accounting Board)
• Counseil National de la Comptabilite or CNC
  (National Accounting Board)
• Comite de la Reglementation Comptable or CRC
  (Accounting Regulation Committee)
• Autorite des Marches Financiers or AMF (Financial
  Markets Authority)
• Ordre des Experts Comptables or OEC (Institute of
  Public Accountants)
• Compagnie Nationale des Commissaires aux Comptes
  or CNCC (National Institute of Statutory
  Auditors)

21
Six National Financial Accounting Systems

• France
• French companies must report the following
• Balance Sheet
• Income Statement
• Notes to Financial Statements
• Directors Report
• Auditors Report
• Listed companies must provide half yearly interim
  reports and starting in 2003, the results of
  their environmental activities. Information must
  be given on
• Auditors Report
• Water, raw material and energy consumption, and
  actions taken to improve energy efficiency
• Activities to reduce pollution in the air, water,
  or ground, including noise pollution and their
  costs, and
• Amount of provisions for environmental risks.

22
Six National Financial Accounting Systems

• Germany
• In 1965 Corporation Law moved the German
  financial reporting system toward British
  American ideas.
• The fourth, seventh and eighth EU directives all
  entered German law through the Comprehensive
  Accounting Act of December 19, 1985.
• The fundamental characteristic of German
  accounting
• Creditor protection as embodied in the commercial
  law
• The determination principle states that taxable
  income is determined by whatever is booked in a
  firms financial records.
• Its reliance on statutes and court decisions

23
Six National Financial Accounting Systems

• Germany
• The 1985 Accounting Act specifies the content and
  format of financial statements, which include
• Balance Sheet
• Income Statement
• Notes
• Management Report
• Auditors Report
• A feature of the German financial reporting
  system is a private report by the auditors to a
  companys managing board of directors and
  supervisory board. The report comments on the
  companys future prospects and especially factors
  that may threaten its survival

24
Six National Financial Accounting Systems

• United States
• Accounting in the United States is regulated by
• A private sector body (FASB)
• A governmental agency (SEC)
• Generally Accepted Accounting Principles are
  comprised of all financial accounting standards,
  rules, and regulations that must be observed in
  the preparation of financial report.
• The Sarbanes Oxley Act was signed into law in
  2002, significantly expanding US requirements on
  corporate governance, disclosure and reporting
  and the regulation of the audit profession.
• Among its more important provisions is the
  creation of the PCAOB, a new non profit
  organization overseen by the SEC.

25
Six National Financial Accounting Systems

• United States
• A typical annual financial report of a large US
  corporation includes the following
• Report of management
• Report of independent auditors
• Primary financial statements (income statement,
  balance sheet, statement of cash flows, statement
  of comprehensive income and statement of
  stockholders equity)
• Management discussion and analysis of results of
  operations and financial condition
• Disclosure of accounting policies
• Notes to financial statements
• Five or ten year comparison of selected financial
  data
• Selected quarterly data

26
Summary of Significant Accounting Practices