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Accounting 6570

Accounting 6570. Worldwide Accounting Diversity. Accounting Diversity. Differences exist everywhere! Language Currency Terminology Reports required Report formats Measurement practices Disclosure practices Application of accounting rules Level of detail.

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Accounting 6570

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  1. Accounting 6570 Worldwide Accounting Diversity

  2. Accounting Diversity • Differences exist everywhere! • Language • Currency • Terminology • Reports required • Report formats • Measurement practices • Disclosure practices • Application of accounting rules • Level of detail

  3. Magnitude of Accounting Diversity • Gray’s Conservatism Index • 1 - (RA-RD/|RA|) • RA = adjusted earnings • RD = original earnings • Index > 1.00; Original earnings are less conservative than adjusted earnings • Index < 1.00; Original earnings are more conservative than adjusted earnings

  4. Magnitude of Diversity • Gray’s Conservatism Index • U.K. least conservative • Japan most conservative • Continental European countries more conservative than U.S. but less conservative than Japan • There is a trend towards compliance with International Accounting Standards/IFRS or U.S. GAAP by foreign companies

  5. Reasons for Accounting Diversity • Accounting reflects characteristics of its national environment • Environmental variables influence and help explain why business is conducted differently in different countries • Cultural relativism: the rationality of any behavior should be judged in terms of its own cultural context

  6. Environmental Influences • Legal system • Civil versus common law • Rules based or judgment/precedent oriented • How it affects accounting regulation • Standard setting in public or private sector • Accounting Profession • How influential the profession is in the business world • Formalization of accounting standards • Taxation • Requirements that financial income must equal taxable income

  7. Environmental Influences • Providers of Financing • Banks and family members versus public debt and equity • Degree of capital market development • Institutional versus individual investors • Inflation • Must be accounted for if it is a problem • Will influence financial reporting if present

  8. Environmental Influences • Political and Economic Ties • Political systems • Central planning versus private enterprise • Accounting regulation • Enforcement of standards • International factors • Trade Influences • Colonial influences • Regional trade blocs

  9. Environmental Influences • Social climate • Attitudes toward work, management, employee involvement, wealth • Value systems and attitudes

  10. Problems with Accounting Diversity • Cost of preparing financial statements under different standards is great. • Access to foreign capital markets may be impaired. • International comparability is hindered. • Lack of high quality accounting information impedes acquisitions. • People often have a home country perspective even when statements are reconciled and translated.

  11. Classification of Accounting Systems • Deductive approach • Identifies relevant environmental factors and links them to national practices • Describes accounting systems that should be similar, normative • Inductive approach • Looks at accounting practices being used now • Tries to gather similar groupings

  12. ClassificationDeductive Approach • Nobe’s model • Macro-uniform (government/tax/legal vs. government/economics orientations) • Micro-based (business/pragmatic oriented or business/economic theory oriented) • Supported by Doupnik and Salter (1993)

  13. ClassificationInductive Approach • Describes what is going on in the business world • Nair and Frank 1980 studies • 1973 and 1975 • Found differences in groupings based on measurement and disclosure practices

  14. Cultural InfluencesHofstede’s Study • Study conducted in 1980s • Looked at the structural elements of culture that affect behavior in work • Evaluated values of IBM employees in 50 countries

  15. Cultural InfluencesHofstede’s Study • Basic Value Systems • Individualism vs. Collectivism • Power Distance (Large vs. Small) • Uncertainty Avoidance (Strong vs. weak) • Masculinity vs. Femininity • Short-term vs. Long-term orientation • http://www.geert-hofstede.com

  16. Cultural InfluencesGray’s Accounting Values • Professionalism vs. statutory control • Uniformity vs. flexibility • Conservatism vs. optimism • Secrecy vs. transparency • Figure 3.5 - Conservatism and secrecy • Next slide (Flexibility and professionalism) • There is support for culture as an influential factor in the development of accounting.

  17. Divisions of International Classifications • More-developed Latin - France, Italy, Brazil, Spain • Less-developed Latin – Mexico, Chile, Venezuela • More-developed Asian - Japan • Less-developed Asian – Indonesia, Pakistan, India • Near Eastern – Arab countries, Greece, Turkey, Iran • African – East Africa, West Africa • Asian Colonial – Hong Kong, Singapore • Germanic – Germany, Austria, Israel and Switzerland • Anglo-American - U.S., U.K., Canada, Australia • Nordic – Netherlands, Denmark, Finland, Sweden

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