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International Accounting and Multinational Enterprises

International Accounting and Multinational Enterprises. Comparative International Financial Accounting. Chapter Three. Learning objectives:. 1. Discuss different ways to identify and classify accounting systems internationally

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International Accounting and Multinational Enterprises

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  1. International Accountingand Multinational Enterprises

  2. Comparative International Financial Accounting Chapter Three

  3. Learning objectives: • 1. Discuss different ways to identify and classify accounting systems internationally • 2. Examine the key dimensions of national culture and how they influence behavior in work • 3. Identify accounting values that influence comparative accounting • 4. Show how cultural values and accounting values related to each other in the development of accounting standards and practices worldwide • 5. Compare accounting systems in the Anglo-American, Nordic, German, Latin, and Asian countries

  4. CHAPTER OUTLINE 1.Purposes of International Classification 2. Classification of Accounting and Reporting Systems • The Deductive Approach • The Inductive Approach 3. Cultural Influences on Accounting Development 4. Culture, Societal Values, and Accounting (1) Structural Elements of Culture that Affect Business • Individualism versus Collectivism • Large versus Small Power Distance • Strong versus Weak Uncertainty Avoidance • Masculinity versus Femininity (2)Accounting Values • Uniformity versus Flexibility • Conservatism versus Optimism • Secrecy versus Transparency • (3) Accounting Values and International Classification

  5. CHAPTER OUTLINE 5. Comparative Accounting Systems 6. Anglo-American Accounting (1) United States A. Influences on Accounting Development (2) United Kingdom A.. Influences on Accounting Development 7. Nordic Accounting (1) The Netherlands A. Influences on Accounting Development • (2) Sweden • A. Influences on Accounting Development

  6. CHAPTER OUTLINE 8. Germanic Accounting (1) Germany • A. Influences on Accounting Development (2) Switzerland • A. Influences on Accounting Development 9. Latin Accounting (1) France • A. Influences on Accounting Development (2) Italy • A. Influences on Accounting Development (3) Brazil A. Influences on Accounting Development 10. Asian Accounting (1) China A. Influences on Accounting Development (2) Japan A. Influences on Accounting Development 11. Summary

  7. Introduction A growing awareness that global environmental factors affect accounting development. Also recognition that systematically different patterns of accounting behavior may apply to groups of countries. Identification and classification of these different systems can help describe, analyze, and predict accounting system development. 1

  8. I. Purposes of International Classification • A. To sharpen description, analysis, prediction • B. To help describe and compare different national systems in order to better understand them; and to learn • 1. The extent to which national systems are similar/dissimilar • 2. The pattern of development of systems--potential for change • 3. The reasons why some systems dominate others • C. To assess prospects for harmonization • D. To help national policy makers determine what to do • E. To help developing countries choose appropriate systems • F. To help MNEs overcome problems of establishing control systems

  9. Classification of Accounting and Reporting Systems 1. Deductive Approach (Gerhard Mueller): Macroeconomic pattern - Accounting development follows national economic policies. (I.e. Sweden, France, Germany). 2. Microeconomic Pattern: Accounting is viewed as a part of business economics with accounting principles derived from economic analysis (I.e Netherlands). 3. Independent Discipline: Accounting viewed as a service function derived from business practice (I.e. United States, United Kingdom). 4. Uniform Accounting Pattern: Accounting viewed as efficient means of administration and control. Common in centrally-controlled economies: (I.e. Germany, France, Sweden). 2

  10. 1.Deductive Approach • The goals of the corporation usually follows national economic policies. • Accounting income might be smoothed to promote economic and business stability. • Social responsibility accounting developed to meet macroeconomic concerns.

  11. 2. Microeconomic Pattern: • A fundamental orientation exists toward individual economic entities. • Accounting concepts are derived from economic analysis. • A fundamental concept is concerned with the maintenance in real terms of the monetary capital invested in the corporation. • Replacement –value accounting as used by some companies in the Netherlands is often assumed to fit the microeconomic approach. • Developments in segmental reporting and the disclosure of employee costs, pensions, long-term commitments.

  12. 3. Independent Discipline: • A deep respect for professional judgment. • Accounting is considered to be capable of developing its own conceptual framework, derived on a piecemeal basis from its own successful business practices. • Income is a pragmatic measure that seems useful in practice. • Full and fair disclosure is a GAAP that has evolved over the years.

  13. 4. Uniform Accounting Pattern: • A more scientific approach to accounting is adopted whereby a uniform approach to measurement and disclosure and presentation. • Presentation will promote ease of use and a measure of control for all types of businesses by all kinds of users including mangers, governments, and tax authorities. • Centrally planned economies as well as other countries with a strong governments involvement in economic planning.

  14. Muller’s contributions: • He recognized a wider set of influences, such as legal system, political system, and social climate as relevant to accounting development. • He categorized business environments, which he then linked to different types of accounting systems. Such as (1) Economic development; (2) business complexity; (3)legal systems; and (4) political and social climates, and identified 10 groupings, and pointed out that different business environments need different accounting systems. • Muller’s environmental analysis was adapted and extended by Nobes (1983).

  15. Nobes • Adapted and extended Mueller’s concepts, • Used a hierarchical classification scheme and evolutionary approach to identification of measurement practices in western nations, • Basic distinction between macro and micro economic systems: -Further desegregations were developed under each system to provide increased discrimination, • Recent updating to reflect strong and weak equity markets and shareholder orientations. • Nine factors were identified as those likely to predict which countries would be grouped together • (P 39: figure 3.1) 3

  16. Inductive Approach • Identification of accounting patterns begins with analysis of individual accounting practices. • Using this Approach, Nair and Frank identified five measurement groupings using Price-Waterhouse (PW) data: 1. British Commonwealth 2. Latin American 3. Continental European 4. United States 5. Chile They made a empirical distinction between measurement and disclosure practices because there were considered to have different patterns of development. • Their results suffered from lack of reliability and relevance of PW’s data. 4

  17. Cultural Influences on Accounting Development • The role of culture in accounting systems has been largely ignored in the past but this is changing. • Culture is an essential element for understanding social systems. • Gray proposed incorporating cultural factors in a framework to explain and predict international differences in accounting systems and identify international development patterns of accounting systems. 5

  18. Culture, Societal Values, and Accounting • Flexibility versus uniformity are most relevant to professional versus statutory authority, • Combining these relationships allows for relevant culture areas to be hypothesized, • Accounting values most relevant to measurement practices and the extent of information disclosure are the conservatism and secrecy dimensions, • These factors can be combined and culture areas hypothesized, • Classification of countries by culture area can provide a means for further assessing the relationship between culture and accounting systems. 6

  19. Comparative Accounting Systems:Anglo-American Accounting United States • Accounting based on U.K. traditions, • Securities markets a dominant influence, • SEC recognizes the authority of FASB, • FASB uses an open approach to standard setting, and • U.S. accounting system is probably most comprehensive in the world. 7

  20. Comparative Accounting Systems:Anglo-American Accounting (Cont.) United Kingdom • Importance of company law, • Profession is self-regulated through accounting standards board (ASB) guided by Financial Reporting Control (FRC), and • Primacy given to information needs investors. 8

  21. Comparative Accounting Systems:Nordic Accounting The Netherlands • Company law and accounting profession are major influences, • Government role is minimal, • Overriding criterion are “generally acceptable accounting principles,” and • Novel Feature -- Interested parties may complain to the Court of Justice if financial statements do not comply with the law. 9

  22. Comparative Accounting Systems:Nordic Accounting (Cont.) Sweden • Accounting strongly influenced by legal and tax requirements, the profession (FAR), and stock exchanges, • Government has a strong role (BFN) to accomplish macroeconomic planning and to make policy, • Accounting Council is new standard setting body, and • Traditionally, information preference was given to creditors and the government -- Now a shift to investors. 10

  23. Comparative Accounting Systems:Germanic Accounting Germanic Accounting • Differs significantly from Anglo-American and Nordic, and • Company and/ or tax laws govern accounting practice. Germany • Company law and tax laws predominate, • Accounting practice must follow tax laws, • Accounting profession is small and lacks influence, • Stock market is small but growing in influence, and • Information needs of creditors and tax authorities take precedence. 11

  24. Comparative Accounting Systems:Germanic Accounting (Cont.) Switzerland • Swiss accounting is among the most conservative and secretive in the world, • Accounting practice is dominated by company law and tax regulations, • Accounting profession is small, • Legal requirements relating to accounting are minimal and secret reserves are allowed, • Accounting rules are conservative and focus on the needs of creditors, and • New laws are changing accounting information orientation and presentation to benefit shareholders. 12

  25. Comparative Accounting Systems:Latin Accounting France • Company law predominates, • A standardized code of accounting provides uniformity of practice, • Tax law is also a major influence and override accounting rules, • Accounting profession is small and lacks status, • The stock market is small, and • Information preference to tax authorities and creditors. 13

  26. Comparative Accounting Systems:Latin Accounting Brazil • Government, Company Law, and Tax Regulations predominate, • Information needs of creditors and tax authorities predominate -- changing to include shareholders, and • Accounting profession not well developed. 14

  27. Comparative Accounting Systems:Asian Accounting • Asian countries quite distinct from all other groupings, • Many have strong colonial histories. 15

  28. Comparative Accounting Systems: Asian Accounting China: • Accounting rules are strongly influenced by the government and Communist Party; • The accounting law of the People’s Republic established general principals concerning nature and rule of accounting (1985, revised 1993); • The People’s Republic State Council issued Financial Accounting and Reporting Rules (FARR): • Represent new era in Chinese accounting, • Based on market approach, • Fund accounting has been abolished, and • Users of information beyond government are now recognized; • Government has led reforms along with accounting organizations. 16

  29. Comparative Accounting Systems:Asian Accounting (Cont.) Japan: • Government is the major accounting influence; • Commercial code, securities and exchange law, and corporation tax law are also influential; • Government institutions are directly involved in standard setting: • Ministries of Finance and Justice have joint jurisdiction, • Dual jurisdiction results in lack of unified approach; • Accounting profession is small and lacks influence; • “Secretive” approach is common; (Continued next slide) 17

  30. Comparative Accounting Systems:Asian Accounting (Cont.) Japan (Cont.): • Many companies provide courtesy financial statement translations; • Creditors and tax authorities have information preference; • Immediate write-off is widely accepted; and • Capitalization and amortization is allowed to varying degrees. 18

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