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Chapter Eleven

Chapter Eleven. Worldwide Accounting Diversity and International Standards. Examples of International Accounting Diversity. German companies amortize goodwill as a reduction of owners’ equity. Dutch companies report assets at current replacement cost .

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Chapter Eleven

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  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 R&D 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. Problem Subs use the standards for the country where they are located. To gain access to a country’s 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. Problems Caused By Diverse Accounting 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. 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 Major Deviations From GAAP 10 Accounting Issues Most Commonly Requiring Adjustment

  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 (IAS’s) issued as of January 2000.

  14. International Accounting Standards Committee (IASC) Very few countries have formally adopted the IAS’s as the national practice.

  15. The IOSCO Agreement International Organization of Securities Commissions (IOSCO) In 1987, partnered with the IASC’s Comparability Project. Helped to rewrite IAS’s to eliminate unnecessary alternatives. The goal is to help make it easier for foreign companies to use IAS’s 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 IAS’s 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 company’s 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. • CPA’s 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 When the ad said, “Job with a hot future!”, this isn’t exactly what I expected.

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