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Chapter 5

Chapter 5. Comparative Accounting. Comparative Accounting. Accounting environment, profession, regulation, principles/practices, and differences to IFRSs in Germany Japan United Kingdom Sweden China NOTE: Textbook also covers Mexico . Germany. Background

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Chapter 5

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  1. Chapter 5 Comparative Accounting

  2. Comparative Accounting • Accounting environment, profession, regulation, principles/practices, and differences to IFRSs in • Germany • Japan • United Kingdom • Sweden • China • NOTE: Textbook also covers Mexico

  3. Germany Background • European Union’s largest country, population 83 million. • West Germany and East Germany established in 1949, reunified in 1990. • Historically, banks have been primary source of finance via both loans and equity. • Since reunification, the economy has been affected by internationalization.

  4. Germany Background • German companies increasingly listing on foreign exchanges, e.g., New York Stock Exchange. • Most common business forms are Aktiengesellschaft (AG) and Gesellschaft mit beschrankter Haftung (GMBH). • AG are publicly traded/GMBH are non-publicly traded. • Historically had significant influence on accounting systems in a number of other countries. • Japan’s commercial code is modeled on Germany’s.

  5. Germany • Culture: Germany USA • LTO: 31 29 • Power distance 35 40 • Individualism 67 91 • Uncert Avoidance 65 46

  6. Germany • Indications: • Consensus building tendencies • Predilection for investment safety • Tendency for thrift, large savings and slow, steady progress • Static, rigid, rule-based reporting systems

  7. Germany Accounting Profession • Profession has traditionally been less influential than in U.S./UK. • Auditing is dominant part of profession, certified auditors title of Wirtschaftprufer (WP) was created in 1931. • Institut der Wirtschaftprufer similar to the AICPA. • Obtaining WP title is extremely rigorous. • Wirtschaftpruferkammer (WPK) is state sponsored group that oversees auditing profession.

  8. Germany • Traditional Fundamental Characteristics of German GAAP: • Creditor Protection is paramount • Tax law (massgeblichkeitsprinzip) • Reliance on statutes and court decisions

  9. Germany Accounting Regulation • Commercial code and tax laws are main sources of accounting rules. • Stock exchange rules have less influence than in U.S. • Prudence is fundamental, recognition of revenues only when realized, losses when they appear possible. • Began change away from creditor orientation in 1960s. • Starting in the 1980s, EU directives began having major influence.

  10. Germany Accounting Principles and Practices • Historical cost attribute for measuring tangible assets is adhered to. • Traditional focus on creditor protection is at odds with the true and fair view concept. • Importance of tax laws led to the reverse authoritative principle which requires expenses to be deducted from accounting income if they are to be tax deductible.

  11. Germany Accounting Principles and Practices • In contrast to China, conservatism has been used to resist labor’s wage demands. • Standards allow for income smoothing, frequently accomplished via early recognition of losses. • EU fourth directive requires true and fair view, but Germans have a unique interpretation of the concept. • Commitment to globalization reflected in rule that allows public companies to use IFRS for consolidated statements.

  12. German GAAP • Goodwill is written off quickly- as little as 4 years. • Historical cost only • R&D expensed • Provisions for future losses and expenses used heavily.

  13. Germany Differences to IFRSs • Goodwill – deducted quickly, even immediately, against equity. Under IFRS 3, accounted for as an indefinite life intangible asset. • Internally generated intangibles – not recognized, under IAS 38, recognized as an asset under some conditions. • Leases – accounting uses tax rules with capitalization rare, IAS 17 criteria result in more frequent capitalization. • Accounting for subsidiaries – allow exclusion of dissimilar subsidiaries, which are consolidated under IAS 27.

  14. Germany • What factors best account for Germany’s financial reporting practices? • Macro/Micro? • Code Law/ Common law? • Inflation? • Colonial/ Historical Influences? • Cultural dimensions? • Bank vs equity financing?

  15. Japan Background • Population 127 million, world’s third largest economy. • Banks are primary source of finance via both loans and equity, cross-corporate equity ownership also common. • Keiretsu (and predecessor Zaibatsu) emphasize close business ties and reflect cultural value of collectivism. • 1990s recession led to and increase in Japanese firms attempts to obtain capital internationally.

  16. Japan • Culture: Germany USA Japan • LTO: 31 29 80 • Power dist 35 40 54 • Ind 67 91 46 • UA 65 46 92

  17. Japan • Indications: • Dantai ishiki (group consciousness) • Public duty, not individual rights is the highest value • Loyalty to the master / deference to authority is the ethical foundation • “venture capital is an oxymoron in Japan- 50% of individuals’ total assets are in time deposits. • Wakon yosai- “Japanese spirit, western techniques”

  18. Japan Accounting Profession • Certified Public Accountants Law (1948) established the profession. • Profession is significantly less influential than in U.S./UK and is also much smaller in numbers than U.S. • Obtaining CPA title extremely rigorous, like in Germany. • Collectivism leads to lack of trust of auditors. • Tax advising is a much larger, separate, profession.

  19. Japan Accounting Regulation • Government influences accounting via Commercial Code, Corporate Income Tax Law and Stock Exchange Law. • Similar to Germany, strong creditor orientation and accounting rules closely tied to tax rules. • Big Bang financial reforms are leading to harmonization with international standards. • These reforms included requirements for consolidation and fair value accounting for tradable securities.

  20. Japan Accounting Principles and Practices • In contrast to U.S., net income is less a measure of performance and seen more as funds available for dividends. • Since providers of financing tend to be close to the firm, there has historically been little pressure for disclosure. • Lack of disclosure is apparent in segment reporting. • In 2005, IASB and Accounting Standards Board of Japan agreed to work toward reducing differences.

  21. Japanese GAAP • Similar to Germany- goodwill written off quickly, provisions used heavily, historical cost only, R&D expensed, etc. • Recent changes: statement of cash flow required, capitalized leases, extended consolidation of affiliates, full accrual of pension obligations, investments marked to market.

  22. Japan Differences to IFRSs • Revaluation of Land – allowed but updating not required, under IFRS 16, revaluations require regular updating. • Preoperating costs – capitalization is allowed, under IAS 38, expensed immediately. • Construction contracts – completed contract method is allowed, IAS 11 essentially requires percentage-of-completion. • Provisions – allow for provisions, prior to actual obligation, IAS 37 only allows for present obligations.

  23. In summary • “(Japanese) financial information is oriented towards the needs of other corporations, financial institutions, and the government rather then the individual stockholder (IJA 33, 1998) • “We don’t give a hoot about things like return on equity” (Chairman, Mitsubishi Heavy Industries) HOWEVER “Things are slowly changing”

  24. United Kingdom Background • Population of about 60 million, comprised of England, Northern Ireland, Scotland, and Wales. • Among five countries in this chapter, its financial structure is closest to the U.S. • 15,000 Private Limited Companies (PLCs) with about 2,500 of these listed on the London Stock Exchange.

  25. United Kingdom • Culture: UK USA Japan • LTO: 25 29 80 • Power dist 35 40 54 • Ind 89 91 46 • UA 35 46 92

  26. United Kingdom • Indications: • Very similar to USA, but: • Slightly less conservative • More tolerance for ambiguity

  27. United Kingdom Accounting Profession • World’s first association of professional accountants, The Society of Accountants in Edinburgh established in 1853. • The profession developed in response to the needs of industry and has influenced the development of professions in a number of other countries. • Compared to the U.S. the certification requirements focus more on work experience and less on university education.

  28. United Kingdom Accounting Regulation • The Companies Act, accounting pronouncements, and stock exchange rules comprise accounting regulation. • Similar to the U.S., and unlike Germany and Japan, tax rules do not significantly influence financial reporting. • Standard-setters have historically taken a principles-based approach using a statement of principles as a conceptual framework. • Has not historically had a strong, SEC type agency, but recent scandals have led to increased regulation.

  29. United Kingdom Accounting Principles and Practices • A primary objective of accounting is to support an effective capital market. • The true and fair view principle is paramount. • True and fair view override requires that companies notcomply with standards that would result in misleading financial statements.

  30. United Kingdom Differences to IFRSs • Goodwill – amortization allowed, IFRS 3 prohibits amortization and requires an annual impairment test. • Related party disclosures – requires disclosure of related party names, IAS 24requires disclosure by type, not name, of related party. • Revaluation gains/losses – generally not taken to income statement, IAS 40 requires gains and losses to affect net income. Learning Objective 5

  31. Sweden- • The interest in international accounting within Sweden seems to have increased over the last few years (EAR, 1993). • Sweden, being a small country with several large international companies, has much to gain from harmonizing accounting standards with international practice, as far as the law permits (EAR, 1993)

  32. Sweden-Historical Influences • One of the oldest continuous democracies-carefully protects independence and neutrality (since 1815). • Traditionally strong advocate of world peace, non-violent conflict resolution, and international cooperation. • Currency: the Krona

  33. Sweden-Historical • Sweden joined the EU in 1995 • One of the lowest inflation rates in EU. • Economy has done well, but unemployment is high and so are taxes. Half of voters get their income from the government. • Traditional attitudes: pragmatism, respect for technical expertise, global awareness mixed with realism concerning national constraints, and the desire for consensus.

  34. Sweden-Historical • Collectivist. 60-70% of GDP goes for public expenditures. • Yet, paradoxically, long a bastion of individual freedom- personal convictions and morality given great leeway.

  35. Sweden • Culture: Sweden USA Japan • LTO: 33 29 80 • Power dist 31 40 54 • Ind 71 91 46 • UA 29 46 92

  36. Sweden-Cultural Influences • Hofstede’s scoring- • Also high on femininity

  37. Sweden- • Indications: • Interplay between a strong tendency for individual preference and genuine, pervasive social conscience. • Heavily influenced by macroeconomic policy and tax law but these are administered with emphasis of professional judgement. • High tolerance for ambiguity and diversity • De-emphasis on thrift and a desire for more immediate results. • Social benefits very high: so are taxes!

  38. Sweden-Legal/Political Influences • Corporations are viewed as public entities with social responsibilities. • Income taxes are notoriously high (max=85%; most folks- 40-50%). • Tax and book accounting mostly agree. • Foreign involvement in stock exchange is regulated but this is changing. Sweden is trying to open its markets.

  39. Sweden-Business Environment • Corporate Form: Aktiebolag (AB) • Swedish “spheres” resemble Japanese keiretsu. • Only a few MNEs are listed in foreign markets. IASC-compatible standards, however, are being adopted more and more. • High quality reporting from Companies such as Volvo have raised reporting standards nationally. • Labor- Sweden is highly unionized.

  40. Sweden-Reporting Structures and Characteristics • Redovisningsradet (financial reporting council) makes standards. Consists of reps from accounting profession, industry and government.Compliance is voluntary. • Primary objective of reporting- compliance, however, this is changing, especially for consolidated reporting.

  41. Swedish GAAP • Receivables: must be recorded at what firm expects to collect. • Inventories: mainly FIFO, LCM • Fixed assets: can be written up. Usually SL depreciation but asset lives are short, by statute. • Consolidation & Goodwill:Yes- Purchase method, with goodwill written off over 5-20 years. • Long term contracts: Mostly completed contract.

  42. Sweden-Changes • Tax rates have been lowered. • Numerous new European alliances. • Social Democrat Party has lost significant support. • Increasing support for IASC standards and opening of markets. • Some major MNEs have moved elsewhere to avoid the tax problem. This has motivated country to increase the pace of change.

  43. China Background prior to 1980 • World’s largest country with population of over 1.2 billion. • People’s Republic of China (PRC) established in 1949. • Politically: Communist, one-party state. • Economically: Until the 1980s, all firms state-owned.

  44. China • Background- After 1980 • China begins major reforms aimed at permitting, within controlled boundaries, a market economy. • Currently in transformation to market economy. • World’s fourth largest economy and fastest growing among large economies, largest recipient of FDI.

  45. China Background- Securities markets • First securities regulations adopted in 1984. • Two major stock exchanges, Shanghai and Shenzhen established in 1990 and 1991. • Government controls capital market via Chinese Security Regulatory Commission (CSRC) similar to SEC. • Domestic companies list four types of shares: A, B, C, H. • Market characterized by speculation, high share turnover.

  46. China Accounting Profession • Profession less prestigious than in U.S./UK. • Accounting and auditing have developed separately, but recently, CICPA and CACPA merged (1998). • Economic reform and the large number of joint ventures with foreigners has led to emergence of audit profession. Objective 2

  47. China Accounting Regulation • In 1992, China introduced ASBE. Before the ASBE, more than 40 uniform reporting systems were in use. • Throughout the 1990s, the conceptual framework was actually used to create standards.

  48. China • Accounting Regulation (Cont.) • Recent activity is focused on harmonizing variety of domestic systems which vary by industry. • Committment to converging with IFRS, spurred by desired membership in World Trade Organization (WTO). • Audits of financial statements now widely required. • Death penalty in an accounting fraud case suggests that it is taken very seriously. • Ministry of Finance (MoF) in similar role as FASB.

  49. China Accounting Principles and Practice • Computation of taxable income of primary importance. • Conservatism criticized as a method by which owners can understate income and justify low wages. Lack of conservatism still a difference with IFRS. • Lack of accounting infrastructure contributes to gap between accounting principles and practice.

  50. Chinese GAAP • Goodwill amortized over no more than 10 years. • Historical cost only. • R&D is expensed

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