Lecturer: Lawrence Diederich, M.A. (U.S.

A) Head of Business Languages Department of Business Languages Catholic University of Eichstaett Ingolstadt

Influence of cultural values on accounting practices with regard to International Financial Reporting Standards (IFRS)

Submitted by: Ngoc Phuong Linh Bach Matriculation number: 604693 Major: Master FACT Email: linhbach@gmail.com Date: July 18th 2011

Intercultural Communication Influence of cultural values on accounting practices with regard to International Financial Reporting Standards (IFRS) (SS 2011) Lecturer: Lawrence Diederich. (U.A) Head of Business Languages Department of Business Languages Catholic University of Eichstaett Ingolstadt Submitted by: Ngoc Phuong Linh Bach 604693 linhbach@gmail.com August 5th 2011 .S.A. M.

.......................................... 4................................................................................................................................................................................. 1 Necessary of adoption of IFRS.................................................................................................................................................................................................... 1 Reasons for adoption ................... 11 6............ 9 Language issue .. 5 Accounting values ..............................................................2 5..1 2.................................................... 9 5........... 11 References ...2 3...................... ii 1..................................................................................................................... Outlook ............ 2 Cross-border observation ................ 2 Correlation between certain cultural and accounting values ...................................................................................1 5................................................. ii List of tables .......................................... 2........................................... 13 Page| i ..........................Table of contents Table of contents ...3 Interpretation issue ...................................................................................................................2 Cultural values................................................................................................................................................................................................1 4............................................. 6 5.............................................................. Introduction ........... 1 2............................... 4 4................................ Development of IFRS ............ 11 Convergence and comparability ........................................................ i List of figures ....................... Influences on accounting practices ................................

..................................................... 4 Figure 4-1: Influence of different cultural backgrounds on the comparability of financial reports ........................................... 10 Page | ii .................................................................................................List of figures Figure 3-1: IFRS adoption by country .................................................................. 8 List of tables Table 4-1: Correlation matrix of cultural and accounting values ........................................ 7 Table 5-1: Information disclose by selected countries in Europe ............................................................ 3 Figure 3-2: Culture as an iceberg.....

Different cultural values and thought patterns lead to different perceptions of the real world and therefore to individual interpretations of the same standards or conceptions. Skotarczyk. 2. In this context. whether cultural values influence accounting behaviours with regards to the adoption of International Financial Reporting Standards (IFRS) worldwide. behaviours. the homogeneity of applications of IFRS by different countries is to be surveyed. On that account. Page| 1 . we will attempt to make a statement of the convergence of IFRSapplications and the comparability of financial reports between IFRS-adopters. By examining those two factors. the International 1 cf. institutions and organizations across nations” are deployed. 2. The translation of standards again conveys individual interpretations and is consequently more or less subjective. two key factors: interpretations of IFRS by different countries in certain aspects as well as translation of the standards for example into German will be examined in detail.1 From 2001 until now. which are the ultimate goals of International Accounting Standards Board (IASB). we could come to a conclusion about the influence of value orientations on accounting values and behaviours. This leads to a sub-hypothesis: “Convergence and comparability of financial reports across nations”. the international accounting standards (IAS) were issued by IASC. For this inspection. Briefly.11. when Accountants International Study Group (AISG) – the predecessor of International Accounting Standards Committee (IASC) was established.1. 2011. Gray´s research “Towards a theory of cultural influence on the development of accounting system internationally” and Hofestede´s cultural dimensions in “Culture´s consequences: Comparing values. From this vantage point. From 1973 to 2001. the hypothesis is: “Influence of cultural values on accounting behaviours in the light of IFRS-adoption”. p.1 Necessary of adoption of IFRS Development of IFRS The origin of international accounting standards is traced back in year 1967. Introduction This term paper is predominantly concerned with the question.

Petersen/Bansbach/Dornbach. Ramanna/Sletten. p.2 Reasons for adoption There are many reasons for the adoption of IFRS. the adoption of IRFS opens access to the cross-border financial markets. 1. which enable competitive financing for companies. 2009. Before 2002. pp.2 That means all listed company located in Europe are obliged to apply international financial reporting standards IFRS as well as interpretations. 1. which is essential not only for internationally legal enforcement but also for investors in financial markets with regards to the function of “decision-usefulness” of financial reports. 2. 2009. p. 1. The motivation for the (voluntary) adoption can be explained by the “economic theory of networks” (Ramanna/Sletten. 2005. of which standards are adopted by European 2 3 4 5 cf. cf. cf. Ramanna/Sletten. Oceana and Asia. the application of those standards was based on voluntariness. 41. The first one is the IASB which indicates that the IFRS-adopters apply IFRS/IAS issued by IASB.Accounting Standards Board (IASB) has been the standard-setter for international accounting standards. On the one hand. Companies tend to adopt IFRS when their business partners are also in a (worldwide) network of IFRS-adopters. the application of the standards is legally binding at the European level. 3. Europe. The standards have been also changed into International Financial Reporting Standards IFRS (earlier: IAS). With the EU legislation 1606/2002. The second one is the EU IFRS. China and Australia4. Cross-border observation By and large. 5 Moreover.3 The goal of such standards is to establish the cross-border comparability of financial reports. Großfeld/Luttermann. 4-5.). On the other hand. p. cf. there are a great number of companies in other continents apply IFRS on a voluntary basis such as Brazil. Page | 2 . Japan. 2009. US. The framework is principally not binding. all listed companies located in Europe are obliged to apply IFRS. p. 2009. there are three major versions of IFRS represented in America. Canada.

p. traditional forms of firm financing. approach to ethics”. A. 2010. Zeff. 2007. 7 Furthermore. (Cowperthwaite. 291. In this context. A.8 However. 2007. 291.g. occationally used in Asia IASB EU IFRS Local IFRS Figure 3-1: IFRS adoption by country (a summary of "IFRS adoption by country". within a certain adopted version. A. p. p. PwC) Figure 3-1 shows the variant adoptions of IFRS all over the world.6 • IFRS as published by IASB • mostly used in North America. education. differences also exist. Those can be explained by different accounting cultures9 because the interpretations and applications of standards to some extent depend on jurisdiction of accountants. pp. which are underlain by cultural backgrounds. business ethic. cf. frequently used in Asia and Africa • IFRS adopted by European Union • only used in Europe. Zeff. 2010. p. England and Spain. which is directed by their individual characteristics. Zeff. i. tax law. it should also be emphasized that the determinants of choice over a certain IFRS-versions stated in the previous paragraph are also navigated by a unique set of value orientations of its society. cf. 2007.Union. cf. PwC. 2010. structure of business transactions. 182). the local IFRS with standards adopted locally. the politics and the regulatory culture of a country also contribute to the different choice of IFRS-adoption. 252. The choice over a certain version of IFRS depends first of all upon the business and financial culture. etc. 6 7 8 9 cf. Page | 3 . For example. exceptionally Marocco • IFRS adopted locally • used in Oceana. 291. Those individual characteristics are demonstrated by “intelligence. there are different interpretations of certain terms with regards to financial reports. such as “probable” and “remote” in Germany. Last but not least. although they all apply the EU IFRS.

versions Different application of IFRS    Accounting and auditing behaviours Business and financial structure Politics and regulatory  Doing/ behaviour s Beliefs Value and thought patterns Unique set of value orientations of a society Figure 3-2: Culture as an iceberg (based on the idea of a cultural iceberg of Hall) 4. While some aspects of culture are directly observable. On the assumption of relation between accounting and cultural values. we are going to use Gray´s theory of cultural influence on accounting behaviours in accordance with Hofstede´s cultural dimensions. Within this term paper. Page | 4 . In this way. which influence accounting behaviours with regard to the interpretation of standards as well as translations. accounting values bear a relation to social values and different accounting behaviours can be explained by underlying value and thought patterns of different cultures. one needs to undercover the underlying beliefs. culture of a society can be seen as an iceberg. we are going to focus onto the exploring of accounting values in correlation with cultural values. Hall in “Beyond culture” (1976). value and thought patterns to find out the reasons for different accounting behaviours as well as the choice over a certain IFRS-version.According to Hall10 (1976). the large portion is below the water. 10 The idea of a cultural iceberg was developed by Edward T. The differences in interpretation of standards and translation are namely the product of different perceptions which are underlain by cultural values and thought patterns. Correlation between certain cultural and accounting values In this chapter. Different IFRS.

it is necessary to divide the whole accounting culture into accounting subcultures according to their set of value orientations. we only focus on the first three cultural dimensions that could have significant influence on accounting behaviours. The examination objects here are the differences in interpreting the same standards or terms of standards among IFRS-adopters within the same accounting group such as within the EUIFRS culture. Culture is described as “the collective programming of the mind which distinguishes the members of one group or category of people from another” (Hofstede. Individualism versus Collectivism: the interrelationship between individual and the group. Power distance: the degree of equality/inequality of people from different hierarchies and the distribution of authority within an organization or institution.4. Power distance. sensible to take the culture definition by Hofstede in account. Page | 5 . it is. therefore. 3. 1.1 Cultural values Before introducing the dimensions of culture. In this context. p. Masculinity versus Femininity. There is no universally agreed definition for culture. the major accounting cultures are not the objects of this survey because the different IFRS-adoptions convey different interpretations and translations of standards as a matter of course. there are five cultural values that direct behaviours of a society as well as its members: Individualism versus Collectivism. Thus. However. According to Hofstede (2001). Based on the definition. Confucian dynamism. EU-IFRS culture and local IFRS culture (see figure 3-1). Uncertainty avoidance. As we are going to analyze the influence of cultural values on accounting behaviours by using the cultural dimensions of Hofstede. it is essential to find a proper definition for culture. IFRS-adopters are generally classified in three major accounting cultures: IASB-culture. 2001. Uncertainty avoidance: the degree of how a culture and its members tolerate ambiguous situations and future uncertainty. 2. 9).

8) In this framework. It is assumed that masculinity versus femininity plays a less significant roll in this context and therefore. 5. the accounting values direct the accounting behaviours and contribute to the development of a national accounting system. p. p. 1988. Page | 6 . laissez-faire. p. 11 In his empirical research. Positive correlation between individualism and professionalism. Conservatism versus optimism – “a preference for a cautious approach to measurement so as to cope with the uncertainty of future events as opposed to a more optimistic. 1988. the cultural values at national level are transposed into accounting values at accounting system level. 8) 3. 8) 4. is not taken into consideration. Uniformity versus flexibility – “a preference for the enforcement of uniform accounting practices between companies and for the consistent use of such practices over time as opposed to flexibility in accordance with the perceived circumstances of individual companies” (Gray.4. 1988. negative correlation between uncertainty avoidance / power index and professionalism: The higher 11 12 cf. Gray. risk-taking approach” (Gray. p. 1988. While the cultural values affect the behaviours of a society and its members. Professionalism versus statutory control – “a preference for the exercise of individual professional judgement and the maintenance of professional self-regulation as opposed to compliance with prescriptive legal requirements and statutory control” (Gray. p. 8) 2. Gray drew the following conclusions with regard to the correlation between cultural and accounting values12: 1.2 Accounting values Gray (1988) identifies four following accounting values based on accounting practices as well as accounting academics: 1. Secrecy versus transparency – “a preference for confidentiality and the restriction of disclose information about the business only to those who are closely involved with its management and financing as opposed to a more transparent. 1988. open and publicly accountable approach” (Gray.

the more likely uniformity outperforms flexibility. 10. Gray. negative correlation between individualism and secrecy: The higher uncertainty avoidance and power distance and the lower the individualism. Positive correlation between uncertainty avoidance / power distance and uniformity. 1988. Positive correlation between uncertainty avoidance / power distance and secrecy. to be more specified. 1988. between uncertainty avoidance. by tendency.individualism and the lower uncertainty avoid and power distance. Gray. conservatism and 13 14 15 16 cf. p.13 2. cf.16 Cultural values Individualism Power distance Uncertainty avoidance Accounting values Professionalism + Conservatism n/a + Secrecy + + Uniformity + + Table 4-1: Correlation matrix of cultural and accounting values The conclusions about cultural and accounting values show that there is a strong correlation between certain cultural and accounting values. in favour of statutory control. Gray. Positive correlation between uncertainty avoidance and conservatism. Those correlations display that countries with high uncertainty avoidance and power distance as well as high collectivism are. 10. p. power distance.15 4. Page | 7 . Gray. the more likely conservatism outperforms optimism. the more likely secrecy outperforms transparency. conservatism and secrecy. cf. 1988. 1988. 11. 9. individualism and professionalism.14 3. cf. the more likely professionalism outperforms statutory control. p. negative correlation between individualism and conservatism: The higher uncertainty avoidance and the lower individualism. p. negative correlation between individualism and uniformity: The higher uncertainty avoidance and power distance and the lower the individualism.

2006. Therefore. It is also observable that individualism and uncertainty avoidance are the most relevant cultural values “at the level of the accounting sub-culture” (Gray. the cultural values on country level are transposed into accounting values and thus direct accounting practices. which are underlain by cultural values. Page | 8 . 2007. For example. which can be explained by the high uncertainty avoidance as well as the so-called “Grundsatzdebatte”. affect accounting practices. the German accounting system is famous for its conservatism and prudence. National level Comparability of financial reports across nations? Convergence of applications of IFRS? Across nations Figure 4-1: Influence of different cultural backgrounds on the comparability of financial reports (based on S. Cultural values Accounting values Professionalism Uniformity/Flexibility Conservatism/Optimism Secrecy/Transparency Accounting practices/ behaviours  Individualism/ Collectivism  Power distance  Uncertainty avoidance  Interpretation  Information disclose  Translation  etc. the differences in cultural values have also raised the question of the convergence and comparability of financial reports with regard to the application of IFRS internationally. 1988. p. optimism and transparency. p.secrecy about their business. each country has a different accounting system reflecting its unique set of value orientations.Doupnik/Riccio. while uncertainty avoidance moves in a completely opposite direction towards professionalism. countries with low uncertainty avoidance and power distance as well as high individualism tend to move on in the direction of professionalism. p. Controversially. Individualism correlates positively with professionalism. 17 cf. Marrero. However.11). 239) Figure 4-1 shows that accounting values. 17. 17 In this way.

And just right there. Does it mean a likelihood of 60%. 297. Page | 9 . The following examples could provide an insight into this matter. Within a country. perceptions of facts and circumstances in accounting practices of a country are as unique as its own underlying cultural values. As a result. 5. an only if.5. Influences on accounting practices In this chapter. The problem of terminology can be exemplified by different interpretations of the verbal expressions of “probability”/ “probable” among EU IFRS-adopters. value and thought patterns as well as beliefs of the society form certain major traits of accountants. it is probable that future economic benefits that are attribute to the asset will flow to the enterprise. the application of IFRS still depends on the jurisdiction of accountants and auditors. In this context.1 Interpretation issue Although there are official interpretations of IFRS issued by IASB. 2007.” The question is how the probability in this standard is defined because IASB do not give any interval for the estimation of probability. pp. the convergence of financial statements is in jeopardy. for example to determine whether an item or object is to be recognized and disclosed in a balance sheet: IAS 38 Development costs as an intangible asset “An intangible asset arising from development (or from the development phase of an internal project) should be recognized if. problem of language and different level of information disclose. Zeff. 80% or 90%?18 That is where the subjective judgement of accountants comes into play – the one that reflects 18 cf. “Probability” / “probable” expression is a very important component in a variety of standards. A. The differences in interpretations across nations are caused by individual traits of accountants. Differences in perceptions lead to differences in interpretations and thus different applications of standards among accounting sub-cultures. there are three major issues to be concerned: problems of interpretation as well as of terminology. we are going to analyze the affects of cultural values on the interpretations of IFRS because the interpretations of accountants influence not only the application of standards but also translation.

secrecy correlates positively with uncertainty avoidance as well as power distance and negatively with individualism. cf. Doupnik/T. different cultural values tend to stimulate differences in application of standards.19 Another issue is the information disclose. 291.com The percentage of IFRS-adopters of a country disclosing judgements and estimates in their financial reports. 20 This statement can be proven by the facts of a cross analysis on disclosure on judgement and estimate by states published in year 2009 as a “Report to the European Commission”: Country Czech Republic Individualism (IDV) 21 Power distance index (PDI) Uncertainty avoidance index (UAI) Ranking of secrecy (concluded based on IDV. available at http://www. 2009. Campell. German accountants would estimate the probability on a conservative basis. According to Marreror (2007). As we found out in the previous chapters. Thus. The facts are obtained from the Report to the European Commission „Evaluation oft he Application of IFRS in the 2006 Financial Statements of EU Companies“. Marrero. pp. 36. A. while other countries in Europe such as Greek is more likely to acquire a lower percentage for the same expression of probability. UAI) Information disclose (percentage of IFRS-adopters in a country) 22 56 40 68 1st 33% Germany 62 31 61 2nd 92% Netherlands 80 33 50 3rd 100% Cultural values Table 5-1: Information disclose by selected countries in Europe 19 20 21 22 cf. The Individualism. 2007. the recognition and disclose are decided differently among EU IFRS-adopters based on their different interpretations. 62-63. For instance. Zeff. Power distance index and Uncertainty avoidance index are obtained from Hoftstede score by countries on August 1st 2011. p. 2007. 17.geert-hofstede. p. PDI. Page | 10 .individual perceptions contingent on their own cultural values. due to the high level of conservatism in their culture. the positive correlation between individualism and professionalism as well as the negative correlation between individualism and secrecy can be demonstrated by the statement that individualistic cultures also implies the high professionalism and are inclined to be at higher degree of accounting disclose. In this way. 2008. Tsakumis/R. S. pp.

p. the comparability of financial reports among IFRS-adopters is only arrived to some extent. 2010. It was more a matter. the convergence and comparability of financial reports could also be violated by inaccuracy of translations. cultural values of a society are handed on from one generation to another and thus deeply ingrained and dynamically stable. while “Vermögensgegenstände” in German accounting system simply focus on “its potential to cover liabilities” (Hellmann/Perera/Patel. differences in application of IFRS across nations due to differences in cultural values can not be bridged in the next few years. The translation of “assets” into “Vermögensgegenstände” in German language: The translation is problematic because the concept of “asset” is not transferred into the translation.23 That makes clear that the quality of translation depends largely on the perception and interpretation of concept in accounting sub-culture. 13.5. p. 13) and cover from “Vermögensgegenstände” to good will and deferred items. Page | 11 . Changes can only be made very slowly together with the up-and-coming of 23 cf. especially when the terms or concepts have already existed and differently defined in national accounting systems. Despite of the official interpretations for standards issued by IASB. 2010. The accuracy of translation implies both literally and conceptually. The following example should give an insight into this issue. which had never been existed in German accounting system. Recently the term “assets” has been translated as “Vermögenswerte”.2 Language issue Last but not least. Zeff. It could lead to confusions. 2007. 6. Outlook Undoubtedly. 2010. 296). Hellmann/Perera/Patel. “Assets” in the original concept are “future economic benefits controlled by the entity as a result of past events” (Hellmann/Perera/Patel. Thus. p. On the one hand. 5. “The concern was not just the accuracy of the translation. 13). p.3 Convergence and comparability The convergence and comparability of financial reports across nations targeted by IASB have been not at a targeted high level realized. of whether accountants and finance directors understood the concept” (A. the application of the standards in adopting countries is not convergent because jurisdiction of accountants which reflects country-specific interpretations are underlain by their own cultural values. in each of the other countries.

generations. Consequently. p. cultural values continue to play a dominant roll in the interpretation and application of standards. p. there are still “opportunities for the survival of international differences” (Norbes. In this way. 2006. a high level of convergence and comparability of financial reports across nations is hardly to be reached. 235) due to technical gaps of IFRS such as vague criteria and definitions as well as unspecific interpretations by IASB. 24 cf. Cowperthwaite. which are greatly influenced by jurisdiction of accountants. 2010. 178. the wide discretion guaranteed by IASB leads to arbitrary decisions of IFRS-adopters. Furthermore. 24 On the other hand. Page | 12 .

The International Journal of Accounting. Geerte (2001). Asia Pacific Interdisciplinary Research in Accounting 2010 conference. 297. Vol. pp. Hector/Patel. IFRS: Beyond the Standards. (1988). Doupnik/George T. Australia. pp. Report to the European Commission: Evaluation of the Application of IFRS in the 2006 Financial Statements of EU Companies. Vol. Some obstacles to global financial report comparability and convergence at a higher level of quality. Christopher (2006). July 2010. Philip (2010). Doupnik. pp. pp. Stephen (2007). Nobes. Sage Publication. Timothy S. Andreas/Perera. The influence of conservatism and secrecy on the interpretation of verbal probability expressions in the Anglo and Latin cultural areas. 237-261. ineum consulting (2008). 2nd ed. Vol. The British Accounting Review. No. Vol. Cowperthwaite. Vol. No. 41. pp. Chris (2010). Equivalence of IFRS across Languages: Translation issues from English to German. No. S. A. 9. 3. Accounting Perspectives.J. 1. 3. Journal of financial service professional. Campell (2009). Edson Luiz (2006). Culture´s consequences: Comparing values. Tsakumis/David R. 39. behaviours. 34-39. pp. pp. Culture Matters: How Our Culture Affects the Audit. January 2007. Zefl. Accounting and Taxation. Marrero. 24. The survival of international differences under IFRS: towards a research agenda. institutions and organizations across nations. S. Timothy/Riccio. 175-215. Journal of Accountancy. Hellmann.References Gray. Towards a theory of cultural influence on the development of accounting system internationally. Jose (2007). Page | 13 . Accounting and Business Research. 36. 3. No. Hofstede. ABACUS. 2. Vol. 290-302. 16-18. 233-245. No. California. 1-15.

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