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1079 - International Differences in Accounting-Final
1079 - International Differences in Accounting-Final
Harmonization Process?
by Irena Jindrichovska
Charles University, Prague; Anglo-American University, Prague
Abstract
This paper is based on recent academic literature and focuses on international differences in
accounting. A hot topic of the last twenty-five years has been international accounting harmonization.
This paper sees accounting harmonization as a common movement among accounting regulators,
standard setters and educators in different nations towards the same goal. As a result EU companies
working in different accounting environments with different emphases on particular issues using
different accounting concepts with different traditions have been building new common standards of
reporting.
The first part of the paper discusses necessary features of accounting and its purpose, as it is
understood at present. The later part focuses on differences in accounting practice, due to differences
in funding mechanisms, legal systems and tax regulation, as seen through different national
accounting arrangements. The paper presents comparisons of different accounting practices at the start
of a new accounting era. The article provides topics for further research in the area of cultural
differences and their affect on accounting harmonization and hence on the business life of the
community.
Corresponding author:
Ing. Irena Jindrichovska, CSc.
Institut ekonomickch studi
Fakulta socilnch vd University Karlovy
Opletalova 26
Praha 1
E-mail irenajindrich@tiscali.cz
This short paper was prepared for the conference: Trendy ve vuce etnictv na vysokch
kolch neuniverzitnho smru organized by Soukrom vysok kola ekonomickch studi,
Praha, on 14.1.2004
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1. Introduction
Financial reporting now concerns all listed companies in the EU. By the year 2005 all of
them will be reporting according to the International Accounting Standards that are uniform
throughout the EU.
This is quite a radical change from the past. For continental Europe IAS is very much an
Anglo-Saxon inspired reporting model. Applying and understanding IAS in other European
countries requires considerable effort in getting to know the new concepts and the approach
of the standard setters. On the other hand, there is virtually no UK listed company yet that
already applies IAS. (Alexander et al, 2003)
Although the requirement to apply IAS does not extend to small and medium sized
companies (at least not as an EU requirement), many member states of the EU will, as a
result of the modernization of their Accounting Directives, amend their national accounting
legislation in a manner which brings it closer to IAS.
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Eg 1. What people have; 2. What they used to have, 3. The change in what they have got, 4. What
they may get in the future (Alexander at al, 2003).
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Again, going back to the drawing board, the information accounting offers needs to be
relevant. The accounting report must give the user what he/she wants. Further requirements
are understandability (different levels of complexity for different users) and reliability
(preferably independently verified by a qualified auditor). The information should be
complete and objective: It should provide a total picture of the reporting business, which
implies a large and complex collection of data that may in the end create a conflict with
understandability. Objectivity is a confused notion with several different possible meanings.
This concept means that reports should not be biased by personal perceptions. A further
requirement is timeliness: the information needs to be conveyed to the user in time for use to
be made from it. Approximate information available on time for decision about some action
is more valuable than precise and accurate information presented after the decision has been
made. Last but not least, the comparability of accounting information is a vital feature.
Consistency of treatment is very important here implying application of generally accepted
regulatory standards. We could state at this place that it was the need for comparability that
brought about the idea of common accounting standards.
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4. Differences in accounting
Among the most important causes of differences referred to in the literature are: 1) sources of
finance, 2) the existing legal system, 3) the link between accounting and taxation, and 4)
cultural differences between societies.
Sources of finance (Provision of finance)
This difference in providers of finance (creditors/insiders) versus (equity/owners) is the key
cause for international differences in financial reporting (Nobes and Parker, 1998).
Companies in different countries responded differently to the increased need for finance. In
Germany, France, Italy, Belgium, banks became the major supplier of additional funds. Thus
companies relied more on debt financing. On the contrary, in the UK and in the US
shareholders provided extra funds, which has given rise to active stock exchanges.
Existing legal system
In the past two types of legal system have developed in the West: 1) the common law system
(zvykov prvo), and 2) the code law system (kodifikovan systm).
The common law system originated in England and developed from case law. Common law
is characterized as a legal system which develops case by case and which does not prescribe
general rules, which could be applied to all cases. In common law countries accounting
regulation is in the hands of professional organizations in the private sector. Company law is
kept to a minimum and detailed regulation is produced by the private standard setter.
The code law system originated in Roman law and has developed in continental Europe. It is
characterized by a wide set of rules which attempt to give guidance in all situations. In the
code law countries the company law is very detailed and accounting standards are often
embodied in the company law. Accounting regulation in code law countries is in the hands of
the government and financial reporting is in those circumstances often reduced to complying
with a set of very detailed legal rules. (Alexander et al, 2003)
Link between accounting and taxation
In some countries fiscal authorities use information provided in the financial statements to
determine taxable income. In some countries the costs are only tax deductible if they are also
recognized in the P&L account. This may lead to the danger, that financial reporting becomes
tax influenced or even tax biased. This link is often found in those countries that do not have
an explicit investor approach, e.g. Germany, Belgium, and the Czech Republic.
In the UK, the US and in the Netherlands the link between taxes and accounting is much
weaker. Separate accounts are filed for tax purposes. The measurement and recognition rules
are different from the valuation rules used in financial reporting.
This relation between accounting income and tax income varies over time.
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Cultural differences
Cultural differences between nations are identified as an important influencing factor on
reporting and disclosure behavior with regard to financial statements. (E.g. individualism
versus collectivism, strong versus weak uncertainty avoidance, professionalism versus
statutory control, uniformity versus flexibility, secrecy versus transparency.)
6. Summary
This paper strived to characterise from the normative standpoint the major features of
international accounting regulation and explored the differences between the reporting styles
of different nations growing from their traditions. The recent empirical evidence suggests that
the differences in provision of finance, the legal system, the link between accounting and
taxation and cultural values can explain the differences between the financial reporting,
accounting and economic behaviour of companies around the world. A study taking a
longitudinal approach to the development of differences after the institution of accounting
harmonization could be an interesting topic for future research.
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For examination of these features in the Czech environment see Jindrichovska (2001, 2002).
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References:
Alexander, D, Britton, A, and Jorissen A (2003) International Financial Reporting and
Analysis, Thomson Learning, London
Ali, A and Hwang, L (2000) Country specific factors related to financial reporting and the
value relevance of accounting data. Journal of Accounting Research, 38, (1), Spring
Ball, R., Kothari, S.P. and Robin A. (2000) The Effect of International Institutional Factors
on Properties of Accounting Earnings, Journal of Accounting and Economics, 29: 1-51.
Basu, S. (1997) The Conservatism Principle and the Asymmetric Timeliness of Earnings,
Journal of Accounting and Economics, 24: 3-37.
Guenther, D. and Young, D. (2000) The association between financial accounting measures
and real economic activity: A multinational study. Journal of Accounting and Economics, 29,
53-72.
Jindrichovska, I. (2001) The Relationship between Accounting Numbers and Returns: Some
Empirical Evidence from the Emerging Market of the Czech Republic, The European
Accounting Review, 10:1, 107-131.
Jindrichovska, I. (2002) Conservatism and Timeliness of Earnings and Impact of Losses on
the Czech Market: An Empirical Study. Project financed by EC (European Commission) No.
HPRN-CT-2000-00062 "Harmonia" Accounting Harmonisation and Standardisation in
Europe: Enforcement, Comparability and Capital Market Effects.
Nobes, W. and Parker, R. (1998) Comparative International Accounting. 5th ed, Prentice Hall,
London
Sucher, P. and Alexander, D. (2002) IAS: issues of country, sector and audit firm compliance
in emerging economies, London: Centre for Business Performance of the Institute of
Chartered Accountants in England and Wales.
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Shrnut
Tento lnek se zabv rozdly mezi systmy nrodnho etnictv. Horkm tmatem dnen doby je
harmonizace etnictv. V tto prci srovnvme etn praktiky na potku nov ry. lnek
poskytuje nmty pro dal vzkum nrodnch rozdl ve vztahu k etn harmonizaci a jejho vlivu
na hospodsk ivot spolenosti.
Finann vkaznictv se nyn dotk vech kotovanch spolenost v Evropsk unii. Pestoe se
poadavek vykazovn v mezinrodnm formtu zatm netk malch a stednch podnik, lensk
stty chtt pizpsobit nrodn etn legislativu tak, aby se piblizovala mezinrodnm standardm
IAS/IFRS.
etnictv slou rznm uivatelm a rznm elm, pesto vak se vichni shodnou na spolench
poadavcch, kter by mlo plnit a na charakteristikch jak by mlo mt (m bt: relevantn,
srozumiteln, spolehliv, pln, objektivn, vasn, srovnateln,...)
Historicky se etnictv vyvjelo v tznch zemch nezvisle a asto velmi odlin. Finann
etnictv bylo zprvu komunikanm prostedkem mezi vlastnky a manaery podnik. K tomu dolo
asi na zatku 19. stolet, kdy se v dsledku rozvoje prmyslu oddlila funkce vlastnka a manaera.
Do t doby dily podniky vlastnci sami, ale s rozvojem vroby bylo teba zskat vce kapitlu a tak
vlastnci delegovali dc pravomoci na manaery podnik. A etnictv zskalo novou funkci
informovat vlastnky podnik o vsledcch.
prava etnictv vak nebyla jednotn protoe vroba zdka pesahovala hranice zem nebo sttu.
Proto jsou v etnictv ropzdly kter vznikly v dsledku odlinch vliv prosted a kultury.
Z odborn literatury meme identifikovat nkolik pin tchto rozdl:
1. Zdroje financovn (vritel/insidei versus akcioni/vlastnci)
2. Platn prvn systm (zvykov prvo versus kodifikovan prvn systm)
3. Vztah mezi etnictvm a danmi
4. Kulsturn rozdly (individualismus vs kolektivismus, uniformita vs flexibilita...)
Empirick studie ukzaly, e rozdly stle existuj i pes sbliovn etnictnch systm. Nap. Ali, A
and Hwang, L (2000) - rozdly v dsledku rznch zdroj financovn; Ball, R., Kothari, S. and Robin
A. (2000) rozdly v se stupni konzervativismu a vasnosti v dsledku rozdlnch prvnch systm;
a Guenther, D. and Young, D. (2000) rozdly v reakcch na reln ekonomick udlosti v dsledku
rozdlnch prvnch systm a rznch zdroj financovn.
Pomoc identifikace tchto vliv lze vysvtlit rozdly ve vztahu mezi finannm etnictvm a
ekonomickm chovanm vtiny spolenost. Zajmavm nmtem je sledovat vvoj tchto rozdl v
delm asovm horizontu a ovit zda se etn systmy v dsledku mezinrodn harmonizace
sbliuj.