International Accounting

Autumn 2018

F1 International Accounting; 1
Kristina Artsberg
 International differences in profit index
From a study by Radebaugh, L.H., & Gray, S.J.

The U.K.
The U.S.
France
Netherlands
index
Belgium
Germany
Spain
Japan

0 20 40 60 80 100 120 140

F1 International Accounting; 2
Kristina Artsberg
 Problems with international
differences in accounting methods

• Analysing and comparing

If disclosure is insufficient. But although not, it can be difficult to
interpret and understand techniques.

• Competition disadvantages
Economic consequences both directly and indirectly.

• Reporting problems
Especially for the multinational enterprises that will have to handle
several different sets of standards at the same time, or is forced to
select among different standards.

F1 International Accounting; 3
Kristina Artsberg
 The global environment of accounting;
The need for international accounting
• Accounting and world politics
• Economic globalization, international trade and foreign
direct investment
• Globalization of stock markets
• Patterns of share ownership
• The international financial system
• The nature and growth of MNEs

F1 International Accounting; 4
Kristina Artsberg
 Causes of international differences

• Culture
• Legal systems
• Providers of finance
• Taxation
• Other external influences
• The profession

F1 International Accounting; 5
Kristina Artsberg
 Classification of financial reporting

• 3.5.5 Classification by regulatory style

• 3.6.3 – 3.9 (pp 74-80) Nobes classification

F1 International Accounting; 6
Kristina Artsberg
Factors influencing accounting systems
(A functional view developed by Nobes, C. See more in the text book)

1. The legal system My way to remember:

2. Main financing source 1. Theory
3. Connection to tax computation 2. Level of inflation
4. The accounting profession 3. Connection to tax comp
5. Theory 4. The accounting profess
6. Level of inflation 5. The legal system
7. Accidental occurences 6. Main financing source
7. Accidental occurences

F1 International Accounting; 7
Kristina Artsberg
 Main contextual differences in different
accounting traditions (cont. Nobes study)

Continental: Anglo-Saxon:
1. Code law 1. ‘Case law’
2. Bank financing 2. Stock market financing
3. Taxation is linked to accounting 3. Separate systems between
4. Small accounting profession accounting and tax
5. Legal base and method 4. Big accounting profession
6. No inflation accounting 5. Microeconomic base
7. Creditor swindles 6. Inflation accounting
7. Stock market crash

F1 International Accounting; 8
Kristina Artsberg
 Different accounting models
Continental:
1. The calculative properties in focus
2. Accounting purpose to measure
3. Direct economic consequences
4. Accounting’s constructive role
5. (Reducing the variations in
business cycles)
6. Balance sheet as past
transactions, residual balance
sheet
7. Prudence as deliberate
undervaluation encouraged
8. Frequent use of reserves
Anglo-Saxon:
1. The informative properties in focus
2. Accounting purpose to inform
3. Economic consequences mainly
indirectly
4. Accounting’s responsive role
(map-making)
5. Balance sheet for prediction
6. Reasonable prudence due to
normal business risk
7. Fair value accounting

F1 International Accounting; 9
Kristina Artsberg
 (Four issues for major international differences in
accounting practices.)
Some examples of differences

• Conservatism and accruals

• Provisions and reserves
• Measurement of tangible assets
• Formats of financial statements

F1 International Accounting; 10
Kristina Artsberg
 Reasons for building reserves

• Risk of falling prices on inventory 1

• Subjective nature of accounting measurement 4

• Profit on a long-term basis 3

• Consolidation needs of business 5

• Self-financing
2

F1 International Accounting; 11
Kristina Artsberg
 Traditional/conventional
accounting model
• Transaction based: to match the enterprises historical
costs with revenues
• Main purpose to calculate income (profit or loss).
• The income statement shows the result of the factual
historical transactions between the enterprise itself and
its environment
• The purpose is not to inform about the economic value of
the enterprise. The balance sheet’s role is to help in the
calculation of income (for example through accruals and
deferrals). It is a residual balance sheet.

F1 International Accounting; 12
Kristina Artsberg
 The Balance sheet as a
residual balance sheet

Income statement 1 Income statement 2

Balance sheet

F1 International Accounting; 13
Kristina Artsberg
 The Balance sheet expressing
the value of the enterprise

Balance sheet

P&L1 P&L2 P&L3

F1 International Accounting; 14
Kristina Artsberg
 Controversial about fair value

• Is the stock market really in favour of it?

• Are auditors in favour of fair value measurement?
• The fair value concept results in vague standards that
needs a lot of judgment. This increases the risk for
differences in interpretation and application.
• Can fair value be regulated in the EU system and is it
possible to enforce rules based on fair value (i.e. based
on judgment in application)?

F1 International Accounting; 15
Kristina Artsberg
Accounting in its social environment
Political sub system
Dominating political philosophy
Organization of political power
Legal system

Economic sub system Cultural sub system

Financing source Power distance
Business size and form Degree of individualism
Business education and training Masculinity/Femininity
Openness of economy Unsecurity avoidance
Stage of economic development
Economic disturbances

F1 International Accounting; 16
Kristina Artsberg
 Hofstedes’ four cultural variables
Small power distance:
- Decentralisation popular
- Differences should be minimized
- Democratic decision making
- Subordinated expected to
participate
- The political system is changed
through changing the rules
Big power distance
- Centralisation popular
- Differences accepted
- Hierarchial decision structure
- Expert knowledge and power
- The political system is changed
through chaning the people
involved

Individualism:
- Economic matters more stressed
- The task more important than the
relation
- Individual interests before
collective
- Duties and rights similar for all
Collectivism
- Social values important
- Moral och ethics are stressed
- Collective interests before individual
- Different regulations for different
groups

F1 International Accounting; 17
Kristina Artsberg
 ….cont. Hofstedes’ cultural variables
Masculinity:
- Life get value through work
- Conflicts solved through confrontation
- The strongest will win
- Performance is the ideal
High unsecurity avoidance:
- High stress level, much worrying
- Ambigious situations must be ”solved”
- Emotional need of rules, even if they
don’t work
- Precise and detailed rules, seldom
changed
- Citizens have little power
- Belief in experts and specialisation
- Only one truth. Complicated large
theory building.
F1 International Accounting;
Kristina Artsberg
Femininity:
- Working is necessary to live
- Conflicts are solved through cooperation
- Compromising is necessary
- Welfare society, tolerance
Low unsecurity avoidance:
- Low stress level, relaxed attitude
- Tolerance for ambigious situations
- The fewer rules the better
- General rules that are changed if they
are not followed
- Citizens have relatively much power
- Preference for relativism and empiricism
in science
18
 Hofstedes’ cultural research (empirical findings)
Country Power distance Individualism Masculinity Unsecurity avoidance

Australia 36 90 61 51
Austria 11 55 79 70
Belgium 65 75 54 94
Danmark 18 74 16 23
Finland 33 63 26 59
France 68 71 43 86
Italy 50 76 70 75
Japan 54 46 95 92
Netherlands 38 80 14 53
Norway 31 69 8 50
Switzerland 34 68 70 58
Spain 57 51 42 86
UK 35 89 66 35
Sweden 31 71 5 29
Germany 35 67 66 65
USA 40 91 62 46
F1 International Accounting; 19
Kristina Artsberg