Chapter 2

Worldwide Accounting
Diversity
Worldwide Accounting Diversity
Chapter Topics
 Indicators of worldwide accounting diversity.
 Problems caused by worldwide accounting diversity.
 Environmental factors leading to accounting diversity.
 Classification schemes of national accounting systems.
 The effects of culture on accounting.
 International differences in accounting practice.

2-2
Worldwide Accounting Diversity
Learning Objectives
1. Provide evidence of the diversity that exists in accounting
internationally.
2. Explain the problems caused by accounting diversity.
3. Describe the major environmental factors that influence
national accounting systems and lead to accounting diversity.
4. Present a judgmental classification of countries by financial
reporting system.
5. Discuss the influence that culture is thought to have on
financial reporting.

2-3
Worldwide Accounting Diversity
Learning Objectives
6. Describe a simplified model of the reasons for international
differences in financial reporting.
7. Categorize accounting differences internationally and provide
examples of each type of difference.

2-4
 What is Worldwide Accounting Diversity?

Worldwide Accounting Diversity

Differences in accounting and financial reporting rules between
countries. For example:

Accounting for Goodwill

 U.S. -- goodwill is an asset on the purchaser’s books.
 Germany – goodwill is often subtracted from stockholders’
equity on the purchaser’s books.

Learning Objective 1 2-5

 What is Worldwide Accounting Diversity?

Worldwide Accounting Diversity

Asset revaluation
 U.S. -- upward revaluation of fixed assets is not generally
allowed.
 Mexico, Chile, and The Netherlands upward revaluations are
allowed and sometimes required.

Learning Objective 1 2-6

 What is Worldwide Accounting Diversity?

Worldwide Accounting Diversity

Inflation Accounting
 U.S. (and many other countries) -- financial statements are
not adjusted for inflation.
 Latin American countries -- experience significant inflation,
financial statements are adjusted for changes caused by
inflation.

Learning Objective 1 2-7

 Evidence of Diversity in International
Accounting
Additional evidence of differences in accounting
between countries
Form 20-F
 Required by the SEC for companies using non-U.S. GAAP.
 Reconciles net income and stockholders’ equity from the other
GAAP to U.S. GAAP.

Learning Objective 1 2-8

 Problems Caused by Accounting Diversity

Consolidated financial statements

 U.S. MNEs often have subsidiaries in a large number of
countries.
 Accounting records in local GAAP and local currency are
rolled-up (i.e., consolidated) into U.S. GAAP.
 Require conversion from local to U.S. GAAP.
 Require translation from the local to U.S. currency.

Learning Objective 2 2-9

 Problems Caused by Accounting Diversity
Difficulties with access to foreign capital
markets
 Companies often need to go outside their home country in
order to access financing.
 Raising foreign capital often requires reconciliation to comply
with different accounting rules or needs of investors and
creditors.

Learning Objective 2 2-10

 Problems Caused by Accounting Diversity

Non-comparability of financial statements

 Accounting rules often differ between countries.
 International investors need to make their own
reconciliations or adjustments to financial statements.
 International investors also must face differing levels of
disclosure, quality of accounting standards, and quality of
auditing.

Learning Objective 2 2-11

 Environmental Factors Leading to Accounting
Diversity
Legal systems -- Common law
 Has relatively fewer statutes and more interpretation by
courts to apply laws to specific situations.
 Leads to the creation of precedents or case law.
 Found most often in Great Britain and other English-speaking
countries.
 In these countries, the source of accounting rules tends to be
non-governmental organizations.

Learning Objective 3 2-12

 Environmental Factors Leading to Accounting
Diversity
Legal systems -- Code law
 Characterized by relatively more statutes or code law.
 Found more often in non English-speaking countries.
 Accounting rules in these countries tend to be legislated (i.e.,
the source is the government).

Learning Objective 3 2-13

 Environmental Factors Leading to Accounting
Diversity
Taxation
 U.S. -- taxable income and book income are generally quite
different.
 Germany -- rules governing taxable and book income tend to
be the same, which generally results in more conservative
accounting.

Learning Objective 3 2-14

 Environmental Factors Leading to Accounting
Diversity
Providers of financing
 In many countries major sources of capital are families, banks,
and the government.
 Accounting and disclosure in those countries tend to be less
important.
 In the U.S. and UK the providers of financing are diverse
shareholders, so accounting and disclosure are more
important.

Learning Objective 3 2-15

 Environmental Factors Leading to Accounting
Diversity
Inflation
 Some countries have historically high rates of inflation.
 Accounting in these countries often requires adjustments to
offset the impact of inflation.
 This is common in Latin American countries.
 Given extended periods of low inflation in the U.S., inflation
accounting is not required.

Learning Objective 3 2-16

 Environmental Factors Leading to Accounting
Diversity
Political and economic ties
 These linkages tend to make information sharing easier.
 Nations that share ties often have similar accounting systems.

Correlation of factors
 In summary, correlations exist among these factors.
 Code law countries tend to have accounting rules based on
tax rules, and providers of financing with close ties to the
company (i.e., family, banks, government).

Learning Objective 3 2-17

 Financial Reporting System Classification

Accounting Clusters
Environmental factors related to accounting
diversity have been used to identify three broad
based clusters:

Fair presentation / full disclosure

 Gives primacy to the information needs of investors.
 Most descriptive of the UK and U.S.

Learning Objective 4 2-18

 Financial Reporting System Classification

Accounting Clusters

Legal compliance
 Accounting heavily influenced by tax rules and needs of
government.
 Commonly found in continental Europe.

Learning Objective 4 2-19

 Financial Reporting System Classification

Accounting Clusters

Inflation-adjusted
 Similar to the legal compliance approach.
 Is distinguished by the requirement for adjustments to
mitigate the effects of inflation.

Learning Objective 4 2-20

 Financial Reporting System Classification

Nobes’ judgmental classification

 Focuses on fair presentation / full disclosure and legal
compliance clusters.
 Considers primary needs of information users.
 Considers primary source of accounting rules.
 Classifies countries into six different groups.

Learning Objective 4 2-21

 The Influence of Culture on Financial Reporting

 Culture is also widely considered to influence financial

reporting systems.
 Hofstede’s five cultural dimensions is the most commonly
used scheme to discuss cultural influences.

Learning Objective 5 2-22

 The Influence of Culture on Financial Reporting

Hofstede’s Cultural Dimensions

 Individualism (vs. Collectivism)
 Power Distance
 Uncertainty Avoidance
 Masculinity
 Long-term Orientation

Learning Objective 5 2-23

 The Influence of Culture on Financial Reporting

Hofstede’s Cultural Dimensions

Individualism (vs. Collectivism)
 Degree of interdependence among individuals in a society.
 More interdependence equates to less individualism (more
collectivism).

Learning Objective 5 2-24

 The Influence of Culture on Financial Reporting

Hofstede’s Cultural Dimensions

Power Distance -- Level of acceptance of unequally distributed
power within and across the society’s institutions and
organizations.

Uncertainty Avoidance – Degree to which members of a society

feel threatened by uncertain or unknown situations.

Learning Objective 5 2-25

 The Influence of Culture on Financial Reporting

Hofstede’s Cultural Dimensions

Masculinity – Emphasis on traditional masculine values of
performance and achievement vs. feminine values of
relationship, caring and nurturing.

Long-term Orientation – The extent to which the society values

persistence, thrift, observing order and respect for tradition.

Learning Objective 5 2-26

 The Influence of Culture on Financial Reporting

Gray’s Accounting Values

 Professionalism vs. Statutory Control
 Uniformity vs. Flexibility
 Conservatism vs. Optimism
 Secrecy vs. Transparency

Learning Objective 5 2-27

 The Influence of Culture on Financial Reporting

Gray’s Accounting Values

Professionalism vs. Statutory Control
 Professionalism is reflected by individual professional
judgment and self-regulation of the profession.
 Statutory control focuses on legal compliance and legislative
control of the profession.
 The former is more indicative of the UK and U.S. and the
latter more so with continental Europe.

Learning Objective 5 2-28

 The Influence of Culture on Financial Reporting

Gray’s Accounting Values

Uniformity vs. Flexibility
 Uniformity indicates preference for standardized accounting
methods.
 Flexibility is reflected in the varying of accounting practices
for differences between companies.
 UK and U.S. approaches are examples of flexibility.

Learning Objective 5 2-29

 The Influence of Culture on Financial Reporting

Gray’s Accounting Values

Conservatism vs. Optimism
 Conservatism indicates preference for caution and prudence.
 Optimism tends more toward fair presentation.
 Germany has traditionally reflected a strong tendency toward
conservatism.

Learning Objective 5 2-30

 The Influence of Culture on Financial Reporting

Gray’s Accounting Values

Secrecy vs. Transparency
 Secrecy reflects a preference for minimal information
disclosure.
 Transparency reflects openness and full disclosure.
 Countries with predominantly family-owned and bank
financed firms tend toward secrecy.

Learning Objective 5 2-31

 A Model to Explain International Differences in
Financial Reporting
Nobes’ model
 Describes international differences as a function of culture
and the system of financing.
 Culture influences the development of the system of
financing which influences the development of accounting.
 Uses two classifications, A and B.

Learning Objective 6 2-32

 A Model to Explain International Differences in
Financial Reporting
Class A Accounting
 Descriptive of Anglo-Saxon countries.
 Strong outside shareholder equity-financing.
 Optimism.
 Transparency.

Learning Objective 6 2-33

 A Model to Explain International Differences in
Financial Reporting
Class B Accounting
 Descriptive of continental Europe.
 Less widespread outside shareholder equity-financing.
 Conservatism.
 Secrecy.

Learning Objective 6 2-34

 Further Evidence of Accounting Diversity

Additional differences between countries

 Different financial statement formats.
 Level of detail in financial statements varies between
countries.
 Terminology, level of disclosure, and rules governing
recognition and measurement.
 Different financial statements included in the annual report.

Learning Objective 7 2-35