International Differences in Accounting

International Differences in Accounting

International Differences in Accounting: The Birth of an Accounting
Harmonization Process?
Irena Jindřichovská,Univerzita Karlova v Praze; Anglo-American University v Praze
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.
This short paper was prepared for the conference: “Trendy ve výuce účetnictví
na vysokých školách neuniverzitního směru” organized by Soukromá vysoká škola
ekonomických studií, Praha, on 14.1.2004
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.
2. A little excursion around the basic requirements of modern financial reporting
Broadly speaking, accounting is about the provision of figures to people about
their resources.
It can be seen mainly as technical manipulation of figures characterizing
various points of interest.1 In accounting much of the emphasis is likely to be on
‘doing things with figures’. But the question arises as to which figure or figures should
actually be built into the system. Or more fundamentally, how is one going to decide
which figures to put in?
In general terms, we can answer this question by going back to the original
definition of accounting. The figures the accountants should provide to people are the
figures that they need to know for their own practical purposes. This raises questions
about the users of accounting information, and the purposes for which each particular
type of user requires the information. How can the user be provided with the
information best suited to his/her needs.
Having in mind the users of accounting information e.g. equity investors,
creditors, company employees, analysts, and more broadly the government or the
public, many of the information requirements are essentially forward looking.
Different users with different purposes require different information about the same
items, and they will require (and be able to understand) different degrees of
complexity and depth. Not all the information required is likely to be included in
financial accounts.
In spite of the fact that accounting information needs to be directed to a
particular user, several general points emerge from the preceding discussion about the
necessary features and general characteristics of accounting.
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.
1
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).
3. Evolution of accounting – brief overview
Historically, accounting and reporting grew up largely independently, and often
very differently in different countries. Practice, regulation and especially the mode of
regulation differed often very greatly.
Financial reporting in general can be viewed as a part of the communication
process. The nature and functions of reporting with respect to organizations differ
depending on the nature of the sender and the receiver as well as the nature of the
information transferred. The sender and the receiver form an integral part of the
environment.
Initially financial reporting was mainly internal reporting. It provided company
owners with a vehicle to manage the company. Later on, in the early 1800s private
capital alone was insufficient to finance business activities. Capital was gathered from
sources outside the company. The owners delegated the managing function to directors
and provided them with the necessary authority. Nowadays the external financial
report provides a means of reporting the results and accounts to owners.
Financial reporting evolved from internal to external reporting, but for a long
time external reporting meant providing information within the borders of a specific
country. Thus, because national authorities perceive that there are alternatives for
recognition and measurement and presentation they have chosen those recognition,
measurement, consolidation and presentation policies which best fitted their national
environments. The annual report, for example, provides information on the financial
position of a company and its results. Although the general purpose is similar in most
countries, many differences occur resulting from different environmental and cultural
influences in the individual countries.
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 (zvykové právo), and 2) the code law system (kodifikovaný
systém).
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.
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.)
5. Recent empirical evidence
As the business community becomes more and more internationalised it might
seem that the differences play a less significant role in financial reporting. For large
companies the location of the company is no longer the sole influencing factor on the
reporting behaviour of the company. However, this is not the case.
The variables pointed out by researchers in the 1970s and 1980s as causes
which might explain differences in national accounting systems and national GAAPs
are used in empirical comparative studies where different aspects of financial reporting
practices are researched, e.g. value relevance of accounting information, earnings
management practices, characteristics of the audit market and process.
For illustration:
Ali and Hwang (2000) researched the value relevance of accounting
information and found that it is less relevant in bank oriented financial systems.
Ball, Kothari and Robin (2000) investigated two properties of accounting
income – conservatism and timeliness. Conservatism was for the first time researched
by Basu (1997) and it is defined as the extent to which current period income
asymmetrically incorporates economic losses relative to economic gains. They found
that in common law countries accounting income is significantly more timely than in
code law countries.2
Guenther and Young (2000) investigated cross-country differences in legal
systems, differences in legal protection for external shareholders, and differences in
the degree of tax conformity and their impact on the relation between accounting
earnings and the real economic value relevant events that underlie them. They found
that there is a high association for the UK and the US and a lower one for the bankoriented countries.
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.
References:
[1] Alexander, D, Britton, A, and Jorissen A (2003) International Financial Reporting
and Analysis, Thomson Learning, London
[2] 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
[3] 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.
[4] Basu, S. (1997) ‘The Conservatism Principle and the Asymmetric Timeliness of
Earnings’, Journal of Accounting and Economics, 24: 3-37.
[5] 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.
2
For examination of these features in the Czech environment see Jindrichovska (2001, 2002).
[6] 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.
[7] 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.
[8] Nobes, W. and Parker, R. (1998) Comparative International Accounting. 5th ed,
Prentice Hall, London
[9] 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.
Shrnutí
Mezinárodní rozdíly v účetnictví na počátku harmonizačního procesu
Tento článek se zabývá rozdíly mezi systémy národního účetnictví. Horkým
tématem dnešní doby je harmonizace účetnictví. V této práci srovnáváme účetní
praktiky na počátku nové éry. Článek poskytuje náměty pro další výzkum národních
rozdílů ve vztahu k účetní harmonizaci a jejího vlivu na hospodářský život společnosti.
Finanční výkaznictví se nyní dotýká všech kotovaných společností v Evropské
unii. Přestože se požadavek vykazování v mezinárodním formátu zatím netýká malých
a středních podniků, členské státy chtětí přizpůsobit národní účetní legislativu tak, aby
se přiblizovala mezinárodním standardům IAS/IFRS.
Účetnictví slouží různým uživatelům a různým účelům, přesto však se všichni
shodnou na společných požadavcích, které by mělo plnit a na charakteristikách jaké by
mělo mít (má být: relevantní, srozumitelné, spolehlivé, úplné, objektivní, všasné,
srovnatelné,...)
Historicky se účetnictví vyvíjelo v tůzných zemích nezávisle a často velmi
odlišně. Finanční účetnictví bylo zprvu komunikačním prostředkem mezi vlastníky a
manažery podniků. K tomu došlo asi na začátku 19. století, kdy se v důsledku rozvoje
průmyslu oddělila funkce vlastníka a manažera. Do té doby řídily podniky vlastníci
sami, ale s rozvojem výroby bylo třeba získat více kapitálu a tak vlastníci delegovali
řídící pravomoci na manažery podniků. A účetnictví získalo novou funkci –
informovat vlastníky podniků o výsledcích.
Úprava účetnictví však nebyla jednotná protože výroba zřídka přesahovala
hranice země nebo státu. Proto jsou v úřetnictví ropzdíly které vznikly v důsledku
odlišných vlivů prostředí a kultury.
Z odborné literatury můžeme identifikovat několik příčin těchto rozdílů:
1. Zdroje financování (věritelé/insideři versus akcionáři/vlastníci)
2. Platný právní systém (zvykové právo versus kodifikovaný právní systém)
3. Vztah mezi účetnictvím a daněmi
4. Kulsturní rozdíly (individualismus vs kolektivismus, uniformita vs flexibilita...)
Empirické studie ukázaly, že rozdíly stále existují i přes sbližování účetních
systémů. Např. Ali, A and Hwang, L (2000) - rozdíly v důsledku různých zdrojů
financování; Ball, R., Kothari, S. and Robin A. (2000) – rozdíly v se stupni
konzervativismu a včasnosti v důsledku rozdílných právních systémů; a Guenther, D.
and Young, D. (2000) – rozdíly v reakcích na reálné ekonomické události v důsledku
rozdílných právních systémů a různých zdrojů financování.
Pomocí identifikace těchto vlivů lze vysvětlit rozdíly ve vztahu mezi finančním
účetnictvím a ekonomickým chováním většiny společností. Zajímavým námětem je
sledovat vývoj těchto rozdílů v delším časovém horizontu a ověřit zda se účetní
systémy v důsledku mezinárodní harmonizace sbližují.