Chap005 international accounting Doupnik and perara

Chapter 05 - Comparative Accounting

CHAPTER 5

COMPARATIVE ACCOUNTING

Chapter Outline

China

I.

There are some unique features in the accounting profession in China. They include the

following:

A.

Until the 1980s, those who carried out accounting work were not held in high regard in

society,

and

this

has

had

an

adverse

effect

on

the

development

of

the

accounting

profession in China.

B.

Accounting

and

auditing

in

China

have

taken

different

paths

in

their

development

processes.

Auditing

firms

audited

mainly

domestic

companies,

and

were

under

the

State Administration

of

Audit (SAA), whereas accounting firms focused on companies

using foreign investments and were sponsored by the Ministry of Finance.

C.

Unlike in the

U.K., where there was a good legislative and judicial environment during

the

early

stages

of

the

development

of

the

profession,

in

China,

a

market-oriented

legislative and judicial environment is still emerging.

D.

Unlike

in

the

U.K.,

where

auditors

receive

support

from

the

established

professional

bodies, these support mechanisms are still lacking in China.

II.

The recent economic reform program stimulated the growth of the accounting profession

in China.

A.

With

the

recognition

by

the

State

of

joint

stock

company

form,

the

demands

for

financial information from investors and other interested parties increased.

B.

The

establishment

of

two

stock

exchanges

helped

rapid

growth

of

the

accounting

activities.

C.

Various government regulations on the implementation of economic reform measures

require the involvement of independent auditors.

D.

The

laws

on

joint

ventures

with

foreign

companies

require

the

audit

of

annual

statements.

E.

International accounting firms were allowed to be involved in training local auditors and

setting auditing standards.

III.

There

are

clear

signals

that

Anglo-American

accounting

principles

are

replacing

Soviet-

style accounting.

A.

This was required as a result of the movement towards private ownership.

B.

The

Ministry

of

Finance

is

following

international

accounting

practices

in

setting

Chinese standards; a conceptual framework was promulgated in 1992, and the China

Accounting Standards Committee (CASC) was established in1988.

C.

The

Chinese

Security

Regulatory

Commission

(CSRC)

has

improved

disclosure

requirements

for

companies.

For

example,

it

requires

listed

companies

to

post

their

annual reports on the web site of the relevant stock exchange.

D.

Both CSRC and the two stock exchanges have developed new corporate governance

rules based on those that are common in Anglo-American countries.

E.

The

CSRC

and

Ministry

of

Finance,

consistent

with

the

Sarbanes-Oxley

Act,

require

auditor rotation every five years.

5-1

Chapter 05 - Comparative Accounting

IV.

Major differences between IFRS and Chinese GAAP include:

A.

Accounting standards and practices in China lack conservatism.

B.

There are no coherent interpretations of the relevant requirements.

C.

In

some

areas

covered

by

IFRS

there

are

no

specific

rules

in

China,

including

business

combinations,

impairment

of

assets,

and

the

definitions

of

operating

and

finance leases.

Germany

I.

Unique features in German accounting include:

A.

The primary source of finance for German companies is bank loans rather than equity,

and this determines to a large extent the purpose for financial reporting by companies.

B.

Auditing dominates the financial reporting related professional activities.

C.

The

auditing

profession

is

headed

by

the

Chamber

of

Auditors,

a

State-supervised

organization.

D.

The Commercial Code contains most of the German financial reporting principles, and

sanctions for non-compliance.

E.

Unlike in the U.S., partnership accounting is regulated in Germany.

F.

The principle of prudence (conservatism) is established in the law.

II.

There

are

signs

of

a

change

in

financial

reporting

from

a

creditor

orientation

towards

a

shareholder orientation.

A.

The Companies Act 1965 was the initiator of this change.

B.

In 1998, German law was amended to allow a private sector body (GASC) to develop

accounting standards (until then the Ministry of Justice coordinated the accounting rule

development process).

C.

Since

1998,

German

accounting

standards

have

been

developed

by

following

due

process, and promotion of international convergence is a main objective.

D.

GASB (the standard- setting body of GASC) has been modeled on the U.S. FASB.

E.

In 2004, the Financial Reporting Enforcement Panel (FREP) was created.

III.

Traditionally,

the

primary

function

of

financial

accounting

has

been

the

conservative

determination of distributable income, rather than presentation of a true and fair view.

A.

Traditionally bank credit plays a major role in corporate finance.

B.

German accounting is heavily influenced by tax law.

C. German

accounting

rules

allow

companies

to

smooth

income

over

time

by

using

hidden reserves.

D.

Although the EU’s Fourth Directive

requires companies to present a true and fair view

in their financial statements, it appears that extensive note disclosures are seen as a

way of achieving this without changing the tax-based, income smoothing approach to

financial reporting.

IV.

Since January 2005, all

German listed companies are required to use

IFRS

in preparing

their consolidated financial statements. However, German accounting practices differ from

IFRS in some important respects.

A.

German

accounting

law

contains

no

specific

rules

in

some

areas.

Examples

include

the

translation

of

foreign

currency

financial

statements

of

foreign

subsidiaries,

disclosures of fair values of financial assets and liabilities, and earnings per share.

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Chapter 05 - Comparative Accounting

B.

There

are

inconsistencies

between

IFRS

and

German

rules

in

some

areas.

For

example,

according

to

German

rules,

goodwill

arising

on

consolidation

can

be

deducted

immediately

against

equity,

and

inventories

can

be

valued

at

replacement

cost.

C.

According

to

German

tradition,

a

management

report

is

an

important

part

of

a

company

’s

financial statements, whereas IFRS do not include specific requirements in

this regard.

Japan

I.

Unique features in the Japanese business environment include:

A.

The economy is dominated by a few conglomerates known as

Keiretsu

.

B.

The

main

sources

of

finance

for

business

are

bank

credit

and

cross- corporate

ownership, rather than outside equity finance.

C.

Corporate

earnings

are

regarded

as

the

source

of

funds

that can

be

distributed,

and

not as a measure of corporate performance.

D.

Stock exchanges in Japan are government regulated rather than self-regulated. The

stock exchange law is administered by the Ministry of Finance.

II.

There are differences between the Japanese accounting profession and its counterparts in

Anglo-American countries, including:

A.

The

Ministry

of

Finance

plays

a

major

role,

through

its

Business

Accounting

Deliberation Council (BADC), in developing financial reporting standards in Japan, and

the influence of the Japanese Institute of Certified Professional Accountants (JICPA) in

this

respect

has

been

minor

compared

to

that

of

its

counterparts

in

Anglo-American

countries.

B.

The accounting profession has a relatively low social status in Japan.

C.

For

cultural

reasons,

the

concept

of

independent

auditor

is

not

readily

acceptable

within Japanese companies.

D.

Unlike in the U.S., and similar to Germany, financial reporting is heavily influenced by

tax law.

III.

Recently, major attempts have been made to ensure that Japanese accounting standards

fall into line with international standards.

A.

A Big Bang approach has been taken to achieve this.

B.

In

2001,

the

Accounting

Standards

Board

of

Japan

(ASBJ),

modeled

on

FASB,

was

formed.

C.

In

January

2005,

the

ASBJ

and

IASB

agreed

to

launch

a

joint

project

to

reduce

differences between IFRS and Japanese GAAP.

IV.

There are several important differences between IFRS and Japanese GAAP.

A.

In general, companies are not under pressure from their main providers of finance to

disclose

information

publicly,

and

Japanese

companies

are

reluctant

to

provide

information voluntarily.

B.

There

are

no

specific

rules

in

some

areas

covered

by

IFRS,

such

as

impairment

of

assets, discontinuing operations and segment reporting.

C.

There

are

inconsistencies

between

Japanese

GAAP

and

IFRS;

for

example,

inventories

can

be

valued

at

cost

under

Japanese

GAAP

rather

than

at

the

lower

of

cost and net realizable value as required by IFRS.

5-3

Chapter 05 - Comparative Accounting

Mexico

I.

Many

features

of

the

Mexican

business

environment

are

common

to

other

developing

countries.

A.

Until

recently,

a

substantial

portion

of

the

Mexican

business

sector

was

government

controlled, and a large number of business enterprises were government owned.

B.

The economy has suffered from persistent balance of payments problems.

C.

As a result of the effect of the

“

Tequila crisis,

”

Mexico accepted a bailout package from

the IMF and the U.S. Treasury.

D.

In recent years, there

has an effort to privatize state-owned enterprises, and many of

the restrictions to foreign investment have been removed.

E.

The

measures

aimed

at

achieving

economic

growth

stimulated

the

activities

of

the

stock exchange.

II.

Mexico has an established accounting profession with a long history.

A.

The first professional body was established in 1917.

B.

The

Mexican

Institute

of

Public

Accountants

(MIPA)

was

one

of

the

nine

founding

members of the IASC.

C.

Public accounting firms mainly provide bookkeeping, tax, and audit services.

D.

A professional diploma is required to practice as a public accountant.

III.

Regulation

of

accounting

and

financial

reporting

is

through

legislation,

stock

exchange

listing requirements, and bulletins issued by MIPA.

A.

The law requires that annual financial statements of listed companies must be audited

by a Mexican CPA and published in a nationally circulated medium.

B.

The National Banking and Securities Commission (NBSC), an equivalent of U.S. SEC,

oversees information disclosure by publicly owned companies.

C.

MIPA is responsible for issuing accounting and auditing standards, and follows a due

process.

D.

MIPA

has

developed

a

Code

of

Ethics

which

prohibits

advertising

for

public

accountants.

IV.

As

a

result

of

Mexico’s

membership

with

NAFTA,

Mexican

accounting

principles

are

heavily influenced by U.S. accounting practices in recent years.

A.

The

U.S.

influence

also

is

exerted

through

the

presence

of

subsidiaries

of

U.S.

companies and the Big 4 international accounting firms.

V.

A unique feature of

Mexican accounting practice is the treatment of the effects of inflation

in financial statements by using general purchasing power accounting.

VI.

Bulletin

B-10

introduced

a

novel

concept

known

as

the

“

integrated

result

of

financing,

”

which is calculated by adding the nominal interest expense, the

gain

or loss due to

price

l

evel changes on

the company’s net monetary

position, and the

gains and losses due to

exchange rate fluctuations on the company’s monetary assets and liabilities denominated

in

foreign currencies.

5-4

Chapter 05 - Comparative Accounting

VII.

There are several differences between Mexican GAAP and IFRS. For example, according

to

Mexican

rules,

research

and

development

costs

are

to

be

expensed

as

incurred,

pre-

operating

costs

can

be

capitalized,

a

statement

of

inflation

is

mandatory

irrespective

of

the

inflation rate.

United Kingdom

I.

In the

U.K. the capital market provides the main source of funding for companies, and the

limited liability company is the main form of business organization.

A.

The primary purpose of accounting in the U.K. is to provide information for the efficient

functioning of the capital market.

B.

Accounting

in

the

U.K.

grew

as

an

independent

discipline,

responding

to

business

needs.

C.

The first professional accounting body in modern times was established in the U.K. in

1853,

and

currently

there

are

six

professional

bodies

in

that

country,

coordinated

by

the Consultative Committee of Accountancy Bodies (CCAB).

D.

The U.K. accounting profession has favored a principles-based approach rather than a

rules-based approach to standard setting.

II.

Accounting

regulation

in

the

U.K.

has

been

driven

by

the

idea

that

determination

of

acceptable

accounting

principles

and

standards

should

be

left

in

the

hands

of

the

profession.

A.

U.K.

legislators

did

not

feel

the

need

to

have

a

powerful

securities

commission

to

regulate accounting and financial reporting with detailed rules.

B.

The

responsibilities

for

developing

accounting

standards

and

auditing

standards

lie

with

the

Accounting

Standards

Board

(ASB)

and

Auditing

Practices

Board

(APB),

respectively, both independent bodies.

C.

Changes to traditional thinking

began

as a result of U.K. joining the EU in 1973. The

amendments

to

the

1948

Companies

Act

in

1981

as

a

result

of

integrating

the

EU’s

Fourth Directive in British law made U.K. company legislation highly prescriptive.

D.

In

2003

the

Financial

Reporting

Council

(FRC)

became

the

single,

independent

regulator of accounting and auditing in the U.K.

E.

ASB is one of the several national accounting standard-setters that have formal liaison

with the IASB, and is committed to align U.K. accounting standards with IFRS.

III.

Accounting

principles

and

practices

in

the

U.K.

emphasize

investor

needs

and

the

importance of transparency.

A.

The 1985 Companies Act requires corporate financial statements to provide a true and

fair view o

f the firm’s financial position and results of operations for the financial year

.

Auditors

are

given

the

corresponding

duty

to

render

an

opinion

on

whether

this

requirement is fulfilled. Provision of a true and fair view is an overriding requirement in

the U.K.

B.

Since

January

2005,

U.K.

listed

companies

are

required

to

use

EU

adopted

IFRS

to

prepare their group (consolidated) financial statements.

C.

Financial

statements

generally

are

prepared

on

the

basis

of

historical

cost,

but

companies are allowed to revalue tangible assets.

5-5

Chapter 05 - Comparative Accounting

D.

U.K. accounting standards are generally similar to IFRS, but there are also differences

in

some

areas.

For

example,

U.K.

GAAP

allows

companies

to

amortize

goodwill

at

their discretion, whereas IFRS require goodwill to be tested for impairment annually.

5-6

Chapter 05 - Comparative Accounting

Answers to Questions

1.

Gradual

capital

market

liberalization

will

open

up

international

investment

opportunities

for

national

investors.

Poor

rating

assignments

of

national

firms

could

therefore

trigger

an

immense

outflow

of

investment

capital

providing

national

firms

with

strong

incentives

to

implement sound and internationally comparable accounting practices.

2.

The economic reforms have increased demand for accounting services in many ways. Key

aspects

of

the

economic

reforms

in

China

include

privatization

of

SOEs,

liberalization

of

controls,

commitment

to

encourage

private

investment

in

business

and

to

attract

foreign

investment,

and

emphasis

on

commercial

viability

and

competition

among

businesses.

All

these are integral parts of a market system, and lead to increased demands for accounting

services. For example, when businesses compete, they become increasingly cost conscious.

Investors

need

accurate

information

about

the

financial

performance

and

position

of

the

businesses

they

have

invested

in.

When

Chinese

companies

seek

to

raise

funds

in

overseas markets or the government attempts to attract foreign investors, it is important to

ensure

that

proper

financial

records

are

kept,

and

information

is

disclosed

using

internationally

acceptable

standards.

Further,

various

government

regulations

on

the

implementation of economic reforms require the involvement of independent auditors.

3.

A

unique

feature

in

the

development

of

accounting

and

auditing

in

China

is

that,

unlike

in

many

other

countries,

until

recently

(1998),

these

two

areas

developed

as

two

rival

disciplines competing with each other, supported by two separate government agencies.

4.

The

pressures

arise

from

the

need

to

change

from

an

accounting

system

designed

to

provide

information

to

government

for

planning

purposes

to

a

system

that

is

capable

of

providing

useful

information

for

economic

decision

making.

China

has

expressed

a

commitment

to

adopt

IFRS.

This

is

particularly

important

to

China

because

of

the

requirement

under

WTO

membership

and

the

need

to

attract

foreign

investment.

The

ultimate objective

of accounting regulation

is to achieve a high level of compliance with the

mandated reporting standards. This requires an adequate number of professionals who are

willing and able to implement the standards. However, the accounting profession in China is

still

at

the

early

stage

of

development,

and

a

lack

of

skilled

professionals

will

create

problems for regulators. IFRS are

based on western cultural

values. Some of the concepts

that

are

fundamental

to

IFRS,

such

as

true

and

fair

view

or

fair

presentation

and

transparency, may not be clearly understood by Chinese accountants.

5.

One of the distinct Japanese cultural values is collectivism or group consciousness. This has

directly

affected

the

Japanese

attitude

towards

external

auditors

and

the

audit

function.

Prior

to

the

American

occupation

of

Japan

after

the

Second

World

War,

there

was

no

external auditing

profession. When it was introduced in

1949,

Japanese corporations often

considered

it

as

unnecessary.

Because

of

the

cultural

value

orientation

of

not

trusting

someone

from

outside

the

group,

independent

auditors

had

difficulty

being

accepted

by

clients.

5-7