Worldwide Accounting Diversity
Chapter 2
Worldwide accounting diversity
Chapter Outline
I. Considerable differences exist across countries in the accounting treatment of many items. These differences can result in significantly different amounts being reported in the financial statements prepared by companies using different GAAP.
II. A variety of factors influence a country’s accounting system. A. Legal system – in code law countries, accounting rules tend to be legislated; common law countries tend to have a non-legislative organization that develops accounting standards. B. Taxation – financial statements serve as the basis for taxation in many countries. In those countries with a close linkage between accounting and taxation, accounting practice tends to be more conservative so as to reduce the amount of income subject to taxation. C. Providers of financing – in those countries in which family members, banks, and the government are the major providers of business finance, there tends to be less demand for public accountability and information disclosure. In countries where shareholders are a major provider of financing, the demand for information made available outside the company becomes greater. D. Inflation – countries with chronic high inflation adopt accounting principles in which traditional historical cost accounting is abandoned in favor of inflation adjusted figures. E. Political and economic ties – through previous colonization, a British style of accounting is used throughout most of the former British Empire. Ties between countries also help to explain similarities between the U.S. and Canada, and increasingly, the U.S. and Mexico.
III. Differences in accounting across countries cause several problems. A. Consolidating foreign subsidiaries requires that the financial statements prepared in accordance with foreign accounting rules must be converted into parent company GAAP. B. Companies interested in obtaining capital in
Worldwide accounting diversity
Chapter Outline
I. Considerable differences exist across countries in the accounting treatment of many items. These differences can result in significantly different amounts being reported in the financial statements prepared by companies using different GAAP.
II. A variety of factors influence a country’s accounting system. A. Legal system – in code law countries, accounting rules tend to be legislated; common law countries tend to have a non-legislative organization that develops accounting standards. B. Taxation – financial statements serve as the basis for taxation in many countries. In those countries with a close linkage between accounting and taxation, accounting practice tends to be more conservative so as to reduce the amount of income subject to taxation. C. Providers of financing – in those countries in which family members, banks, and the government are the major providers of business finance, there tends to be less demand for public accountability and information disclosure. In countries where shareholders are a major provider of financing, the demand for information made available outside the company becomes greater. D. Inflation – countries with chronic high inflation adopt accounting principles in which traditional historical cost accounting is abandoned in favor of inflation adjusted figures. E. Political and economic ties – through previous colonization, a British style of accounting is used throughout most of the former British Empire. Ties between countries also help to explain similarities between the U.S. and Canada, and increasingly, the U.S. and Mexico.
III. Differences in accounting across countries cause several problems. A. Consolidating foreign subsidiaries requires that the financial statements prepared in accordance with foreign accounting rules must be converted into parent company GAAP. B. Companies interested in obtaining capital in