Chapter Two Worldwide Accounting Diversity
After reading this chapter, you should be able to • Provide evidence of the diversity that exists in accounting internationally. • Explain the problems caused by accounting diversity. • Describe the major environmental factors that influence national accounting systems and lead to accounting diversity. • Describe a judgmental classification of countries by financial reporting system. • Discuss the influence that culture is thought to have on financial reporting. • Describe a simplified model of the reasons for international differences in financial reporting. • Categorize accounting differences internationally and provide examples of each type of difference.
Considerable differences exist across countries in the accounting treatment of many items. For example, companies in the United States are not allowed to report property, plant, and equipment at amounts greater than historical cost. In contrast, companies in the European Union are allowed to report their assets on the balance sheet at market values. Research and development costs must be expensed as incurred in Japan, but development costs may be capitalized as an asset in Canada and France. Chinese companies are required to use the direct method in preparing the statement of cash flows, whereas most companies in the United States and Europe use the indirect method. Differences in accounting can result in significantly different amounts being reported on the balance sheet and income statement. In its 2009 annual report, the South Korean telecommunications firm SK Telecom Company Ltd. described 15 significant differences between South Korean and U.S. accounting rules. Under South Korean generally accepted accounting principles (GAAP), SK Telecom reported 2009 net income of 1,056 billion South Korean won (KRW). If SK Telecom had used U.S. GAAP in 2009, its net income would have been KRW 1,357 billion, approximately 28 percent larger.1 Shareholders’ equity as stated under South Korean 1
The largest adjustments related to “retroactive application of equity method on business combination” and the recognition of gains on “currency and interest rate swap.” 23
GAAP was KRW 12,345 billion but would have been KRW 14,261 billion under U.S. GAAP, a 16 percent difference. Braskem SA, a Brazilian chemical company, made 13 adjustments in 2009 to its Brazilian GAAP net income to report net income on a U.S. GAAP basis. These adjustments caused Brazilian GAAP income of 767.8 million Brazilian reais (BRL) to decrease by 70 percent, to 232.7 million reais under U.S. GAAP. Similarly, stockholders’ equity of BRL 4,592.5 million on a Brazilian GAAP basis decreased to only BRL 4,379.4 million under U.S. GAAP.2 This chapter presents evidence of accounting diversity, explores the reasons for that diversity, and describes the problems that are created by differences in accounting practice across countries. Historically, several major models of accounting have been used internationally, with clusters of countries following them. These also are described and compared in this chapter. We describe the potential impact that culture has had on the development of national accounting systems and present a simplified model of the reasons for international differences in financial reporting. The final section of this chapter uses excerpts from annual reports to present additional examples of some of the differences in accounting that exist across countries. It should be noted that much of the accounting diversity that existed in the past has been eliminated as countries have abandoned their local GAAP in favor of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). This chapter provides a historical perspective of accounting diversity that should allow readers to more fully appreciate the harmonization and convergence efforts described in...
References: Afterman, Allan B. International Accounting, Financial Reporting, and Analysis. New York: Warren, Gorham & Lamont, 1995, pp. C1-17, C1-22. Brooks, Jermyn Paul, and Dietz Mertin. Neues Deutsches Bilanzrecht. Düsseldorf: IDW-Verlag, 1986. Cochrane, James L.; James E. Shapiro; and Jean E. Tobin. “Foreign Equities and U.S. Investors: Breaking Down the Barriers Separating Supply and Demand.” NYSE Working Paper, 95-04, 1995. Collins, Stephen H. “The Move to Globalization,” Journal of Accountancy, March 1989. Doupnik, Timothy S., and Stephen B. Salter. “An Empirical Test of a Judgemental International Classification of Financial Reporting Practices.” Journal of International Business Studies, First Quarter 1993, pp. 41–60. Doupnik, Timothy S., and George T. Tsakumis. “A Review of Empirical Tests of Gray’s Framework and Suggestions for Future Research.” Journal of Accounting Literature, 2004, pp. 1–48. Gernon, H., and Gary Meek. Accounting: An International Perspective, 5th ed. Burr Ridge, IL: Irwin/McGraw-Hill, 2001. Gray, S. J. “Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally.” Abacus, March 1988, pp. 1–15. Hofstede, G. Culture’s Consequences: International Differences in Work-Related Values. London: Sage, 1980. ———. Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations, 2nd ed. Thousand Oaks, CA: Sage, 2001.
Malaysian Accounting Standards Board. MASB i-1, “Presentation of Financial Statements of Islamic Financial Institutions,” 2001. Meek, Gary K., and Sharokh M. Saudagaran. “A Survey of Research on Financial Reporting in a Transnational Context.” Journal of Accounting Literature, 1990, pp. 145–82. Nobes, Christopher W. “A Judgemental International Classification of Financial Reporting Practices.” Journal of Business Finance and Accounting, Spring 1983. ———. “Towards a General Model of the Reasons for International Differences in Financial Reporting.” Abacus 34, no. 2 (1998), p. 166. Radebaugh, Lee H., and Sidney J. Gray. International Accounting and Multinational Enterprises, 5th ed. New York: Wiley, 2002. Rahman, Zubaidur M. “The Role of Accounting in the East Asian Financial Crisis: Lessons Learned?” Transnational Corporations 7, no. 3 (December 1998), pp. 1–52. U.S. Department of Commerce. “U.S. International Transactions.” Survey of Current Business, January 2005, pp. 45–76. Violet, William J. 1983. “The Development of International Accounting Standards: An Anthropological Perspective.” International Journal of Accounting, 1983, pp. 1–12.
Please join StudyMode to read the full document