Ch 4 - International Accounting PDF

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Chapter 4: International accounting Solutions 4.1 In the context of financial accounting, what is harmonisation and what is standardisation?

4.1

Harmonisation in relation to financial accounting refers to efforts to make the accounting standards being released by different countries as similar as possible and to remove all fundamental differences. Standardisation is typically construed as meaning that the accounting standards released by different countries will be identical. In recent times the two terms have been used synonymously— although arguably, this is incorrect.

Initially within Australia and from about 1995, the AASB established a process to harmonise Australian accounting standards with the standards being released by the IASC (which was later replaced by the IASB). Since the Australian standards were being ‘harmonised’ there were still a number of differences between the Australian standards and their international counterparts. As Policy Statement 6: International Harmonisation Policy (issued in April 1996 by the Australian Accounting Standards Board) noted in paragraph 1.2, ‘in this context international harmonisation of Australian accounting standards refers to a process which leads to those standards being made compatible, in all significant respects, with the standards of other national and international standard-setters’.

However, in 2002 following a directive from the Financial Reporting Council, Australia was required to thereafter adopt the accounting standards being issued by the IASB.

Harmonisation and standardisation were two goals of the IASC, and subsequently, the IASB (which as noted above, replaced the IASC). According to the IASC (1998), they established some short- and long-term aims (p.8), including the following:

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(a)

IASC’s short-term aim should be for national accounting standards and International Accounting Standards to converge around high-quality solutions (that is, to be harmonised); and

(b)

IASC’s aim in the longer term should be global uniformity (that is, standardisation)—a single set of high-quality accounting standards for all listed and economically significant business enterprises around the world. It is not possible to forecast how long this will take, as different countries are likely to converge with uniform global standards at different rates.

4.3 Identify some factors that might be expected to explain why different countries use different systems of accounting.

4.3

Chapter 4 has provided a number of factors which have been suggested to explain why different countries would use different systems of accounting if there standards were developed domestically. These include the following:



It is argued that as countries become more ‘wealthy’ they tended to develop their own accounting standards (which can be costly). Lessdeveloped countries typically adopted the accounting standards issued by the IASC/IASB (which may or may not actually be relevant to the information needs of the local people).



It has been argued that the nature of the domestic business ownership and financing systems can influence the accounting methods being used within a country. For example, in countries which have companies that rely relatively more on equity capital (funds from many ‘outsiders’) there will be a tendency to provide greater disclosures than in countries with companies that rely relatively more on debt capital.

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It has been argued that the colonial inheritance or history of a company will impact the accounting methods employed.

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Invasion is another factor that can affect accounting practices. A country invaded by another may have a particular method of accounting imposed upon it.

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A commonly mentioned reason for international differences in accounting is tied to the broad notion of ‘cultural difference’. Culture itself could be expected to influence other things (some already discussed Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd Solutions Manual to accompany Deegan, Financial Accounting Theory 4e 77

above) such as legal systems, tax systems and how businesses are formed and financed, which will in turn influence the types of information demanded. 

Sources of aid or finance might also influence the accounting methods used. For example, an international funding organisation (such as the World Bank) might require that particular accounting rules be used as a condition of providing funds to a country.



Religion, which is obviously linked to culture, has also been found to provide explanations for differences in accounting methods. Because religion can extend across national boundaries, religion has been used to explain why some different countries show similarities in accounting methods.

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Other factors to explain differences in accounting systems have included different taxation systems, the relative strength of the accounting profession, and accidents of history.

Although the above reasons have been provided to justify or explain international differences in accounting procedures, the global push by the IASB for all countries to adopt the same accounting standards tends to disregard these reasons why accounting might, or indeed should, be different in different countries. It would appear that parties supporting the IASB initiatives believe that the benefits from global uniformity (for example, enhanced capital flows, increased efficiency for multinationals and so forth) outweigh individual differences in the needs and demands for financial information. 4.4 Does the adoption of IFRS by different countries necessarily mean that the accounting procedures and practices they adopt will be consistent and comparable internationally?

4.4

There is a difference between adopting IFRS and adopting standardised accounting practices. There are a number of reasons why the standardisation of accounting standards will not necessarily lead to standardisation in practice. Some of the reasons include the following:

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

In many countries tax-driven accounting choices will flow through to financial statements compiled pursuant to IFRS. Taxation rules vary between countries.

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Differences in the economic and political forces operating within a country will have implications for various decisions and judgements made throughout the accounting process. Local economic and political forces may influence how managers, auditors, courts regulators and other parties influence the implementation of accounting standards.

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Different countries will have varying levels of expertise in applying IFRS.

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Since the IASB has no ability to enforce the application of its accounting standards in countries that have made the decision to adopt IFRS, regulatory bodies in particular countries may take the decision to modify a particular IFRS before it is released. Inconsistencies internationally in how the adoption of accounting standards are implemented, monitored and enforced will lead to inconsistencies in how the standards are applied, which in turn diminishes the international comparability of financial reports.

Given the above points we might question the belief that the global adoption of IFRS will lead to consistency in international accounting practices. Realistically, there will continue to be international differences in accounting practice despite the efforts of the IASB. 4.5 After considering the Hofstede–Gray model, briefly explain the hypothesised link between society values, accounting values and accounting practice.

4.5

Firstly, society values are deemed to represent a system of values collectively held by all members of a particular society, values which in turn affect an individual’s behaviour. Accounting values can be considered to be the values of a particular ‘subculture’ of that society. Different subcultures within a particular society are expected to have some common characteristics. According to Gray (1988), it is necessary to identify the mechanism by which values at the societal level are linked to values at the subcultural level, as it is the latter values which are likely to influence directly the development of accounting systems in practice. Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd Solutions Manual to accompany Deegan, Financial Accounting Theory 4e 79

For example, Gray considered the four cultural value dimensions developed by Hofstede (Hofstede’s cultural values included the dimensions of individualism versus collectivism; large versus small power distance; strong versus weak uncertainty avoidance; masculinity versus femininity) and then related them to values that he expected were in place within the accounting subculture (professionalism versus statutory control; uniformity versus flexibility; conservatism versus optimism; secrecy versus transparency). The hypothesised relation between the societal values and accounting values is summarised in Table 4.1 within Chapter 4. The accounting subculture values could then be used to explain international differences in accounting practices. The relationship between society values, accounting values and accounting practice is summarised in Figure 4.1 within Chapter 4. 4.6 Any effort towards standardising accounting practices on an international basis implies a belief that a globalised ‘one size fits all’ approach is appropriate. Is this naïve?

4.6

Moves towards standardisation do imply a belief that a globalised one-size-fitsall approach is appropriate. This chapter has referred to the work of different researchers who have shown that, in the absence of standardisation efforts by bodies such as the IASB, we can expect international differences in accounting standards and accounting practice. These differences can potentially be explained by international differences in culture, religion and business ownership and financing systems. The view provided by a good deal of the research indicates that underlying differences in how people think and how they conduct their business in turn impacts the information they require (which seems a reasonable proposition). A number of researchers have explicitly questioned the relevance of ‘Western-style’ standards to the needs of people within developing countries, or the relevance of ‘Anglo-American’ standards in ‘continental European’ countries.

As we know, the standard-setting process in many countries is a political process (or perhaps ‘was’, given that domestic standard-setters have in many cases been replaced by the IASB) in which the standard-setters invite submissions from Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd Solutions Manual to accompany Deegan, Financial Accounting Theory 4e 80

constituents as part of the due process of developing accounting standards. The submissions are considered to influence the contents of the final standards. When developed in this manner accounting standards developed in one country tended to be different than standards developed in other countries. For many years such differences were accepted as being reasonable—however, such differences no longer appear to be considered as ‘reasonable’ (particularly to parties such as the IASB).

If we accept that people in different countries have different values and consequently different information needs then it is perhaps somewhat naïve to expect that one system of accounting will meet the needs of all people within all countries. Nevertheless, work towards international standardisation is ongoing and is being primarily driven by the IASB. 4.11 Nobes (1998) suggests that for countries that have organisations that rely relatively heavily on equity markets, as opposed to other sources of finance, there will be a greater propensity for such organisations to make public disclosures of information. Evaluate this argument.

4.11

The basis of the argument is that if funds are provided by people acquiring equity in the entity, then this equity will generally be held by a large number of diverse individuals, many without any real ability or power to influence the activities of the entity or to demand information to satisfy their individual information needs. Hence such shareholders, without the ability to make the entity satisfy their information demands, will need to be provided with general purpose financial reports (perhaps as required by accounting standards) which will provide information to satisfy the majority of their respective needs. The provision of public information will also provide information to prospective shareholders. Without such information, people would conceivably be less inclined to seek an ownership interest in an organisation.

If an organisation relies primarily upon debt capital then it is generally the case that the debt capital has been provided by a relatively small number of investors. These debt providers will be able to specifically demand the information they require and this information can be prepared and provided to the debt providers on a private basis. Further, if an organisation is going to seek debt funds from a Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd Solutions Manual to accompany Deegan, Financial Accounting Theory 4e 81

prospective lender then the organisation can directly provide the lender with the information that is required. 4.13 Do you think it is realistic to expect that there will eventually be an internationally uniform set of accounting standards? What factors would work for or against achieving and maintaining this aim?

4.13

Chapter 4 has provided a number of reasons why it might actually be inappropriate to have a single standardised system of accounting. A standardised system of accounting assumes that the types of decisions being made (as an example, rational economic resource allocation decisions) by people in all countries are the same and therefore the information needs are also the same. The chapter has shown that various factors, such as differences in culture, business ownership and financing systems, religion and so forth (there will obviously be some interrelationships between these factors) will impact the information demands of the people within particular communities. The implication is that it is perhaps somewhat unrealistic to expect uniformity in accounting practices across all countries—unless of course we assume some convergence in cultures (or alternatively, unless we assume that the research which indicates that differences in culture, religion and so on explain differences in accounting is flawed in some way). Obviously those organisations that are pushing for standardisation in accounting across the world (for example, the IASB) do not consider that different people, of different cultures and religions, require different information.

It also needs to be stressed that worldwide adoption of particular accounting standards (such as IFRS) does not necessarily mean they will be applied uniformly across all countries, meaning that some diversity in accounting practices will still be expected.

On a more pragmatic basis, there is great doubt mounting as to when, or if, the US will ultimately commit to adopting IFRS. That is, despite earlier indications that the ‘Convergence Project’ between the IASB and FASB will ultimately lead to the US adopting IFRS, this now appears doubtful and this obviously has direct implications for the existence of an internationally uniform set of accounting standards. Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd Solutions Manual to accompany Deegan, Financial Accounting Theory 4e 82

4.14 Prior to recent international actions to adopt IFRSs, would you expect that large international companies domiciled in a particular country would have adopted different accounting policies from companies that operated only within the confines of that country? Explain your answer.

4.14

Consistent with the work of Zarzeski (1996)—referred to in Chapter 4—we would expect a difference in the accounting policies adopted by large international companies and those adopted by smaller companies that operate solely within the country. The smaller companies would tend to tailor their accounting policies to the needs and expectations of local people, with this demand being influenced by local values, norms and expectations. Conversely, larger companies operating on an international scale would tend to embrace more universal or international accounting methods that are in demand by people internationally. Local expectations would be less relevant.

In a sense, the EU adopted the above position. Even though member states of the EU have adopted standards released by the IASB, this is only for companies that are listed on a stock exchange, and only for their consolidated financial statements. Listed companies are more likely to be international in nature than unlisted companies. 4.17 What are some perceived benefits that flow from the decision that a country will adopt IFRSs?

4.17

Chapter 4 has identified some of the perceived advantages that will arise from the decision to adopt accounting standards released by the IASB. These perceived advantages (which have not necessarily been empirically supported) include the following:

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International investors are better able to understand the financial performance and position of local companies.

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Tied to the above point, there is an expectation that standardisation will facilitate greater capital inflows.

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Also tied to the above point, standardisation will make it easier for local companies to list on foreign securities exchanges.

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

Companies listed on several securities exchanges would only need to produce one set of financial statements and this will have implications for cost savings.



The accounting

and

auditing

staff

employed

by

international

organisations will be better able to move to other member companies and this will have implications for the efficient operations of an entity. 

There will be cost savings in the accounting-standard setting function. Rather than individual companies duplicating the efforts of others, the majority of functions of the standard-setting process will be centralised at the IASB.

4.21 What are some possible reasons for historical differences in accounting rules operating within Australia, the United States and the United Kingdom?

4.21

Chapter 4 has provided numerous reasons for the differences in accounting rules that might operate between the three countries. For example, the extent of economic development within a country; the nature of the domestic business ownership and financing systems; the colonial inheritance or history of a company; cultural difference; sources of finance; religion; different taxation systems; the relative strength of the accounting profession; and accidents of history. Arguably these differences are fairly limited within this sample of companies relative to some other countries—for example, some Middle Eastern countries. As a result, we could argue that the differences betwe...