DeeganFAT3e PPT Ch04-Ed

8/11/2019 DeeganFAT3e PPT Ch04-Ed

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4-1Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e

Financial Accounting TheoryCraig Deegan

Chapter 4International accounting

Slides written by Craig Deegan


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Learning objectives

In this chapter you will be introduced to: an appreciation that there are many differences between

some countries in the accounting policies and practicesadopted

various explanations about why countries adopt particular

accounting practices in preference to others some of the arguments that suggest that it is appropriate

that there are international differences in accountingpractices

the background to recent actions by the IASB and FASB

to further standardise international accounting


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Learning objectives (cont.)

what is meant by the terms harmonisation andstandardisation as they apply to international accounting some of the perceived benefits of standardising

accounting practices on an international scale some of the obstacles to harmonisation and

standardisation, and the criticisms that efforts toharmonise and standardise accounting internationallyhave attracted


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Evidence of international differencesin accounting

Although many countries now adopt IFRS, if we go back afew years and apply different countries former accountingrules to the same transactions we can find significantdifferences in profits and net assets (consider AccountingHeadline 4.1, p.108)

The (sometimes significant) differences in accounting profitshave been used by many parties to justify the ongoing effortsof the IASB to standardise international accounting

But do we really need to standardise accounting on aninternational basis because of these differences, and if wedo, what are some of the costs and benefits? This lecturecovers these issues


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Standardisation versusharmonisation

In relation to international accounting, two terms that arecommonly used are standardisation and harmonisation We can define harmonisation as a process of increasing the

compatibility of accounting practices by setting bounds totheir degree of variation

Standardisation, by contrast, appears to imply theimposition of a more rigid and narrow set of rules (thanharmonisation)

Therefore, the term harmonisation appears to allow moreflexibility than standardisation

What is happening through the efforts of the IASB is aprocess of standardisation


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Does it really matter if different countriesuse different accounting methods?

Many varied views about the costs and benefits ofinternational standardisation Some perceived benefits would include:

international investors are better able to understand thefinancial performance and position of local companies

tied to the above point, there is an expectation thatstandardisation will facilitate greater capital inflows

also tied to the above point, standardisation will make iteasier for local companies to list on foreign stockexchanges


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Does it really matter if different countriesuse different accounting methods? (cont)

companies listed on several stock exchanges would onlyneed to produce one set of financial statements and thiswill have implications for cost savings

the accounting and auditing staff employed by internationalorganisations will be better able to move to other membercompanies

there will be cost savings in the accounting-standardsetting function rather than individual companiesduplicating the efforts of others, the majority of functions ofthe standard-setting process will be centralised at the IASB


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Does it really matter if different countriesuse different accounting methods? (cont)

a perception that IFRS will lead to more accurate,comprehensive and timely financial statement information,relative to the information that would have been generatedfrom the national accounting standards they replaced

to the extent that the resulting financial information wouldnot be available from other sources, this should lead tomore-informed valuations in the equity markets, and hencelower the risks faced by investors


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But obviously it is very difficult to quantify anybenefits associated with internationalstandardisation

There is very little empirical research or theory thatactually provides evidence of the advantages ordisadvantages of uniform accounting rulesnationally, or internationally.

For example, whilst the FRC in Australia said thatreal benefits would flow from Australia adoptingIFRS there is no quantifiable evidence of suchbenefits

Whether the benefits of adopting IFRS are shared

by a majority of corporations within a country, orwhether the benefits are confined to larger multi-national corporations, is a matter of conjecture.


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Objectives of IASB

The body at the centre of internationalstandardisation is the IASB It seeks to formulate and publish accounting standards

and to promote their worldwide acceptance It seeks to work on the improvement and standardisation

of regulations, accounting standards and procedures The IASB does not appear to believe that the many

reasons provided as to why different nations should havedifferent accounting standards (e.g. tied to differences inculture, religion and so forth) outweigh the benefits of

international standardisation (we will consider somearguments against international standardisation shortly)


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International Accounting StandardsBoard (IASB) (cont.) The Institute of Chartered Accountants of England and

Wales, the Canadian Institute of Chartered Accountants andthe American Institute of Certified Public Accountants initiallyestablished an Accountants International Study Group in1967.

The Accountants International Study Group then formed thebasis for the establishment of the IASC in 1973

The IASB replaced the IASC in 2001 Australia decided in the mid-1990s to harmonise its

standards with those of the IASC But then in 2002, a decision was made by the Financial

Reporting Council that Australia would adopt standards

released by the IASB IFRS still not accepted by the US SEC for US domestic

companies, however the US FASB and the IASB arecurrently working on a convergence project which mightultimately see the US adopt IFRS


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International Accounting StandardsBoard (IASB) (cont.)

The FRCs decision that Australia would adoptIFRS created a great deal of work fororganisations in that they had to make quitesignificant changes to their accounting practices

The adoption of IAS/IFRS required companies towrite off a great deal of assets particularlyintangible assets

Was it all worth the effort?


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The United States role in the internationalstandardisation of accounting

One notable exception to the global adoption of IFRS is theUS

Within the US, accounting standards are developed by theFASB

The SEC has the power to override the standards developed

by the FASB US was traditionally strong in its resolve not to adopt IFRS

but this resolve diminished in the light of collapses such asEnron

US standards are considered to be more rules -based

whereas IFRS are more principles -based A belief grew that principles -based standards may be more

effective in reducing accounting fraud


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Somewhat obviously, the IASB was seeking tostandardise practice. However, there are a number of reasons why the

standardisation of accounting standards will notnecessarily lead to standardisation of accounting

practice (there is a difference). Hence, consistent with Nobes (2006), we would

argue that the study of international differences inaccounting practice (and the reasons andmotivations therefore) will remain an importantarea of research despite the ongoingstandardisation efforts of the IASB.

Does the international standardisation of accountingstandards necessarily lead to the internationalstandardisation of accounting practice? (cont.)


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Does the international standardisation of accountingstandards necessarily lead to the internationalstandardisation of accounting practice? (cont.)

Reasons why international differences inaccounting practice will survive beyond theintroduction of IFRS would include: Differences in taxation systems

Tax driven accounting choices, which are domestic, mightflow through to IFRS statements

Differences in economic and political influences onfinancial reporting

Powerful local economic and political forces determine howmanagers, auditors, courts regulators and other parties

influence the implementation of rules. These forces haveexerted a substantial influence on financial reportingpractice historically, and are unlikely to suddenly ceasedoing so, IFRS or no IFRS (Ball, 2006).

h l d ff ll


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Reasons why international differences willsurvive beyond the introduction of IFRS wouldinclude (cont.)

Modifications made to IFRS at a national levelthe IASB has no ability to enforce the application of itsaccounting standards in countries that have made the decisionto adopt IFRS. This is a key limitation.Regulatory bodies in particular countries may take the decisionto modify a particular IFRS before it is released (for example,the EU in relation to their acceptance of IFRS 39).

h i i l diff ill


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Reasons why international differences willsurvive beyond the introduction of IFRS wouldinclude (cont.)

Differences in implementation, monitoring and enforcementUnless there is international consistency in the implementationof accounting standards and subsequent enforcementmechanisms then we cannot expect accounting practices to beuniform despite the actions of the IASB.

Investors might be misled into believing that IFRS adoptionhas created a consistency in international accountingpractices. That is, the adoption of IFRS might (incorrectly) beconstrued as a signal that a country has improved its quality ofreporting.In a sense, the adoption of IFRS brings a level of legitimacy to

a country's financial reporting despite any limitations in thelevel of enforcement of the standards.


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International differences inimplementation and enforcement

Ball discussed the free rider problem associated withIFRS.

If a 'symbol of legitimacy' - such as IFRS - can be acquiredat low cost then some countries with low accountingproficiency will make the choice to adopt IFRS because ofthe reputational benefits such a choice may generate.

Such a choice will have costly implications for countries withhigher levels of accounting proficiency and who put in placeappropriate implementation, monitoring and enforcementmechanisms.


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So is a belief in the international standardisationof accounting practice realistic?

Given the arguments just provided we might question the belief thatthe global adoption of IFRS will lead to consistency in internationalaccounting practices.

There will arguably continue to be international differences inaccounting practice and such differences will continue to provide aninteresting area of research for accounting academics.

However, at a more fundamental level, is it really a good idea that

there should be global consistency in accounting practice anyway? Is it appropriate to have a global one -size-fits- all approach to

financial reporting when there are international differences: in the nature of capital, labour and product markets; in monitoring and enforcement mechanisms; in economic and political influence; and, differences in cultures?

The next part of this lecture explores various reasons why, in theabsence of globalisation efforts such as those being undertaken bythe IASB, we would expect to find international differences inaccounting practices


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International financial accountingmodels

Historically there have been two main models offinancial accounting adopted internationally Anglo-American model

strongly influenced by professional accounting bodiesrather than government, emphasises importance ofcapital markets, emphasises true and fair, considerationsof economic substance over legal form

Continental European Model relatively small input from accounting profession, little

reliance on qualitative true and fair, strong reliance ongovernment


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Reasons for international accountingdifferences

Underlying laws and political systems Tax systems Level of education Level of economic development

Nature of business ownership and financingsystem


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Reasons for international accountingdifferences (cont.)

Colonial inheritance Taxation Culture History

Language Religion


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The effect of culture on accountingsystems

Differences in national cultures has been used by manyresearchers to explain why, prior to the efforts of the IASB,there were fundamental differences between nationsaccounting practices (although, keep in mind the previousdiscussion that suggests that the global use of IFRS will notnecessarily standardise accounting practice)

Culture impacts on legal systems, tax systems and the waybusinesses are formed and financed etc.

Previously used to explain differences in social systems Culture can be defined as a n expression of norms, values

and customs which reflect typical behavioural characteristics(Takatera & Yamamoto 1987)


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The effect of culture on accountingsystems (cont.)

Culture reserved for societies as a whole ornations Subculture used for the level of an organisation,

profession or family

International differences in accounting systemsmay be explained by a framework incorporatingculture


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Hofstedes cultural dimensions

Four underlying societal dimensions along whichcountries could be positioned Individualism versus Collectivism Large versus Small Power Distance Strong versus Weak Uncertainty Avoidance

Masculinity versus Femininity The value systems of accountants will be derived

from and related to societal values Without the intervention of organisations such as

the IASB, these societal values will in turn impacton the development of accounting standards at anational level


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Individualism versus Collectivism

Addresses degree of interdependence a societymaintains among individuals Individualism refers to a preference for a loosely knit

social framework wherein individuals care for themselvesand their immediate families

Collectivism stands for a tightly knit social frameworkwhere relatives, clan or other in-group look after eachother


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Power Distance

Power Distance is the extent to which members ofa society accept that power in institutions andorganisations is distributed unequally Large Power Distance societies accept a hierarchical

order in which everyone has a place

Small Power Distance societies strive for powerequalisation


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Uncertainty Avoidance

The degree to which the members of a society feeluncomfortable with uncertainty and ambiguity Strong Uncertainty Avoidance societies maintain rigid

codes of belief and behaviour Weak Uncertainty Avoidance societies maintain a more

relaxed atmosphere where practice counts more thanprinciples


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Masculinity versus Femininity

Addresses the way in which a society allocatessocial roles Masculinity stands for a preference for achievement,

heroism, assertiveness and material success Femininity stands for a preference for relationships,

modesty, caring for the weak, and quality of life

l d d


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Societal dimensions and accountingsubculture

The value systems of accountants are derivedfrom related societal values The values of the accounting subculture will in turn

impact on the development of the respectiveaccounting systems at a national level should accounting systems be developed in a one -size-

fits-all approach?


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Grays accounting values

Gray developed four accounting values deemed torelate to the accounting subculture, with theintention of linking them to Hofstedes four societalvalues professionalism versus statutory control uniformity versus flexibility conservatism versus optimism secrecy versus transparency


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Grays hypotheses

H1: The higher a country ranks in terms ofIndividualism and the lower it ranks in terms ofUncertainty Avoidance and Power Distance, themore likely it is to rank highly in terms ofProfessionalism

H2: The higher a country ranks in terms ofUncertainty Avoidance and Power Distance andthe lower it ranks in terms of Individualism, thenthe more likely it is to rank highly in terms of

Uniformity


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Grays hypotheses (cont.)

H3: The higher a country ranks in terms ofUncertainty Avoidance and the lower it ranks interms of Individualism and Masculinity, then themore likely it is to rank highly in terms ofConservatism

H4: The higher a country ranks in terms ofUncertainty Avoidance and Power Distance andthe lower it ranks in terms of Individualism andMasculinity, then the more likely it is to rank highly

in terms of Secrecy


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Grays hypotheses (cont.)

Gray further hypothesised relationships betweenaccounting values and: the authority and enforcement of accounting systems the measurement and disclosure characteristics of

accounting systems

O h h i H f d


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Other research using Hofstedescultural dimensions

Zarzeski (1996) used Hofstedes dimensions to explain corporatedisclosure

entities with a higher international profile tend to be lesssecretive

local enterprises are more likely to disclose informationcommensurate with the secrecy of their culture than areinternational enterprises

Oth h i H f t d


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Other research using Hofstedescultural dimensions (cont.) Perera (1989)

used Hofstedes cultural dimensions and Grays accountingsubcultural value dimensions to explain differences in theaccounting practices of European and Anglo-Americancountries

Baydoun and Willett (1995) investigated the use of the French United Accounting

System in Lebanon

Chand and White (2007) explored various cultural attributes within the Fijian society

to determine whether the recent adoption of IFRS within theFijian context made sense. Their view was that rules-basedstandards would be more appropriate than the principles-based standards that have been developed by the IASB.

Th ff t f li i ti


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The effect of religion on accountingsystems

Another factor that has been used to explaindifferences in accounting is religion

Religion transcends national boundaries Impacts on global harmonisation of accounting

standards

Hamid, Craig and Clarke (1993) examined howIslamic cultures have failed to embrace Westernaccounting practices compliance with Islamic beliefs can affect the structure of

business and finance many Western accounting practices are incompatible with

Islamic principles relevance of IASB standards to such cultures?

Th ff t f ligi ti g


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The effect of religion on accountingsystems (cont.)

Religion can affect how people do business andhow they make decisions, for example Islam precludes debt financing and prohibits payment of

interest the Western objective of financial reporting of rational

economic decision making (refer to the conceptualframeworks discussed in Chapter 5) may not be arelevant objective in some societies


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Legal systems

Another factor that will cause internationaldifferences in accounting is the legal system inoperation

Legal systems can be broadly divided intocommon law and Roman law systems in Roman Law systems the law tends to be very detailed in Common Law systems which is how Australia can be

classified law typically evolves from the ruling of judges

In Common Law countries accounting practices

tend to rely relatively heavily on professional judgment

Business ownership and financing


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Business ownership and financingsystem

Another factor is the business ownership andfinancing system

At a country level the financing system is relevantto the purpose of financial reporting

Three types of financing systems capital market-based (e.g. United Kingdom and United

States) credit-based system: governmental (e.g. France and

Japan)

credit-based system: financial institutions (e.g. Germany)

Business ownership and financing


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Business ownership and financingsystem (cont.)

Systems relying on equity markets will havegreater demand for public disclosures

Credit-based systems more concerned with theprotection of creditors

Colonial inheritance also a major explanatoryfactor


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Taxation systems

Differences in accounting methods internationallyhave also been linked to differences in taxationsystems

Where there are insider systems of finance(common in continental European countries)financial accounting practices have typically beenlinked to taxation law


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Impact of international agencies

Various international agencies have also had anaffect on the accounting systems used withinparticular countries

Examples of institutions or bodies which canimpact on a countrys accounting policies are multinational companies international accounting firms large monetary organisations e.g. World Bank

So there are many forces working


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Copyright 2009 McGraw-Hill Australia Pty Ltd

So there are many forces workingagainst international standardisation Hence, to this point we can see that there are many

explanations for international differences Given the many factors that explain why international

differences in accounting will, or perhaps should exist, then how logical are efforts towards

international standardisation? Do we think that the efforts of the IASB are likely to

succeed in the long-run? Will diverse countries with different cultures, religions,

finance systems and so forth start to question a one -size-fits- all approach emanating from London?

Time will tell

DeeganFAT3e PPT Ch04-Ed

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