Week 2-Accounting Regulation & Publishes
accounts
Part 1: Accounting Regulation
Are accounting rules necessary?
Some benefits of having (common) accounting rules:
▪Less risk of corporate abuse
▪More uniformity and increased comparability (however, can one size fit
all?)
▪Greater stakeholder confidence in the integrity of the accounts → this
should lower the cost of funding for businesses.
Causes of international differences in accounting:
Potential causes may include:
1. Differences in legal systems: “Common Law” vs. “Code Law” countries
2. Differences in the main providers of finance to corporations (equity- vs
debt-oriented)
3. Taxation rules
4. Accounting profession
Common Law vs Code Law:
Common Law: Provides answer to specific cases, rather than
formulating/prescribing specific rules about financial reporting.
Code Law: Much more prescriptive/structured.
Company law has established rules on how companies need to prepare
financial statements.
Differences in the providers of finance:
Where can a company get funding from?
▪Two main sources of funding:
➢In certain countries, banks are very important providers of funding and
therefore equity funding is not that pronounced. e.g., Germany, France,
Italy.
➢In other countries, equity funding is very common,
e.g. UK, USA. These countries usually have very
well-developed equity markets.
Link between legal regime and strength of equity markets:
La Porta et al. (1997) find a statistical link between common law countries
and strong
equity markets.
Common law countries: Stronger legal protection of investors, compared
to code
law countries.
Link between ownership structure and published information provision:
▪Countries in which banks are important providers of finance tend to have
small ownership dispersion → banks are also primary shareholders →
lower need for published info on company performance.
, ▪Countries in which there is widespread ownership of companies →
greater need for disclosure of quality accounting information.
Taxation:
The degree to which tax regulations determine accounting
measurements differs across countries.
-In some countries, the tax rules are the accounting rules (e.g., in France,
Germany). One set of financial statements tax-driven → in that case they
might be incentivised to show lower profits to get higher tax deduction.
•In other countries, the tax rules are separate to the accounting rules
(e.g., UK, Australia). Separate accounts are prepared for tax purposes.
How accounting was regulated?
• Traditionally, each country had its own accounting standards body that
produced the local accounting standards.
GAAP = Generally Accepted Accounting Principles
• Thus, there would exist different local accounting rules,such as the UK
GAAP, German GAAP, US GAAP etc.
What issues did this create? -->Need for harmonisation
-Internationalisation of business of accounting standards
- Integration of financial markets --> A single set of high-
quality
global accounting rules IFRS
What do we mean by “harmonisation”?
Harmonisation:
-Does not mean that everything needs to be the same.
-Rather, it’s the process of increasing the comparability of accounting
practices.
How?
-By setting bounds to their degree of variation.
Reasons in favour of accounting harmonisation(Advantages):
▪Better for investors: greater transparency /comparability for
investment purposes
▪Better for companies: Reduction in cost of capital if accounting
becomes more transparent & reliable
▪Advantages for companies willing to list in foreign exchanges and cost
savings for multinationals
▪Easier mobility for accounting employees
What are the IFRS?:
IFRS: International Financial Reporting Standards
They deal with key issues such as:
➢What information should be disclosed
➢How information should be presented
➢How assets should be valued
➢How profit should be measured
accounts
Part 1: Accounting Regulation
Are accounting rules necessary?
Some benefits of having (common) accounting rules:
▪Less risk of corporate abuse
▪More uniformity and increased comparability (however, can one size fit
all?)
▪Greater stakeholder confidence in the integrity of the accounts → this
should lower the cost of funding for businesses.
Causes of international differences in accounting:
Potential causes may include:
1. Differences in legal systems: “Common Law” vs. “Code Law” countries
2. Differences in the main providers of finance to corporations (equity- vs
debt-oriented)
3. Taxation rules
4. Accounting profession
Common Law vs Code Law:
Common Law: Provides answer to specific cases, rather than
formulating/prescribing specific rules about financial reporting.
Code Law: Much more prescriptive/structured.
Company law has established rules on how companies need to prepare
financial statements.
Differences in the providers of finance:
Where can a company get funding from?
▪Two main sources of funding:
➢In certain countries, banks are very important providers of funding and
therefore equity funding is not that pronounced. e.g., Germany, France,
Italy.
➢In other countries, equity funding is very common,
e.g. UK, USA. These countries usually have very
well-developed equity markets.
Link between legal regime and strength of equity markets:
La Porta et al. (1997) find a statistical link between common law countries
and strong
equity markets.
Common law countries: Stronger legal protection of investors, compared
to code
law countries.
Link between ownership structure and published information provision:
▪Countries in which banks are important providers of finance tend to have
small ownership dispersion → banks are also primary shareholders →
lower need for published info on company performance.
, ▪Countries in which there is widespread ownership of companies →
greater need for disclosure of quality accounting information.
Taxation:
The degree to which tax regulations determine accounting
measurements differs across countries.
-In some countries, the tax rules are the accounting rules (e.g., in France,
Germany). One set of financial statements tax-driven → in that case they
might be incentivised to show lower profits to get higher tax deduction.
•In other countries, the tax rules are separate to the accounting rules
(e.g., UK, Australia). Separate accounts are prepared for tax purposes.
How accounting was regulated?
• Traditionally, each country had its own accounting standards body that
produced the local accounting standards.
GAAP = Generally Accepted Accounting Principles
• Thus, there would exist different local accounting rules,such as the UK
GAAP, German GAAP, US GAAP etc.
What issues did this create? -->Need for harmonisation
-Internationalisation of business of accounting standards
- Integration of financial markets --> A single set of high-
quality
global accounting rules IFRS
What do we mean by “harmonisation”?
Harmonisation:
-Does not mean that everything needs to be the same.
-Rather, it’s the process of increasing the comparability of accounting
practices.
How?
-By setting bounds to their degree of variation.
Reasons in favour of accounting harmonisation(Advantages):
▪Better for investors: greater transparency /comparability for
investment purposes
▪Better for companies: Reduction in cost of capital if accounting
becomes more transparent & reliable
▪Advantages for companies willing to list in foreign exchanges and cost
savings for multinationals
▪Easier mobility for accounting employees
What are the IFRS?:
IFRS: International Financial Reporting Standards
They deal with key issues such as:
➢What information should be disclosed
➢How information should be presented
➢How assets should be valued
➢How profit should be measured
