lOMoARcPSD|14840171
International Financial Management - IB
Lecture 1 How Does Worldwide Accounting Diversity
Challenge Multinational Corporations?
Multinational Corporations (MNCs)
The definition of MNCs: a multinational corporation is a corporate organization that owns or
controls production of goods or services in one or more countries other than its home
country (Pitelis et al., 2000)
MNCs’ Accounting and Control Issues
Subsidiaries spread across the globe
Exposure to different accounting systems
Complexity of accounting and control systems
MNCs face the problem of accounting diversity
Evidence of Accounting Diversity:
Presentation differences (Format of statements)
Terminology differences (names of accounts)
o Example: UK/US comparative accounting terms
, lOMoARcPSD|14840171
Differences in recognition and measurement rules (definition of accounts)
o Example: US GAAP versus IFRS
Sources of Accounting Diversity
Institutional Characteristics
1. Legal System
2. Taxation
3. Providers of Financing
4. Inflation
5. Political and Economic Ties
Culture
1. Legal System
CODE LAW (also called Civil Law)
o Accounting in code law countries is legislated; therefore, accounting professions may
have less influence over the accounting rules
o Accounting rules tend to be general
o Information disclosures tend to be low
COMMON LAW (also called Anglo-Saxon Law)
o Accounting rules in common law countries are generally determined by the non-
government accounting professions; therefore accounting rules are more specific
o Accounting rules in common law countries are characterized with fair presentation,
high transparency and full disclosure.
2. Taxation
In some countries accounting servers for taxation (e.g. Germany, Poland)
If accounting rules or principles align with tax rules, then:
o The net income may lose its ability to reflect the economic reality
o Think about a case of car depreciation
, lOMoARcPSD|14840171
3. Providers of Financing
4. Inflation
Double or Triple inflation render historical cost accounting
useless
Countries use adjusting accounting records to correct the
distorted accounting numbers in financial statements
Without any adjustments, during inflation periods, in
countries where accounting serves for taxation, companies
will pay taxes on fictitious profits
5. Political and Economic Ties
Accounting is a technology that is borrowed from or imposed on another country
Historical events shaping the political arena; e.g. colonialism, trade relations
o India and UK
o Dutch Antilles and The Netherlands
o Mexico and US
The Influence of Culture
Culture is the way you think, act and interact.
Culture is also widely considered to influence accounting systems and their implementation.
Hofstede’s Cultural Dimensions
Individualism
Power Distance
Uncertainty Avoidance
Masculinity
Long-term Orientation
, lOMoARcPSD|14840171
Gray’s Accounting Sub-Cultures form Countries
Professionalism versus Statutory Control: a preference of using individual professional
judgement and the maintenance of professional self-regulation as opposed to compliance
with statutory control
Uniformity versus Flexibility: a preference of uniforming accounting processing for all firms
vs. flexibility (The Germany’s case of depreciation treatment in financial and tax accounting)
Conservatism versus Optimism: a preference of cautious measurement to financial
performance vs. more opportunistic methods
Secrecy versus Transparency: a preference of confidentiality and restriction to public
disclosures vs. more transparent, open and publicly accountable approach.
The Development of Accounting Diversity
Problems due to Accounting Diversity
Preparation of consolidated statements
Access to foreign capital markets or financing abroad
Comparability of financial statements - in terms of understanding the financial
performance and situation
Lack of high quality disclosure standards in some parts of the world
International Financial Management - IB
Lecture 1 How Does Worldwide Accounting Diversity
Challenge Multinational Corporations?
Multinational Corporations (MNCs)
The definition of MNCs: a multinational corporation is a corporate organization that owns or
controls production of goods or services in one or more countries other than its home
country (Pitelis et al., 2000)
MNCs’ Accounting and Control Issues
Subsidiaries spread across the globe
Exposure to different accounting systems
Complexity of accounting and control systems
MNCs face the problem of accounting diversity
Evidence of Accounting Diversity:
Presentation differences (Format of statements)
Terminology differences (names of accounts)
o Example: UK/US comparative accounting terms
, lOMoARcPSD|14840171
Differences in recognition and measurement rules (definition of accounts)
o Example: US GAAP versus IFRS
Sources of Accounting Diversity
Institutional Characteristics
1. Legal System
2. Taxation
3. Providers of Financing
4. Inflation
5. Political and Economic Ties
Culture
1. Legal System
CODE LAW (also called Civil Law)
o Accounting in code law countries is legislated; therefore, accounting professions may
have less influence over the accounting rules
o Accounting rules tend to be general
o Information disclosures tend to be low
COMMON LAW (also called Anglo-Saxon Law)
o Accounting rules in common law countries are generally determined by the non-
government accounting professions; therefore accounting rules are more specific
o Accounting rules in common law countries are characterized with fair presentation,
high transparency and full disclosure.
2. Taxation
In some countries accounting servers for taxation (e.g. Germany, Poland)
If accounting rules or principles align with tax rules, then:
o The net income may lose its ability to reflect the economic reality
o Think about a case of car depreciation
, lOMoARcPSD|14840171
3. Providers of Financing
4. Inflation
Double or Triple inflation render historical cost accounting
useless
Countries use adjusting accounting records to correct the
distorted accounting numbers in financial statements
Without any adjustments, during inflation periods, in
countries where accounting serves for taxation, companies
will pay taxes on fictitious profits
5. Political and Economic Ties
Accounting is a technology that is borrowed from or imposed on another country
Historical events shaping the political arena; e.g. colonialism, trade relations
o India and UK
o Dutch Antilles and The Netherlands
o Mexico and US
The Influence of Culture
Culture is the way you think, act and interact.
Culture is also widely considered to influence accounting systems and their implementation.
Hofstede’s Cultural Dimensions
Individualism
Power Distance
Uncertainty Avoidance
Masculinity
Long-term Orientation
, lOMoARcPSD|14840171
Gray’s Accounting Sub-Cultures form Countries
Professionalism versus Statutory Control: a preference of using individual professional
judgement and the maintenance of professional self-regulation as opposed to compliance
with statutory control
Uniformity versus Flexibility: a preference of uniforming accounting processing for all firms
vs. flexibility (The Germany’s case of depreciation treatment in financial and tax accounting)
Conservatism versus Optimism: a preference of cautious measurement to financial
performance vs. more opportunistic methods
Secrecy versus Transparency: a preference of confidentiality and restriction to public
disclosures vs. more transparent, open and publicly accountable approach.
The Development of Accounting Diversity
Problems due to Accounting Diversity
Preparation of consolidated statements
Access to foreign capital markets or financing abroad
Comparability of financial statements - in terms of understanding the financial
performance and situation
Lack of high quality disclosure standards in some parts of the world
