LECTURE 1: WORLDWIDE ACCOUNTING DIVERSITY (Chapter 1 pages 2-40 or chapter 2 IA)
Theme: What is accounting diversity? How can an MNC deal with accounting diversity?
Relevant MNC’s risk: information uncertainty
International Financial Management is the activity of management that is concerned with the planning,
procuring, and controlling of the firm’s financial resources globally.
➔ Address significant accounting, financing, and strategic problems that multinational corporations
(MNCs) may experience and propose methods to solve these problems
Multinational Corporations (MNCs) are corporate organizations that own or control the production of
goods or services in one or more countries other than its home country - Unilever and Shell (HQ in NL
but subsidiaries all across the world)
● MNCs are the major participants of international financial management:
○ Make money: Top 10 MNCs’ revenues account for the sum of more than 180 countries’
GDP including developed countries such as Ireland and South Korea
○ Push innovation and R&D: Top 100 MNCs account for over ⅓ R&D investments
worldwide
● What are the challenges for MNCs in terms of accounting and controlling?
MNC’s risk management:
● Information exposure
● Tax exposure
● Governance exposure
● Financial market exposure
● Macroeconomic exposure
MNC’s accounting and control issues:
● Subsidiaries spread across the globe implies:
○ Exposure to different accounting systems implies:
■ Complexity of accounting and control systems and therefore:
● MNCs face the problem of accounting diversity
Evidence of accounting diversity:
● Presentation differences (format of statements)
○ In British accounting, accounts are sorted in the reverse order of liquidity (non-current
assets to current assets; non-current liabilities to current liabilities: in the US the order is
the contrary)
○ In British accounting, a footnote is in the balance statement, not in US
○ British accounting presents only the net value of property plant and equipment (PPE)
while US presents the gross value, the depreciation (-) and then the net value
● Terminology differences (name of accounts)
, UK terms US terms
Trade debtors Accounts receivable
Stocks Inventories
Creditors Liabilities
Shareholders funds Stockholders equity
Ordinary shares Common stock
Share premium account Additional paid-in capital
Profit and loss account Retained earnings
Turnover Sales or revenue
● Differences in recognition and measurement rules (definition of accounts)
○ Consequences of replacing FIFO with LIFO? A higher cost of good sold due to the
inflation effect and a lower gross margin, lower tax paid and low dividend due
■ LIFO: inventory recently purchased recognizes expense → inventory cost are
higher due to inflation, expenses are higher so net income is lower
● Does not imply companies should avoid LIFO
● There are benefits from reporting a lower income: lower taxes
associated with lower income
● Corporate taxes paid to the government are lower so governments may
be reluctant to allow LIFO
■ FIFO: oldest inventory purchased recognizes expense → inventory cost are lower
due to inflation, expenses are lower so net income is higher
Items US GAAP IFRS
Inventory costing LIFO (last in first out) is allowed LIFO (last in first out) is not allowed
Inventory write-downs Reversals are prohibited Reversals (limited to the amount of the
original write-down) can be recovered
Research and Both research costs and Research costs are expensed;
development cost development costs are expensed development costs are capitalized
as incurred (based on some condition)
Source of accounting diversity:
1. Institutional characteristics:
a. Legal system (origin)
, CODE LAW (civil law) COMMON LAW (Anglo-Saxon law)
Codified system of law (civil code, codes covering Not always a written constitution or codified
corporate law, administrative law, tax law, and law.
constitutional law) enshrining basic rights and duties. Relies on previous cases
Administrative law is however less codified and
administrative court judges tend to behave more like
common law judges.
Only legislative enactments are considered binding Judicial decisions are binding - decisions of
for all. There is little scope for judge-made law in the highest court can generally only be
civil, criminal, and commercial courts, although in overturned by that same court or through
practice judges tend to follow previous judicial legislation
decisions; constitutional and administrative courts
can nullify laws and regulations and their decisions in
such cases are binding for all.
Less freedom of contract - many provisions are Extensive freedom of contract - few
implied into a contact by law and parties cannot provisions are implied into the contract by
contract out of certain provisions law (although provisions seeking to protect
private consumers may be implied)
Generally everything is permitted that is not
expressly prohibited by the law
Germany, France, Spain, the Netherlands The US, England, India
i. Code law:
1. Accounting in code law countries is legislated, therefore, accounting
professions may have less influence over the accounting rules
2. Accounting rules tend to be general
3. Information disclosures about accounting tend to be low
ii. Common law:
1. Accounting rules are generally determined by the non-government
accounting professions, therefore, their accounting rules are more
specific
2. Accounting rules are characterized with fair presentation, high
transparency, and full disclosure
b. Taxation: deferred taxes; deferred liabilities
i. In some countries accounting serves for taxation (Germany, Poland)
ii. If accounting rules or principles align with tax rules, then:
1. The net income may lose its ability to reflect the economic reality
2. Think about a case of car depreciation
c. Providers of financing: capital comes from debt or equity (asset = liabilities +
stakeholder equity)
, i. Debtors and shareholders have different interests
1. Debt holders care about whether the interest payment and principle can
be claimed back in a timely and safe way
2. Equity investors and shareholders care about whether dividends are
going to be paid and whether the share price is going to increase or
decrease. Share price is determined by growth of business
Debt financing Equity financing
Financing from family members, bank, Financing from investors (potential
state (creditors) shareholders)
Creditors are in company’s board All shareholders cannot be in
and/or have direct access to company’s board and they do not
information have direct access to information
Firms experience less accountability Firms provide extensive accounting
pressures disclosure
Creditors focus on downside risk Investors focus on downside risk and
(whether company goes bankrupt) upside potential
Care about balance sheet statement Care both about balance and income
sheet statement
d. Inflation
i. Double or triple inflation renders historical cost accounting useless
ii. Countries use adjusting accounting records to correct the distorted accounting
numbers in financial statements
iii. Without any adjustments, during inflation periods, in countries where
accounting serves for taxation, companies will pay taxes on fictitious profits
e. Political and economic ties
i. Accounting is a technology that is borrowed from or imposed on another
country
ii. Historic event shaping the political arena are colonialism, trade relations
1. India and UK, Dtuch Antilles and the Netherlands, Mexico and the US
2. Culture is the way you think, act and interact
a. Culture is also widely considered to influence accounting systems and their
implementation
b. Hofstede’s cultural dimensions
c. Gray’s accounting subcultures from countries:
i. Professionalism vs statutory control: a preference of using individual
professional judgement and the maintenance of professional self-regulation as
opposed to compliance with statutory control
Theme: What is accounting diversity? How can an MNC deal with accounting diversity?
Relevant MNC’s risk: information uncertainty
International Financial Management is the activity of management that is concerned with the planning,
procuring, and controlling of the firm’s financial resources globally.
➔ Address significant accounting, financing, and strategic problems that multinational corporations
(MNCs) may experience and propose methods to solve these problems
Multinational Corporations (MNCs) are corporate organizations that own or control the production of
goods or services in one or more countries other than its home country - Unilever and Shell (HQ in NL
but subsidiaries all across the world)
● MNCs are the major participants of international financial management:
○ Make money: Top 10 MNCs’ revenues account for the sum of more than 180 countries’
GDP including developed countries such as Ireland and South Korea
○ Push innovation and R&D: Top 100 MNCs account for over ⅓ R&D investments
worldwide
● What are the challenges for MNCs in terms of accounting and controlling?
MNC’s risk management:
● Information exposure
● Tax exposure
● Governance exposure
● Financial market exposure
● Macroeconomic exposure
MNC’s accounting and control issues:
● Subsidiaries spread across the globe implies:
○ Exposure to different accounting systems implies:
■ Complexity of accounting and control systems and therefore:
● MNCs face the problem of accounting diversity
Evidence of accounting diversity:
● Presentation differences (format of statements)
○ In British accounting, accounts are sorted in the reverse order of liquidity (non-current
assets to current assets; non-current liabilities to current liabilities: in the US the order is
the contrary)
○ In British accounting, a footnote is in the balance statement, not in US
○ British accounting presents only the net value of property plant and equipment (PPE)
while US presents the gross value, the depreciation (-) and then the net value
● Terminology differences (name of accounts)
, UK terms US terms
Trade debtors Accounts receivable
Stocks Inventories
Creditors Liabilities
Shareholders funds Stockholders equity
Ordinary shares Common stock
Share premium account Additional paid-in capital
Profit and loss account Retained earnings
Turnover Sales or revenue
● Differences in recognition and measurement rules (definition of accounts)
○ Consequences of replacing FIFO with LIFO? A higher cost of good sold due to the
inflation effect and a lower gross margin, lower tax paid and low dividend due
■ LIFO: inventory recently purchased recognizes expense → inventory cost are
higher due to inflation, expenses are higher so net income is lower
● Does not imply companies should avoid LIFO
● There are benefits from reporting a lower income: lower taxes
associated with lower income
● Corporate taxes paid to the government are lower so governments may
be reluctant to allow LIFO
■ FIFO: oldest inventory purchased recognizes expense → inventory cost are lower
due to inflation, expenses are lower so net income is higher
Items US GAAP IFRS
Inventory costing LIFO (last in first out) is allowed LIFO (last in first out) is not allowed
Inventory write-downs Reversals are prohibited Reversals (limited to the amount of the
original write-down) can be recovered
Research and Both research costs and Research costs are expensed;
development cost development costs are expensed development costs are capitalized
as incurred (based on some condition)
Source of accounting diversity:
1. Institutional characteristics:
a. Legal system (origin)
, CODE LAW (civil law) COMMON LAW (Anglo-Saxon law)
Codified system of law (civil code, codes covering Not always a written constitution or codified
corporate law, administrative law, tax law, and law.
constitutional law) enshrining basic rights and duties. Relies on previous cases
Administrative law is however less codified and
administrative court judges tend to behave more like
common law judges.
Only legislative enactments are considered binding Judicial decisions are binding - decisions of
for all. There is little scope for judge-made law in the highest court can generally only be
civil, criminal, and commercial courts, although in overturned by that same court or through
practice judges tend to follow previous judicial legislation
decisions; constitutional and administrative courts
can nullify laws and regulations and their decisions in
such cases are binding for all.
Less freedom of contract - many provisions are Extensive freedom of contract - few
implied into a contact by law and parties cannot provisions are implied into the contract by
contract out of certain provisions law (although provisions seeking to protect
private consumers may be implied)
Generally everything is permitted that is not
expressly prohibited by the law
Germany, France, Spain, the Netherlands The US, England, India
i. Code law:
1. Accounting in code law countries is legislated, therefore, accounting
professions may have less influence over the accounting rules
2. Accounting rules tend to be general
3. Information disclosures about accounting tend to be low
ii. Common law:
1. Accounting rules are generally determined by the non-government
accounting professions, therefore, their accounting rules are more
specific
2. Accounting rules are characterized with fair presentation, high
transparency, and full disclosure
b. Taxation: deferred taxes; deferred liabilities
i. In some countries accounting serves for taxation (Germany, Poland)
ii. If accounting rules or principles align with tax rules, then:
1. The net income may lose its ability to reflect the economic reality
2. Think about a case of car depreciation
c. Providers of financing: capital comes from debt or equity (asset = liabilities +
stakeholder equity)
, i. Debtors and shareholders have different interests
1. Debt holders care about whether the interest payment and principle can
be claimed back in a timely and safe way
2. Equity investors and shareholders care about whether dividends are
going to be paid and whether the share price is going to increase or
decrease. Share price is determined by growth of business
Debt financing Equity financing
Financing from family members, bank, Financing from investors (potential
state (creditors) shareholders)
Creditors are in company’s board All shareholders cannot be in
and/or have direct access to company’s board and they do not
information have direct access to information
Firms experience less accountability Firms provide extensive accounting
pressures disclosure
Creditors focus on downside risk Investors focus on downside risk and
(whether company goes bankrupt) upside potential
Care about balance sheet statement Care both about balance and income
sheet statement
d. Inflation
i. Double or triple inflation renders historical cost accounting useless
ii. Countries use adjusting accounting records to correct the distorted accounting
numbers in financial statements
iii. Without any adjustments, during inflation periods, in countries where
accounting serves for taxation, companies will pay taxes on fictitious profits
e. Political and economic ties
i. Accounting is a technology that is borrowed from or imposed on another
country
ii. Historic event shaping the political arena are colonialism, trade relations
1. India and UK, Dtuch Antilles and the Netherlands, Mexico and the US
2. Culture is the way you think, act and interact
a. Culture is also widely considered to influence accounting systems and their
implementation
b. Hofstede’s cultural dimensions
c. Gray’s accounting subcultures from countries:
i. Professionalism vs statutory control: a preference of using individual
professional judgement and the maintenance of professional self-regulation as
opposed to compliance with statutory control
