Summary International Financial Reporting

Week 1: Accounting diversity, and classification of reporting systems

Hofstede’s cultural dimensions: power distance, uncertainty avoidance, individualism, masculinity,
and long-term orientation

Relationship between Hofstede’s cultural dimensions and Gray’s accounting values; a negative
relationship decreases the other, while a positive relationship goes in the same direction.
 In countries where people don’t like uncertainty, accounting will not encourage professional
judgement but complying with the rules set by the government so there is uniformity where
all the companies apply the same rules in time with more conservatism accounting, and
more secrecy (less disclosure)

Gray’s accounting framework: accounting
systems will be influenced by cultural through
 Accounting values; professionalism,
uniformity, conservatism, and secrecy
 Institutional environment where the
company is operating in

Modified Gray’s framework: emphasizes the
role of accounting values on top of the
accounting rules. Accounting practices will be
mainly influenced by the values of the people
involved in accounting; even when the same
accounting rules (IFRS) apply for everyone, a
difference in reporting can be expected because
of these different accounting values across countries (cultural events)

Gray’s groups different countries into clusters, and compares these clusters along accounting values
Uniformity and professionalism Conservatism accounting and secrecy (less disclosure)




Accounting diversity will create issues in international corporations:
X Consolidation of financial statements: the parent company has to prepare a set of financial
statements, showing the group as a whole. when subsidiaries are located in foreign countries
o Different currency; convert the statements to the parent currency
o Accounting standards; convert the financial reports to parent GAAP. Subsidiaries
are required by law to follow the local accounting standards when providing an
annual report. However for the consolidation they can have two sets; the
mandatory standards of the country of the subsidiary and another set using the
standard of the parent company or convert the mandatory to the parent

, X Access to foreign capital markets (as lenders/investor): cross listing as aim to lower the costs
of financing, but this may increase the reporting costs, in particular for listed US companies
that use another set of standards than the IFRS, because companies have to provide the net
income and stockholders equity in US GAAP to the investors > high consolidation costs
X Comparability of financial statements: Learn the foreign and own accounting rules in order
to understand the reporting to make a comparison between the reports and make an
investment/lending decision. If you don’t know them both you might take on risks.
X Quality of accounting information: some countries have low quality accounting standards,
for instance not need to report off-balance sheet liabilities or contingent liabilities

Advantages of multinationals:
√ Tax evasion patents: use a Double-Irish-Dutch-sandwich tax loophole, where via subsidiaries
profits are transferred to an offshore, low tax, countries
√ Diversity of the environments: use foreign subsidiaries to manage earnings and show a
better image of the company as a whole than what it is in reality. They manage earnings in
the countries where they have less institutional quality

Classification of accounting systems: to identify what they have in common, what the main
differences are, and which once are dominating. There are different classification systems in order to
minimize diversity and facilitate international harmonization
 Gernon & Meek (2001): classify accounting systems in three main categories
I. Fair presentation/full disclosure model (Anglo-Saxon): disclosure is aimed at
being quite extensive in common law countries (UK/US), because this is
influences by disport ownership (a large number of shareholders and creditors)
II. Legal compliance model (Continental European): code law countries (Europe)
where the banks are the main providers of financing, and a proper government-
planning is involved in the accounting standards
III. Inflation-adjusted model: based on the legal compliance model, but with an
extensive adjustment for inflation, in order to correct for historical costs that is
no longer relevant since prices have gone up (South America)
 Nobes (1983): based on a survey a set of developed western countries are
being classified in terms of class, subclass, family, and species (individual
countries), based on how accounting has developed and being used.
Countries part of the same family are the most similar once, where those
of different classes are the most different once.
a. Macro-uniform: the government has a lot of weight in setting the
accounting standards. Where in government economics the accounting has been
developed closely with the economic policies, in continental governments accounting
measures are related to taxes (or law)
b. Micro-based: accounting is not related to the government, but to the business side.
Accounting has developed independently from the government. Business economics
theory is a linked with the economic, whereas in business practice pragmatic
accounting has evolved independently form the governments based on business
Sweden and Netherlands would be closely related because of the economic theory
 Doupnik & Salter (1993): test the theory of Nobes (1983), and find evidence that is
consistent, but also evidence that differs. The basic idea with the classification is the same,
the only difference is that some countries are separated or merged
 Nobes (1998): simplification of the Nobes (1983) model by stating there are only two main
influences, namely the cultural and the financing system (outsider financing), that have an
influence on the accounting
a. Class A: accounting for outsiders (full disclosure model)
b. Class B: accounting for tax and creditors

, These classifications seem different, but in the end there are quite a lot similarities between them!

Differences in accounting diversity: there are differences in financial statements
 Which individual financial statements are included in annual reports
 The format used to present individual financial statements
 The level of detail provided in financial statements
 Terminology
 Disclosure requirements
 Recognition and measurement rules; hard to tackle since the uniformity of item accounting is
of influence on the comparability of the financial statements

Although accounting diversity still exists, we are less concerned about it because;
 Cross-listings; when a company does cross-listing it goes from class B accounting to class A
accounting due to the strong outside financing
 Globalization of security markets
 Demand for internationally accepter accounting standards; IFRS and US GAAP, the Stock
Exchange Commission accept IFRS as of 2007

Chapter 1
Chapter 2
Order balance sheets:
- North America; assets in order of liquidity, beginning with cash
- Europe; assets in reverse order of liquidity, beginning with intangible assets

Legal systems of financial reporting:
 Code law (Continental European); general accounting law that does not provide much detail.
Banks serve the primary suppliers of financing, therefore accounting is legalistic and designed
to provide information for taxation or government-planning purposes
 Common law (Anglo-Saxon); non-legislative organization develops detailed accounting
standard. Oriented towards meeting the decision needs of large numbers of investors and
creditors.

In countries where published financial statements form the basis for taxation there is an
incentive to minimize financial statement income, this is not the case in countries in which
expenses taken for tax purposes are not required to be recognized in the financial statement

Providers of capital (financing); equity investors (shareholders), banks, family members, and
government. As equity financing becomes more important in a country, so does the
disclosure of information available to the public.

Financial reporting