International Financial Reporting Summary
Lecture 1 – International Financial Reporting
International perspective to accounting: financial reporting, managerial accounting,
auditing, taxation.
Different layers:
- Comparative accounting: of different countries
- Supranational accounting: issued by supranational organizations
- International business activities and foreign investments: standards, guidelines and
practices of MNCs
An accounting system = a collection of accounting standards, rules, guidelines, practices,
and institutions.
Accounting systems arise from and reflect the environment in which they operate. Diversity
in accounting systems worldwide.
Main influential factors 1. Legal systems: common versus code law.
Common law:
- English-speaking countries, Anglo-Saxon
- Limited amount of statutory law
- Case law (based on precedent) supplementary to statutory law
Influence on accounting:
- Corporation law might exist
- Non-governmental organizations govern accounting practices by rules
- More detailed accounting rules
- More influence from professional accounting bodies
Code law (codified or civil law):
, - Non-English-speaking countries
- More comprehensive, continuously updated statutory law
Influence on accounting:
- Government governs accounting practices by law
- Corporation law (commercial law)
- Accounting law is rather general
- Use of other resources for guidance
Main influential factors 2. Taxation. Differences between financial and tax accounting. GAAP
determine taxable income, or separate tax rules do.
Influence on accounting:
- Incentives to minimize reported income for tax purposes.
Main influential factors 3. Providers of finance. E.g. banks, government, family and external
shareholders.
Influence on accounting:
- Dispersed ownership: information disclosure and public accountability.
- Orientation towards:
-profits (equity) or
-solvency and liquidity (debt)
- incentives for aggressive vs. conservative accounting
Relationships between some factors:
Main influential factors 4. Inflation accounting (adjustments of historical cost for increasing
prices). High relevance if financial statements are the basis for taxation (fictitious profits).
Main influential factors 5. Political, economic and historic ties. EU: IFRS used by listed firms
from member states. US: dominant economy worldwide, influence on IFRS.
,Main influential factors 6. Culture (!). Social values influence humans, thus accounting
practices.
Hofstede’s cultural dimensions, can describe differences in cultures:
- Individualism versus collectivism
- Large versus small power distance
- Strong versus weak uncertainty avoidance
- Masculinity versus femininity
- Long-term versus short-term orientation
- Indulgence versus restraint (new)
Gray’s cultural accounting framework: takes the values of Hofstede and see how they
influence accounting systems through accounting values and institutional consequences:
- Professionalism vs statutory control: use professional judgement, is it encouraged,
or comply with law.
- Uniformity vs flexibility: how do you apply accounting principles. You and peers do
the same vs. change practices depending on environment.
- Conservatism vs optimism: about bad news, you record that in accounting as soon
as information available > and good news (new subsidiary) you would wait until its
certain. Optimisms : focus on good instead of bad
- Secrecy vs. transparency: sharing less information
, Problems caused by diversity:
- Consolidation of financial statements
-translating foreign currency to parent currency
-converting financial reports to parent GAAP
- Access to foreign capital markets
-lower financing cost versus higher reporting cost
- Comparability of financial statements
-affects investment/lending decisions
- Quality of accounting information
-low quality accounting standards in some countries
MNCs can also take advantage through tax avoidance, subsidiary planning, earnings
management.
Purpose of classifying accounting systems:
- To what extent do accounting systems resemble each other
- To what extent do accounting systems move away from each other
- Which systems are dominant and why
Relevance:
- To identify main influential factors
- To facilitate international harmonization
Classification of accounting systems:
1. Fair presentation/full disclosure (Anglo-Saxon) model: accounting oriented to large
numbers of investors and creditors. Common law countries.
2. Legal compliance (Continental European) model: accounted oriented to banks, taxation,
government-planning purposes. Code law countries.
Lecture 1 – International Financial Reporting
International perspective to accounting: financial reporting, managerial accounting,
auditing, taxation.
Different layers:
- Comparative accounting: of different countries
- Supranational accounting: issued by supranational organizations
- International business activities and foreign investments: standards, guidelines and
practices of MNCs
An accounting system = a collection of accounting standards, rules, guidelines, practices,
and institutions.
Accounting systems arise from and reflect the environment in which they operate. Diversity
in accounting systems worldwide.
Main influential factors 1. Legal systems: common versus code law.
Common law:
- English-speaking countries, Anglo-Saxon
- Limited amount of statutory law
- Case law (based on precedent) supplementary to statutory law
Influence on accounting:
- Corporation law might exist
- Non-governmental organizations govern accounting practices by rules
- More detailed accounting rules
- More influence from professional accounting bodies
Code law (codified or civil law):
, - Non-English-speaking countries
- More comprehensive, continuously updated statutory law
Influence on accounting:
- Government governs accounting practices by law
- Corporation law (commercial law)
- Accounting law is rather general
- Use of other resources for guidance
Main influential factors 2. Taxation. Differences between financial and tax accounting. GAAP
determine taxable income, or separate tax rules do.
Influence on accounting:
- Incentives to minimize reported income for tax purposes.
Main influential factors 3. Providers of finance. E.g. banks, government, family and external
shareholders.
Influence on accounting:
- Dispersed ownership: information disclosure and public accountability.
- Orientation towards:
-profits (equity) or
-solvency and liquidity (debt)
- incentives for aggressive vs. conservative accounting
Relationships between some factors:
Main influential factors 4. Inflation accounting (adjustments of historical cost for increasing
prices). High relevance if financial statements are the basis for taxation (fictitious profits).
Main influential factors 5. Political, economic and historic ties. EU: IFRS used by listed firms
from member states. US: dominant economy worldwide, influence on IFRS.
,Main influential factors 6. Culture (!). Social values influence humans, thus accounting
practices.
Hofstede’s cultural dimensions, can describe differences in cultures:
- Individualism versus collectivism
- Large versus small power distance
- Strong versus weak uncertainty avoidance
- Masculinity versus femininity
- Long-term versus short-term orientation
- Indulgence versus restraint (new)
Gray’s cultural accounting framework: takes the values of Hofstede and see how they
influence accounting systems through accounting values and institutional consequences:
- Professionalism vs statutory control: use professional judgement, is it encouraged,
or comply with law.
- Uniformity vs flexibility: how do you apply accounting principles. You and peers do
the same vs. change practices depending on environment.
- Conservatism vs optimism: about bad news, you record that in accounting as soon
as information available > and good news (new subsidiary) you would wait until its
certain. Optimisms : focus on good instead of bad
- Secrecy vs. transparency: sharing less information
, Problems caused by diversity:
- Consolidation of financial statements
-translating foreign currency to parent currency
-converting financial reports to parent GAAP
- Access to foreign capital markets
-lower financing cost versus higher reporting cost
- Comparability of financial statements
-affects investment/lending decisions
- Quality of accounting information
-low quality accounting standards in some countries
MNCs can also take advantage through tax avoidance, subsidiary planning, earnings
management.
Purpose of classifying accounting systems:
- To what extent do accounting systems resemble each other
- To what extent do accounting systems move away from each other
- Which systems are dominant and why
Relevance:
- To identify main influential factors
- To facilitate international harmonization
Classification of accounting systems:
1. Fair presentation/full disclosure (Anglo-Saxon) model: accounting oriented to large
numbers of investors and creditors. Common law countries.
2. Legal compliance (Continental European) model: accounted oriented to banks, taxation,
government-planning purposes. Code law countries.
