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International Accounting and Multinational Enterprises

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Title: International Accounting and Multinational Enterprises


1
International Accountingand Multinational
Enterprises

2
Comparative International Financial Accounting
Chapter Three
3
Learning objectives
  • 1. Discuss different ways to identify and
    classify accounting systems internationally
  • 2. Examine the key dimensions of national culture
    and how they influence behavior in work
  • 3. Identify accounting values that influence
    comparative accounting
  • 4. Show how cultural values and accounting values
    related to each other in the development of
    accounting standards and practices worldwide
  • 5. Compare accounting systems in the
    Anglo-American, Nordic, German, Latin, and Asian
    countries

4
CHAPTER OUTLINE
  • 1. Purposes of International Classification
  • 2. Classification of Accounting and Reporting
    Systems
  • The Deductive Approach
  • The Inductive Approach
  • 3. Cultural Influences on Accounting Development
  • 4. Culture, Societal Values, and Accounting
  • (1) Structural Elements of Culture
    that Affect Business
  • Individualism versus Collectivism
  • Large versus Small Power Distance
  • Strong versus Weak Uncertainty Avoidance
  • Masculinity versus Femininity
  • (2)Accounting Values
  • Uniformity versus Flexibility
  • Conservatism versus Optimism
  • Secrecy versus Transparency
  • (3) Accounting Values and International
    Classification

5
CHAPTER OUTLINE
  • 5. Comparative Accounting Systems
  • 6. Anglo-American Accounting
  • (1) United States
  • A. Influences on Accounting Development
  • (2) United Kingdom
  • A.. Influences on Accounting Development
  • 7. Nordic Accounting
  • (1) The Netherlands
  • A. Influences on Accounting Development
  • (2) Sweden
  • A. Influences on Accounting Development

6
CHAPTER OUTLINE
  • 8. Germanic Accounting
  • (1) Germany
  • A. Influences on Accounting Development
  • (2) Switzerland
  • A. Influences on Accounting Development
  • 9. Latin Accounting
  • (1) France
  • A. Influences on Accounting Development
  • (2) Italy
  • A. Influences on Accounting Development
  • (3) Brazil
  • A. Influences on Accounting Development
  • 10. Asian Accounting
  • (1) China
  • A. Influences on Accounting Development
  • (2) Japan
  • A. Influences on Accounting Development
  • 11. Summary

7
Introduction
  • A growing awareness that global environmental
    factors affect accounting development. Also
    recognition that systematically different
    patterns of accounting behavior may apply to
    groups of countries.
  • Identification and classification of these
    different systems can help describe, analyze, and
    predict accounting system development.

1
8
I. Purposes of International Classification
  • A. To sharpen description, analysis, prediction
  • B. To help describe and compare different
    national systems in order to better understand
    them and to learn
  • 1. The extent to which national systems are
    similar/dissimilar
  • 2. The pattern of development of
    systems--potential for change
  • 3. The reasons why some systems dominate others
  • C. To assess prospects for harmonization
  • D. To help national policy makers determine what
    to do
  • E. To help developing countries choose
    appropriate systems
  • F. To help MNEs overcome problems of
    establishing control systems

9
Classification of Accounting and Reporting Systems
  • 1. Deductive Approach (Gerhard Mueller)
    Macroeconomic pattern - Accounting development
    follows national economic policies. (I.e. Sweden,
    France, Germany).
  • 2. Microeconomic Pattern Accounting is viewed
    as a part of business economics with accounting
    principles derived from economic analysis (I.e
    Netherlands).
  • 3. Independent Discipline Accounting viewed as
    a service function derived from business practice
    (I.e. United States, United Kingdom).
  • 4. Uniform Accounting Pattern Accounting
    viewed as efficient means of administration and
    control. Common in centrally-controlled
    economies (I.e. Germany, France, Sweden).

2
10
1.Deductive Approach
  • The goals of the corporation usually follows
    national economic policies.
  • Accounting income might be smoothed to promote
    economic and business stability.
  • Social responsibility accounting developed to
    meet macroeconomic concerns.

11
2. Microeconomic Pattern
  • A fundamental orientation exists toward
    individual economic entities.
  • Accounting concepts are derived from economic
    analysis.
  • A fundamental concept is concerned with the
    maintenance in real terms of the monetary capital
    invested in the corporation.
  • Replacement value accounting as used by some
    companies in the Netherlands is often assumed to
    fit the microeconomic approach.
  • Developments in segmental reporting and the
    disclosure of employee costs, pensions, long-term
    commitments.

12
3. Independent Discipline
  • A deep respect for professional judgment.
  • Accounting is considered to be capable of
    developing its own conceptual framework, derived
    on a piecemeal basis from its own successful
    business practices.
  • Income is a pragmatic measure that seems useful
    in practice.
  • Full and fair disclosure is a GAAP that has
    evolved over the years.

13
4. Uniform Accounting Pattern
  • A more scientific approach to accounting is
    adopted whereby a uniform approach to measurement
    and disclosure and presentation.
  • Presentation will promote ease of use and a
    measure of control for all types of businesses by
    all kinds of users including mangers,
    governments, and tax authorities.
  • Centrally planned economies as well as other
    countries with a strong governments involvement
    in economic planning.

14
Mullers contributions
  • He recognized a wider set of influences, such as
    legal system, political system, and social
    climate as relevant to accounting development.
  • He categorized business environments, which he
    then linked to different types of accounting
    systems. Such as (1) Economic development (2)
    business complexity (3)legal systems and (4)
    political and social climates, and identified 10
    groupings, and pointed out that different
    business environments need different accounting
    systems.
  • Mullers environmental analysis was adapted and
    extended by Nobes (1983).

15
Nobes
  • Adapted and extended Muellers concepts,
  • Used a hierarchical classification scheme and
    evolutionary approach to identification of
    measurement practices in western nations,
  • Basic distinction between macro and micro
    economic systems
  • -Further desegregations were developed under
    each system to provide increased discrimination,
  • Recent updating to reflect strong and weak equity
    markets and shareholder orientations.
  • Nine factors were identified as those likely to
    predict which countries would be grouped together
  • (P 39 figure 3.1)

3
16
Inductive Approach
  • Identification of accounting patterns begins with
    analysis of individual accounting practices.
  • Using this Approach, Nair and Frank identified
    five measurement groupings using Price-Waterhouse
    (PW) data
  • 1. British Commonwealth
  • 2. Latin American
  • 3. Continental European
  • 4. United States
  • 5. Chile
  • They made a empirical distinction between
    measurement and disclosure practices because
    there were considered to have different patterns
    of development.
  • Their results suffered from lack of reliability
    and relevance of PWs data.

4
17
Cultural Influences on Accounting Development
  • The role of culture in accounting systems has
    been largely ignored in the past but this is
    changing.
  • Culture is an essential element for understanding
    social systems.
  • Gray proposed incorporating cultural factors in a
    framework to explain and predict international
    differences in accounting systems and identify
    international development patterns of accounting
    systems.

5
18
Culture, Societal Values, and Accounting
  • Flexibility versus uniformity are most relevant
    to professional versus statutory authority,
  • Combining these relationships allows for relevant
    culture areas to be hypothesized,
  • Accounting values most relevant to measurement
    practices and the extent of information
    disclosure are the conservatism and secrecy
    dimensions,
  • These factors can be combined and culture areas
    hypothesized,
  • Classification of countries by culture area can
    provide a means for further assessing the
    relationship between culture and accounting
    systems.

6
19
Comparative Accounting SystemsAnglo-American
Accounting
  • United States
  • Accounting based on U.K. traditions,
  • Securities markets a dominant influence,
  • SEC recognizes the authority of FASB,
  • FASB uses an open approach to standard setting,
    and
  • U.S. accounting system is probably most
    comprehensive in the world.

7
20
Comparative Accounting SystemsAnglo-American
Accounting (Cont.)
  • United Kingdom
  • Importance of company law,
  • Profession is self-regulated through accounting
    standards board (ASB) guided by Financial
    Reporting Control (FRC), and
  • Primacy given to information needs investors.

8
21
Comparative Accounting SystemsNordic Accounting
  • The Netherlands
  • Company law and accounting profession are major
    influences,
  • Government role is minimal,
  • Overriding criterion are generally acceptable
    accounting principles, and
  • Novel Feature -- Interested parties may complain
    to the Court of Justice if financial statements
    do not comply with the law.

9
22
Comparative Accounting SystemsNordic Accounting
(Cont.)
  • Sweden
  • Accounting strongly influenced by legal and tax
    requirements, the profession (FAR), and stock
    exchanges,
  • Government has a strong role (BFN) to accomplish
    macroeconomic planning and to make policy,
  • Accounting Council is new standard setting body,
    and
  • Traditionally, information preference was given
    to creditors and the government -- Now a shift
    to investors.

10
23
Comparative Accounting SystemsGermanic
Accounting
  • Germanic Accounting
  • Differs significantly from Anglo-American and
    Nordic, and
  • Company and/ or tax laws govern accounting
    practice.
  • Germany
  • Company law and tax laws predominate,
  • Accounting practice must follow tax laws,
  • Accounting profession is small and lacks
    influence,
  • Stock market is small but growing in influence,
    and
  • Information needs of creditors and tax
    authorities take precedence.

11
24
Comparative Accounting SystemsGermanic
Accounting (Cont.)
  • Switzerland
  • Swiss accounting is among the most conservative
    and secretive in the world,
  • Accounting practice is dominated by company law
    and tax regulations,
  • Accounting profession is small,
  • Legal requirements relating to accounting are
    minimal and secret reserves are allowed,
  • Accounting rules are conservative and focus on
    the needs of creditors, and
  • New laws are changing accounting information
    orientation and presentation to benefit
    shareholders.

12
25
Comparative Accounting SystemsLatin Accounting
  • France
  • Company law predominates,
  • A standardized code of accounting provides
    uniformity of practice,
  • Tax law is also a major influence and override
    accounting rules,
  • Accounting profession is small and lacks status,
  • The stock market is small, and
  • Information preference to tax authorities and
    creditors.

13
26
Comparative Accounting SystemsLatin Accounting
  • Brazil
  • Government, Company Law, and Tax Regulations
    predominate,
  • Information needs of creditors and tax
    authorities predominate -- changing to include
    shareholders, and
  • Accounting profession not well developed.

14
27
Comparative Accounting SystemsAsian Accounting
  • Asian countries quite distinct from all other
    groupings,
  • Many have strong colonial histories.

15
28
Comparative Accounting Systems Asian Accounting
  • China
  • Accounting rules are strongly influenced by the
    government and Communist Party
  • The accounting law of the Peoples Republic
    established general principals concerning nature
    and rule of accounting (1985, revised 1993)
  • The Peoples Republic State Council issued
    Financial Accounting and Reporting Rules (FARR)
  • Represent new era in Chinese accounting,
  • Based on market approach,
  • Fund accounting has been abolished, and
  • Users of information beyond government are now
    recognized
  • Government has led reforms along with accounting
    organizations.

16
29
Comparative Accounting SystemsAsian Accounting
(Cont.)
  • Japan
  • Government is the major accounting influence
  • Commercial code, securities and exchange law, and
    corporation tax law are also influential
  • Government institutions are directly involved in
    standard setting
  • Ministries of Finance and Justice have joint
    jurisdiction,
  • Dual jurisdiction results in lack of unified
    approach
  • Accounting profession is small and lacks
    influence
  • Secretive approach is common
  • (Continued next slide)

17
30
Comparative Accounting SystemsAsian Accounting
(Cont.)
  • Japan (Cont.)
  • Many companies provide courtesy financial
    statement translations
  • Creditors and tax authorities have information
    preference
  • Immediate write-off is widely accepted and
  • Capitalization and amortization is allowed to
    varying degrees.

18
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