Comparative international - downloadmienphi.nets1.downloadmienphi.net/file/downloadfile6/149/1382160.pdf · Comparative International Accounting has been ... Part II FINANCIAL REPORTING

Comparative

international aCCounting

Christopher nobes and robert parker

tenth edition

Christopher Nobes is professor of accounting at royal holloway, university of london. From 1993 to 2001 he was a representative on the board of the international accounting Standards Committee.

Robert Parker is emeritus professor of accounting at the university of exeter, uK. he was formerly editor of the journal, Accounting and Business Research.

Both authors have received the american accounting associations award of outstanding international accounting educator.

revised resources for lecturers are available to download at www.pearsoned.co.uk/nobes.

an imprint of www.pearson-books.comFront cover image: getty images/iconica

now in its tenth edition, Comparative International Accounting by nobes and parker is renowned for its depth of discussion and comprehensive coverage of the international dimensions of financial accounting and reporting.

it uncovers the conceptual and contextual foundations of the increasingly used international Financial reporting Standards (iFrS) and contrasts them with uS generally accepted accounting principles (gaap). nobes and parker examine the key issues inherent in the subject, such as transition, harmonization and political lobbying, and the international differences that remain. they also look at the special accounting problems of multinational companies.

Comparative International Accounting has been extensively revised for the many changes in international accounting since the last edition.

New to this edition are:an additional chapter on how the practice of iFrS can vary within a country and between countries updated case studies and an increased number of real-world examples new information on pension accounting, auditing standards and iFrS 8 increased coverage of China and of small and medium enterprises (Smes) Contributions from a diverse group of international practitioners and academics, which are updated every two years to incorporate the latest developments in the field

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COMPARATIVE INTERNATIONAL ACCOUNTING

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We work with leading authors to develop the strongest educational materials in business and finance, bringing cutting-edge thinking and best learning practice to a global market

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Tenth Edition

COMPARATIVEINTERNATIONAL ACCOUNTING

Christopher Nobes

and

Robert Parker

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Pearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEEngland

and Associated Companies throughout the world

Visit us on the World Wide Web at:www.pearsoned.co.uk

First edition published in Great Britain under the Philip Allan imprint 1981Second edition published 1985Third edition published under the Prentice Hall imprint 1991Fourth edition published 1995Fifth edition published under the Prentice Hall imprint 1998Sixth edition published 2000Seventh edition published 2002Eighth edition published 2004Ninth edition published 2006Tenth edition published 2008

Prentice Hall Europe 1991, 1995, 1998 Pearson Education Limited 2000, 2002, 2004, 2006, 2008Chapter 18 John Flower 2002, 2004, 2006, 2008

The rights of Christopher Nobes and Robert Parker to be identified as authors of this work have been asserted by them in accordance with the Copyright,Designs and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 610 Kirby Street, London EC1N 8TS.

ISBN: 978-0-273-71476-7

British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication DataComparative international accounting / [edited by] Christopher Nobes and Robert Parker. 10th ed.

p. cm.Includes bibliographical references and index.ISBN-13: 978-0-273-71476-7 (alk. paper) 1. Comparative accounting.

I. Nobes, Christopher. II. Parker, R. H. (Robert Henry)HF5625.C74 2008657dc22

2008007524

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Typeset in 9.5/12.5pt Stone Serif by 35 Printed by Ashford Colour Press Ltd., Gosport

The publishers policy is to use paper manufactured from sustainable forests.

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Contributors xviPreface xviii

Part I SETTING THE SCENE

1 Introduction 32 Causes and examples of international differences 243 International classification of financial reporting 514 International harmonization 74

Part II FINANCIAL REPORTING BY LISTED GROUPS

5 The context of financial reporting by listed groups 1016 The requirements of International Financial Reporting Standards 1177 Different versions of IFRS practice 1458 Financial reporting in the United States 1579 Enforcement of Financial Reporting Standards 189

10 Political lobbying on Accounting Standards US, UK and international experience 206

Part III HARMONIZATION AND TRANSITION IN EUROPE AND EAST ASIA

11 Harmonization and transition in Europe 23712 Harmonization and transition in East Asia 257

Part IV FINANCIAL REPORTING BY INDIVIDUAL COMPANIES

13 The context of financial reporting by individual companies 28514 Making accounting rules for non-listed business enterprises in Europe 29315 Accounting rules and practices of individual companies in Europe 314

Part V MAJOR ISSUES IN FINANCIAL REPORTING BY MNEs

16 Key financial reporting topics 343

Brief contents

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17 Consolidation 36818 Foreign currency translation 38419 Segment reporting 427

Part VI ANALYSIS AND MANAGEMENT ISSUES

20 International financial analysis 45721 International auditing 48122 International aspects of corporate income taxes 51023 Managerial accounting 531

Glossary of abbreviations 558Suggested answers to some of the end-of-chapter questions 563Author index 583Subject index 587

Supporting resourcesVisit www.pearsoned.co.uk/nobes to find valuableonline resources

For instructors Complete, downloadable Instructors Manual,

including answers to the end of chapter questionsin the text, additional questions for further study and multiple choice questions(with answers).

PowerPoint slides of the figures and tables in the book that can be downloadedand used as OHTs

For more information please contact your local Pearson Education sales representativeor visit www.pearsoned.co.uk/nobes.

Convenience. Simplicity. Success.

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Contributors xvi

Preface xviii

Part I SETTING THE SCENE

1 Introduction 3Contents 3Objectives 3

1.1 Differences in financial reporting 41.2 The global environment of accounting 51.3 The nature and growth of MNEs 121.4 Comparative and international aspects of accounting 151.5 Structure of this book 18

Summary 21References 21Useful websites 22Questions 22

2 Causes and examples of international differences 24Contents 24Objectives 24

2.1 Introduction 252.2 Culture 252.3 Legal systems 282.4 Providers of finance 292.5 Taxation 332.6 Other external influences 352.7 The profession 362.8 Conclusion on the causes of international differences 372.9 Some examples of differences 38

Summary 46References 47Questions 50

Contents

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3 International classification of financial reporting 51Contents 51Objectives 52

3.1 Introduction 523.2 The nature of classification 533.3 Classifications by social scientists 533.4 Classifications in accounting 553.5 Extrinsic classifications 563.6 Intrinsic classifications: 1970s and 1980s 603.7 Developments related to the Nobes classification 663.8 Further intrinsic classification 673.9 Is there an Anglo-Saxon group? 693.10 A taxonomy of accounting classifications 69


4 International harmonization 74Contents 74Objectives 74

4.1 Introduction 754.2 Reasons for, obstacles to and measurement of harmonization 764.3 The International Accounting Standards Committee 784.4 Other international bodies 874.5 The International Accounting Standards Board 91


Part II FINANCIAL REPORTING BY LISTED GROUPS

5 The context of financial reporting by listed groups 101Contents 101Objectives 101

5.1 Introduction 1015.2 IFRS in the EU 1025.3 Adoption of, and convergence with, IFRS 1055.4 Foreign listing and foreign investing 1065.5 Reconciliations from national rules to US GAAP and IFRS 1085.6 High-level IFRS/US differences 110

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5.7 Reconciliations from IFRS to US GAAP 1115.8 Convergence of IFRS and US GAAP 113


6 The requirements of International Financial Reporting Standards 117Contents 117Objectives 118

6.1 Introduction 1186.2 The conceptual framework and some basic standards 1186.3 Assets 1256.4 Liabilities 1286.5 Group accounting 1306.6 Disclosures 131

Summary 132References 132Further reading 133Useful websites 133Questions 133Appendix 6.1 An outline of the content of International

Financial Reporting Standards 134

7 Different versions of IFRS practice 145Contents 145Objectives 145

7.1 Introduction 1457.2 Motivations for different IFRS practice 1467.3 Scope for different IFRS practice 1487.4 Conclusion 154


8 Financial reporting in the United States 157Contents 157Objectives 158

8.1 Introduction 1588.2 Regulatory framework 159

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8.3 Accounting standard-setters 1638.4 The conceptual framework 1668.5 Contents of annual reports 1698.6 Accounting principles 1748.7 Consolidation 1818.8 Audit 1838.9 Differences from IFRS 184

Summary 186References 186Further reading 187Useful websites 188Questions 188

9 Enforcement of Financial Reporting Standards 189Contents 189Objectives 189

9.1 Introduction 1899.2 Modes and models of enforcement 1909.3 United States 1949.4 European Union 1959.5 Australia 201


10 Political lobbying on Accounting Standards US, UK and international experience 206Contents 206Objectives 206

10.1 Introduction 20710.2 Motivations for political lobbying 20810.3 Political lobbying up to 1990 21010.4 US political lobbying from 1990 22010.5 Political lobbying of the IASC/IASB 22410.6 Preparer attempts to control the accounting standard-setter 22810.7 Political lobbying of the FASBs convergence with the IASB 22910.8 Some concluding remarks 231


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Part III HARMONIZATION AND TRANSITION IN EUROPE AND EAST ASIA

11 Harmonization and transition in Europe 237Contents 237Objectives 237

11.1 Introduction 23811.2 Harmonization within the European Union 23811.3 Transition in Central and Eastern Europe 244


12 Harmonization and transition in East Asia 257Contents 257Objectives 257

12.1 Introduction 25812.2 Japan 25812.3 China 272

Summary 277References 278Further reading 280Useful websites 280Questions 280Appendix 12.1 ASBE Standards 282

Part IV FINANCIAL REPORTING BY INDIVIDUAL COMPANIES

13 The context of financial reporting by individual companies 285Contents 285Objectives 285

13.1 Introduction 28513.2 Outline of differences between national rules and

IFRS or US GAAP 28613.3 The survival of national rules 28613.4 Financial reporting, tax and distribution 28913.5 Special rules for small or unlisted companies 290

Summary 292References 292

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Useful websites 292Questions 292

14 Making accounting rules for non-listed business enterprises in Europe 293Contents 293Objectives 293

14.1 Introduction 29314.2 Who makes accounting rules? 29414.3 Which business enterprises are subject to accounting rules? 303

Summary 307References 308Further reading 309Useful websites 310Questions 311Appendix 14.1 Contents of the Plan comptable gnral 312Appendix 14.2 Financial accounting chart of accounts 313

15 Accounting rules and practices of individual companies in Europe 314Contents 314Objectives 314

15.1 Introduction 31415.2 France 31515.3 Germany 31915.4 United Kingdom 324

Summary 326References 326Further reading 327Useful websites 327Questions 327Appendix 15.1 Formats for French financial statements 328Appendix 15.2 Formats for German financial statements 333Appendix 15.3 Formats for British financial statements 336

Part V MAJOR ISSUES IN FINANCIAL REPORTING BY MNEs

16 Key financial reporting topics 343Contents 343Objectives 343

16.1 Introduction 344

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16.2 Recognition of intangible assets 34416.3 Asset measurement 34516.4 Financial instruments 34716.5 Provisions 35016.6 Employee benefits 35416.7 Deferred tax 35816.8 Revenue recognition 36216.9 Comprehensive income 364


17 Consolidation 368Contents 368Objectives 368

17.1 Introduction 36917.2 Rate of adoption 36917.3 The concept of a group 37017.4 Harmonization from the 1970s onwards 37117.5 Definitions of group companies 37517.6 Publication requirements and practices 37617.7 Techniques of consolidation 377

Summary 381References 382Further reading 382Questions 382

18 Foreign currency translation 384Contents 384Objectives 385

18.1 Introduction 38518.2 Translation of transactions 38918.3 Introduction to the translation of financial statements 39518.4 The US initiative 39818.5 The temporal method versus the closing rate method 40118.6 FAS 52 40618.7 IAS 21 40918.8 Translation of comprehensive income 41118.9 Accounting for translation gains and losses 41318.10 Research findings 41918.11 An alternative to exchange rates? 423

Summary 423References 424

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Further reading 425Questions 425

19 Segment reporting 427Contents 427Objectives 427

19.1 What is segment reporting? 42719.2 The need for segment information 43219.3 Disclosure regulations 43319.4 Evidence on the benefits of segment reporting 443


Part VI ANALYSIS AND MANAGEMENT ISSUES

20 International financial analysis 457Contents 457Objectives 457

20.1 Introduction 45820.2 Understanding differences in accounting 45820.3 Disclosure practices in international financial reporting 46320.4 Interpreting financial statements 47020.5 Financial analysis and the capital market 474


21 International auditing 481Contents 481Objectives 481

21.1 Introduction 48221.2 Reasons for the internationalization of auditing 48421.3 Promulgating international standards 48921.4 The international audit process 495


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22 International aspects of corporate income taxes 510Contents 510Objectives 510

22.1 Introduction 51122.2 Tax bases 51322.3 International tax planning 51722.4 Transfer pricing 51822.5 Tax systems 51922.6 Harmonization 525


23 Managerial accounting 531Contents 531Objectives 531

23.1 Introduction 53223.2 The balanced scorecard as an overview tool 53323.3 Currency and control 53523.4 Variances and foreign exchange 53923.5 Culture and management accounting 54023.6 Control and performance 54923.7 Looking forward 551


Glossary of abbreviations 558

Suggested answers to some of the end-of-chapter questions 563

Author index 583

Subject index 587

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Co-editor, author of Chapters 2, 3, 4, 5, 6, 7, 8, 12, 13, 16 and 22, and co-author of Chapter 17Christopher Nobes Professor of Accounting at Royal Holloway College, Univer-sity of London. He has also taught in Australia, Italy, the Netherlands, New Zealand,Scotland, Spain and the United States. He is currently a visiting professor at theNorwegian School of Management. He was the 2002 Outstanding InternationalAccounting Educator of the American Accounting Association. He was a memberof the Accounting Standards Committee of the United Kingdom and Ireland from1986 to 1990, and a UK representative on the Board of the International AccountingStandards Committee from 1993 to 2001. He is vice-chairman of the accountingcommittee of the Fdration des Experts Comptables Europens.

Co-editor, author of Chapters 1, 9, 11, 14 and 15, and co-author of Chapter 17Robert Parker Emeritus Professor of Accounting at the University of Exeter andformer professorial fellow of the Institute of Chartered Accountants of Scotland. He has also practised or taught in Nigeria, Australia, France and Scotland and waseditor or joint editor of Accounting and Business Research from 1975 to 1993. He wasthe British Accounting Associations Distinguished Academic of the Year in 1997,and the 2003 Outstanding International Accounting Educator of the AmericanAccounting Association.

Authors of other chaptersJan Buisman IFRS Senior Technical Partner for PricewaterhouseCoopers inSweden and partner in the firms Global Corporate Reporting Group. He was for-merly the Netherlands representative on the International Auditing PracticesCommittee, and chairman of Royal NIVRAs Auditing Standards Board. He is nowchairman of the Accounting Practices Committee of FAR in Sweden. (Co-author ofChapter 21)

John Flower Formerly, Director of the Centre for Research in European Account-ing (Brussels), and earlier with the Commission of the European Communities andProfessor of Accounting at the University of Bristol. He now lives in Germany.(Chapter 18)

Graham Gilmour Senior Manager in the Global Corporate Reporting Group ofPricewaterhouseCoopers. (Co-author of Chapter 21)

Stuart McLeay Professor of Treasury at the University of Wales, Bangor. Formerly,he worked as a chartered accountant in Germany, France and Italy, and was a finan-cial analyst at the European Investment Bank. Co-editor of the ICAEW EuropeanFinancial Reporting series. (Chapter 20)

Contributors

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Clare B. Roberts Professor of Accounting at the University of Aberdeen BusinessSchool. (Chapter 19)

Stephen Salter Associate Professor and Director of the Center for Global Com-petitiveness at the University of Cincinnati. Formerly, he was a partner at Ernst &Young Management Consultants. (Chapter 23)

Stephen A. Zeff Herbert S. Autrey Professor of Accounting at Rice University.(Chapter 10)

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Purpose

Comparative International Accounting is intended to be a comprehensive and coher-ent text on international financial reporting. It is primarily designed for under-graduate and postgraduate courses in comparative and international aspects ofaccounting. We believe that a proper understanding requires broad overviews (as inPart I), but that these must be supported by detailed information on real countriesand companies (as in Parts II to IV) and across-the-board comparisons of major topics (as in Parts V and VI).

This book was first published in 1981. This present edition (the tenth) is a com-plete updating of the ninth edition which constituted the most extensive revisionthat we had ever made. One chapter (7) has been added: an examination of the pos-sible motivations and opportunities for different national versions of IFRS practice.

A revised manual for teachers and lecturers is available from http://www.pearsoned.co.uk/nobes. It contains several numerical questions and a selection of multiple-choice questions. Suggested answers are provided for all of these and forthe questions in the text. In addition, there is now an extensive set of PowerPointslides.

Authors

In writing and editing this book, we have tried to gain from the experience of thosewith local knowledge. This is reflected in the nature of those we thank below foradvice and in our list of contributors. For example, the original chapter on NorthAmerica was co-authored by a Briton who had been assistant research director ofthe US Financial Accounting Standards Board; his knowledge of US accounting wasthus interpreted through and for non-US readers. The amended version is by one ofthe editors, who has taught in several US universities. This seems the most likelyway to highlight differences and to avoid missing important points through over-familiarity. The chapter on political lobbying has been written by Stephen Zeff, anAmerican who is widely acknowledged as having the best overview of historical andinternational accounting developments. Other contributors presently live or workin Germany, in Sweden and in the United States.

Structure

Part I sets the scene for a study of comparative international financial reporting.Many countries are considered simultaneously in the introductory chapter andwhen examining the causes of the major areas of difference (Chapter 2). It is then

Preface

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possible to try to put accounting systems into groups (Chapter 3) and to take theobvious next step by discussing the purposes and progress of international harmon-ization of accounting (Chapter 4).

All this material in Part I can act as preparation for the other parts of the book.Part I can, however, be fully understood only by those who become well-informedabout the contents of the rest of the book, and readers should go back later to Part I as a summary of the whole.

Part II examines financial reporting by listed groups. In much of the world this means, at least for consolidated statements, using the rules of either theInternational Accounting Standards Board or the United States. In addition to anoverview and chapters on these two systems of accounting, Part II also contains a chapter on whether national versions of IFRS exist, one on enforcement ofaccounting regulations, and one on political lobbying.

Part III contains two chapters that examine the processes of harmonization andtransition as applied in the EU and East Asia. Part IV concerns the financial report-ing of individual companies, where large international differences remain. Thereare three chapters: context, regulatory styles, and accounting differences.

Part V examines, broadly and comparatively, particular major financial reportingtopics: key non-consolidation issues, consolidation, foreign currency translationand segment reporting. Part VI considers four issues of international analysis andmanagement: international financial analysis, international auditing, internationalaspects of corporate income taxes, and managerial accounting.

At the end of the book, there is a glossary of abbreviations relevant to inter-national accounting, suggested answers to some chapter questions, and two indexes(by author and by subject).

Publishers acknowledgements

We are grateful to the following for permission to reproduce copyright material:

Table 1.4: United Nations Conference on Trade and Development (UNCTAD) (2007)World Investment Report 2007: Transnational Companies, Exractive Industries andDevelopment. Geneva, UNCTAD. Copyright United Nations 2007; Table 1.8:United Nations Conference on Trade and Development (UNCTAD) (2007) WorldInvestment Report 2007: Transnational Companies, Exractive Industries and Develop-ment. Geneva, UNCTAD. Copyright United Nations 2007; Table 2.3: Source ofdata: Datastream. Reproduced by kind permission of Jon Tucker and David Bence of Bristol Business School; Figure 3.1: American Accounting Association (1977)Accounting Review, Supplement to Vol. 52, 1977, p. 99. Copyright 1977 AmericanAccounting Association. Reproduced with permission; Figure 3.2: Puxty, A.G.,Willmott, H.C., Cooper, D.J. and Lowe, A.E. (1987) Modes of regulation inadvanced capitalism: locating accountancy in four countries, Accounting,Organizations and Society, Vol. 12, No. 3, p. 283. Reproduced with permission ofElsevier; Table 3.1: Nair, R.D. and Frank, W.G. (1980) The impact of disclosure and measurement practices on international accounting classifications, AccountingReview, Vol. 55, No. 3, p. 429. Reproduced with permission of the American

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Accounting Association; Table 5.3: Adapted from BASF (2005) BASF Annual Report2004, pp. 92, 93, BASF SA, Ludwigshafen, Germany. Reproduced with permission;Table 5.6: Extracted from the Bayer AG (2007) Bayer AG Annual Report 2006, BayerAG, Leverkusen, Germany. Reproduced with permission; Table 5.8: Adapted fromthe Degussa AG (2005) Degussa AG Annual Report 2004, Degussa AG, Dsseldorf,Germany. Reproduced with permission; Tables 7.1, 7.2 and 7.3: Nobes, C.W. (2006)The survival of international differences under IFRS: towards a research agenda,Accounting and Business Research, Vol. 36, No. 3. Reproduced with permission; Table8.2: American Institute of Certified Public Accountants (AICPA) (2006) AccountingTrends and Techniques (issued annually). AICPA, Jersey City, New Jersey, p. 133.Copyright 2006 by the American Institute of Certified Public Accountants, Inc.All rights reserved. Reprinted with permission; Table 8.3: American Institute ofCertified Public Accountants (2006) Accounting Trends and Techniques (issued annu-ally). AICPA, Jersey City, New Jersey, p. 295. Copyright 2006 by the AmericanInstitute of Certified Public Accountants, Inc. All rights reserved. Reprinted withpermission; Table 8.4: American Institute of Certified Public Accountants (2006)Accounting Trends and Techniques (issued annually). AICPA, Jersey City, New Jersey,p. 273. Copyright 2006 by the American Institute of Certified Public Accountants,Inc. All rights reserved. Reprinted with permission; Table 8.5: American Institute ofCertified Public Accountants (2006) Accounting Trends and Techniques (issued annu-ally). AICPA, Jersey City, New Jersey, p. 278. Copyright 2006 by the AmericanInstitute of Certified Public Accountants, Inc. All rights reserved. Reprinted withpermission; Table 8.8: American Institute of Certified Public Accountants (2006)Accounting Trends and Techniques (issued annually). AICPA, Jersey City, New Jersey,p. 153. Copyright 2006 by the American Institute of Certified Public Accountants,Inc. All rights reserved. Reprinted with permission; Table 13.1: Adapted from BASF(2005) BASF Annual Report 2004, pp. 92, 93, BASF SA, Ludwigshafen, Germany.Reproduced with permission; Table 13.2: Bayer AG (2005) Bayer AG Annual Report2004, Bayer AG, Leverkusen, Germany, pp. 7484. Reproduced with permission;Figure 16.2: Adapted from FEE (1995) A classification of non-state pensionschemes in Survey of Pensions and Other Retirement Benefits in EU and non-EUCountries, Routledge, London. Reproduced with permission of the Taylor & FrancisGroup, Ltd; Table 19.2: Honda (2007) Honda Annual Report 2006, Honda, Tokyo,Japan, p. 63. Reproduced with permission; Table 20.4: The Volvo Group (2005) TheVolvo Group Financial Report, 2004, AB Volvo, Goteborg, Sweden. Reproduced withpermission; Table 23.1: Landry, S., Chan, W. and Jalbert, T. (2002) Balanced score-card for multinationals, Journal of Corporate Accounting and Finance, p. 38. Copyright 2002 John Wiley & Sons. Reprinted by permission; Table 23.4: Derived fromHarrison, G. and McKinnon, J. (1999) Cross-cultural research in management con-trol systems design: A review of the current state, Accounting, Organizations andSociety, Vol. 24, p. 486 where full references to cited papers are given. Reproducedwith permission from Elsevier.

In some instances we have been unable to trace the owners of copyright material,and we would appreciate any information that would enable us to do so.

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Other acknowledgements

In the various editions of this book, we have received great help and much usefuladvice from many distinguished colleagues in addition to our contributors. Weespecially thank Sally Aisbitt (deceased); Dr Ataur Rahman Belal, Aston BusinessSchool, Aston University; Andrew Brown of Ernst & Young; John Carchrae of theOntario Securities Commission; Terry Cooke of the University of Exeter; JohnDenman and Peter Martin of the Canadian Institute of Chartered Accountants;Brigitte Eierle of Regensburg University; Maria Frosig, Niels Brock CopenhagenBusiness School, Denmark; Michel Glautier of ESSEC; Dr Jing Hui Liu, University ofAdelaide, Australia; Horst Kaminski, formerly of the Institut der Wirtschaftsprfer;Jan Klaassen of the Free University, Amsterdam; Yannick Lemarchand of theUniversity of Nantes; Ken Lemke of the University of Alberta; Klaus Macharzina ofthe University of Hohenheim; Malcolm Miller and Richard Morris of the Universityof New South Wales; Geoff Mitchell, formerly of Barclays Bank; Jules Muis of the European Commission; Ng Eng Juan of Nanyang Technological University ofSingapore; Graham Peirson of Monash University; Jacques Richard of the Universityof Paris Dauphine; Alan Richardson of York University, Toronto; Alan Roberts of the University of Rennes; Paul Rutteman, formerly of EFRAG; Etsuo Sawa, formerlyof the Japanese Institute of Certified Public Accountants; Hein Schreuder, formerlyof the State University of Limburg; Marek Schroeder of the University ofBirmingham; Patricia Sucher, formerly of Royal Holloway, University of London;Lorena Tan, formerly of Price Waterhouse, Singapore; Ann Tarca of the Universityof Western Australia; Peter van der Zanden, formerly of Moret Ernst & Young andthe University of Tilburg; Gerald Vergeer of Moret Ernst & Young; and RuudVergoossen of Royal NIVRA and the Free University of Amsterdam; Dr Yap Kim Len,HELP University College, Malaysia. We are also grateful for the help of many secret-aries over the years.

Despite the efforts of all these worthies, errors and obscurities will remain, forwhich we are culpable jointly and severally.

Christopher NobesRobert ParkerUniversities of Londonand Exeter

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Part I

SETTING THE SCENE

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IntroductionRobert Parker

CONTENTS

OBJECTIVES

1.1 Differences in financial reporting1.2 The global environment of accounting

1.2.1 Accounting and world politics1.2.2 Economic globalization, international trade and foreign direct investment1.2.3 Globalization of stock markets1.2.4 Patterns of share ownership1.2.5 International monetary system

1.3 The nature and growth of MNEs1.4 Comparative and international aspects of accounting1.5 Structure of this book

1.5.1 An outline1.5.2 Setting the scene (Part I)1.5.3 Financial reporting by listed groups (Part II)1.5.4 Harmonization and transition in Europe and East Asia (Part III)1.5.5 Financial reporting by individual companies (Part IV)1.5.6 Major issues in financial reporting by MNEs (Part V)1.5.7 Analysis and management issues (Part VI)

SummaryReferencesUseful websitesQuestions

After reading this chapter, you should be able to:

l explain why international differences in financial reporting persist, in spite of theadoption of international financial reporting standards (IFRS) by the member statesof the European Union and some other important countries;

l illustrate the ways in which accounting has been influenced by world politics, thegrowth of international trade and foreign direct investment, the globalization ofstock markets, varying patterns of share ownership, and the international monetarysystem;

l outline the nature and growth of multinational enterprises (MNEs);

l explain the historical, comparative and harmonization reasons for studyingcomparative international accounting.

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1.1 Differences in financial reporting

Differences in financial reporting are the norm. If a number of accountants fromdifferent countries, or even one country, are given a set of transactions from whichto prepare financial statements, they will not produce identical statements. Thereare several reasons for this. Although all accountants will follow a set of rules,whether implicit or explicit, no set of rules covers every eventuality or is prescript-ive to the minutest detail. Thus there is always room for professional judgement, a judgement that will depend in part on the accountants environments (e.g.whether or not they see the tax authorities as the main users of the statements).Moreover, the accounting rules themselves may differ not just between countriesbut also within countries. In particular the rules for company groups may differfrom the rules for individual companies. Multinational enterprises (MNEs) whichoperate as company groups in more than one country may find inter-country dif-ferences particularly irksome.

Awareness of these differences has led in recent decades to impressive attempts toreduce them, in particular, by the International Accounting Standards Board (IASB),which issues International Financial Reporting Standards (IFRS), and by the EuropeanUnion (EU), which has issued Directives and Regulations on accounting and financialreporting. The importance of American stock markets has meant that US generallyaccepted accounting principles (GAAP), the most detailed and best known of allnational sets of rules, have greatly influenced rule-making worldwide. The work ofall these regulatory agencies has certainly led to a lessening of international differ-ences but, as this book will show, many still remain and some will always remain.

An example of the differences that can, and continue, to arise is provided by therecord of GlaxoSmithKline (GSK) and its predecessor GlaxoWellcome (GW) since1995. GW merged with SmithKlineBeecham. It is listed in New York as well as onthe London Stock Exchange, and in accordance with requirements of the USSecurities and Exchange Commission (SEC) provides a reconciliation to US GAAP of its earnings and shareholders equity as measured under UK rules (from 2005onwards under IFRS). The differences as disclosed in Tables 1.1 and 1.2 are startling.Data from other such reconciliations are given later in this book. Not all are asextreme as those of GSK, but it is clear that the differences can be very large andthat no easy rule-of-thumb adjustment procedure can be used. One reason for thisis that the differences depend not only on the differences between two or more sets of rules, but also on the choices allowed to companies within those rules. Theadoption by listed companies within the EU of IFRS from 2005 onwards, and greaterconvergence between those standards and US GAAP, has reduced, but not removed,these differences.

Understanding why there have been differences in financial reporting in the past, why they continue in the present, and will not disappear in the future, is oneof the main themes of comparative international accounting. In the next two sec-tions of this chapter we look at the global environment of accounting and financialreporting, and in particular at the nature and growth of multinational enterprises.We then explore in more depth the reasons for studying comparative internationalaccounting. In the last section we explain the structure of the book.

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Table 1.2 GlaxoSmithKline reconciliations of shareholders equity to US GAAP

DifferenceUK IFRS US (% change)

m m m %

1995 91 8,168 +8,8761996 1,225 8,153 +5661997 1,843 7,882 +3281998 2,702 8,007 +1961999 3,142 7,230 +1302000 7,517 44,995 +4992001 7,390 40,107 +4432002 6,581 34,992 +4322003 5,059 34,116 +5742004 5,925 34,042 +4752005 7,570 34,282 +3532006 9,648 34,653 +259

Table 1.1 GlaxoSmithKline reconciliations of earnings to US GAAP

Difference UK IFRS US (% change)

m m m %

1995 717 296 591996 1,997 979 511997 1,850 952 491998 1,836 1,010 451999 1,811 913 502000 4,106 (5,228) 2272001 3,053 (143) 1052002 3,915 503 872003 4,484 2,420 462004 4,302 2,732 362005 4,816 3,336 312006 5,498 4,465 19

Chapter 1 Introduction

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1.2 The global environment of accounting

Accounting is a technology which is practised within varying political, economicand social contexts. These have always been international as well as national, but since at least the last quarter of the twentieth century, the globalization of

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accounting rules and practices has become so important that narrowly nationalviews of accounting and financial reporting can no longer be sustained.

Of particular contextual importance are:

l major political issues, such as the dominance of the United States and the expan-sion of the European Union;

l economic globalization, including the liberalization of, and dramatic increases in,international trade and foreign direct investment;

l the emergence of global financial markets;

l patterns of share ownership, including the influence of privatization;

l changes in the international monetary system;

l the growth of multinational enterprises (MNEs).

These developments are interrelated and all have affected financial reporting andthe transfer of accounting technology from one country to another. They are nowexamined in turn.

1.2.1 Accounting and world politicsImportant political events since the end of the Second World War in 1945 haveincluded: the emergence of the United States and the Soviet Union as the worldstwo superpowers, followed by the collapse of Soviet power at the end of the 1980s;the break-up of the British and continental European overseas empires; and the creation of the European Union, which has expanded from its original core of sixcountries to include, among others, the UK and eventually many former com-munist countries. More detail on the consequences that these events have had foraccounting is given in later chapters. The following illustrations may suffice for themoment:

l US ideas on accounting and financial reporting have been for many decades, andremain, the most influential in the world. The collapse of the US energy tradingcompany, Enron, in 2001 and the demise of its auditor, Andersen, had repercus-sions in all major economies.

l The development of international accounting standards (at first of little interestin the US) owes more to accountants from former member countries of theBritish Empire than to any other source. The IASC and its successor are based inLondon; the driving force behind the foundation of the IASC, Lord Benson, wasa British accountant born in South Africa.

l Accounting in developing countries is still strongly influenced by the formercolonial powers. Former British colonies tend to have Institutes of CharteredAccountants (set up after the independence of these countries, not before),Companies Acts and private sector accounting standard-setting bodies. FormerFrench colonies tend to have detailed governmental instructions, on everythingfrom double entry to published financial statements, that are set out in nationalaccounting plans and commercial codes.

l Accounting throughout Europe has been greatly influenced by the harmoniza-tion programme of the EU, especially its Directives on accounting and, more

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recently, its adoption of IFRS for the consolidated financial statements of listedcompanies.

l The collapse of communism in Central and Eastern Europe led to a transforma-tion of accounting and auditing in many former communist countries. Thereunification of Germany put strains on the German economy such that largeGerman companies needed to raise capital outside Germany and to change theirfinancial reporting in order to be able to do so.

1.2.2 Economic globalization, international trade and foreign direct investmentA notable feature of the world economy since the Second World War has been theglobalization of economic activity. This has meant the spreading round the worldnot just of goods and services but also of people, technologies and concepts. Thenumber of professionally qualified accountants has greatly increased. Member bodies of the International Federation of Accountants (IFAC) currently have wellover two million members. Accountants in all major countries have been exposedto rules, practices and ideas previously alien to them.

Much has been written about globalization and from many different and con-trasting points of view. One attractive approach is the globalization index pub-lished annually in the journal Foreign Policy. This attempts to quantify the conceptby ranking countries in terms of their degree of globalization. The components ofthe index are: political engagement (measured, inter alia, by memberships of inter-national organizations); technological connectivity (measured by internet use); personal contact (measured, inter alia, by travel and tourism and telephone traffic);and economic integration (measured, inter alia, by international trade and foreigndirect investment). The compilers of the index acknowledge that not everything canbe quantified; for example, they do not include cultural exchanges. The ranking ofcountries varies from year to year but the most globalized countries according to the index are small open economies such as Singapore, Switzerland and Ireland.Small size is not the only factor, however, and the Top 20 typically also include the US, the UK and Germany. A possible inference from the rankings is that measures of globalization are affected by national boundaries. How different wouldthe list be if the EU were one country and/or the states of the US were treated as separate countries?

From the point of view of financial reporting, the two most important aspects ofglobalization are international trade and foreign direct investment (FDI) (i.e. equityinterest in a foreign enterprise held with the intention of acquiring control orsignificant influence). Table 1.3 illustrates one measure of the liberalization andgrowth of international trade: merchandise exports as a percentage of gross domesticproduct (GDP). Worldwide, the percentage has more than trebled since the end ofthe Second World War. The importance of international trade to member states of the EU is particularly apparent; much of this is intra-EU trade. At the regionallevel, economic integration and freer trade have been encouraged through the EUand through institutions such as the North American Free Trade Area (NAFTA) (theUS, Canada and Mexico). The liberalization has also been due to the dismantling oftrade barriers through rounds of talks under the aegis of the General Agreement on

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Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO).One area in which trade is insufficiently liberalized is agricultural products, leadingto the criticism that liberalization has benefited developed rather than developingcountries. For a discussion of both the positive and negative aspects of internationaltrade, see Finn (1996).

The importance of foreign direct investment is illustrated in Table 1.4, whichranks the 10 leading MNEs by the size of their foreign assets. It also shows the

Table 1.3 Merchandise exports as a percentage of gross domestic product at1990 prices (selected countries, 195098)

1950 1973 1998

France 7.7 15.2 28.7Germany 6.2 23.8 38.9Netherlands 12.2 40.7 61.2United Kingdom 11.3 14.0 25.0Spain 3.0 5.0 23.5United States 3.0 4.9 10.1Mexico 3.0 1.9 10.7Brazil 3.9 2.5 5.4China 2.6 1.5 4.9India 2.9 2.0 2.4Japan 2.2 7.7 13.4World 5.5 10.5 17.2

Source: Maddison, A. (2001) The World Economy: A Millennial Perspective. Organisation for Economic Co-operationand Development (OECD), Paris.

Table 1.4 Worlds top ten non-financial multinationals ranked by foreign assets,2004

Foreign % that is foreign ofAssets

Company Country Industry (US $bn) Assets Sales Employees TNI

General Electric US Electrical 449 60 37 46 48Vodaphone UK Telecoms 248 96 85 80 87Ford Motor US Motors 180 59 42 46 49General Motors US Motors 174 36 31 35 34BP UK Oil 155 80 81 83 81Exxon Mobil US Oil 135 69 70 50 63Royal Dutch/Shell NL/UK Oil 130 67 64 84 72Toyota Motor Japan Motors 123 53 60 36 49Total France Oil 97 86 81 56 74France Telecom France Telecoms 86 65 41 40 49

Note: TNI = transnationality index, calculated as an average of the assets, sales and employees percentages.Source: United Nations Conference on Trade and Development (UNCTAD) (2007) World Investment Report 2007:Transnational Companies, Extractive Industries and Development. Geneva, UNCTAD. Copyright United Nations2007. Reproduced with permission.

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percentages of their assets, sales and employees that are foreign, and a simpletransnationality index (TNI), calculated as the average of the percentages. The homecountries of these MNEs are the US (4 MNEs), France (2), the UK (2), Japan (1) and the Netherlands/UK (1). The industries represented are electrical equipment,telecommunications, motor vehicles and oil. Two UK companies, Vodafone and BP,have the highest transnationality indices.

1.2.3 Globalization of stock markets

At the same time as international trade and FDI have increased, capital marketshave become increasingly globalized. This has been made possible by the deregula-tion of the leading national financial markets (e.g. the Big Bang on the LondonStock Exchange in 1986); the speed of financial innovation (involving new tradingtechniques and new financial instruments of sometimes bewildering complexity);dramatic advances in the electronic technology of communications; and growinglinks between domestic and world financial markets. Table 1.5 lists the countrieswhere there are stock exchanges with more than 250 domestic listed companies and also a market capitalization (excluding investment funds) of more than $800 billion.

Table 1.5 Major stock exchanges, April 2007

Market Market Domestic capitalization capitalization listed of domestic as % of United

Country Exchange companies equities ($bn) Kingdom

Europe and Africa Euronext 956 2,229 56Germany Deutsche Brse 658 1,022 26South Africa Johannesburg 345 807 20Switzerland Swiss exchanges 256 1,342 34United Kingdom London 2,603 3,961 100

The AmericasBrazil So Paulo 362 845 21Canada Toronto 3,832 1,823 46United States NASDAQ 2,788 4,061 102

New York 1,795 16,112 406

Asia-PacificChina Hong Kong 1,177 1,821 46India Bombay (Mumbai) 4,826 932 23Japan Tokyo 2,396 4,653 117Korea Korean 1,695 905 23Australia Australian 1,777 1,282 32

Sources: World Federation of Exchanges; Euronext.

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Precise measures of the internationalization of the worlds stock markets are hardto construct. Two crude measures are cross-border listings and the extent to whichcompanies translate their annual reports into other languages for the benefit of foreign investors. For example, French companies are listed on stock exchanges in Australia, Belgium, Canada, Germany, Luxembourg, the Netherlands, Spain,Sweden, Switzerland, the UK and the US (Glard, 2001, pages 10389). Table 1.6shows the extent of listing by foreign companies on eight of the worlds major stockexchanges. In absolute terms, the largest number of foreign listings is on the NewYork stock exchange; in percentage terms, Switzerland has the most foreign listings.The lack of foreign listings in Tokyo (the worlds second largest stock exchange) andToronto is very apparent. Davis et al. (2003) examine the international nature ofstock markets from the nineteenth century onwards, and chart the rise in listingrequirements on the London, Berlin, Paris and New York exchanges.

Some companies publish their annual reports in more than one language. Themost important reason for this is the need for large MNEs to raise money and havetheir shares traded in the US and the UK. This explains why English is the mostcommon secondary reporting language. Other reasons for using more than one lan-guage are that the MNE is based in a country with more than one official language,that the MNE has headquarters in more than one country or that it has substantialcommercial operations in several countries. For example, the Finnish telecommun-ications company, Nokia, publishes its annual report and financial statements not only in Finnish and Swedish (the two official languages of Finland) but also inEnglish. The Business Review section of the report is also available in French,German, Italian, Portuguese, Spanish, Chinese and Japanese (Parker, 2001b). Thetranslation of annual reports is further discussed in Chapter 20. Evans (2004) dis-cusses the problems of translating accounting terms from one language to another.

A more sophisticated measure of internationalization is the extent to which stockmarkets have become integrated, in the sense that securities are priced accordingto international rather than domestic factors (Wheatley, 1988). Froot and Dabora(1999) show that domestic factors are still important even for such Anglo-Dutchtwin stocks as Unilever NV/PLC.

Table 1.6 Foreign company listings on eight major stock exchanges, April 2007

As % of totalNo. listings

Euronext (France, Netherlands, Belgium, Portugal) 246 20Germany 101 13London 648 20NASDAQ 326 10New York 447 20Switzerland 89 26Toronto 54 1Tokyo 26 1

Source: World Federation of Exchanges.

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National stock exchange regulators not only operate in their domestic marketsbut are also, through the international bodies to which they belong, such as theInternational Organization of Securities Commissions (IOSCO) and the Committeeof European Securities Regulators (CESR), playing increasingly important roles inthe internationalization of accounting rules (see Chapters 4 and 11).

1.2.4 Patterns of share ownership

The globalization of stock markets does not mean uniformity of investor behaviouraround the world. Patterns and trends in share ownership differ markedly fromcountry to country. The nature of the investors in listed companies has implicationsfor styles of financial reporting. The greater the split between the owners and man-agers of these companies, the greater the need for publicly available and independ-ently audited financial statements. La Porta et al. (1999) distinguish companieswhose shares are widely held from those that are family controlled, state controlled,controlled by a widely held financial corporation, or controlled by a widely heldnon-financial corporation. According to their data, which cover 27 countries (notincluding China, India and Eastern Europe) in the mid-1990s, 36 per cent of thecompanies in the world were widely held, 30 per cent were family controlled and 18 per cent were state controlled. The countries whose largest 20 companieswere most (60 per cent or more) widely held were, in descending order, the UK,Japan, the US, Australia, Ireland, Canada, France and Switzerland. The countrieswhose largest 20 companies were most (60 per cent or more) family controlled were Mexico, Hong Kong and Argentina. The countries with companies with most (35 per cent or more) state control were Austria, Singapore, Israel, Italy, Finland andNorway. The countries with companies held 15 per cent or more by a widely-heldfinancial corporation were Belgium, Germany, Portugal and Sweden.

More up-to-date data is available from surveys of share ownership. These showdifferent trends in different countries. In the US the percentage of persons invest-ing in shares directly or through mutual funds (known as unit trusts in the UK) rosefrom 19 per cent in 1983 to 37 per cent in 1992 to 50 per cent in 2002 (InvestmentCompany Institute, 2002). By contrast, in the UK the equivalent percentages were26 per cent in 1990, 20 per cent in 1998 and 16 per cent in 2002 and 2004.Continuing trends in the UK have been the growth of shareholdings by foreigninvestors (12 per cent in 1990, 28 per cent in 1998, 33 per cent in 2004) and byfinancial institutions such as pension funds and insurance companies (33 per centin 2004, down from a peak of 52 per cent in 1991 as holdings by foreign investorsincreased) (National Statistics, 2005).

Privatization , i.e. the selling-off of state-owned businesses, has greatly expandedthe private sector in many countries. In the UK, for example, the privatization ofpublic utilities and other publicly owned enterprises from the 1980s onwardsbrought several very large organizations within the ambit of company law andaccounting standards. In the short run this increased the number of shares held bypersons, but many of them later sold out and some companies have deliberatelytried to reduce the number of their small shareholders. Privatization has openedcompanies up to foreign ownership, thus stimulating the growth of FDI, and facil-itating their expansion into foreign markets. Privatization has been most dramatic

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in the former communist countries of Central and Eastern Europe. In some cases,notably in Russia, privatization has transferred the ownership of large companiesfrom the state to a small group of so-called oligarchs.

1.2.5 International monetary system

From 1945 to 1972, the international monetary system under the Bretton WoodsAgreement was based on fixed exchange rates with periodic devaluations. From1973, major currencies have floated against each other and exchange rates havebeen very volatile (as illustrated in Table 18.1). Within the EU, however, mostnational currencies, with the notable exception of the pound sterling, were replacedby a single currency, the euro, in 1999. Accounting standard-setters have beenmuch concerned with hedging activities and other transactions in foreign currency.There is discussion of these issues in Chapters 16 and 18.

1.3 The nature and growth of MNEs

MNEs may be broadly defined as those companies that produce a good or a servicein two or more countries. MNE is an economic category not a legal one. The sizeof most MNEs is such that they need to raise external finance and hence to be incor-porated companies listed on stock exchanges. As listed companies (i.e. whose sharesare publicly traded), their financial reporting is subject to special regulations that arediscussed at length in Part II of this book. The existence of MNEs brought a newdimension to areas such as auditing, which already existed at the domestic level (seeChapter 21). Issues such as the translation of the financial statements of foreign sub-sidiaries for the preparation of consolidated statements (see Chapter 18) are peculiarto multinational companies. Most of the worlds MNEs produce consolidated finan-cial statements in accordance with either US GAAP, IFRS or approximations thereto.

The above definition of MNEs is broad enough to include early fourteenth-century enterprises such as the Gallerani company, a Sienese firm of merchants that had branches in London and elsewhere and whose surviving accounts provideone of the earliest extant examples of double entry (Nobes, 1982). From the late sixteenth century onwards, chartered land and trading companies notably theEnglish, Dutch and French East India Companies were early examples of resource-seeking MNEs, i.e. those whose object is to gain access to natural resources that arenot available in the home country. The origins of the modern MNE are to be foundin the period 1870 to 1914, when European people and European investment wereexported on a large scale to the rest of the world and when the United Statesemerged as an industrial power. On the eve of the First World War, the stock ofaccumulated FDI was greatest in, by order of magnitude, the United Kingdom, theUnited States, Germany, France and the Netherlands. Two world wars decreased the relative economic importance of European countries and increased that of theUnited States. Table 1.7 shows how the rankings changed from 1914 to 2005. Afterthe Second World War, the United States became, as it remains, the worlds largestexporter of FDI. More recently, however, European-based multinationals have

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Table 1.7 Percentage shares of estimated stock of accumulated foreign directinvestment by country of origin, 19142005 (%)

1914 1938 1980 1990 2000 2005

United Kingdom 45 40 15 13 14 12United States 14 28 42 24 20 19Germany 14 1 8 8 8 9France 11 9 5 6 7 8Netherlands 5 10 8 6 5 6Other Western Europe 5 3 9 16 22 17Japan 4 11 4 4Rest of world 6 9 9 16 20 25

100 100 100 100 100 100

Sources: Based on Dunning (1992) and UNCTC (2006).


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regained some of their relative importance and both US and European MNEs werechallenged, at least for a time, by those of Japan. All these countries are major recipients of FDI as well as providers of it.

MNEs can be classified according to their major activity. Most nineteenth-cen-tury and earlier multinationals were resource-seeking. In the twentieth centuryother types have developed. Some MNEs are market-seeking, i.e. they establishsubsidiaries whose main function is to produce goods to supply the markets of thecountries in which they are located. Other MNEs are efficiency-seeking, i.e. eachsubsidiary specializes in a small part of a much wider product range, or in discretestages in the production of a particular product. Manufacturing MNEs have alsodeveloped subsidiaries that specialize in trade and distribution, or in providing ser-vices such as insurance, banking or finance. Some MNEs, such as the larger banks andaccountancy firms, provide services on a global basis. Improvements in technologyhave led to the creation of overseas subsidiaries specializing in information transfer.

The extent to which the production of goods and services has been internation-alized varies between countries and industries. The United States has the worldshighest absolute value of FDI, but the size of its economy is such that investmentoverseas is relatively less important for the United States than for many Euro-pean countries, although it is higher in percentage terms than that of Japan (seeTable 1.8). Table 1.9 demonstrates the extent to which the headquarters of thelargest MNEs are located in the US, Japan and the European Union.

Economists and others have sought to explain why MNEs exist. The mostfavoured explanation is Dunnings eclectic paradigm, which states that the propen-sity for firms of a particular country to engage in, or to increase, overseas produc-tion is determined by three interrelated conditions. These are the extent to whichthe enterprises possess, or can gain privileged access to, assets that provide themwith a competitive advantage over local firms; the extent to which relative trans-actions costs make it appropriate for the enterprises to use such advantages themselves rather than to license or franchise them to other firms; and the extentto which relevant costs and government policies push enterprises towards locating

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Table 1.8 Accumulated stock of outward foreign direct investment as percentageof GDP in 2005 (selected countries)

Country %

Norway 123Switzerland 107Belgium 104Netherlands 103Sweden 57United Kingdom 56France 41Canada 35Germany 35Italy 17United States 16Japan 9World 24

Source: United Nations Conference on Trade and Development (UNCTAD) (2007) World Investment Report 2007:Transnational Companies, Extractive Industries and Development. Geneva, UNCTAD. Copyright United Nations2007. Reproduced with permission.

Table 1.9 Share of the worlds top 500 MNEs by revenues, 2005

United States 170France 38United Kingdom 38Germany 35Netherlands 14Italy 10Spain 9Sweden 6Belgium 4Finland 2Denmark 2UK/Netherlands 1Belgium/Netherlands 1Ireland 1Luxembourg 1Total EU 162Japan 70China 20Canada 14Switzerland 12South Korea 12Australia 8India 6Brazil 4Mexico 5Russia 5Taiwan 3Norway 2Other countries (one each) 7

500

Source: Fortune Global 500, 2006.

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1 This expression is used in this book with its common European meaning, i.e. the UK, the US and other mainlyEnglish-speaking countries such as Canada, Australia and New Zealand.


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production overseas rather than towards meeting demand by exports from thehome country. An important consequence of the growth of multinational enter-prise is that much of the worlds trade takes place within firms as well as betweencountries. The prices at which the transactions take place are internal transferprices, which are often not the same as open market prices. This has importantimplications, for taxation, management control, and the relationships betweenMNEs and their host countries. These matters are considered further in Chapters 22and 23.

The rise of the MNE is one of the main factors responsible for the internation-alization of the accountancy profession. Accountancy firms have followed theirclients around the world, setting up new offices overseas and/or merging with overseas firms. The audit of MNEs is considered further in Chapter 21.

1.4 Comparative and international aspects of accounting

Given the global context set out above, there are clearly strong arguments for study-ing international accounting. Moreover, there are at least three reasons why a com-parative approach is appropriate. First, it serves as a reminder that the US and otherAnglo-Saxon1 countries are not the only contributors to accounting as it is practisedtoday. Secondly, it demonstrates that the preparers, users and regulators of finan-cial reports in different countries can learn from each others ideas and experiences.Thirdly, it explains why the international harmonization of accounting has beendeemed desirable but has proved difficult to achieve (Parker, 1983). These three reasons are now looked at in more detail.

Historically, a number of countries have made important contributions to thedevelopment of accounting. The Romans had forms of bookkeeping and the cal-culation of profit, although not double entry. In the Muslim world, while ChristianEurope was in the Dark Ages, developments in arithmetic and bookkeeping pavedthe way for later progress. In the fourteenth and fifteenth centuries, the Italian citystates were the leaders in commerce, and therefore in accounting. The Italianmethod of bookkeeping by double entry spread first to the rest of Europe and even-tually round the whole world. One lasting result of this dominance is the numberof accounting and financial words in English and other languages that are of Italianorigin. Some examples in English are bank, capital, cash, debit, credit, folio, imprestand journal.

In the nineteenth century, Britain took the lead in accounting matters, to be followed in the twentieth century by the United States. As a result, English hasbecome established as the worlds language of accounting (Parker, 2000 and 2001a).Table 1.10, which gives details of some members of IFAC, shows, inter alia, that the modern accountancy profession developed first in Scotland and England. Thetable also shows that some countries (e.g. Australia, Canada and the UK) have more

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Table 1.10 Age and size of some members of IFAC

Country

Australia

Brazil

Canada

China

France

Germany

India

Japan

Netherlands

New Zealand

United Kingdom and Ireland

United States

Notes: Dates of earliest predecessor bodies in brackets. The names of some of the bodies have changed from time to time.Excluding junior CPAs.

Body

CPA Australia

Institute of Chartered Accountants in Australia

Conselho Federal de Contabilidade

Canadian Institute of CharteredAccountants

Certified General Accountants Association ofCanada (CGAA-Canada)

Society of Management Accountants ofCanada (CMA-Canada)

Chinese Institute of CertifiedPublic Accountants

Ordre des Experts Comptables

Institut der Wirtschaftsprfer

Institute of Chartered Accountants of India

Japanese Institute of CertifiedPublic Accountants

Koninklijk Nederlands Instituut vanRegisteraccountants

Institute of Chartered Accountants of NewZealand

Institute of Chartered Accountants in Englandand Wales

Institute of Chartered Accountants of Scotland

Association of Chartered Certified Accountants

Chartered Institute of ManagementAccountants

Institute of Chartered Accountants in Ireland

American Institute of CertifiedPublic Accountants

Founding date

1952 (1886)

1928 (1885)

1946

1902 (1880)

1913

1919

1988

1942

1932

1949

1948 (1927)

1967 (1895)

1909 (1894)

1880 (1870)

1951 (1854)

1939 (1891)

1919

1888

1887

Approx. members2006 (000s)

112

43

194

71

42

37

142+

18

13

131

17

13

29

128

17

115

70

13

330

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than one important accountancy body. A multiplicity of bodies has been the normin Anglo-Saxon countries. The largest body is the American Institute of CertifiedPublic Accountants.

Table 1.10 does not show rates of growth; the Chinese Institute of CertifiedPublic Accountants has grown in recent years to become the third largest in theworld. The table also does not show the extent to which bodies have worldwide andnot just national membership. Two UK-based bodies, the ACCA and the CIMA,have been notably active and successful in this regard. A look at the table also sug-gests that some countries have far more accountants per head of population thanothers: compare, for example, France (population 60 million; accountants 18,000)and New Zealand (population 4 million; accountants 29,000). Of course, compar-isons such as these depend in part on how the term accountant is defined in eachcountry. There is further discussion of the accountancy profession in Chapter 2.

Table 1.11 demonstrates the overwhelmingly British and American origins of thelargest international accountancy firms. Accounting techniques, institutions andconcepts have been imported and exported around the world. Britain, for example,has not only imported double entry from Italy and exported professional account-ancy to the rest of the world, but has also exported the concept of a true and fairview, first to the other countries of the British Commonwealth and, more recently,to the other member states of the European Union (Parker, 1989; Nobes, 1993). The concepts and practices of management accounting throughout the industrial-ized world owe much to American initiatives. In the second half of the twentiethcentury, Japan contributed to management accounting and control. Carnegie andNapier (2002) make a persuasive case for the study of comparative internationalaccounting history.

The second reason for taking a comparative approach is that it allows one tolearn from both the achievements and failures of others and to avoid the perils ofaccounting ethnocentrism. It is possible for a country to improve its own account-ing by observing how other countries react to problems that, especially in indus-trialized nations, may not differ markedly from those of the observers home country.It is also possible to examine whether, where accounting methods differ, the differences are justified by differences in the economic, legal and social environ-ment and are not merely the accidents of history. Such accidents may not impedeharmonization (see Section 2.6), whereas more fundamental differences are likely to be much more difficult to deal with.

Table 1.11 Leading international accountancy firms, 2008

Main countries of origin

Deloitte UK, USA, Canada, Japan

Ernst & Young USA, UK

KPMG Netherlands, UK, USA, Germany

PricewaterhouseCoopers UK, USA

Note: The names given above are those of the international firms. National firms may have different names.

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A feature of recent decades has been the extent to which countries have beenwilling to adopt and adapt accounting methods and institutions from other coun-tries. Examples will be found in many of the chapters of this book. The UK accepted continental European ideas about greater uniformity in the layout of financial statements. France and Germany accepted US and UK approaches to consolidatedstatements. The Netherlands accepted a much greater degree of regulation of com-pany accounting and auditing than previously. France and Australia set up theirown versions of the US Securities and Exchange Commission (SEC). Germany,where enforcement of accounting standards had been weak, is trying a compromisebetween the SEC and the UK Financial Reporting Review Panel. Even the US, shakenby accounting scandals from 2001 onwards, is showing itself willing to consider thevirtues of the principles approach to accounting standard-setting espoused in theUK and by the IASB.

The third reason for taking a comparative approach is better to understand harmonization, a process that has grown steadily in importance since the 1970s.The arguments for and against are considered in Chapter 4. At this point it may benoted that, as is demonstrated in Part V of this book, major problems such as leaseaccounting, consolidation accounting and foreign currency translation have beentackled in different countries in significantly different ways, although a pattern maysometimes be discerned. Solutions devised by the Financial Accounting StandardsBoard (FASB) in the US the worlds most powerful national accounting standard-setting body have been very influential but have not always been accepted. Indeed,one reason for the acceptance by many countries and companies of internationalstandards is that they are not US GAAP. On the other hand they are sufficientlyclose to US GAAP to be acceptable to most stock-exchange regulators.

The growing strength of the IASB and the adoption of its standards by the EU (in part in order to prevent EU-based MNEs adopting US GAAP) can be seen as a process of regulatory competition (Esty and Geradin, 2001), with the IASB and theFASB competing in a race to the top. The process of harmonization within the EUmeant that all the major countries had their own regulatory solutions challengedand had to accept compromises of both a technical and a political nature. It is clearthat any attempt to harmonize financial reporting touches on wider issues thanaccounting. In Chapter 2 we look at some of the underlying reasons for the differ-ences that exist. Before that, we explain the structure of this book.

1.5 Structure of this book

1.5.1 An outline

The book is divided into six parts. Part I sets the context, covering the causes andnature of differences in financial reporting, classification of accounting systems,and an introduction to international harmonization. Part II deals with financialreporting by listed groups, which is dominated worldwide by IFRS and US GAAPand the competition between them. Part III looks at the problems of harmonization

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and transition in Europe (both West and East) and in East Asia, with particular reference to Japan and China. Part IV covers the financial reporting (particularlythat by individual legal enterprises) that continues to be governed by sets ofnational rules, some of which differ considerably from IFRS and US GAAP. Part Vexamines some major technical accounting issues faced by MNEs. Part VI examinessome analysis and management issues.

The chapters in the six parts of the book are described in more detail below.

1.5.2 Setting the scene (Part I)

The adoption of IFRS by the 27 member states of the European Union and the convergence of IFRS and US GAAP, both formally agreed in 2002, have not removedthe differences in financial reporting among countries. This is partly because IFRS is used in many countries only for consolidated statements, and partly because different national versions of IFRS practice exist. The causes and nature of these differences are discussed in Chapter 2. Several writers on international accountinghave attempted classifications of financial reporting. These are discussed and evalu-ated in Chapter 3. Most classifications have been of countries, which are explicitlyor implicitly assumed to have homogeneous financial reporting. More recently theemphasis has shifted to accounting systems, in recognition of the fact that coun-tries (and even companies) can use more than one type of accounting. In this book we discuss differences between countries, between systems and between com-panies. This examination of international differences and patterns in them leads toChapter 4, which discusses international harmonization, explaining why and howthe need for this has grown in recent decades. We particularly look at the extent to which it has been met by the establishment of an International AccountingStandards Committee (IASC) and its successor the International AccountingStandards Board (IASB).

1.5.3 Financial reporting by listed groups (Part II)

Chapter 5 follows on from the material of Chapter 4 by exploring the relation-ship between international and national standards, including competition andconvergence between IFRS and the most influential set of national standards, USGAAP. The requirements of IFRS are summarized in Chapter 6, first in terms of topics (conceptual framework, assets, liabilities, group accounting, disclosures) andsecondly in the numerical order of extant standards. Chapter 7 examines the possible motives and opportunities for different national versions of IFRS practice.Chapter 8 describes and analyzes corporate financial reporting and its environmentin the US, including a comparison of US rules with international rules. Chapter 9discusses how the application of IFRS and US GAAP to the financial statements oflisted groups is governed and enforced in the US, in leading member states of theEU (UK, France and Germany), and in other important countries such as Australia.The setting and enforcement of accounting rules is in part a political issue, andChapter 10 therefore examines the politicization of accounting and particularlypolitical lobbying by preparers of financial statements.

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1.5.4 Harmonization and transition in Europe and East Asia (Part III)

Chapter 11 looks at the attempts that have been made to harmonize the great variety of financial reporting that exists within the EU, as part of a more general aimof eliminating economic barriers. The chapter explains the initial difficulties of recon-ciling Continental European and Anglo-Saxon approaches, and the more recentproblems of the accession to the EU of many economies which have had to make atransition from communist to market-based accounting. Chapter 12 compares andcontrasts financial reporting in the two major economies of East Asia: Japan andChina. Both have been and still are subjected to a variety of outside influences, butboth retain their own special national characteristics.

1.5.5 Financial reporting by individual companies (Part IV)

Financial reporting by individual business enterprises is much more diverse thanthat of listed company groups. Chapter 13 explains why this is the case, with spe-cial emphasis on the information needs of tax authorities and the determination of distributable profit. Chapter 14 analyzes the different ways of rule-making thathave evolved (accounting plans, legal codes, statutes, standards) and assesses theirusefulness. Chapter 15 explains how the accounting rules applicable to individualbusiness enterprises may differ from IFRS or US GAAP, with particular reference toFrance, Germany and the UK.

1.5.6 Major issues in financial reporting by MNEs (Part V)

Accounting standards are always in a state of change and those contained withinIFRS and US GAAP are no exception. It is never sufficient merely to learn thedetailed content of standards at a particular date. All standards are compromisesand this is especially so when they have to be agreed at an international level.Chapter 16 examines eight key financial reporting topics: recognition of intangibleassets, asset measurement, financial instruments, provisions, employee benefits,deferred tax revenue recognition and comprehensive income. The chapter showshow the valuation rules in the standards do not fit into a consistent conceptualframework and discusses the differences between IFRS and US GAAP from a concep-tual perspective. Chapters 17 to 19 examine three problems which relate especiallyto MNEs: consolidated financial statements, foreign currency translation and seg-ment reporting, with comparisons of the solutions arrived at in IFRS and US GAAP.

1.5.7 Analysis and management issues (Part VI)

Chapter 20 examines the problems faced by non-domestic readers and analysts offinancial reports, problems that for listed groups have been lessened but not removedby the increasing use of IFRS and US GAAP. Chapter 21 explains how auditing hasbeen internationalized, with particular reference to the role of MNEs, internationalcapital markets, international accounting firms and IFRS. It looks at internationalstandards on auditing (ISAs), the international audit process in practice, and theaudit expectations gap in an international context. Chapter 22 discusses international

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aspects of corporate income taxes, including the relationship between taxableincome and accounting income, international tax planning, tax systems, and theharmonization of taxation. Chapter 23 concludes the book by examining manage-rial accounting within MNEs, with particular reference to the problems of operatingwith different currencies and coping with differences in national cultures.

SUMMARY

l The scale of international differences in corporate financial reporting remainslarge, despite the adoption of IFRS for listed companies within the EU and elsewhere.

l Financial reporting since the Second World War has taken place within a globalcontext which has been characterized by: vast changes in world politics; dramaticgrowth in international trade and foreign direct investment (FDI); the global-ization of stock markets; varying patterns of share ownership; an unstable inter-national monetary system; and the rise of MNEs, which are the main exportersand importers of FDI and a major factor in the internationalization of theaccountancy profession.

l Historically several countries have made important contributions to the develop-ment of accounting and financial reporting.

l The comparison of accounting rules and practices between countries is a strongantidote to accounting ethnocentrism. Successful innovations in one country arebeing copied in others.

l Harmonization is taking place at both regional and international levels.

l This book is arranged into six parts: setting the scene; financial reporting by listedgroups; harmonization and transition; financial reporting by individual companies;major issues for MNEs; and analysis and management.

Carnegie, G.D. and Napier, C.J. (2002) Exploring comparative international accounting history, Accounting, Auditing & Accountability Journal, Vol. 15, No. 5.

Davis, L., Neal, L. and White, E.N. (2003) How it all began: the rise of listing requirementson the London, Berlin, Paris, and New York Stock Exchanges, International Journal ofAccounting, Vol. 38, No. 2.

Dunning, J.H. (1992) Multinational Enterprises and the Global Economy, Addison-Wesley,Wokingham.

Esty, D.C. and Geradin, D. (eds) (2001) Regulatory Competition and Economic Integration, OxfordUniversity Press, Oxford.

Evans, L. (2004) Language, translation and the problem of international accounting com-munication, Accounting, Auditing & Accountability Journal, Vol. 17, No. 2.

Finn, D. (1996) Just Trading. On the Ethics and Economics of International Trade, Abingdon Press,Nashville.

Froot, K.A. and Dabora, E.M. (1999) How are stock prices affected by the location of trade?Journal of Financial Economics, August.

Glard, G. (2001) France Individual Accounts, in D. Ordelheide, and KPMG, TransnationalAccounting, Vol. 2, Palgrave Publishers, Basingstoke.

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Investment Company Institute and the Securities Industry Association (2002) EquityOwnership in America. 2002. Available at www.ici.org/stats.

La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (1999) Corporate ownership around theworld, Journal of Finance, April.

Maddison, A. (2001) The World Economy. A Millenial Perspective, OECD.National Statistics (2005) Share Ownership. A Report on Ownership of Shares as at 31st December

2004. Available at www.statistics.gov.uk/StatBase.Nobes, C.W. (1982) The Gallerani account book of 13058, Accounting Review, April.Nobes, C.W. (1993) The true and fair view requirement: impact on and of the Fourth

Directive, Accounting and Business Research, Winter.Parker, R.H. (1983) Some international aspects of accounting, in S.J. Gray (ed.), International

Accounting and Transnational Decision, Butterworths, London.Parker, R.H. (1989) Importing and exporting accounting: the British experience, in A.G.

Hopwood (ed.), International Pressures for Accounting Change, Prentice Hall, London.Parker, R.H. (2000) Why English? Accountancy, August.Parker, R.H. (2001a) European languages of account, European Accounting Review, Vol. 10,

No. 1.Parker, R.H. (2001b) Read with care, Accountancy, June.United Nations Center on Transnational Corporations (UNCTC) (2006) World Investment

Report.Wheatley, S. (1988) Some tests of international equity integration, Journal of Financial

Economics, Vol. 21, No. 2.

Accounting Education www.accountingeducation.com

British Accounting Association www.baa.group.shef.ac.uk

European Accounting Association www.eaa-online.org

International Accounting Standards Board www.iasb.org

International Federation of Accountants www.ifac.org

United Nations Conference on Trade and Development www.unctad.org

World Bank www.worldbank.org

World Federation of Exchanges www.world-exchanges.org

World Trade Organization www.wto.org

Suggested answers to the asterisked questions are given at the end of the book.

1.1 What effects have the major political events in the world since the end of theSecond World War had on accounting and financial reporting?

1.2 Why have the major accounting firms become international? From what countries have they mainly originated? Why?

1.3 What major contributions to accounting and its terminology have been made historically by the following countries: Italy, the United Kingdom, the UnitedStates, Japan?

Useful websites

QUESTIONS

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1.4 Which are the top three developed countries in respect of each of:

(a) share of the worlds top 500 companies;(b) number of qualified accountants;(c) market capitalization of stock exchange?

Why is the answer not the same for all three questions?

1.5 What factors have made possible the internationalization of the worlds stockmarkets?

1.6 What factors have led to the establishment of multinational enterprises?

1.7 Which countries historically have been the home countries of MNEs? Are they thesame countries from which international accounting firms have originated?

1.8 Why are there more accountants per head of population in New Zealand than inFrance?

1.9 Why are some EU companies listed on non-European (especially North American)stock exchanges?

1.10 Why is English the leading language of international corporate financial reporting?

1.11 Access the website of GlaxoSmithKline (www.gsk.com) to explain the differencesdisclosed in its annual reports between US GAAP and IFRS and UK GAAP from 2004onwards. Could these differences (summarized in Tables 1.1 and 1.2) have beensmaller if the company had made other choices of options available within IFRSand UK GAAP? Are the size of the differences influenced by the fact that GSK is apharmaceutical company?

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Causes and examples of international differencesChristopher Nobes

CONTENTS

OBJECTIVES

2.1 Introduction2.2 Culture2.3 Legal systems2.4 Providers of finance2.5 Taxation2.6 Other external influences2.7 The profession2.8 Conclusion on the causes of international differences2.9 Some examples of differences

2.9.1 Conservatism and accruals2.9.2 Provisions and reserves2.9.3 Measurement of assets2.9.4 Financial statement formats

SummaryReferencesFurther readingQuestions

After reading this chapter, you should be able to:l discuss the degree to which international cultural differences might explain

accounting differences;l outline the two main types of legal system to be found in the Western world and

how these are related to accounting differences;l explain how the predominant methods of financing of companies can differ

internationally and how this may affect the purpose and nature of accounting;l illustrate the linkages between taxation and financial reporting, and show how

th

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