Chapter 4 and 5

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International Classification of Financial Reporting

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International Harmonization of accounting

Classification of Accounting and Reporting Systems

 Classification aids in    Describing, analyzing, and predicting the development of accounting systems Strategic planning and control decisions International systems integration  The Challenge?

 Adapt past effective techniques to meet the demands of the global market  Must understand international traditions and heritage

Purposes of International Classification

 Describe and compare international systems  Improved understanding of    Similarities and differences of systems Development of systems and potential for change Dominance of some systems over others  Assess issues of international harmonization  Identify and solve problems

Purposes of International Classification

 Developing countries will be informed of systems in other countries  Aid international accountants and auditors  Problems with accounting and control systems for MNEs – understood and solved

Classification Research

 Deductive or judgmental approach  Environmental factors identified and linked to national accounting practices  International groupings or development patterns are proposed  Inductive or empirical approach  Individual practices analyzed   Development patterns or groupings identified Explanations based on economic, social, political, and cultural factors proposed

Deductive approach

 Mueller’s four approaches to accounting development   Macroeconomic pattern  Business accounting is tied to national economic policies – Examples: Sweden, France, Germany Microeconomic pattern  Accounting is a branch of business economics – Example: replacement-value accounting in Holland

Deductive approach

 Mueller’s four approaches to accounting development   Independent discipline pattern  Accounting is a service function derived from business practice – Examples: U.S. and U.K.

Uniform accounting pattern  Accounting is an efficient means of administration and control – Examples: France, Germany, Sweden, Switzerland

Nobes’s Hierarchial Classification

Inductive Approach

 Nair and Frank (1980) findings  1973 data      Four measurement groups British Commonwealth Latin America Continental European U.S.

 Seven disclosure groups   Could not be plausibly described No explanation offered for difference in groupings

Inductive Approach

  Nair and Frank (1980) findings   Differences between measurement and disclosure groups Hypotheses not supported  Cultural and economic variables associated with disclosure practices  Trading variables associated with measurement practices Overall – little attention given to influence of culture

Cultural Influences on Accounting Systems Culture, Societal Values, and the Accounting Subculture – Fig. 2.3

Structural Elements of Culture

 Hofstede – 4 Underlying societal dimensions     Individualism Power Distance Uncertainty Avoidance Masculinity   Countries grouped into culture areas Hofstede and Bond – 5 th dimension  Confucion Dynamism

Hofstede’s Societal Dimensions

 Individualism versus Collectivism  People’s self-concept: “I” or “we”  Large versus Small Power Distance  How a society handles inequalities among people  Strong versus Weak Uncertainty Avoidance  Control the future or just let it happen   Masculinity versus Femininity  The way a society allocates social roles to gender Confucian Dynamism  Short-term or long-term orientation

Accounting Values – Gray

 Professionalism versus statutory control  Uniformity versus flexibility  Conservatism versus optimism  Secrecy versus transparency

Professionalism versus Statutory Control

   Accountants are perceived to have independent attitudes throughout the world Public regulation or self regulation   U.K. – rely on judgment of accountant France and Germany – implement detailed legal requirements Link to societal value dimensions – Professionalism  Individualism     Weak uncertainty avoidance Small power distance Masculinity Short-term orientation

Uniformity versus Flexibility

   Uniform accounting plan and imposition of tax rules for measurement purposes  France and Spain   Facilitate national planning Pursue macroeconomic goals Intertemporal consistency and some degree of intercompany comparability b/c of flexibility  U.S. and U.K.

Link to societal value dimensions – Uniformity   Strong uncertainty avoidance Collectivism  Large power distance

Figure 2.4 Culture and Accounting Systems in Practice

Authority and Enforcement

Conservatism versus Optimism

  Conservatism seen as a fundamental value  Strongly conservative  Japan, France, Germany, Switzerland  Less conservative  U.S., U.K., the Netherlands Link to societal value dimensions – Conservatism     Strong uncertainty avoidance Long-term orientation Collectivism Femininity

Secrecy versus Transparency

    Stems from management and accountants Closely related to conservatism  Secrecy relates to disclosure  Conservatism relates to measurement Secrecy   High – Japan, France, Germany, Switzerland Low – U.S. and U.K.

Link to societal value dimensions – Secrecy  Strong uncertainty avoidance    High power distance Collectivism Femininity

Accounting Values and Societal Values

Accounting Values and International Classification

   Accounting values most relevant to professional or statutory authority and enforcement  Professionalism and Uniformity  Both concerned with regulation and degree of enforcement or conformity Accounting values most relevant to measurement and disclosure  Conservatism and secrecy Country groupings  Optimistic and transparent  Conservative and secretive

Accounting Values and International Classification

International Pressures for Accounting Change

 Growing international interdependencies  Harmonization of the regulatory framework internationally  Centrally planned economies embraces market-oriented approach  Former U.S.S.R., Eastern Europe, China  New opportunities for international investment, joint ventures, and alliances

Economic Groupings and International Organizations

   European Union  Promotes economic integration/harmonization UN  World Bank    International Monetary Fund UN conference on Trade and Development World Trade Organisation OECD  Foster international economic and social development in industrialized countries  “Code of Conduct” for MNEs

Impact of MNEs and Globalization

 Cultural and social  Employment and consumption patterns  Significantly influenced  Pressure for more accountability  Environmental impact

Impact of MNEs and Globalization

 OECD, EU, IOSCO work for harmonization and internationalization of securities markets  IASB and the International Federation of Accountants (IFAC)  Professional organizations involved in harmonization