Chapter 15

International Accounting and Harmonisation

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International Accounting

• Accounting in an international context is now an issue

• Various catalysts:• globalisation

• international trade

• financial markets

• MNEs

• IASB and FASB now envisaging possibility of a single global accounting regime

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Accounting blocs

• For historical, commercial, social and cultural reasons accounting practice varies

• However, possible to identify 4 blocs:• Anglo-American• Continental European • Islamic• Marxist

• Significant national variations within these

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European Accounting

• Common origin in Italian double-entry• Governance cultures:

• less emphasis on stock market

• small family-based businesses predominate

• less developed accounting profession

• legalistic accounting perspective

• Result is that financial reporting function less developed than Anglo-American model

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Germany

• Dominance of prudence and conservatism principles as a result of economic history

• Subordination of accounting to law

• Result is legalistic, conservative accounting system

• Relative unimportance of stock market and accounting profession

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Germany ctd.

• B/S constructed on conservative value basis• aimed at government and creditors• not primarily for decision-making purposes

• Handelsbilanz: commercial balance sheet• designed to calculate profits figure that can be

distributed, without compromising creditors

• Steuerbilanz: tax balance sheet• under Massgeblichkeits principle, tax accounts based

primarily on Handelsbilanz

• IFRS represents major catalyst

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German corporate governance

• Traditionally firms seek funds from banks, not stock exchange

• Therefore, ownership structure much tighter• fewer owners

• supervisory board with representatives of most significant investors

• cross-investment

• Experience of larger entities, e.g., Daimler-Benz, demonstrates limitations of this model

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Recent Developments

• Governance regime limiting German companies• EU and IFRS as catalysts• Structures beginning to change

• broader shareholder base

• growth of Frankfurt Stock Exchange

• application of IFRS

• Growing importance of accounting profession• Cromme Code of Corporate Governance

• Retains Supervisory Board

• May impact Anglo-American Model

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France

• Shares some common historical experiences with Germany

• e.g., legacy of Italian double-entry method

• Nevertheless, shows some significant accounting independence• central role of State in formulating practice • tightly regulated: Plan Comptable General• subordination of accounting to legislation

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French Corporate Governance

• As in Germany, a strong stock market culture does not exist

• Ownership structure unique• state ownership of many enterprises• many small family-owned businesses• cross-ownership• strong influence of banks

• Impact of IFRS likely to be considerable

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Recent Developments

• Realisation that corporate governance regime limiting French firms

• EU/IFRS acting as catalysts• Changes beginning to emerge

• stronger stock exchange - Paris Bourse• companies now reporting on internal controls• state divesting from some larger entities• accounting profession becoming proactive

• Viennot/Bouton Reports• strengthen role of independent directors

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Harmonisation & Convergence

• Greater awareness of international issues:• stronger financial markets• globalisation/MNEs

• Standardisation: ‘uniform reporting rules’• too ambitious/inappropriate?

• Harmonisation: ‘reduction of reporting differences’• attainable goal?• given impetus by success of IASB/IFRS

• Possibility of convergence• FASB/IASB: equivalence road map• SEC making concessions on US GAAP

Reconciliations

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Summary

• Different accounting cultures exist

• Anglo-American / Continental European

• significant common origins

• important differences

• Anglo-American seen as more mature

• EU anxious to retain European aspect

• Harmonisation ‘project’ quite robust

• Increased impetus from success of IASB