Chapter 16

International accounting

Definitions of international accounting

Weirich and others identify three major concepts:

1. parent-foreign subsidiary accounting or accounting for subsidiaries

2. comparative international accounting

3. universal or world accounting

World accounting• Directs international accounting to the

formulation and study of a universally accepted set of accounting principles

• Weirich and others define it as follows:– ‘international accounting is

considered to be a universal system that could be adopted in all countries. A world-wide set of generally accepted accounting principles (GAAP) … would be established’

Concept of comparative or international accounting

This concept involves:• an awareness of the international

diversity in corporate accounting and reporting principles

• an understanding of the accounting principles and practices of individual countries

• the ability to assess the impact of diverse accounting practices on financial reporting

A second concept of international accounting

• This concept involves a descriptive and informative approach

• Within this concept, international accounting includes all varieties of principles, methods and standards of accounting of all countries

• This concept includes a set of generally accepted accounting principles established for each country … no universal or perfect set of principles would be expected to be established

Parent-foreign subsidiary accounting

• This reduces international accounting to a process of consolidating the accounts of the parent company and its subsidiaries and translating foreign currency into local currency

• The definition, from Weirich and others, is:– ‘refers to the accounting practices of a parent

company and a foreign subsidiary. A reference to a particular country or domicile is needed under the concept for effective internal financial reporting. The accountant is concerned mainly with the translation and adjustment of the subsidiary’s financial statement. Different accounting problems arise … depending upon which country is used as a reference for translation and adjustment purposes’

Amenkhienan’s list of concepts and theories

1. Universal or world theory2. Multinational theory3. Comparative theory4. International transactions theory5. Translation theory

Each of these theories provides some grounds for the development of a conceptual framework for international accounting

Issues relevant to international business

Private sector accounting1. Comparative analysis:

a. national accounting, reporting and auditing practice

b. national accounting theory2. Policy at the international level3. Accounting for multinational operations:

a. financial accountingb. managerial accounting

4. Taxation

Issues relevant to international business (cont’d)

Public sector accounting1. Comparative analysis of national

systems2. Accounting for government agencies and

public not-for-profit organisations

Differences in financial reporting practices

1. Basis of presentation2. Consolidation reporting practices3. Business consolidations, the two most

common methods being:a. the purchase methodb. the pooling-of-interests method

4. Minority ownership, two alternative methods being:

a. the equity methodb. the cost method

Differences in financial reporting practices (cont’d)

5. Valuation of fixed assets6. Goodwill7. Inventory costing8. Contingency reserve policy9. Deferred income taxes, the different

methods being:a. the deferral methodb. the liability method

Differences in financial reporting practices (cont’d)

10.Pension disclosure11.Research and development costs, these

practices including either:a. capitalisation then amortisation, orb. expensing

12.Foreign currency translation, these methods including:

a. the non-current methodb. the monetary-non-monetary methodc. the current-rate methodd. the temporal method

Differences in financial reporting practices (cont’d)

13.Long-term leases, methods being either:a. capitalise then amortiseb. expense

Determinants of national differences

Mueller identifies four elements of differentiation:• state of economic development• state of business complexity• shade of political persuasion• reliance on some particular system of

law

Mueller’s 10 distinct sets of business environments

1. USA/Canada/the Netherlands2. Australia and British Commonwealth (excluding

Canada)3. Germany/Japan4. Continental Europe (excluding Germany, the

Netherlands and Scandinavia)5. Scandinavia6. Israel/Mexico7. South America8. The developing nations of the Near and Far East9. Africa10.Communist nations

Environmental conditions

The following environmental conditions are likely to affect the determination of accounting standards:

1. cultural relativism2. linguistic relativism3. political and civic relativism4. economic and demographic

relativism5. legal and tax relativism

Harmonisation of accounting standards

• The first step to harmonisation consists of recognising national idiosyncrasies and attempting to reconcile them with other countries’ objectives

• The second step is to correct or eliminate some of the barriers, in order to achieve an acceptable degree of harmonisation

Advantages of harmonisation

1. Many countries still lack adequate codified standards. Internationally accepted standards would eliminate set-up costs and allow them to immediately become part of the mainstream of accepted international accounting standards

2. The growing internationalisation of the world’s economies and the increasing interdependency of nations in terms of international trade and investment flows is a major argument for some form of internationally accepted standards

Advantages of harmonisation (cont’d)

3. The need for companies to raise outside capital given the insufficiency of retained earnings to finance projects and the availability of foreign loans has increased the need for harmonisation

Limits to harmonisation• Tax collections in all countries are a great

source of demand for accounting services. Because the systems vary internationally, this will lead to diversity in the accounting principles and systems used

• Accounting policies are sometimes fashioned to achieve either political or economic goals compatible with the economic or political system espoused by a given country

• Some obstacles are created by accountants themselves through strict national licensing requirements

Actors involved in harmonisation

• Accountants International Study Group:– formed as a three-nation group to

study practices in the USA, the UK and Canada

– terms of reference were to institute comparative studies as to accounting thought and practice in participating countries, and to make reports

• The International Federation of Accounting Committee was formed in 1976

The International Federation of Accounting Committee (IFAC)

12-point program1. Develop statements that would serve as

guidelines for international auditing practices

2. Establish a suggested minimum code of ethics to which it hoped member bodies would subscribe

3. Determine the requirements and develop programs for the professional education and training of accountants

4. Evaluate, develop and report on financial-management and other management-accounting techniques and procedures

The IFAC 12-point program (cont’d)

5. Collect, analyse, research and disseminate information on the management of public accounting practices to assist practitioners in conducting their practices more effectively

6. Undertake other studies of value to accountants such as (possibly) a study of the legal liability of auditors

7. Foster closer relations with users of financial statements, including preparers, trade unions, financial institutions, industry, government and others

8. Maintain close relations with regional bodies and explore the potential for establishing other regional bodies as well as for assisting in their organisation and development

The IFAC 12-point program (cont’d)

9. Establish regular communication among members of the IFAC and with other interested organisations through the medium of a newsletter

10. Organise and promote the exchange of technical information, educational materials and professional publications and other literature

11. Organise and conduct an International Congress of Accountants every five years

12. Seek to expand the membership of the IFAC

The International Accounting Standards Committee (IASC)

• The IASC was founded in 1973, its objectives being:– to formulate and publish in the public interest

accounting standards to be observed in the presentation of financial statements, and to promote their worldwide acceptance and observance

– to work generally for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements

• Translates into a goal of developing a common international approach to accounting standards-setting aimed at worldwide harmonisation

Non-compliance with IASC standards

Sir Henry Benson has attributed noncompliance to the following factors:• some countries take the view that they

cannot require compliance locally until they are satisfied that the standards are internationally acceptable

• some countries see local legislation as an obstacle to the introduction of international standards

Non-compliance with IASC standards (cont’d)

• some accounting bodies do not have the power of discipline over their members and therefore cannot impose compliance with either national or international standards

• some countries have not yet overcome stubborn local resistance from the business community

Group of Experts on International Standards of Accounting and Reporting

Created upon the recommendation of the United Nations in 1976, with the following objectives:• to review the existing practice of reporting

by transnational corporations and reporting requirements in different countries

• to identify gaps in information in existing corporate reporting and to examine the feasibility of various proposals for improved reporting

Group of Experts on International Standards of Accounting and

Reporting (cont’d)

• to recommend a list of minimum items, together with their definition, that should be included in reports by transnational corporations and their affiliates

Results of the Group of Experts

• The Group issued a report that included a 34-page list of recommended items to be disclosed by the ‘enterprise as a whole’

• Following issuance, an Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting was formed with the objective of contributing to the harmonisation of accounting standards

• International reaction was mixed: the USA resigned its position on the Intergovernmental Working Group in 1986

The Organization for Economic Co-operation and

Development (OECD)

• The OECD includes 24 relatively industrialised countries

• The OECD issued a Declaration on International Investment and Multinational Enterprises in 1976, including a list of information that should be disclosed

The European Union (EU)

• The EU has been active in achieving regional harmonisation of accounting principles through a series of directives within the Treaty of Rome

• These directives are not as binding as regulations, and leave the mode and means of implementation to member countries

Directives of the EUThe Fourth, Fifth and Seventh directives are the most relevant to international accounting:• the Fourth Directive deals with the annual

financial statements of public and private companies, other than banks and insurance companies

• the proposed Fifth Directive deals with the structure, management and external audit of limited-liability corporations

• the Seventh Directive addresses the issue of consolidated financial statements and offers some guidelines for more standardisation of accounting reporting

Standard-setting strategies for developing countries

Four strategies may be identified:1. the evolutionary approach2. the development through transfer of

accounting technology3. the adoption of international accounting

standards4. the development of accounting

standards based on analysis of accounting principles and practices in the advanced nations against the backdrop of their underlying investment

The evolutionary approach

• Consists of an isolationist approach to standard-setting whereby the developing country defines its own standard without any outside interference or influences

• The learning process comes from local experience, and it assumes that foreign partners will adapt to its own idiosyncratic rules

The transfer-of-technology approach

• This approach may result from either the operations and activities of international accounting firms, multinationals and academicians practising in the developing countries, or from various international treaties and cooperative arrangements calling for exchanges of information and technology

• National goals combine with the social, political and economic environment and general resources and constraints to influence the overall economic plan

Costs of transfer of accounting technology

• Transfer of a wrong or inapplicable technology

• Lack of appropriate infrastructure for the correct application of the technology

• Increased dependence on outside experts• Lack of incentives for developing local

standards• Considerable loss of pride by some culture

groups

Adopting international accounting standards

Adopting international accounting standards consists of joining the IASC or some other international standards body, the rationale perhaps being to:• reduce the setup and production costs of

accounting standards• join the international harmonisation drive• facilitate the growth of foreign

investment that may be needed

Adopting international accounting standards (cont’d)

• enable the accounting profession to emulate well-established professional standards of behaviour and conduct

• legitimise professional status as a fully-fledged member of the international community

The situationist strategy

• Calls for a consideration of the diagnostic factors that determine the development of accounting in developing countries

• Based on cultural relativism, linguistic relativism and legal-and-tax relativism, the accounting concepts and the reporting-and-disclosure systems in any given country rest on the varying aspects of that country

Diversity of judgement

The diversity of judgement in an international accounting context may be examined by reference to:

1. cognitive relativism2. cultural relativism3. linguistic relativism4. organisational-culture relativism5. contractual relativism

Cognitive relativism in accounting

• This approach assumes the presence of a cognitive process that guides the judgement/decision process

• All accounting and auditing phenomena involve the cognitive use of a knowledge structure or schema, developed by individuals through experience, learning and prior knowledge

Cultural relativism in accounting

• Again, this approach assumes the presence of a cognitive process that guides the judgement/decision process

• Individuals from different cultures may invoke different knowledge structures or schema when faced with an accounting or auditing phenomenon

• This approach implies that accounting and auditing knowledge is organised in a culturally standardised and hence familiar event-sequence that tells the individual how to react to a particular accounting and/or auditing phenomenon

Linguistic relativism in accounting

• This approach assumes the presence of a linguistic process that guides the judgement/decision process

• The basis of the linguistic-relativity hypothesis in accounting is that the characteristics of the accounting language, lexical or grammatical characteristics have a marked influence on the cognitive processes preceding the judgement/decision process in accounting

Organisational-culture relativism in accounting

• Organisational cultural efficiency requires the sharing of frameworks, language and referents that shape the schemata individuals use when faced with an accounting and/or auditing phenomenon

• This approach implies that the organisational culture gives the individual faced with an accounting and/or auditing phenomenon categories, processing routines and schemas that help solve the problems in the best interests of the culture

Contractual relativism in accounting

• According to this model, contracts define permissible behaviour and actions that ultimately determine the judgement/decision process in accounting

• The importance of these contracts results from the assumptions and implications inherent in the four models of agency theory:1. stewardship/accountability model2. transaction-cost economies model3. principal-agent model4. positivist agency model

Judgement in international accounting

The judgement/decision process in accounting and auditing is determined by a cognitive process that is itself uniquely shaped by:• the national culture of the individual faced by

the accounting and/or auditing phenomenon• the individual’s linguistic repertoire• the organisational culture of the entity of which

the individual considers himself/herself a dedicated and loyal member

• the covenants and requirements of the contracts that bind the individual to a set of norms and allegiances to the firm