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CHAPTER 6COMPARATIVE ACCOUNTING

Chapter Outline

China

I. There are some unique features in the accounting profession in China. They include the following:A. Until the 1980s, those who carried out accounting work were not held in high regard in

society, and this has had an adverse effect on the development of the accounting profession in China.

B. Accounting and auditing in China have taken different paths in their development processes. Auditing firms audited mainly domestic companies, and were under the State Administration of Audit (SAA), whereas accounting firms focused on companies using foreign investments and were sponsored by the Ministry of Finance.

C. Unlike in the U.K., where there was a good legislative and judicial environment during the early stages of the development of the profession, in China, a market-oriented legislative and judicial environment is still emerging.

D. Unlike in the U.K., where auditors receive support from the established professional bodies, these support mechanisms are still lacking in China.

II. The recent economic reform program stimulated the growth of the accounting profession in China.A. With the recognition by the State of joint stock company form, the demands for

financial information from investors and other interested parties increased.B. The establishment of two stock exchanges helped rapid growth of the accounting

activities.C. Various government regulations on the implementation of economic reform measures

require the involvement of independent auditors.D. The laws on joint ventures with foreign companies require the audit of annual

statements.E. International accounting firms were allowed to be involved in training local auditors and

setting auditing standards.

III. There are clear signals that Anglo-American accounting principles are replacing Soviet-style accounting.A. This was required as a result of the movement towards private ownership.B. The Ministry of Finance is following international accounting practices in setting

Chinese standards; a conceptual framework was promulgated in 1992 (The Accounting Standards for Business Enterprises- ASBE), and the China Accounting Standards Committee (CASC) was established in1988. The

ASBE issued in February 2006, which replaced the 1992 ASBE, and CASs previously issued, became mandatory for all PRC listed companies in January 2007. The 2006 ASBE adopted a significant number of the accounting standards laid out by the IASB.

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C. The Chinese Security Regulatory Commission (CSRC) has improved disclosure requirements for companies. For example, it requires listed companies to post their annual reports on the web site of the relevant stock exchange.

D. Both CSRC and the two stock exchanges have developed new corporate governance rules based on those that are common in Anglo-American countries.

E. The CSRC and Ministry of Finance, consistent with the Sarbanes-Oxley Act, require auditor rotation every five years.

IV. Major differences between IFRS and Chinese GAAP include:A. Accounting standards and practices in China lack conservatism.B. There are no coherent interpretations of the relevant requirements.C. In some areas covered by IFRS there are no specific rules in China, including

business combinations, impairment of assets, and the definitions of operating and finance leases.

Germany

I. Unique features in German accounting include:A. The primary source of finance for German companies is bank loans rather than equity,

and this determines to a large extent the purpose for financial reporting by companies. B. Auditing dominates the financial reporting related professional activities.C. The auditing profession is headed by the Chamber of Auditors, a State-supervised

organization.D. The Commercial Code contains most of the German financial reporting principles, and

sanctions for non-compliance.E. Unlike in the U.S., partnership accounting is regulated in Germany.F. The principle of prudence (conservatism) is established in the law.

II. There are signs of a change in financial reporting from a creditor orientation towards a shareholder orientation.A. The Companies Act 1965 was the initiator of this change.B. In 1998, German law was amended to allow a private sector body (GASC) to develop

accounting standards (until then the Ministry of Justice coordinated the accounting rule development process).

C. Since 1998, German accounting standards have been developed by following due process, and promotion of international convergence is a main objective.

D. GASB (the standard-setting body of GASC) has been modeled on the U.S. FASB.E. In 2004, the Financial Reporting Enforcement Panel (FREP) was created.

III. Traditionally, the primary function of financial accounting has been the conservative determination of distributable income, rather than presentation of a true and fair view.A. Traditionally bank credit plays a major role in corporate finance.B. German accounting is heavily influenced by tax law.C. German accounting rules allow companies to smooth income over time by using

hidden reserves.D. Although the EU’s Fourth Directive requires companies to present a true and fair view

in their financial statements, it appears that extensive note disclosures are seen as a way of achieving this without changing the tax-based, income smoothing approach to financial reporting.


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IV. Since January 2005, all German listed companies are required to use IFRS in preparing their consolidated financial statements. However, German accounting practices differ from IFRS in some important respects.A. German accounting law contains no specific rules in some areas. Examples include

the translation of foreign currency financial statements of foreign subsidiaries, disclosures of fair values of financial assets and liabilities, and earnings per share.

B. There are inconsistencies between IFRS and German rules in some areas. For example, according to German rules, goodwill arising on consolidation can be deducted immediately against equity, and inventories can be valued at replacement cost.

C. According to German tradition, a management report is an important part of a company’s financial statements, whereas IFRS do not include specific requirements in this regard.

D. The new regulations (BilMoG) introduced in May 2009 incorporated IFRS related elements into German GAAP. For example, the capitalization of internally generated intangible assets such as self created patents is now permissible option while prohibited under previous rules, and the abolition of tax accounting for external financial reporting.

Japan

I. Unique features in the Japanese business environment include:A. The economy is dominated by a few conglomerates known as Keiretsu.B. The main sources of finance for business are bank credit and cross-corporate

ownership, rather than outside equity finance.C. Corporate earnings are regarded as the source of funds that can be distributed, and

not as a measure of corporate performance.D. Stock exchanges in Japan are government regulated rather than self-regulated. The

stock exchange law is administered by the Ministry of Finance.

II. There are differences between the Japanese accounting profession and its counterparts in Anglo-American countries, including: A. The Ministry of Finance plays a major role, through its Business Accounting

Deliberation Council (BADC), in developing financial reporting standards in Japan, and the influence of the Japanese Institute of Certified Professional Accountants (JICPA) in this respect has been minor compared to that of its counterparts in Anglo-American countries.

B. The accounting profession has a relatively low social status in Japan.C. For cultural reasons, the concept of independent auditor is not readily acceptable

within Japanese companies.D. Unlike in the U.S., and similar to Germany, financial reporting is heavily influenced by

tax law.

III. Recently, major attempts have been made to ensure that Japanese accounting standards fall into line with international standards.A. A Big Bang approach has been taken to achieve this.B. In 2001, the Accounting Standards Board of Japan (ASBJ), modeled on FASB, was

formed.


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C. In January 2005, the ASBJ and IASB agreed to launch a joint project to reduce differences between IFRS and Japanese GAAP. Accordingly, efforts are being made to bring Japanese accounting principles and practices closer to international standards.

IV. There are several important differences between IFRS and Japanese GAAP.A. In general, companies are not under pressure from their main providers of finance to

disclose information publicly, and Japanese companies are reluctant to provide information voluntarily.

B. There are no specific rules in some areas covered by IFRS, such as impairment of assets, discontinuing operations and segment reporting.

C. There are inconsistencies between Japanese GAAP and IFRS; for example, inventories can be valued at cost under Japanese GAAP rather than at the lower of cost and net realizable value as required by IFRS.


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Mexico

I. Many features of the Mexican business environment are common to other developing countries.

A. Until recently, a substantial portion of the Mexican business sector was government controlled, and a large number of business enterprises were government owned.

B. The economy has suffered from persistent balance of payments problems.C. As a result of the effect of the “Tequila crisis,” Mexico accepted a bailout package from

the IMF and the U.S. Treasury.D. In recent years, there has been an effort to privatize state-owned enterprises, and

many of the restrictions to foreign investment have been removed.E. The measures aimed at achieving economic growth stimulated the activities of the

stock exchange.F. Mexico has experienced several years of record-low inflation, low interest rates, a low

external debt and a strong peso.

II. Mexico has an established accounting profession with a long history.A. The first professional body was established in 1917.B. The Mexican Institute of Public Accountants (MIPA) was one of the nine founding

members of the IASC.C. Public accounting firms mainly provide bookkeeping, tax, and audit services.D. A professional diploma is required to practice as a public accountant.

III. Regulation of accounting and financial reporting is through legislation, stock exchange listing requirements, and bulletins issued by MIPA.A. The law requires that annual financial statements of listed companies must be audited

by a Mexican CPA and published in a nationally circulated medium.B. The National Banking and Securities Commission (NBSC), an equivalent of U.S. SEC,

oversees information disclosure by publicly owned companies.C. In June 2004, the Mexican Board for Research and Development of Financial

Reporting Standards (CINIF) assumed responsibility for issuing accounting standards (until then this responsibility was with the Accounting Principles Commission of MIPA).

D. MIPA has developed a Code of Ethics which prohibits advertising for public accountants.

E. Mexican financial reporting standards (FRS) framework requires companies to follow IFRS as supplementary, when no specific guidance is provided by Mexican FRS for a particular transaction or event.

IV. As a result of Mexico’s membership with NAFTA, Mexican accounting principles are heavily influenced by U.S. accounting practices in recent years.A. The U.S. influence also is exerted through the presence of subsidiaries of U.S.

companies and the Big 4 international accounting firms.B. International Qualifications Appraisal Board, the CICA’s International Qualifications

Appraisal board, and Mexican Institute of Public Accountants and Mexican Committee for the International Practice of Accounting, agreed on the principal elements for granting accounting certification and licenses, which included education, examination, and experience. NAFTA’s Free Trade Commission affirmed the PMRA in October 2003.


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V. A unique feature of Mexican accounting practice is the treatment of the effects of inflation in financial statements by using general purchasing power accounting.

VI. Bulletin B-10 introduced a novel concept known as the “integrated result of financing,” which is calculated by adding the nominal interest expense, the gain or loss due to price level changes on the company’s net monetary position, and the gains and losses due to exchange rate fluctuations on the company’s monetary assets and liabilities denominated in foreign currencies.

VII. There are several differences between Mexican GAAP and IFRS. For example, according to Mexican rules, research and development costs are to be expensed as incurred, pre-operating costs can be capitalized, a statement of inflation is mandatory irrespective of the inflation rate.

United Kingdom

I. In the U.K. the capital market provides the main source of funding for companies, and the limited liability company is the main form of business organization.A. The primary purpose of accounting in the U.K. is to provide information for the efficient

functioning of the capital market.B. Accounting in the U.K. grew as an independent discipline, responding to business

needs.C. The first professional accounting body in modern times was established in the U.K. in

1853, and currently there are six professional bodies in that country, coordinated by the Consultative Committee of Accountancy Bodies (CCAB).

D. The U.K. accounting profession has favored a principles-based approach rather than a rules-based approach to standard setting.

II. Accounting regulation in the U.K. has been driven by the idea that determination of acceptable accounting principles and standards should be left in the hands of the profession.A. U.K. legislators did not feel the need to have a powerful securities commission to

regulate accounting and financial reporting with detailed rules.B. The responsibilities for developing accounting standards and auditing standards lie

with the Accounting Standards Board (ASB) and Auditing Practices Board (APB), respectively, both independent bodies.

C. Changes to traditional thinking began as a result of U.K. joining the EU in 1973. The amendments to the 1948 Companies Act in 1981 as a result of integrating the EU’s Fourth Directive in British law made U.K. company legislation highly prescriptive.

D. In 2003 the Financial Reporting Council (FRC) became the single, independent regulator of accounting and auditing in the U.K.

E. ASB is one of the several national accounting standard-setters that have formal liaison with the IASB, and is committed to align U.K. accounting standards with IFRS.

III. In recent years, accounting standard setting in the UK has undergone major changes.A. In July 2012, setting accounting standards became the responsibility of the FRC

Board, whereas this was previously done by the ASB. In addition to being responsible for issuing accounting standards and dealing with their enforcement, the FRC is also responsible for promoting high quality corporate governance and reporting to foster


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investment. It also monitors and takes action to promote the quality of corporate reporting and auditing; operates independent disciplinary arrangements for accountants and actuaries; and oversees the regulatory activities of the accountancy and actuarial professional bodies.

B. In October 2012, in an effort to make narrative reporting simpler, clearer and more focused, the UK Department for Business, Innovation and Skills (BIS) published draft regulations for narrative reporting. It replaces a summarized P&L and balance sheet with what is essentially a narrative discussion about the company’s strategy and performance.

C. The FRC developed a suite of three standards: FRC 100 – Application of Financial Reporting Requirements (Published in November 2012); FRC 101- Reduced Disclosure Framework (Expected early 2013); and FRC 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland (Expected in January 2015) with the stated aim of simplifying accounting and reporting for unlisted entities, improving reporting of financial instruments and providing cost savings for subsidiaries of listed groups.

IV. Accounting principles and practices in the U.K. emphasize investor needs and the importance of transparency.A. The 1985 Companies Act requires corporate financial statements to provide a true and

fair view of the firm’s financial position and results of operations for the financial year. Auditors are given the corresponding duty to render an opinion on whether this requirement is fulfilled. Provision of a true and fair view is an overriding requirement in the U.K.

B. Since January 2005, U.K. listed companies are required to use EU adopted IFRS to prepare their group (consolidated) financial statements.

C. Financial statements generally are prepared on the basis of historical cost, but companies are allowed to revalue tangible assets.

D. U.K. accounting standards are generally similar to IFRS, but there are also differences in some areas. For example, U.K. GAAP allows companies to amortize goodwill at their discretion, whereas IFRS require goodwill to be tested for impairment annually.

Answers to Questions

1. Gradual capital market liberalization will open up international investment opportunities for national investors. Poor rating assignments of national firms could therefore trigger an immense outflow of investment capital providing national firms with strong incentives to implement sound and internationally comparable accounting practices.

2. The economic reforms have increased demand for accounting services in many ways. Key aspects of the economic reforms in China include privatization of SOEs, liberalization of controls, commitment to encourage private investment in business and to attract foreign investment, and emphasis on commercial viability and competition among businesses. All these are integral parts of a market system, and lead to increased demands for accounting services. For example, when businesses compete, they become increasingly cost conscious. Investors need accurate information about the financial performance and position of the businesses they have invested in. When Chinese companies seek to raise funds in overseas markets or the government attempts to attract foreign investors, it is important to ensure that proper financial records are kept, and information is disclosed using


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internationally acceptable standards. Further, various government regulations on the implementation of economic reforms require the involvement of independent auditors.

3. A unique feature in the development of accounting and auditing in China is that, unlike in many other countries, until recently (1998), these two areas developed as two rival disciplines competing with each other, supported by two separate government agencies.

4. The pressures arise from the need to change from an accounting system designed to provide information to government for planning purposes to a system that is capable of providing useful information for economic decision making. China has expressed a commitment to adopt IFRS. This is particularly important to China because of the requirement under WTO membership and the need to attract foreign investment. The ultimate objective of accounting regulation is to achieve a high level of compliance with the mandated reporting standards. This requires an adequate number of professionals who are willing and able to implement the standards. However, the accounting profession in China is still at the early stage of development, and a lack of skilled professionals will create problems for regulators. IFRS are based on western cultural values. Some of the concepts that are fundamental to IFRS, such as true and fair view or fair presentation and transparency, may not be clearly understood by Chinese accountants.

5. Features of the accounting profession in China, which are different from those of Anglo-American countries:a. Following the revolution in 1949, the Chinese accounting profession was under

bureaucratic control rather than market control. Consequently, accounting was focused on reporting compliance with state economic plans.

b. Education of accountants has not been well developed in China. For example, it was particularly disrupted during the cultural revolution in the 1960-70s.

c. Unlike in Anglo-American countries, accounting and auditing in China took different paths in their development processes. Traditionally, auditing firms in China mainly audited domestic companies, whereas accounting firms focused on companies using foreign investments. Further, accountants and auditors had their own rules issued by different government departments.

d. There are some differences in the evolution of the accounting profession in China compared to that in Anglo-American countries. For example, in the United Kingdom, auditors enjoyed good legislation and judicial environment during the early stages of development, whereas such an environment is yet to be developed in China.

6. One of the distinct Japanese cultural values is collectivism or group consciousness. This has directly affected the Japanese attitude towards external auditors and the audit function. Prior to the American occupation of Japan after the Second World War, there was no external auditing profession. When it was introduced in 1949, Japanese corporations often considered it as unnecessary. Because of the cultural value orientation of not trusting someone from outside the group, independent auditors had difficulty being accepted by clients.

7. In the 1990s, Japanese companies were compelled to seek finance from overseas markets due to various reasons, such as large scale losses among Japanese banks and other


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companies, and the collapse of Japanese asset prices. However, the financial reporting standards used by Japanese companies were criticized for their failure to produce information in a transparent manner. In the mid-1990s the Japanese government initiated a program of financial reform, which included a series of major changes aimed at aligning Japanese financial reporting regulations with internationally acceptable standards. The term “Accounting Big Bang” was used to describe this reform program because of the magnitude of the changes involved.

8. In August 2007, the ASBJ and IASB jointly announced the Tokyo Agreement, highlighting the desire to accelerate the process of convergence between Japanese GAAP and IFRS. As part of the agreement the two boards agreed to eliminate by 2008 major differences between the two sets of standards, identified in 2005, with the remaining differences being removed by June 2011. The target date of 2011 does not apply to any major new IFRS that will become effective after 2011, and both boards agreed to work closely to ensure the acceptance of the international approach in Japan when new standards become effective.

9. The principle of prudence is firmly established in the German law mainly because of the heavy losses suffered by creditors of German companies during the Great Depression in the late 1920s and early 1930s. The accounting system at the time allowed companies to revalue assets as they wished, and was blamed for the losses as it failed to protect the creditors from becoming victims of companies, which adopted highly optimistic methods to value their assets. The objective of establishing the principle of prudence in the 1937 Stock Corporations Law was to ensure that the events of the 1920s and 1930s would not happen again. This is reflected in the strict adherence to the use of historical cost for measuring asset values.

10. In Germany, tax law has a strong influence on accounting and financial reporting. The reason for this link between taxation and financial reporting is historical. When corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already been codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements.

11. There are two main external factors that have influenced financial reporting in Germany in recent years. They are, EU Directives and the forces of globalization. The 1985 Accounting Act implemented the Fourth, Seventh, and Eighth Directives and transformed them into German Commercial Law. The EU’s decision to adopt IFRS from January 1 2005, was in recognition of the global trends in financial reporting. Even before the EU’s decision, large German companies like Daimler-Chrysler that had their shares listed on foreign stock exchanges were already using internally acceptable accounting standards.

12. DRSC/GASB in their annual report for the year 2009, provide a comprehensive overview of the national and the international activities of these bodies. Accordingly, the work of the GASB was essentially characterized by IASB projects relating to the financial crisis. Further, the Accounting Interpretation Committee (AIC) developed or amended interpretations and application advice on different topics in 2009. The issues for GASB/DRSC in 2009 were mainly the amendments of the German Accounting Standards as a consequence of the German Accounting Law Modernization Act (BilMoG).


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13. It is correct that BilMoG is not ‘IFRS light’ instead it is ‘German GAAP complex’. BilMoG introduced many notions to German GAAP which brought German GAAP closer to IFRS. However, the objective of BilMoG was to modernize German accounting by introducing the necessary changes to German Commercial Code, and not necessarily to bring German accounting in line with IFRS. This process made the German GAAP complex.

14. The NBSC’s role in the area of financial reporting by Mexican companies is similar to that of

the U.S. SEC. It is a government body that regulates the operation of the Mexican stock exchange, including financial reporting by Mexican public companies. For example, NBSC’s permission is required for listing on the stock exchange.

15. The Professional Mutual Recognition Agreement (PMRA) signed by NAFTA participants (United States, Canada and Mexico) in September 2002 allows accountants in one participant country to practice in another participant country. For example, the Mexican CPCs are allowed to practice accounting in the United States subject to passing examinations on national legislation and standards.

The implementation of NAFTA - PMRA is an example of converging national licensing requirements into an international framework.

16. The significance of Bulletin A-8 is that it requires Mexican companies to apply international accounting standards for issues that are not covered by Mexican GAAP.

17. There are three main external factors that have influenced financial reporting in Mexico in recent years. First, NAFTA required Mexico, among other things, to remove barriers to trade with partner countries (the U.S. and Canada). One of the barriers was the use of incompatible financial reporting standards by Mexican companies. Second, the IMF/U.S. Treasury bail-out plan in the mid-1990s after the “Tequila” crisis also included specific requirements concerning information disclosure by Mexican companies. Finally, the efforts of the IASB as global standard setter have also influenced financial reporting by Mexican companies.

18. Recent amendment to Mexico's MFRS B-10 requires corporations to include the effects of inflation in financial statements only if such inflation exceeds 26% (the combined inflation of the last three years). Inflation continues to be taken into account in the determination of taxes to be paid.

19. An important contribution that Mexican accounting has made to international accounting is in the treatment of the effects of inflation for accounting purposes by using General Price-level Accounting. The introduction of the “integral cost of financing” as an income statement item was particularly innovative. This is the net result of three different costs: nominal interest expense, the gain or loss due to price level changes on the net monetary position, and foreign exchange gains and losses on monetary assets and liabilities denominated in foreign currencies arising from variations in exchange rates.

20. Membership in the EU has had a profound effect on accounting regulation in the U.K. The U.K. pioneered private-sector regulation of accounting where legislation provides broad principles and the accounting profession determines specific rules for financial reporting. However, this approach was changed with the 1981 amendments to the U.K. Companies


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act that introduced the EU Fourth Directive. These amendments were prescriptive in that they stated exactly how certain matters should be treated, such as the format of financial statements. Another significant change was introduced in the 1989 Companies Act, which for the first time referred to accounting standards. It requires that companies must state whether the financial statements have been prepared in accordance with applicable accounting standards.

21. The Companies Act of 2004 in the United Kingdom made the FRC the unified independent regulator with three specific roles: set accounting and auditing standards; proactively enforce and monitor those standards; and oversee the self-regulatory professional bodies. The FRC has five subsidiary bodies: the Accounting Standards Board; the Financial Reporting Review Panel; The Professional Oversight Board for Accountancy; the Auditing Practices Board; and the Accountancy Investigation and Discipline Board. The FRC is funded equally by government, business and the accountancy profession.

22. The most important feature of the approach taken in the United Kingdom in setting accounting standards is the establishment of the FRC as the unified and independent regulator. The other main features of the UK financial reporting regime include: the adoption of principles-based approach; commitment to align the UK accounting standards with IFRS; and enforcement of accounting standards through the FRRP, which reviews financial statements of companies to ensure fair presentation of information.

23. The discussion paper referred to aims at responding to the growing concerns about the increasing complexity and decreasing relevance of corporate reports. For example, many people point to the increasing length and detail of annual reports and the regulations that govern them; some are worried that reports no longer reflect the reality of the underlying businesses, with key messages lost in the clutter of lengthy disclosures and regulatory jargon. Accordingly, the discussion paper aims to stimulate discussion not only in the UK but around the world on these issues.

24. In October 2012, the UK Department for Business, Innovation and Skills (BIS) published draft regulations for narrative reporting. The key points of the draft regulation are: a separate strategic report which replaces the business review and includes some extra content for quoted companies concerning the business model, human rights and diversity; the directors’ report is now excludes the content which is in the new strategic report; and shareholders who currently receive only the summary financial statement will in future receive the strategic report instead. Accordingly, a summarized P&L and balance sheet is replaced with what is essentially a narrative discussion about the company’s strategy and performance. The aim of the draft regulations is to make narrative reporting simpler, clearer and more focused.


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Solutions to Exercises and Problems

1. The purpose of this exercise is to encourage students to consider the approach taken in their own country towards accounting regulation, compare that with another country that has taken a different approach, and explain why the two countries have taken different approaches. In doing this, students should examine the legal and professional aspects of accounting regulation. In explaining possible reasons for the differences, they should refer to the main factors that influence accounting and financial reporting in the two countries.

2. The number of accountants per head of population is much higher in the U.K. than in Japan. The main reason is that there is a greater demand in the U.K. for accounting information, particularly due to the pressures exerted through the capital market’s expectations with regard to how companies should perform financially, and what financial information they should disclose. This is because, in the U.K., the capital market is the main source of funding for business. In Japan, the main source of funding for business is the banking system, and the capital market plays a relatively minor role. Banks can have direct access to company financial information. Therefore, unlike in the U.K., the demand for published accounting information is much smaller.

3. a. The factor that has exerted the greatest influence on the development of accounting in each of these countries is the providers of finance for business enterprises. While the other factors have also been important, the purpose of accounting is determined largely on the basis of who provides finance. For example, the changes in accounting and financial reporting that are currently taking place in China, Japan, Germany, and Mexico are mainly due to the fact that in all these countries, the source of funding for business are changing. In the U.K., the capital market has been the main influencing factor in the development of accounting.

b. China: A distinguishing feature is the manner in which accounting and auditing have developed. Unlike in many other countries, In China accounting and auditing have taken different paths in their development as rival disciplines with the support of different government agencies.Japan: A distinguishing feature is the manner in which accounting has been regulated. The accounting profession is not strong in Japan, compared to its counterpart, for example, in the U.K., and it has played a relatively minor role in regulating accounting and financial reporting in that country. The main sources of accounting regulation are the Commercial Code and the Corporate Income Tax Law.Germany: A distinguishing feature is the dominance of auditing in the financial reporting related activities. Mexico: A distinguishing feature is the use of General Price Level accounting to incorporate the effects of inflation into accounting reports.U.K.: A distinguishing feature is having six professional bodies representing the accounting profession.


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4. a. China: IFRS are permitted for some domestic listed companies, but not permitted for domestic non-listed companies.Japan: IFRS are not permitted for domestic listed companies or for domestic non-listed companies.Germany: IFRS are required for all domestic listed companies and permitted for non-listed companies. Mexico: IFRS are not permitted for domestic listed companies or non-listed companies.U.K.: IFRS are required for all domestic listed companies. The Department of Trade and Industry has a proposal to allow IFRS for domestic non-listed companies.

b. Germany, Japan, and the U.K. have residents who are members of the IASB.

5. a. An issue for which the practices of several countries are at variance with IASB GAAP:Pre-operating expenses: IAS 38 requires pre-operating expenses to be charged to expenses. The practices in China, Japan, Germany, and Mexico are at variance with this requirement. In China, pre-operating expenses are charged to expenses, but can be deferred until the entity begins operations. In the other three countries, pre-operating expenses can be capitalized.

b. While the most important financial accounting practice at variance with IASB GAAP is a matter of opinion, the following are significant differences between IFRS and each country’s GAAP:

China: Internally generated intangible assets – IAS 38 stipulates that research expenditure is expensed when incurred, and development expenditure can be capitalized under some circumstances. But under Chinese GAAP, all research and development costs are expensed when incurred, capitalization is not allowed.Japan: Inventory valuation – IAS 2 requires inventories to be valued at the lower of cost and net realizable value. Japanese companies are allowed to value inventories at cost rather than at the lower of cost and net realizable value.Germany: Pre-operating expenses – IAS 38 requires pre-operating expenses to be charged to expenses when incurred. German companies are allowed to capitalize pre-operating expenses, or amortize them over four years.Mexico: Statement of cash flows – IAS 7 requires a statement of cash flows. Mexican companies are required to publish a statement of changes in financial position instead of a statement of cash flows.U.K.: Proposed dividends – IAS 10 does not allow recognition as a liability at the balance sheet date. U.K. companies accrue proposed dividends as a liability.

6. Companies listed on the NYSE as at June 3, 2004:China: 16 companiesJapan: 19 companiesGermany: 18 companiesMexico: 23 companiesU.K.: 71 companies


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7. The main mechanisms put in place to regulate accounting and financial reporting in U.K. are legislation, professional pronouncements and stock exchange listing requirements. The U.K. tradition has been for company legislation to provide only broad guidelines for accounting, leaving specific rules to be developed by the profession. However, EU membership has changed this tradition, and as a result, certain specific rules affecting accounting have been included in the Companies Act. These include rules regarding the format of financial statements and the need for registration of auditors. In the U.K., accounting standard setting is by a private sector independent body, the ASB. Unlike in the U.K., accounting standard setting in China started only recently, only about fifteen years ago, and it is under the control of the government, with the Ministry of Finance as the responsible government agency. In China, the Chinese Security Regulatory Commission performs a role similar to that of the U.S. SEC. There is no equivalent body in the U.K. In recent years, both the U.K. and China have experienced major changes in the area of accounting regulation. In China the focus of the changes has been to bring Chinese accounting practices closer to internationally acceptable standards. For example, a conceptual framework was issued in 2001 (Accounting System for Business Enterprises). China has not adopted IFRS, but has committed to use IFRS as the basis for developing Chinese accounting standards. In the U.K., the focus of recent changes has been to strengthen the position of the independent regulator, the Financial Reporting Council, mainly in response to the recent financial disasters in the U.S. In doing this, special effort has been made to ensure that the regulator is independent from any interested party, including the government. This is different from the approach taken in China.

8. In 2012, there were two major reforms affecting accounting and financial reporting in the United Kingdom. First, The FRC developed a suite of three standards, FRC 100 (published in November 2012), FRC 101(to be published in 2013), and FRC 102 (to be published in 2015), by taking into account feedback received over many years and with the stated aim of simplifying accounting and reporting for unlisted entities, improving reporting of financial instruments and providing cost savings for subsidiaries of listed groups. Second, in October 2012, the UK Department for Business, Innovation and Skills (BIS) published draft regulations for narrative reporting. Recognizing the importance of narrative reporting, the aim of the draft regulations is to make narrative reporting by companies simpler, clearer and more focused.

9. Students are expected to explain that professionalization in accounting refers to the evolution of professionalism within accounting, which includes professional power, associational control and adhering to ideologies; relationships with other social institutions, such as employment, markets for services and the state; and adoption of strategies.

Given the above description of professionalization of accounting, the process that has taken in China can be described as unique, for example, refer to the suggested answer to Question 5.

10. In recent years, both Germany and Japan have undertaken major projects to reform their systems of accounting regulation. Both countries have recognized the need for companies to adopt internationally acceptable accounting standards. Until recently, in both countries, the responsibility for setting accounting standards was with government agencies. In that context, the professional bodies played a relatively minor role. Since professional


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accounting bodies, not governments, were members of international organizations such as the IASB, this became a major problem for these two countries. As a result, both Germany and Japan have established private sector standard setting bodies (Accounting Standards Board of Japan and the German Accounting Standards Board), so that they have a mechanism to participate effectively in the international accounting standards setting process.

11. In Germany, the Act to Modernize Accounting Law introduced major changes to the German Commercial Code, for example, it removed the close connection of accounting reports to tax rules; and the controversial options relating to provisions and production cost that were perceived to be responsible for hindering international acceptance of German accounting practices. The Act led the way for German accounting to be shifted away from the Continental European model and moved closer to the Anglo-American model. This reflects a willingness to change. However, the main purpose of the Act seems to be to address domestic concerns, and not necessarily at converging with International Financial Reporting Standards. For example, the emphasis on creditor protection in financial reporting has been retained.

12. First, the level of inflation in Mexico has been much higher in Mexico compared to the other countries covered in this chapter. As a result, incorporating the effects of inflation into financial reports is an important financial reporting issue. Second, the other four countries do not face issues similar to those arising from Mexico’s membership in NAFTA. Mexico is under great pressure to ensure that its companies adopt U.S. GAAP for financial reporting purposes, because the use of incompatible accounting standards would be a barrier to free trade between Mexico and the U.S. This is a major challenge facing the accounting profession in Mexico.

13. In comparing the financial statement prepared by companies in China, Japan, and Mexico with those of other companies, which have used IASB GAAP, the treatments of the following items should be considered carefully, as they can have a significant impact on the reported financial results and positions of companies. Measurement of property, plant and equipment. IASB GAAP allows the use of either fair value or historical cost, but Chinese GAAP requires the use of historical cost.Treatment of research and development costs. IASB GAAP requires that all research costs are expensed, and development costs, if certain criteria are met, are capitalized, but Chinese GAAP requires that all research and development costs (except patent registration and legal costs) be expensed.Treatment of pre-operating costs. IASB GAAP requires that pre-operating costs be expensed when incurred, but Japanese GAAP and Mexican GAAP allow pre-operating costs to be capitalized.Inventory valuation. IASB GAAP requires inventories to be valued at the lower of cost and net realizable value, but Japanese GAAP allows inventories to be valued at cost rather than at the lower of cost and net realizable value.Treatment of construction contracts: IASB GAAP requires the use of the stage of completion method to recognize contract revenue, but Japanese GAAP allows the use of completed contract method.


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Creation of provisions. IASB GAAP specifies that provisions can only be created if an enterprise has a present obligation as a result of past transaction, but Japanese GAAP allows provisions to be created before an obligation arises.Statement of cash flows. IASB GAAP requires a statement of cash flows, but Mexican GAAP requires a statement of changes in financial position, instead of a statement of cash flows.

It is always useful to get an opinion about the financial statements of companies domiciled in a foreign country from a professional who is familiar with the financial reporting standards and practices of that country.

14. a. As an outcome of the Big Bang reform in 2001, the Financial Accounting Standards Foundation (FASF) and the new private-sector standard-setting body modelled on the FASB, the Accounting Standards Board of Japan (ASBJ) were created. The FASF and ASBJ derive standard-setting authority from the Business Accounting Deliberate Council (BADC). The FASF was established partly to facilitate harmonization with international accounting standards. The JICPA takes part in setting accounting standards by sending board members to the FASF and the ASBJ. Additionally, many CPAs participate in various technical committees at the ASBJ as technical staff.

b. In August 2007, the ASBJ and IASB jointly announced an agreement (known as the Tokyo Agreement) to accelerate the process of convergence between Japanese GAAP and IFRS, that was started in March 2005. As part of the agreement the two boards have agreed to eliminate by 2008 major differences between the two sets of standards, identified in 2005, with the remaining differences being removed by June 2011.

c. In February 2010, the JICPA joined the Global Accounting Alliance (GAA), the largest global accounting network.

15. The North American Free Trade Agreement (NAFTA) among the United States, Canada and Mexico aims to reduce most barriers to trade in goods, liberalize the cross border flow of services and capital, and open up new areas of opportunity in each country to conduct business in the other two countries. As a result of being party to the NAFTA agreement, there is pressure for Mexico to harmonize its accounting standards and practices with those of the US and Canada.


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Case 6-1 CHINA PETROLEUM AND CHEMICAL CORPORATION

1. The net profit figure reported under PRC GAAP is RMB 19,011 million. This is RMB 2,592 million lower than the amount under IFRS, and RMB 6,566 million lower than the amount under U.S. GAAP.Students are expected to comment on the main reasons for those differences on the basis of the information given in the case. The net profit figure of RMB 19,011 reported under PRC GAAP was increased to RMB 21,593 under IFRS. The increase of RMB 2,582 under IFRS was due to the following reasons:

Depreciation and disposal of oil and gas properties RMB 3,044Acquisition of subsidiaries 443

Capitalization of general borrowing costs 389Gain from issuance of shares by subsidiary 136Gain from debt restructuring 82Revaluation of land use rights 18 4,112Unrecognized losses of subsidiaries (182)Pre-operating expenditures (169)Effect on taxation (1,179) (1,530)

2,582The net profit figure of RMB 21,593 reported under IFRS was increased to RMB 25,577 under U.S. GAAP. The increase of RMB 3,984 under U.S. GAAP was due to the following reasons:

Depreciation of revalued property, plant and equipment RMB 3,998Disposal of property, plant and equipment 1,316Capitalized interest on investments in associates 141Reversal of deficits on revaluation of property, plant…. 86Foreign exchange gains and losses 76Reversal of impairment of long-lived assets…… 47Exchange of assets 23Capitalization of property, plant and equipment 12 5,699Deferred tax effect of U.S. GAAP adjustments (1,715)

3,984

2. The differences for CPCC between PRC GAAP and IFRS, and between IFRS and U.S. GAAP are given in the case. Students are expected to identify the main areas of difference. As mentioned in the case, treatments of the following items under PRC GAAP and IFRS are different:

Depreciation and disposal of oil and gas properties Capitalization of general borrowing costs Acquisition of subsidiaries Gains from issuance of shares by a subsidiary Gains from debt restructuring Revaluation of land use rights Unrecognized losses of subsidiaries


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Pre-operating expenditures Impairment looses on long-lived assets Government grants (Refer pp.5-72 - 5-75 in the textbook)

Treatments of depreciation and disposal of oil and gas properties seem to have a significant impact on reported profit.

As mentioned in the case, treatments of the following items under IFRS and U.S. GAAP are different:

Foreign exchange gains and losses Capitalization and revaluation of property, plant and equipment Exchange of assets Impairment of long-lived assets Capitalization of interest on investment in associates Goodwill amortization Companies included in consolidation Related party transactions (Refer pp.5-77 – 5-82)

Treatments of depreciation of revalued property, plant and equipment, and disposal of property, plant and equipment seem to have a significant impact on reported profit

3. U.K. readers of the financial statements may not find them very useful, as the information is not reconciled to the U.K. GAAP. There are differences between U.K. GAAP and IFRS, and between U.K. GAAP and U.S. GAAP. However, with the adoption of IFRS in the EU, this may not be a major problem any more.

4. U.S. readers should find the information useful. However, it would be better for them if the information was reconciled directly from PRC GAAP to U.S. GAAP.

5. When a company is listed on a foreign stock exchange, it is always useful to explain the differences, if any, between accounting standards used in preparing financial statements, and those that are stipulated by the listing requirements. The need for such explanation is reduced if the two sets of standards are comparable. However, differences can still exist due to different interpretations of the requirements. Therefore, the approach taken by CPCC can be recommended to other companies.


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