International AccountingChapter 4Craig Deegan

4-2

Evidence of international differences in accounting

Although many countries now adopt IFRS, if we go back a few

years and apply different countries’ former accounting rules to

the same transactions we can find significant differences in

profits and net assets The differences in accounting profits have

been used by many parties to justify the ongoing efforts of the

IASB to standardise international accounting

Standardisation versus harmonisation

HarmonisationProcess of increasing the compatibility of accounting practices by setting bounds to their degree of variation

StandardisationBy contrast, appears to imply the imposition of a more

rigid and narrow set of rules (than harmonisation)

Conclusion

Therefore, the term harmonisation appears to allow more flexibility than standardisation

VS

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Objectives of IASB

Objective 2 It seeks to work on the improvement and standardisation of regulations, accounting standards and procedures

Objective 1 It seeks to formulate and publish accounting standards and to promote their worldwide acceptance

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International Accounting Standards Board (IASB)

• The Institute of Chartered Accountants of England and Wales, the

Canadian Institute of Chartered Accountants and the American Institute

of Certified Public Accountants initially established an Accountants’

International Study Group in 1967.

• The Accountants’ International Study Group then formed the basis for

the establishment of the IASC in 1973

• The IASB replaced the IASC in 2001

• Australia decided in the mid-1990s to harmonise its standards

with those of the IASC

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International Accounting Standards Board (IASB)

• But then in 2002, a decision was made by the Financial Reporting Council

that Australia would adopt standards released by the IASB

• IFRS still not accepted by the US SEC for US domestic companies, however

the US FASB and the IASB are currently working on a convergence project

which might ultimately see the US adopt IFRS

• The FRC’s decision that Australia would adopt IFRS created a great deal of

work for organisations in that they had to make quite significant changes to

their accounting practices

• The adoption of IAS/IFRS required companies to write off a great deal of

assets—particularly intangible assets

International financial accounting models

ANGLO-AMERICAN

Strongly influenced by professional accounting bodies

rather than government, emphasises importance of capital

markets, emphasises true and fair, considerations of economic

substance over legal form

CONTINENTAL EUROPEAN

Relatively small input from accounting profession, little

reliance on qualitative true and fair, strong reliance on

government

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Reasons for international accounting differences

CULTURE 1

2

3

4

RELIGION

FINANCING SYSTEM

TAX SYSTEMS

The effect of culture on accounting systems

CULTUREDefined as “… an expression of norms, values and customs which reflect typical be-havioural characteristics” (Takatera & Yamamoto 1987)

‘Culture’ reserved for societies as a whole or nations

‘Subculture’ used for the level of an organisation, profession or family

Hofstede’s cultural dimensions

PresentStart

Individualism VS Collectivism

Power Distance

Uncertainty Avoidance

Masculinity versus Femininity

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Financing system

• Types of financing systems

Capital market-based

Credit-based system

At a country level the financing system is relevant to the

purpose of financial reporting

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The effect of religion on accounting systems

• Another factor that has been used to explain differences in accounting is religion

• Religion transcends national boundaries

• Impacts on global harmonisation of accounting standards

• Hamid, Craig and Clarke (1993) examined how Islamic cultures have failed to

embrace ‘Western’ accounting practices

– compliance with Islamic beliefs can affect the structure of business and

finance

– many Western accounting practices are incompatible with Islamic principles

– relevance of IASB standards to such cultures?

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The effect of religion on accounting systems

– Islam precludes debt financing and prohibits

payment of interest

– The Western objective of financial reporting of

rational economic decision making, may not be a

relevant objective in some societies

Religion can affect how people do business and how they make

decisions, for example

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Taxation systems

Where there are ‘insider systems of

finance’ (common in continental

European countries) financial

accounting practices have typically been

linked to taxation law

Differences in accounting methods internationally have also been

linked to differences in taxation systems

Impact of international agencies

Various international agencies have also had an affect on the

accounting systems used within particular countries

Examples of institutions or bodies which can impact on a

country’s accounting policies are

Multinational Companies

International Accounting Firms

Large Monetary Organisations e.g. World Bank

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