INTERNATIONAL ACCOUNTING EBOOK
As of today we have 78,, eBooks for you to download for free. Rev. ed. of: International accounting and finance handbook. sional literature including 20 . Read "Advances in International Accounting" by available from Rakuten Kobo. Sign up today and get $5 off your first purchase. This title is a refereed, academic . The Fifth Edition of International Accounting provides an overview of the broadly defined area of international accounting but also focuses on.
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To download more slides, ebook, solutions and test bank, visit http:// cittadelmonte.info Seventh Edition. INTERNATIONAL ACCOUNTING Frederick. Editorial Reviews. From the Publisher. This introduction to International Accounting is written from an accounting perspective -- rather than a legal. Editorial Reviews. About the Author. Timothy S. Doupnik is the Cramer Fellow in International International Accounting - Kindle edition by Doupnik. Download it .
This book includes a wide range of topics that deals with international accounting standards, regulations, and financial reporting. The book is a timely collection of several original research papers written by well-known authors and experts in the field from countries around the globe on very important and emerging issues in international accounting. This regulation is a revolutionary one, and therefore, there is a need for the type research that focus on the lobbying activities towards the International Accounting Standard Board IASB. This book includes an in-depth coverage of such lobbying activities as well as an extensive research papers that focus on the content analysis of the comment letters received by International Accounting Standards Board IASB. Fair value accounting has gained some special interest in recent years. The book includes several research papers on Fair Value Accounting and its application in different countries. Other topics covered in the book include auditing, taxation, and accounting education in several countries.
Stephen A. James's Place Tax Guide Effective Budgeting using Microsoft Excel. Palani Murugappan. Multiple Interest Rate Analysis. Financial Crises and Earnings Management Behavior. Bruno Maria Franceschetti. Management Accounting Research in Practice. Petri Suomala. International Accounting Standardization. Jeno Beke. Regulating Capitalism? Managing Financial Resources. Mick Broadbent.
The Routledge Companion to Accounting Education. Richard M. Audit Reporting for Going Concern Uncertainty. Sandro Brunelli. Bryan Kesler. Healthcare and Medical Office Accounting. Wayne Label. Advances in Management Accounting. Mary A. The Structure of Production. Mark Skousen. Accounting Choices in Family Firms. Silvia Ferramosca. The Routledge Companion to Accounting and Risk. Margaret Woods. The Blokehead. Excise Taxation and the Origins of Public Debt.
International Accounting Books
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Chi ama i libri sceglie Kobo e inMondadori. Choose Store. Western Europe Europe is the second largest equity market region in the world in terms of market capitalization and trading volume.
Economic expansion significantly contributed to the rapid growth in European equity markets. A related factor in Continental Europe has been a gradual shift to an equity orientation that long has characterized the London and North American equity markets. Developed countries around the world can be divided roughly into those having a common law English orientation and those having a code law Continental Europe orientation see Chapter 2.
International Accounting (7th Edition) | International Financial Reporting Standards (K views)
In these countries, equity investors are widely dispersed and are the most important suppliers of capital. As a result, capital markets in many common law countries have evolved credible and open disclosure and accounting systems, and relatively stringent market regulation. In code law countries such as France, Germany, and Japan, banks provide most of the financing, and ownership tends to be concentrated among small groups of insiders.
Demand for detailed public disclosure is generally lower in these countries than in common law countries, but is increasing. European equity markets will continue to grow. Pension reforms, for one, are creating new demand for investment opportunities.
Cross-border equity flows are increasing as a percentage of cross-border bond flows, in part because equity has proved to be a profitable investment.
In addition, the advent of the euro has prompted a rush of cross-border mergers, which are expected to continue. Intense rivalry among European stock exchanges has contributed to the development of an equity culture. Continental European markets have become more investor oriented to increase their credibility and attract new listings. External investors, in particular foreign investors and institutional investors, are demanding expanded disclosure and improved corporate governance.
In addition, equity market development has become increasingly important to national governments and regulators, who also compete for recognition and prestige. Many European securities regulators and stock exchanges have implemented more stringent market rules and are strengthening their enforcement efforts. Asia Many experts are predicting that Asia will become the second most important equity market region. The Peoples Republic of China China has emerged as a major global economy, and the Asian Tiger nations continue to experience phenomenal growth and development.
Critics argue that Asian accounting measurement, disclosure, and auditing standards and the monitoring and enforcement of those standards are weak. Market capitalization as a percentage of gross domestic product GDP in Asia is lower than that in the United States and several major European markets. This suggests, however, that equity markets can play a much larger role in many Asian economies.
Also, Asian governments and stock exchanges appear eager to improve market quality and credibility to attract investors. The goal is to relieve the strain on pay-as-you-go state pension schemes. The growing numbers of private pension funds are allocating more of their assets to equities to increase returns. Also, some countries are liberalizing restrictions on pension fund investment.
Each market develops in response to economic conditions, the nature of its investors, sources of financing, and other factors. In Japan, for example, banks have long been the primary sources of finance. These banks have had full access to inside information about Japanese companies, and so there has been less demand in Japan for credible external financial reporting.
The exchange recently implemented new listing rules and more stringent disclosure requirements to attract new domestic and foreign listings. Cross-Border Equity Listing and Issuance The current wave of interest in cross-border listings on major world exchanges is not a chance phenomenon. National regulators and stock exchanges compete fiercely for foreign listings and trade volume, considered necessary for any stock exchange that seeks to become or remain a global leader.
In response, organized exchanges and market regulators have worked to make access faster and less costly for foreign issuers and at the same time increase their markets credibility. As capital markets become more specialized, each can offer unique benefits to foreign issuers. Many companies have difficulty deciding where to raise capital or list their shares. Knowledge of many equity markets with different laws, regulations, and institutional features is now required.
Also required is an understanding of how issuer and stock exchange characteristics interact. The issuers home country, industry, and offering size are just some of the factors that need to be considered.
One entrepreneur planning to raise capital said, I spoke to three investment banks about it, and I had three different answers about which would be the right market for me. Exhibit presents a detailed list of factors companies consider in choosing a foreign capital market.
One example is the growing importance of stock exchange alliances and consolidation. This business combination creates the worlds first trans-Atlantic stock market. Some are even predicting that financial markets and trading will be dominated by two or three global exchange groups operating across continents within the not too distant future.
Similarly, the emergence of newer markets, such as Londons Alternative Investment Market AIM , Frances Alternext and Germanys Entry Standard, expands the pool of companies that can now break the bonds of local debt financing. All of these developments present a highly complex setting for financial reporting regulation. Home country is relevant because companies can raise capital more easily in foreign countries that have legal and regulatory environments similar to their own.
For example, an Australian company can probably access the U. Industry is important because, other things equal, issuers seek to raise capital in markets where other companies in the same industry are listed in order to improve the chances for adequate attention by financial analysts.
Offering size is important because only relatively large offerings attract sufficient attention in the United States.
Much smaller IPOs are common in Europes new markets. Many stock exchange Web sites include information on unique stock exchange features that may attract foreign companies considering listing or raising capital in those markets. What is the extent of interest in a company shown by financial analysts and investors who normally participate in a market? What is the level of trading activity on the exchange? Higher trading volume means more potential buyers of a companys securities.
How easy is it to raise capital? Some jurisdictions have complex listing or ongoing reporting requirements that may be difficult or impossible for a smaller company to meet.
What is the availability of capital in a market? What is the reputation of the exchange? A growing international company may want the increased credibility and recognition that come with listing on a preeminent market such as the New York Stock Exchange.
To what extent does the company desire to raise its profile and establish its brand identity in a particular market?
A stock exchange listing can benefit companies that operate or plan to operate in an overseas country. To what extent are the markets regulatory environment and language similar to those in the companys home market? For example, a company from an English-speaking country with a common law British-American legal and regulatory system, such as Australia, might find it easier to list in the United Kingdom than in Continental Europe.
To what extent do institutional investors face statutory or self-imposed restrictions on the proportion of their investment portfolio that they can hold in securities of foreign companies? Sometimes these restrictions force a large international company to list on many stock exchanges to have access to sufficient institutional capital. These restrictions are difficult to overcome in some jurisdictions. What are the nature and activities of investors in the market?
For example, large pension funds in the Netherlands, Switzerland, and the United Kingdom invest heavily in equities of both domestic and foreign companies. What is the likelihood that the company will be required to have locally listed shares to carry out a merger or acquisition in a particular country?
Will there be a need for locally listed shares to be used in employee stock option plans? The rapid growth in global capital markets and cross-border investment activity means that the international dimensions of accounting are more important than ever for professionals who have to deal in one way or another with these areas.
Accounting plays a critical role in the efficient functioning of capital markets. Lenders, investors, financial analysts, regulators, and stock exchanges require information about the financial performance, position, and the future prospects of companies seeking financing.
In turn, the needs of capital market participants have strongly shaped the development of accounting practice, as discussed in Chapter 2. Demands of market participants strongly influence companies accounting and disclosure choices and national and international efforts to harmonize accounting measurement, disclosure, and auditing practices around the world. How does, for example, a British or American investor make sense of Japanese accounts or Brazilian accounts where measurement and transparency rules are very different from what they are typically accustomed to?
Until Japan and Brazil formally implement international financial reporting standards, should investors attempt to. Or should they put themselves in the shoes of a Japanese or Brazilian shareholder and conduct their analysis from a local perspective?
These and other related issues are covered in Chapter 9. On the other side of the coin, a major factor motivating many corporations to raise monies abroad is to increase their access to funds and lower their capital costs.
The challenge here is trying to ensure that the foreign reader receives the same intended message as the domestic reader. This challenge is significant in a world where firms compete for funds, an issue explored in Chapter 5.
We invite you to revisit this section before you begin reading each chapter and upon completion of each chapter to be sure that you understand the essential ideas that are being conveyed. This text is intended to sensitize you to the important concepts and issues in the field of international accounting and reporting, and in so doing, enable you to ask the right questions as a reader of international financial statements, whether you opt for a career in the corporate, legal, financial services, or not-for-profit world.
After studying Chapter 1, you should be able to: Explain how international accounting is distinct from domestic accounting. Describe what the term accounting diversity entails. Identify the factors that are contributing to the internationalization of the subject of accounting.
Understand how foreign direct investment activities differ from international trade and the implications of this difference for accounting. Appreciate, in general terms, the historic development of international accounting. Comprehend the reasons why the study of international accounting is so important. Identify several internal and external reporting issues that arise when business and investments transcend national borders.
Explain what is meant by global capital markets and what this development means for capital market participants. After studying Chapter 2, you should be able to: Identify and understand the importance of the eight factors that have a significant influence on accounting development. Understand the four approaches to accounting development found in marketoriented Western economies and identify countries in which each one in prevalent.
Have a basic working knowledge of accounting classifications and how they compare with one another. Explain the difference between the fair presentation and legal compliance orientations of accounting and identify nations in which each is prevalent. Explain why distinctions of accounting at the national level are becoming blurred. After studying Chapter 3, you should be able to: Understand how financial reporting is regulated and enforced in five European countries: Describe the key similarities and differences among the accounting systems of these five countries.
Identify the use of International Financial Reporting Standards at the individual company and consolidated financial statement levels in these five countries. Describe the audit oversight mechanisms in these five countries. After studying Chapter 4, you should be able to: Understand how financial reporting is regulated and enforced in five countries of the Americas and Asia: Describe the auditor oversight mechanisms in these five countries.
Explain the difference between principle-based and rules-based accounting standards. After studying Chapter 5, you should be able to: Distinguish voluntary and mandatory disclosure and its regulation. Identify the broad objectives for accounting disclosure systems in investor-oriented equity markets.
Discuss triple bottom line reporting and why it is a growing tendency among large multinational corporations. Gain a basic understanding of the following selected corporate financial disclosure practices: After studying Chapter 6, you should be able to: Describe the nature of foreign currency transactions done in the spot, forward, and swap markets.
Understand the foreign currency translation terms set forth in Exhibit Explain the difference between a translation gain or loss and a transaction gain or loss. Comprehend alternative foreign currency translation methods that exist and their rationale.
Evaluate which of the available foreign currency translation methods are best under which specific business and currency market conditions. Compare and contrast the financial statement effects of the temporal versus the current rate method of foreign currency translation.
Understand the relationship between foreign currency translation and inflation. Appreciate how foreign currency translation is handled outside the United States. After studying Chapter 7, you should be able to: Understand why financial statements potentially are misleading during periods of changing prices.
Define the inflation accounting terms listed in Exhibit Comprehend the effect of general price-level adjustments on financial statement amounts. Describe in what ways the current cost accounting framework differs from conventional accounting. Appreciate how and why adjustments for changing prices may vary from country to country. Have a basic understanding of the IASBs pronouncement on changing prices in hyperinflationary economies. Discuss whether constant dollars or current costs better measure the effects of changing prices.
Understand how changing prices and foreign exchange rates are related and their financial statement effects. After studying Chapter 8, you should be able to: Define and understand the distinction between harmonization and convergence as they apply to accounting standards. State the pros and cons of adopting international accounting standards.
Understand what is meant by reconciliation and mutual recognition of different sets of accounting standards.
Identify the six organizations that have leading roles in setting international accounting standards and in promoting international accounting convergence. Understand what the major provisions of the U. Sarbanes-Oxley Act are and why similar legislation is being enacted in other countries. After studying Chapter 9, you should be able to: Understand the special difficulties involved in undertaking international business strategy analysis.
Identify basic approaches to information gathering. Describe the steps involved in conducting an accounting analysis. Appreciate the impact on accounting analysis of a cross-country variation in accounting measurement, disclosure, and auditing quality and b the difficulty in obtaining necessary information. Comprehend several coping mechanisms available to deal with cross-country accounting measurement differences.
Expose the particular difficulties and pitfalls involved in doing an international prospective analysis. Undertake a more intelligent approach to international financial ratio analysis.
Appreciate national variations associated with the audit or attest function. After studying Chapter 10, you should be able to: Identify four critical dimensions of business modeling. Understand the distinction between standard and Kaizen costing concepts.
Measure expected returns of a foreign investment. Calculate in general fashion a firms cost of capital in a multinational framework. Comprehend the basic issues and complexities involved in designing multinational information and financial control systems.
Perform an exchange rate variance analysis. State the unique difficulties involved in designing and implementing performance evaluation systems in multinational companies. Deal with the effects of inflation and exchange rate fluctuation on performance measurement of multinational companies.
After studying Chapter 11, you should be able to: Define market risk and provide an example of this risk with a foreign exchange example.
State four tasks involved in managing foreign exchange risk. Define and calculate translation exposure. Define and calculate transaction exposure. Understand the distinction between accounting exposure and economic exposure. Explain what a financial derivative is and the accounting issues associated with it. After studying Chapter 12, you should be able to: Identify the major types of tax systems that exist around the world.
Understand what determines a multinational entitys effective tax burden. Understand concepts relating to the taxation of foreign source income and the rationale behind the foreign tax credit.
Identify the major variables that complicate international transfer pricing. Explain the meaning of arms-length price and the transfer pricing methods designed to achieve it.
Explain what an advance pricing arrangement is. Please refer to pages of the annual report of Infosys. Its web address is www. Discussion Questions 1. Explain how international accounting differs from purely domestic accounting. Accounting may be viewed as having three components: What are the advantages and disadvantages of this classification? Can you suggest alternative classifications that might be useful? What contemporary factors are contributing to the internationalization of the subject of accounting?
Describe in two short paragraphs how foreign direct investment activities differ from international trade and the implications of this difference for accounting.
Given the international heritage of accounting, do you feel that efforts to harmonize global accounting standards are a good thing? Why or why not? Why have international accounting issues grown in importance and complexity in recent years? Explain the term global capital markets. This chapter primarily discusses global equity markets. What other types of financial instruments are traded in these markets? How important are global capital markets in the world economy?
Over time, national governments in many countries have sold shares in state-owned financial institutions to nongovernmental entities.
Discuss how these privatizations might affect the capital markets as well as the accounting systems of these companies. Outsourcing, especially from vendors located abroad, has become a politically sensitive issue, especially in the United States.
Do you think this argument has merit? What are the consequences of this debate for international accounting? Exercises 1. For each leg of the production chain, identify the various accounting and related issues that might arise. Examine Exhibit and compute the compounded annual growth rate of merchandise trade versus the global trade in services for the 20 year period beginning and ending What implication does your finding have for accounting as a service activity?
Examine the Web sites of five exchanges listed in Appendix that you feel would be most attractive to foreign listers. Which exchange in your chosen set proved most popular during the last two years?
Provide possible explanations for your observation. Does the geographic pattern of merchandise exports contained in Exhibit correlate well with the pattern of AKZO Nobels geographic distribution of sales shown in Exhibit ?
What might explain any differences you observe? For managerial accountants? Exhibit lists the number of majorityowned foreign affiliates in each country that Nestle includes in its consolidated results. What international accounting issues are triggered by this Exhibit? Revisit Exhibit and show how the ROE statistics of Which of the two ROE statistics is the better performance measure to use when comparing the financial performance of Infosys with that of Verizon, a leading U.
Stock exchange Web sites vary considerably in the information they provide and their ease of use. Select any two of the stock exchanges presented in Appendix Explore the Web sites of each of these stock exchanges. Prepare a table that compares and contrasts the sites for types. Are English-language press releases of listed companies available?
Links to listed companies Web sites? Listing requirements? Price and volume data for listed securities? Helpful information for investors? Do you expect this pattern to persist in the future? Please explain. If you had a nontrivial sum of money to invest and decided to invest it in a country index fund, in which country or countries identified in Exhibit would you invest your money? What accounting issues would play a role in your decision?
E-centives offering circular stated that no offers or sales of the companys common stock would be made in the United States, and that there would be no public market for the common stock in the United States after the offering. At the time of the public offering, E-centives maintained over 4.
The company does not charge members a fee for its service. Instead, the company generates revenue primarily from marketers whose marketing matter is delivered to targeted groups of E-centives members. As of the offering date, the company had little revenue and had not been profitable.
E-centives growth strategy is to expand internationally. To date, the company has focused on pursuing opportunities in the United States. E-centives intends to expand into Europe and other countries. The company is currently considering expanding into Switzerland, the United Kingdom, and Germany. Refer to Exhibit , which lists factors relevant for choosing an overseas market for listing or raising capital.
Which factors might have been relevant in E-centives decision to raise capital and list on the Swiss Exchanges New Market? The New Market is designed to meet the financing needs of rapidly growing companies from Switzerland and abroad.
It provides firms with a simplified means of entry to the Swiss capital markets. Listing requirements for the New Market are simple. For example, companies must have an operating track record of 12 months, the initial public listing must involve a capital increase, and to ensure market liquidity, a bank must agree to make a market in the securities.
E-centives E-centives, Inc. The company offers systems and technologies that enable businesses to build large, rich databases of consumer profiles and interests. In return, consumers receive a free personalized service that provides them Why do you believe E-centives chose not to raise public equity in the United States? What are the potential drawbacks related to E-centives decision not to raise capital in the U. What are the advantages and disadvantages to E-centives of using U.
What are the listing requirements for the New Market? What are the financial reporting requirements? Does E-centives appear to fit the profile of the typical New Market company? Case Global Benchmarks: Infosys Technologies Limited Investors, individual, corporate and institutional, are increasingly investing beyond national borders. Returns abroad, even after allowing for foreign currency exchange risk, have often exceeded those offered by domestic investments. Information provided in a firms annual report is often the major source of information available to those seeking to sample foreign equities.
In attempting to assess the risk and return attributes of a given company, readers must answer questions such as the following: What accounting principles were employed? Should the financial statements be restated according to a different set of accounting principles to be more useful? What types of information are not provided that one would expect to find in financial statements of companies from the investors home country?
How would one compensate for limited disclosure? What does the audit report reveal about the level of audit quality? What auditing standards were used? Are they acceptable? Does the audit report mean the same thing as it does in the readers home country? Appendix refers you to the financial statements including selected notes and auditors report for Infosys Technologies Limited. Its name eventually evolved into Infosys Technologies Limited in , when the company went public. Its mission is to provide high quality and cost competitive technology solutions for companies around the world.
In examining the information referred to in Appendix , comment on how the statements of Infosys stack up to other companies in the industry in meeting the information needs of a nondomestic investor such as yourself. Specifically, what reporting practices raise issues for you? What reporting practices do you find particularly helpful? In preparing your critique, compare the reporting practices of Infosys to a service provider in your country, most of whom maintain corporate Web sites on the Internet.
Development and Classification Accounting must respond to societys ever-changing informational needs and reflect the cultural, economic, legal, social, and political conditions within which it operates. The history of accounting and accountants reveals continuing change.
At first, accounting was little more than a recording system for certain banking services and tax-collection schemes. Double-entry bookkeeping systems were later developed to meet the needs of trading ventures. Industrialization and division of labor made cost-behavior analysis and managerial accounting possible. The rise of the modern corporation stimulated periodic financial reporting and auditing. In keeping with societys increased concerns about the environment and about corporate integrity, accountants have found ways to measure and report environmental remediation liabilities and to uncover money laundering and other white-collar crimes.
Accounting provides decision information for huge domestic and international public securities markets. It extends into management consulting and incorporates ever-increasing information technology within its systems and procedures. Why should we want to know how and why accounting develops? The answer is the same as for developmental studies in other fields. We can better understand a nations accounting by knowing the underlying factors that have influenced its development.
Accounting differs around the world, and knowledge of the developmental factors helps us see why. In other words, they can explain the observable differences as well as the similarities. Because accounting responds to its environment, different cultural, economic, legal, and political environments produce different accounting systems, and similar environments produce similar systems.
This leads us to classification. Why should we classify compare national or regional financial accounting systems? Classification is fundamental to understanding and analyzing why and how national accounting systems differ. We can also analyze whether these systems are converging or diverging.
The goal of classification is to group financial accounting systems according to their distinctive characteristics. Classifications reveal fundamental structures that group members have in common and that distinguish the various groups from each other.
By identifying similarities and differences, our understanding of accounting systems is improved. Classifications are a way of viewing the world. Diversity among nations is to be expected. The factors that influence national accounting development also help explain the accounting diversity among nations.
The following eight factors have a significant influence on accounting development. The relationship between culture the eighth item and accounting development ends the discussion in this section.
Sources of Finance. In countries with strong equity markets, such as the United States and the United Kingdom, accounting profits measure how well management is running the company. Accounting is designed to help investors assess future cash flows and the associated risks, and to value the firm. Disclosures are extensive to meet the requirements of widespread public share ownership.
By contrast, in creditbased systems, where banks are the dominant source of finance, accounting focuses on creditor protection through conservative earnings measures to minimize dividend payouts and retain sufficient funds for the protection of lenders.
Because financial institutions have direct access to any information they want, extensive public disclosures are not considered necessary. Japan and Switzerland are examples. Legal System. The legal system determines how individuals and institutions interact. The Western world has two basic orientations: Code law derives mainly from Roman law and the Code Napolon. Codification of accounting standards and procedures is natural and appropriate. Thus, in code law countries, accounting rules are incorporated into national laws and tend to be highly prescriptive and procedural.
Statute law exists, of course, but it tends to be less detailed and more flexible than in a code law system. This encourages experimentation and permits the exercise of judgment.
In most common law countries, accounting rules are established by private sector professional organizations. This allows them to be more adaptive and innovative. Except for broad statutory requirements, most accounting rules are. For further discussion of this point, see C. He points out that outsiders e. Insiders families, other companies, government, and banks usually dominate ownership in credit-based countries, which is why low levels of disclosure are usually found there.
Germany is an exception. Although Germany is a credit-based country, German-listed companies have high disclosures because of Germanys unusually large market in listed debt p. French, German, and Scandinavian. French and German code law, like the common law, spread around the world through conquest, imperialism, or borrowing. For example, leases are normally not capitalized under code law. In contrast, under common law leases are capitalized when they are, in substance, the purchase of property.
Exhibit lists code and common law countries. Taxation In many countries, tax legislation effectively determines accounting standards because companies must record revenues and expenses in their accounts to claim them for tax purposes. In other words, financial and tax accounting are the same. This is the case, for example, in Germany and Sweden. Aspen, Under martial law or other national emergency situations, all aspects of the accounting function may be regulated by a central governmental court or agency.
This was the case, for instance, in Nazi Germany, where intensive war preparations and World War II itself required a highly uniform national accounting system for total control of all national economic activities. In other countries, such as the Netherlands, financial and tax accounting are separate: Taxable profits are essentially financial accounting profits adjusted for differences with the tax laws.
Of course, even where financial and tax accounting are separate, tax legislation may occasionally require the application of certain accounting principles. Political and Economic Ties Accounting ideas and technologies are transferred through conquest, commerce, and similar forces.
Double-entry bookkeeping, which originated in Italy in the s, gradually spread across Europe along with other ideas of the Renaissance.
British colonialism exported accountants and accounting concepts throughout the empire. The United States imposed U. Many developing economies use an accounting system that was developed elsewhere, either because it was imposed on them e. As discussed more generally in Chapter 8, economic integration through the growth of international trade and capital flows is a powerful motivator for the convergence of accounting standards in countries around the world.
Inflation Inflation distorts historical cost accounting by understating asset values and related expenses, and overstating income. Countries with high inflation often require that companies incorporate price changes into the accounts. For example, Mexico applies general price-level accounting when its cumulative three-year inflation rate equals or exceeds 28 percent an annual average compounded rate of 8 percent. Accounting responses to inflation are explored in Chapter 7.
Level of Economic Development This factor affects the types of business transactions conducted in an economy and determines which ones are most prevalent. The type of transactions, in turn, determines the accounting issues that are faced.
For example, stock-based executive compensation or asset securitization makes little sense in economies with underdeveloped capital markets. Today, many industrial economies are becoming service economies. Accounting issues relevant in manufacturing, such as valuing fixed assets and recording depreciation, are becoming less important.
New accounting challenges, such as valuing intangibles and human resources, are emerging. Educational Level Highly sophisticated accounting standards and practices are useless if they are misunderstood and misused.
For example, a complex technical report on cost behavior variances is meaningless unless the reader understands cost accounting. Disclosures about the risks of derivative securities are not informative unless they can be read competently.
Professional accounting education is difficult to achieve where general educational levels are low. Mexico is a country. Israel discontinued inflation-adjusted accounting in after drastic reductions in inflation.
In other situations, a country must import accounting training or send its citizens elsewhere to get it, something that China is now doing. Mexico and China are discussed in Chapter 4. Several of these first seven variables are closely associated.
For example, the common law legal systoem originated in Britain and was exported to such countries as Australia, Canada, and the United States. These four countries all have highly developed capital markets that dominate the orientation of their financial reporting. Financial and tax accounting are separate. By contrast, most of continental Europe and Japan have code law legal systems and rely on banks or the government for most of their finance.
Thus, their accounting rules generally conform to tax laws. Establishing cause and effect is difficult. The type of legal system may predispose a country toward its system of finance. A common law legal system emphasizes shareholder rights and offers stronger investor protection than a code law system. The outcome is that strong equity markets develop in common law countries and weak ones develop in code law countries. Whether it dominates the orientation of accounting may depend on whether accounting has a major competing purpose, namely, informing outside shareholders.
Tax accounting is not suitable for this purpose. If common law results in strong equity markets, taxation will not dominate. There will be two sets of accounting rules: One is oriented toward a fair presentation of financial position and results of operations; the other is designed to comply with legal requirements and tax law. The fair presentation versus legal compliance distinction is further discussed at the end of the chapter. Culture Culture encompasses the values and attitudes shared by a society.
Cultural variables underlie nations legal systems and other institutional arrangements. Hofstede identified four national cultural dimensions or societal values: His analysis is based on data from employees of a large U. Uncertainty avoidance is the degree to which society is uncomfortable with ambiguity and an uncertain future.
Power distance is the extent to which hierarchy and an unequal distribution of power in institutions and organizations are accepted. Masculinity versus femininity is the extent to which gender roles are differentiated and performance and visible achievement traditional masculine values 7 R.
La Porta, F. Lopez-de-Silanes, A. Shleifer, and R. Hofstede, Cultures Consequences: Sage Publications, Some scholars now call this achievement orientation.
They are: Professionalism vs. A preference for independent professional judgment is consistent with a preference for a loosely knit social framework where there is more emphasis on independence, a belief in fair play and as few rules as possible, and where a variety of professional judgments will tend to be more easily tolerated.
Uniformity vs. A preference for uniformity is consistent with a preference for strong uncertainty avoidance leading to a concern for law and order and rigid codes of behaviour, a need for written rules and regulations, a respect for conformity and the search for ultimate, absolute truths and values.
Later work documents a fifth cultural dimension, Confucian dynamism also called long-term orientation. This later work contends that only individualism, power distance, and masculinity are universal across all cultures. Uncertainty avoidance is a unique characteristic of Western societies, whereas Confucian dynamism is unique to Eastern societies.
See G. Hofstede and M. Bond, The Confucian Connection: Hofstede, Cultures and Organizations: Softwares of the Mind London: McGraw-Hill, The existence of this fifth dimension has been contested.
See R. Yeh and J. Lawrence, Individualism and Confucian Dynamism: These authors note a data problem in Hofstedes subsequent work. Once an outlier is removed, Confucian dynamism no longer emerges as an independent construct; it reflects the same cultural dimension as individualism. It should also be pointed out that there are other cultural dimensions that are not considered by Hofstede. For example, religion, which extends beyond national boundaries, underlies business practices, institutional arrangements, and, by extension, accounting.
Language is another cultural input. For a critique of Hofstede, see B. Conservatism vs. A preference for more conservative measures of profits is consistent with strong uncertainty avoidance following from a concern with security and a perceived need to adopt a cautious approach to cope with uncertainty of future events.
Secrecy vs. A preference for secrecy is consistent with strong uncertainty avoidance following from a need to restrict information disclosures so as to avoid conflict and competition and to preserve security. Secrecy is also consistent with a preference for collectivism. Gray hypothesizes that individualism and uncertainty avoidance will influence accounting the most, followed by power distance, then masculinity.
The empirical work testing Grays framework is reviewed in T. Doupnik and G. Judgmental classifications rely on knowledge, intuition, and experience. He identified four approaches to accounting development in Western nations with market-oriented economic systems. Firm goals normally follow rather than lead national economic policies as business firms coordinate their activities with national policies.
Thus, for example, a national policy to maintain stable employment by avoiding big swings in business cycles would result in accounting practices that smooth income. As another example, a nation that wished to promote the development of certain industries could permit them to rapidly write off capital expenditures. Accounting in Sweden developed from the macroeconomic approach. The focus is on individual firms whose main goal is to survive.
To accomplish this goal, firms must maintain their physical capital. It is also critical that they clearly separate capital from income to evaluate and control their business activities.
Accounting measurements based on replacement cost best fit this approach. Accounting developed from microeconomics in the Netherlands. Accounting is viewed as a service function that derives its concepts and principles from the business process it serves, not from a discipline such as economics. Businesses cope with real-world complexities and ever-present uncertainties through experience, practice, and intuition. Accounting develops the same way. For example, income is simply what seems to be the most useful in practice, and disclosures respond pragmatically to user needs.
Accounting developed as an independent discipline in the United Kingdom and the United States. Uniformity in measurement, disclosure, and presentation makes it easier for government planners, tax authorities, and even managers to use accounting information to control all types of businesses.
In general, the uniform approach is used in. Nair and W. Doupnik and S. Mueller, International Accounting New York: Macmillan, This work is the basis for most of the classifications of accounting systems worldwide. France, with its national uniform chart of accounts, is the leading exponent of the uniform approach. Code Law Accounting Accounting can also be classified by a nations legal system. Stock markets dominate as a source of finance, and financial reporting is aimed at the information needs of outside investors.
Setting accounting standards tends to be a private sector activity, and the accounting profession plays an important role. Common law accounting is often called Anglo-Saxon, British-American, or micro-based.
Banks or governments insiders dominate as a source of finance, and financial reporting is aimed at creditor protection. Setting accounting standards tends to be a public sector activity, with relatively less influence by the accounting profession. Code law accounting is often called continental, legalistic, or macro-uniform. It is found in most of the countries of continental Europe and their former colonies in Africa, Asia, and the Americas.
This characterization of accounting parallels the so-called stockholder and stakeholder models of corporate governance in common and code law countries, respectively. As noted earlier in this chapter, a nations legal system and its system of finance may be linked in a cause-and-effect way. Laws protect outside investors and are generally well enforced.
The outcome is that strong capital markets develop in common law countries and weak ones develop in code law countries. Relative to code law countries, firms in common law countries raise substantial amounts of capital through public offerings to numerous outside. European academics like K. Kfer Switzerland , L. Illetschko Austria , E.
Schmalenbach Germany , and A.
International Accounting (7th Edition)
Ball, S. Kothari, and A. Lopez-deSilanes, A. Because investors are at arms length to the firm, there is a demand for accounting information that accurately reflects the firms operating performance and financial position. Public disclosure resolves the information asymmetry between the firm and investors. By contrast, ownership of firms in code law countries tends to be concentrated in the hands of families, other corporations, and large commercial banks.
Firms satisfy substantial fractions of their capital needs from the government or through bank borrowing. Debt as a source of finance is relatively more important in code law countries than in common law countries. Conservative accounting measurements provide a cushion to lenders in the event of default. Major lenders and significant equity investors may occupy seats on boards of directors, along with other stakeholders, such as labor and important suppliers and customers.
Because information demands are satisfied by private communication, there is less demand for public disclosure. Accounting income is the basis for income taxes owed and often, as well, for dividends and employee bonuses, resulting in pressures for smooth income amounts from year to year.
Practice Systems: Legal Compliance Accounting Many accounting distinctions at the national level are becoming blurred. There are several reasons for this.
Capital is increasingly global, creating pressure for a world standard of corporate reporting. For many companies, global convergence of financial reporting standards will reduce the costs of complying with different accounting rules and may also reduce their costs of capital. The integration of the worlds capital markets is arguably the most important reason why the International Accounting Standards Board has emerged as the focal point for accounting standard setting in Australia, Japan, Europe, Singapore, South Africa, the United States, and elsewhere see Chapter 8.
Stock market development is also a top priority in many countries, especially those emerging from centrally planned to market-oriented economies.
Two such countries are the Czech Republic and China, discussed in Chapters 3 and 4, respectively. One set of financial statements complies with local, domestic financial reporting requirements, while the other set uses accounting principles and contains disclosures aimed at international investors. Starting in , all European listed companies were required to adopt International Financial Reporting Standards in their consolidated financial statements.
In other words, it is necessary to distinguish accounting practice at the national level from that at the transnational level. This change makes the standard-setting process more like that in common law countries such as Australia, Canada, the United Kingdom, and the United States, and is. These points indicate that another framework besides legal systems is needed to classify accounting worldwide.
In addition, the issue of deferred income taxes never arises when tax and financial accounting are the same. Another issue is the use of discretionary reserves to smooth income from one period to the next. Generally, these reserves work the following way.
In good years extra expenses are provided for, with the corresponding credit going to a reserve account in shareholders equity.
In lean years reserves are dissolved to boost income. This process irons out year-to-year fluctuations in income. Because this practice jeopardizes a fair presentation, it is less common under fair presentation and more common under legal compliance. Of course, if such manipulations are fully disclosed, investors can undo the effects on income.
This may not be the case; reserves often are secret. Fair presentation and substance over form characterize common law accounting described above. It is oriented toward the decision needs of external investors. Financial statements are designed to help investors judge managerial performance and predict future cash flows and profitability.
Extensive disclosures provide additional information relevant for these purposes. IFRS are also aimed at fair presentation. IFRS are particularly relevant for companies relying on international capital markets for finance.
Fair presentation accounting is found in the United Kingdom, the United States, the Netherlands, and other countries influenced by political and economic ties to them such as British influence throughout the former British Empire and U.
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