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Financial Accounting TheoryCraig Deegan

Chapter 4

International Accounting (Part-2)

Dewan Mahboob Hossain;

Department of Accounting & Information

Systems

University of Dhaka

Dhaka

Bangladesh


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Prepared By: Dewan Mahboob Hossain 3

Main issues for difference

Differences in taxation system Differences in economic and political influences on

financial reporting

Modifications made to IFRS at national level

Differences in implementation, monitoring andenforcement


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Differences in taxation systems: evidence

Nobes (2006) uses a comparison of differences intaxation systems between Germany and the UK to

identify why financial accounting practices in the two

countries might be systematically different despite

both countries adopting IFRS.

In Germany, companies are required to continue to

prepare unconsolidated statements under

conventional rules for calculation of taxable income

and distributable income.

In the UK, IFRS is allowed for individual company

financial statements and therefore as a starting point

for calculation of taxable income.


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Economic and political influences

Powerful local economic and political forcesdetermine how managers, auditors, courts,

regulators and other parties influence the

implementation of rules.

Those forces have exerted a substantial influence onfinancial reporting practice historically, and are

unlikely to suddenly cease doing so, IFRS or no

IFRS.


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Modifications made to IFRS at a national level

IASB has no ability to enforce the application of itsaccounting standards in countries that have made

the decision to adopt IFRS.

If modifications to IFRS are made at a national level,

the result will be international inconsistencies inaccounting practices.

Regulatory bodies in particular countries may make

a decision to modify a particular IFRS before it is

released.


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Implementation, monitoring and

enforcement

Inconsistencies internationally in how the adoption of accounting standards isimplemented, monitored and enforced will lead to inconsistencies in how

standards are applied, which will in turn diminish the international comparability

of financial reports.

In some cases, the massive underdevelopment of the accounting profession,

implementation may be different.

In China, there are hardly 70000 practicing accountants and most of them arepoorly trained. So, implementation may be hampered.

The list of IFRS adopting countries ranges from countries with developed

accounting and auditing professions and developed capital markets to

countries without a similarly developed institutional background.

The free rider problem associated with IFRS: If a symbol of legitimacy suchas IFRS- can be acquired at a low cost, some countries with low accounting

proficiency will make the choice to adopt IFRS because of the reputation

benefits such a choice may generate.

However, such a choice will have costly implications for countries with a higher

level of accounting proficiency and who put in place appropriate

implementation, monitoring and enforcement.


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Explanations of differences in

accounting

1. Nature of business ownership and financing system

2. Colonial inheritance

3. Invasions

4. Taxation

5. Inflation

6. Level of education

7. Age and size of the accounting profession

8. Stage of economic development

9. Legal systems

10. Culture

11. History

12. Geography13. Language

14. Influence of theory

15. Political systems, local climate

16. Religion.


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Culture

The collective programming of the mind whichdistinguishes the members of one human group from

another.

Accounting is a socio-technical activity that involves

interaction between both human and non-humanresources.

Accounting cannot be culture-free.

Culture is typically reserved for societies as a whole, or

nations, whereas subcultures is used for the level of anorganization, profession or a family.

It is quite possible that had accounting systems evolved

independently in developing countries they would have

rather different from any now we witness in present day

Europe.


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Hofstede (1984)

Indiv id ual ism v s. Col lect iv ism:

A preference for loosely knit social framework

A tightly knit social framework

Large Vs. Smal l pow er distance

To which the members of a society accept that power in institutions and organizations

is distributed unequally .

Large power distance society: Hierarchical.

Small power distance society: strive for power equalities and demand for

justifications for power inequalities.

Strong Vs. weak uncerta inty avoidance

The degree to which the members of the society feel uncomfortable with ambiguity or

uncertainty.

Strong uncertainty avoidance: Rigid codes of beliefs and behavior. Weak uncertainty avoidance: maintain more relaxed atmosphere.

Mascul in i ty vs . feminin i ty

Masculinity: Achievement, heroism, assertiveness, and material success.

Femininity: relationships, modesty, caring for weak and the quality of life.


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Gray (1988): directly linked to Hofstede

Professional vs. statutory control:

Self-regulation or prescription requirements and statutory

control.

Uniformity vs. flexibility:

Uniform accounting practices between companies and the consistency

over time or flexibility in accordance with perceived

circumstances of individual companies.

Conservatism vs. optimism:

Cautious approach to measurement so as to cope with the uncertainty of

future events or optimistic, laissez-faire, risk takingapproach.

Secrecy Vs. transparency:

Confidentiality: restriction of disclosure of information or transparent,

open and publicly accountable approach.


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Hypothesized relationships between Grays accounting

values and Hofstedes cultural values

Culturalvalues

(Hofstede)

Accounting values (Gray)+ : positive relationship - : negative ?: unclear relationship

Professionalis

m

Uniformity Conservatism Secrecy

PowerDistance

_ + ? +

Uncertainty

avoidance

_ + + +

Individualism

+ _ _ _

Masculinity ? ? _ _


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Religion

Islamic culture typically fails to embrace western accountingpractices.

The Islamic tradition does have notions of stewardshipbut to

God rather than to suppliers of equity and debt capital.

Muslims believe that they hold assets not for themselves but in

trust for God. Islam prevents debt financing and prohibits the payment of

interest. This prohibition has significant implications for

processes aimed at the international harmonization of

accounting standards.

Many past and present western standards entail discountingprocedures involving a time value of money concept which is

not admitted by Islam.


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Legal Systems

Two kinds of legal systems: common law andRoman law systems.

Common law:

1. few prescriptive statutory laws.

2. Judges apply both limited amount of statutory lawand the outcomes of previous judicial decisions to

the facts of a specific case.

3. Each judgment becomes a legal precedent for

future cases.4. Originated in England and spread to its former

colonies: the US, Canada, Australia and NZ.


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Legal Systems (contd..)

Roman Law Systems:Statutory law tends to be very detailed and covers most

aspects of daily life.

Accounting implications:

Common law cou nt r ies :few detailed accounting laws guiding practices.Accounting practices: judgments of accountants.

Roman law countr ies :a body of codified accounting laws prescribing in detailshow each type of transaction or event should be treated in the accounts.

In the EU, we would expect England, Wales, Ireland and Scotland historically tohave had relatively few codified accounting laws.

In the reminder of the EU we could expect accounting practice to havehistorically been developed through detailed codified accounting laws.

The adoption of IFRSs (principles based) would have represented a significantchange in practice for countries with Roman law systems relative tocountries with common law systems.

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