Overview

Regional Analysis

Austria

Belgium

Germany

Luxembourg

Switzerland

The purpose of this paper is to provide a regional analysis of accounting, auditing and financial reporting standards of some countries from the western and central parts of Europe (click to see a map). The countries included are Austria, Belgium, Germany, Luxembourg and Switzerland (click the respective country to see a map). The first section of this paper will include a regional analysis, consisting of comparisons for each country general characteristics (size, location, population, and language), governmental characteristics, economic information, trade information and regional membership. The second section will be an in depth analysis of individual countries including Belgium, Germany and Switzerland. For each of these three countries, information is presented about its general characteristics, history, political system, economy, business environment, legal and regulatory environment and accounting, auditing and financial reporting standards. A more general discussion is provided for Austria and Luxembourg. Similar information is provided for these two countries, as well, however, only general financial reporting information is provided.

To grasp how these European countries accounting systems compare to the U.S., a comparative financial statement analysis is also presented. Respectively, the financial statements of Bekaert Group of Belgium, Hoechst of Germany, and Nestle SA of Switzerland are compared to those of Cable Design Technologies, Eli Lilly and Company, and Hershey Foods Corporation, all of the U.S.

Comparison of regional general characteristics

Comparison of governmental characteristics

Comparison of regional economic characteristics - indicators

Comparison of regional economic characteristics - other info.

Comparison of regional trade information

Regional Membership

Sources

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As stated above, the countries included in this regional analysis include Austria, Belgium, Germany, Luxembourg and Switzerland. All of these countries have very similar characteristics. They are all modernized, well-developed countries with stable economic and political environments. Commerce and trade are important for each country's growth. Although the preservation of independent culture is important to each of these countries, the close proximity and dependence on each other's economies' have forced unification. Below are various tables summarizing general, economic and trade statistics for each country. The source of this information is The 1997 World Factbook.

What is apparent from the tables above is that these countries are similar, despite the mix of cultures. Although the population and sizes vary for each, they have similar government and legal systems. In addition, all of the countries are economically stable and have a strong reliance on trade other countries and Europe.

Just as each country is bound to a region, individual countries adhere to one another through organizations and associations, which provide a common global thread to communicate professional ideas and concerns. There are several such establishments worldwide; some are country specific, others are firm specific, and some are particular to practicing individuals. Examples of each follow.

The council of the European Union (EU) is an institution which exercises legislative and decision making powers and ensures general coordination of the activities of the European Community. The EU is just as it implies and has members of Europe exclusively. At the same time it is the forum in which the representatives of the governments of the 15 member states can assert their interests and try to reach compromises. Austria, Belgium, Germany, and Luxembourg are among the 15 members. Switzerland has opted not to be a member of the EU.

One of the most current issues involving the EU is its progression toward adopting a single currency, which is called the EURO, on January 1, 1999. As of March 25, 1998, the European Commission recommended that 11 member states meet the necessary conditions for adoption of the Euro. Austria, Belgium, Germany and Luxembourg are among those member states that meet conversion criteria, signifying that they all exist in favorable economic environments. For example, the latest available inflation data (up to January 1998) shows that these four countries are among the 14 that have average inflation over the last year of less than the reference value of 2.7%. In addition they had government deficits of 3% of GDP or less in 1997. Belgium, Germany and Austria are classified, as no longer have excessive deficits and Luxembourg was initially one of the only countries not to have an excessive deficit. Also, these four countries are among 11, which enjoyed a long period of exchange rate stability within the Exchange Rate Mechanism of the European Monetary System, with most currencies trading very close to their central rates for the last two years. Finally, these countries had average interest rates over the last year below the reference rate of 7.8%.

The International Accounting Standards Committee (IASC) is an independent private sector body. Their goal is to achieve uniformity in Accounting Principles used by businesses and organizations around the world. The members of the IASC consist of professional accountancy bodies that are members of the International Federation of Accountants (IFAC). Currently, there are 122 Member organizations, four Associate Members, and two Affiliate Members in 91 countries. Austria, Belgium, Germany, Luxembourg, and Switzerland all have organizations that are members of the IASC. Below is a list of each country's respective accounting organization(s)

Another example, present in all five countries is the Affiliated Conference of Practicing Accountants. This organization is also a worldwide association of independent accounting firms, which collectively form a global alliance and resource network for firms and clients. Finally, the Europe, Asia, Pacific professionals Group (EuroAsPa), is an international network of independent accountants, lawyers, tax experts and consultants. Presently, there is only one member in Belgium and only a link established for Germany. Any individual or firm however, that wishes to become a network member is able to have a link established for their country if one does not already exist.

Europa Homepage, http://europa.eu.int/euro/

International Accounting Standards Committee Homepage, www.iasc.org.uk

The 1997 World Factbook, www.odci.gov/cia/publications/factbook/country-frame.html

General Overview

Politics and Government

Legal System

Economy

Financial Reporting

Sources

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Austria is situated in southern Central Europe, covering a part of the eastern Alps and the Danube region; although it is land-locked, it borders on the Mediterranean area. As Austria is situated at the heart of a continent, it has always been a junction for communication links between the trade and cultural centers of Europe.

Austria is a federal state with a total area of 32,701 sq. miles and consists of nine provinces - Burgenland, Carinthia, Lower Austria, Salzburg, Styria, Tyrol, Upper Austria, Vienna and Vorarlberg. Austria has common borders with no fewer than eight other countries. Their inhabitants belong to the major European ethnic groups: the Germanic, Neo-Latin and Slav peoples (the Magyars of Hungary are an exception, deriving from the Ural-Altaic group).

Austria has a population of about 8,132,505, estimated in 1997. Austria's population is 98% German-speaking. In the provinces of Carinthia and Burgenland there are two ethnic groups whose rights are guaranteed by the terms of article 7 of the Austrian State Treaty of Vienna of 1955. Slovene ethnic groups live in southern Carinthia, Croatian and Hungarian ethnic groups in Burgenland towns and villages. And there is a small Czech and Slovakian linguistic minority living in Vienna. A federal law enacted by the Austrian Parliament in 1976 deals with the legal status of these minorities. (Source for whole general overview section: www.austria.org/geninx.htm)

Before 1933, Austria existed as a parliamentary democracy. From March 1938, Germany occupied Austria, preventing it from existing as a sovereign nation and finally on April 27, 1945 Austria gained its independence from Germany.

Currently, the head of the Austrian state is the Federal President, Thomas Klestil, who was elected on May 24, 1992. The main legislative bodies of the Austrian Republic are Nationalrat (National) and the Bundesrat (Federal). The Nationalrat consists of 183 seats elected by popular vote, approves federal legislation and also any newly formed Government. The Bundesrat consists of 63 members who represent each of the nine provinces, reflects the federal element of the Austrian system of government. Virtually every draft law approved by the lower house must also be presented to the upper house. The Bundesrat can object to such draft legislation, but if the Nationalrat re-enacts the original law, it becomes effective. Austria's political parties include the Social Democratic Party of Austria; Austrians People's Party; Freedom Movement; Communists; the Greens and the Liberal Forum. (Source for whole politics and government section: www.austria.org/geninx.htm)

Austria's legal system is one of civil law with Roman law origin. Austria's judicial system consists of the Supreme Judicial Court, Administrative court and Constitutional Court. A notable factor about Austrian law is the fact that the administration of justice should be completely independent. Judges are independent in the exercise of their judicial function and that they can be neither dismissed nor transferred. The institution of the lay assessor means that the people take part directly in the administration of justice. The lay assessors or, in the event of crimes entailing severe penalties, a jury consider cases under the guidance of a professional judge. A series of successive stages of appeal, reaching as far as the Supreme Court, provides adequate insurance against the possibility of legal error. The maximum penalty under Austrian law is life imprisonment; there is no death penalty.

The Administrative Court ensures the legality of all acts of public administration while the Constitutional Court examines legislation to make sure that there is no violation of the Constitution. Any citizen who feels that his rights have been violated by an administrative act or that his basic rights as guaranteed by the constitution have been encroached upon may appeal to the Administrative and Constitutional Courts. (Source for whole general overview section: www.austria.org/geninx.htm)

Austria has a well-developed market economy with a sizable - but falling - proportion of nationalized industry, an extensive social safety net, and a high standard of living. Austria's economy is closely integrated with Germany and other EU members - Austria joined the EU on 1 January 1995. Since the early 1980s, the Austrian economy has experienced stable growth. EU membership has had a positive impact on foreign investment and has helped to lower inflation. In April 1996, the government passed a two-year austerity budget - including cuts in social allowances, a freeze on civil servants' wages, and new energy and capital gains taxes - designed to bring the economy in line with the Maastricht criteria for membership in the European Economic and Monetary Union (EMU). EMU convergence has become a top priority for Austria. Despite Austria's generally favorable prospects, the economy faces a number of medium-term challenges; for example, fiscal tightening is constraining expected growth, and unemployment is expected to increase. (Source: The 1997 World Factbook.)

All companies must provide audited financial statements within five months of a corporation's fiscal year end, which is usually a calendar year. Financial statements must provide a "true and fair view of the entity's assets, financial situation and earnings," according to the Financial Accounting and Reporting Act of 1990.

No professional body issues accounting standards in Austria. Accounting standards are established in law, specifically the commercial code. Before the Financial Accounting and Reporting Act (Rechnungslegungsgesetz o RLG) reforms of 1990, accounting principles in Austria were based on traditional, quasi-statutory accounting conventions and the Basic Principles of Proper Bookkeeping and Accounting. Numerous statutory provisions, court rulings and interpretations and recommendations by the Chamber of Public Accountants (Kammer der Wirtchaftstreuhander) supplemented these principles. In an effort to internationalize its regulatory framework, Austria has adopted many measures ranging from the Stock Exchange Act to a complete overhaul of its Banking Law. The changes most relevant to understanding financial reporting in Austria are found in the third volume of the revised Commercial Code. Articles 189 to 283 of the RLG of June 28, 1990, establish in detail every aspect of financial accounting from bookkeeping to consolidation. The RLG provides for the first codification of Austria's traditional Principles of proper accounting and seeks to coordinate Austria's accounting and financial reporting with EU Directives. In general, the RLG is closer to the Fourth and Seventh Directives thant to the guidelines of International Accounting Standards Committee (IASC). (Source for whole Financial Reporting section: www.fawpir.com/sample/austria.htm)

Austria - General Information, www.austria.org/geninx.htm

The 1997 World Factbook, www.odci.gov/cia/publications/factbook/country-frame.html

Heinzerling, Sieglinde, Financial Analysis Worldwide, Austria, www.fawpir.com/sample/austria.htm

General Overview

History

Politics and Government

Economy

Business Environment

Legal and Regulatory Environment

Organization of the Accounting Profession

Auditing

Financial Statements

Accounting Policies

Comparative Analysis

Sources

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Belgium is located in the north west of Europe, at the edge of the North Sea, and is one of the most densely populated and prosperous countries in the world. Centrally located in Western Europe, it lies between Germany, the Netherlands, Luxembourg and France. Belgium, which is slightly smaller than Maryland, is 11,898 square miles square miles. Belgium's population of 10,165,059 (1997 estimate), and is spread amongst three defined regions, which are similar to American States: the Flemish region (Flanders); Brussels-Capital Region; and the Walloon Region (Wallonia). In addition, Belgium has three Communities based on language: the Flemish (Dutch-speaking) Community, the French Community and the German-speaking Community, which correspond to population groups. Belgium's central location, well-developed communication network, urban and democratic environment has made it an ideal location for commercial activity in Europe.

The Flemish region, with a population of approximately 5,866,000 (1995) is one of the most densely populated areas in the world. It is situated in the northern part of Belgium and is comprised of five Dutch-speaking provinces including Antwerp, Limburg, East Flanders, West Flanders and Flemish Brabant. Flanders is known for its well-developed transportation structure and is home to several industries including petrochemical, automobile assembly, diamond trade, textiles, metallurgical, chemical and construction materials.

The Brussels-Capital Region, comprised of approximately 950,000 inhabitants (1995) is located in the central part of Belgium. Brussels, the 8^th largest financial center in the world and capital of Belgium is the headquarters of the European Commission, the executive division of the European Union and the European Parliament for its special sessions. In addition, Brussels is home to several European and American corporate headquarters and international organizations such as North Atlantic Treaty Organization (NATO).

The Walloon Region, with a population of approximately 3,293,000 inhabitants is situated in the southern part of Belgium. It consists of five French-speaking provinces including Hainaut, Namur, Liege, Luxembourg and Walloon Brabant. Wallonia attracts many investors, particularly in the area of new technologies and is notable as a major agriculture center, a source of coal reserves, and aircraft construction. (Source: www.cais.com/usa/geninfos/geninfos.html)

Belgium has been ruled by several different powers throughout history, including the Spanish, French and Austrians. Historically, the majority of Belgium's rulers have encouraged trade and commerce. Until 1830 when Belgium gained its independence from the rule of King William I, it was considered the southern part of the Netherlands (the northern part was Holland). Belgium gained its independence after discontent Catholics and young Liberals formed a Union and rebelled against King William I reign. In 1831, Belgium elected it's first monarch, King Leopold I of Saxe-Coburg and adopted a constitution which was very progressive for its time. King Albert II has been reigning as Belgium's sixth monarch since his brother Baudouin's death in 1993. (Source: www.belgium-emb.org/usa)

Belgium's government is a parliamentary democracy under a constitutional monarch. Through a series of institutional reforms in 1970, 1981, 1988-89 and 1993, a gradual shift of powers from central authority to regions has transformed Belgium into a federal state. The government is broken into the central state, regions and communities, all of which have their own exclusive powers and are not allowed to interfere in matters that are under the jurisdiction of the others.

The central state is responsible for national defense, foreign policy, social security, and monetary and fiscal affairs. The three regions (Flanders, Wallonia and Brussels) have authority over socio-economic matters such as urban planning, housing environment, economic development employment, energy, public works and transport as well as the administrative supervision of the provinces and the communities. The three language communities (Dutch, French, and German) deal with cultural matters, education, use of languages and "person-related matters", such as health policy, policy of the disabled and protection of youth.

The Executive branch is comprised of the King and his Prime Minister and Cabinet; the Legislative branch is a Bicameral Parliament with 150 members in the Chamber of Deputies and 71 members in the Senate; and the Judiciary branch is made up of courts and tribunals. The Federal Government is a coalition among four political parties: the Flemish Christian-Democrats (CVP), the Francophone Social-Democrats (PS), the Flemish Social-Democrats (SP) and the Francophone Christian-Democrats (PSC). (Source: www.businesseurope.com/belgium/)

This highly developed private enterprise economy has capitalized on its central geographic location, highly developed transport network, and diversified industrial and commercial base. Industry is concentrated mainly in the populous Flemish area in the north, although the government is encouraging reinvestment in the southern region of Walloon. With few natural resources, Belgium must import substantial quantities of raw materials and export a large volume of manufactures, making its economy unusually dependent on the state of world markets. Two-thirds of its trade is with other EU countries. The economy grew at a strong 4% annual pace during the period 1988-90, slowed to 1% in 1991-92, dropped by 1.5% in 1993, recovered with moderate 2.3% growth in 1994 and 1995, and fell off again to 1.4% in 1996, with continued substantial unemployment. Belgium's public debt has risen to 140% of GDP, and the government is trying to control its expenditures to bring the figure more into line with other industrialized countries. (Source: The 1997 World Factbook)

As the ninth largest trading nation in the world, Belgium business actively imports and exports due to its long history of reliance on trade and lack of natural resources. With an excellent network of distributors and a well-developed transportation system of railroads, highways and ports, Belgium is one of the highest per capita exporters in the world, with imports and exports each equivalent to approximately 70 percent of GDP. Major imports include road vehicles and tractors, pharmaceuticals and chemicals, non-precious metals, plastics, precious metals and stones. Major exports include machinery transportation equipment (cars), pharmaceuticals and chemical products, mineral products, non-precious and precious metals. About 67 percent of Belgium's foreign trade is with other EU countries, demonstrating the pivotal role Belgium plays as a commercial center in Western Europe. 5.8 percent of Belgium's exports go the US and about 8.8 percent of its imports come from the US.

The Belgium government upholds an encouraging and open trading climate conducive to foreign investment. US direct investment in Belgium was US$14 billion at the end of 1994. As the largest foreign investor in Belgium, over 1200 US companies have made this country their home. In addition, Brussels has become a rapidly growing European corporate decision center and location for conferences and congresses, as over 1300 headquarters of foreign companies and institutions from the US, France, Great Britain, Germany, Japan, Sweden and Italy have been attracted here. This is because foreign companies are treated the same as Belgian businesses.

There are four basic choices of operation: branch; subsidiary; partnership; sole proprietorship. The majority of businesses operate in Belgium as a branch or a subsidiary. Some individuals operate as an unincorporated sole proprietorship. Both general and limited Partnerships, is a less common form of doing business than in the U.S. Various groups such as trade and other associations, can opt to establish alternative entities, such as not-for-profit associations, economic interest groupings, and related entities. There are no restrictions or requirements on repatriation of capital and profits and a Belgian national does not need to own part of the firm's equity.

The Belgian government has instituted several corporate tax incentives to attract foreign investors. For example, special corporate tax rules exist for foreign companies that plan to establish coordination, distribution and service centers in Belgium. The success is reflected by the fact that as of 1996, 360 multinational companies (of which 83 are of American origin) adopted the status of coordination center, representing a combined equity investment of more than US$22 billion.

Belgium has internationalized its capital markets more so than other members of the EU have. Belgium has two stock exchanges. The majority of the trading in shares occurs on the Brussels Stock Exchange, which is also the larger of the two and commodity trading occurs on Antwerp Exchange. The Banking and Finance Commission administers the stock exchanges through the Societe de la Bourse de Valeurs Mobiliers, although the Ministry of Finance is ultimately responsible. (Source: www.cais.com/usa/business/pocket96.html)

Belgium has a civil law system influenced by English constitutional theory. The judiciary branch is made up of courts and tribunals and judicial reviews of legislative acts occur. Judges are appointed for life by the Belgian monarch.

As a member of the EU single market comprising approximately 370 million consumers, it participates in the process of developing and implementing consistent product standards applicable in all 15-member nations. A single duty among all EU members on products coming from non-EU countries and Value Added Tax (VAT) rates are being coordinated among the 15 member countries. Belgium applies the EU common external tariff to goods imported from non-EU countries, however, goods imported from other EU countries are not subject to the tariff. Goods imported into Belgium or domestically produced are usually subject to a VAT payable upon importation if Belgium is the destination of goods being shipped into the EU. For imports, the VAT is applied after all customs duties are added to the price of the goods.

Many products may be imported or exported without any prior license, but certain listed products and products from certain countries are subject to import licenses. Belgian controls apply to the export and re-export of conventional military weapons, materials for weapons of mass destruction and dual-use items. (Source: http://belgium.fgov.be)

Belgium's accounting-standard-setting process is comprised of three levels, which include basic laws, royal decrees, and recommendations of the Commission for Accounting Principles. All financial reporting regulations are written into law in Belgium. Basic laws are drafted by parliamentary commissions and are voted on in the parliament. Legally binding Royal decrees are usually drafted by the Finance and Economic Affairs ministerial departments and are issued by the king without going through parliament. The decrees serve as specific regulations to interpret subjects that have been specified in general terms in the basic law.

The Royal Decree of October 25, 1975 established the Commission for Accounting Principles, a permanent commission for accounting principles, which formulates financial reporting and record-keeping standards and underlying accounting principles, as deemed necessary. Although the recommendations of the Commission are not legal pronouncements, the business community generally follows and consults them for technical problems. The Commission has 11 members, appointed by the king, which include two senior officials of the Belgian tax administration; one employee of the Banking Commission; one member of the Institute of Company Auditors and; seven members chosen on the basis of their technical knowledge or experience in accounting or auditing.

There are two main accounting bodies in Belgium, which include Institut Des Reviseurs D'Entreprises (Institute of Auditors) and Institut Des Experts (Institute of Public Accountants). The main responsibility of both of these organizations is to provide a professional framework in which to organize qualified people with respect to ethical rules, training of professionals, and proper performance in certain reserved areas. Some of the larger accounting firms in Belgium include Arthur Andersen, Coopers & Lybrand, Ernst & Young, Price Waterhouse, and some native mid-sized firms include Van Doorn Trust & Partners and Van Oers-Breda.

The government regulates accounting in Belgium. The primary regulations relating to accounting are the Law of July 17, 1975, the Royal Decree of October 1976 and the Royal Decree of September 12, 1983. In addition, there have been Royal Decrees that have amended the primary ones, such as November 29, 1977, May 5, 1985, November 6, 1987, March 6, 1990 and December 3, 1993.

The Law of July 17, 1975 regulates financial accounting so that the information provided is based on precepts of prudence, reliability, consistency, and shows a true and fair view of a company's financial position and results of its operations. This Law affects businesses, however, certain parts of the law are not applicable to banks, savings and loan association holdings and insurance companies. The Banking Commission (Commission Bancaire) is a government-controlled organization with the responsibility of regulating accounting and financial reporting by banks and credit institutions. Another government-controlled organization is The Insurance Control Office (Office de Controle des Assurances) whose main responsibility is to regulate the accounting and financial reporting by insurance companies.

The Law of 1975 established criteria defining the way accounting records should be kept and financial statements should be prepared. The records include:

1. standardized reporting format for presenting the balance sheet, the profit and loss statement, and notes;
2. obligation to disclose accounting policies in the notes to the financial statements and an obligation to disclose the nature, reason, and effect of accounting changes;
3. chart of accounts that standardizes the content of the financial statement captions;
4. and an obligation to adhere to a set of minimum footnote disclosure requirements.

The Royal Decree of October 8, 1976 eliminated the Company Law of 1873 and all succeeding decrees regarding corporate financial reporting. This decree established rules on the form and content of annual financial statements within the framework set forth in the Law of July 1975, applicable to all business entities if their annual sales exceeded 20 million BF. The Royal Decree of September 12, 1983 revised previous accounting regulations, adopted the EU Fourth Directive and established minimum content and presentation of the standard chart of accounts for non-consolidated financial statements. The Royal Decree of November 29, 1977 prescribed reporting requirements for consolidated financial statements and The Royal Decree of September 1, 1986 adopted the EU Seventh Directive for consolidated financial statements. The Royal Decree of March 6, 1990 finalized the implementation of the Law of July 1975 and EU Seventh Directive to be applied to consolidate financial statements. Finally, the Royal Decree of December 3, 1993 modified the Royal Decrees of 1976, 1983 and 1990.

The law requires that accounting records be physically located with Belgium and be maintained in one of the country's official languages. The Law of July 17, 1975 requires that businesses maintain a general journal and inventory book (records annual inventory of all assets and liabilities) and the Royal Decree of March 7, 1978 requires the maintenance of a general ledger. VAT regulations require businesses to maintain a sales journal, purchase journal and cash/bank journal. Other records that are normally kept, but not required by law include customers' ledger, suppliers' ledger, property ledger and cost and inventory records.

Belgian Law of February 21, 1985 states that only members of the Institute of Company Auditors (Institut des Reviseurs d'Entreprises) are eligible to become statutory auditors. The Institute, which has exclusive authority over its members, was created though the law of July 22, 1953 for the purpose of organizing the audit profession; training candidate-auditors; issuing technical, ethical, and disciplinary rules and regulations; and monitoring its' members' adherence to standards.

Company Auditors must have a university degree in economics, accounting, or law or a degree from another recognized school; three years of practical training and professional development in auditing; and passing examinations which include the topics of business law, taxation, costs accounting, general accounting, internal control and auditing.

If any limited liability company that has sales of more than BF 145 million, assets of more than BF 70 million and/or more than 50 employees, meeting two of three of these criteria will require the company to appoint one or more statutory auditors. Regardless of its legal structure, a company that has more than 100 employees must appoint one or more company auditors. The company auditor must certify an organization's annual accounts and financial information provided by management.

Designated members of the Institute of Company Auditors draft auditing standards, which are binding only for members. The Institute's council issues and modifies the standards. The Vademecum des reviseurs d'enterprises contain Belgium's auditing standards, which include general standards, standards of fieldwork and standards of reporting. The general standards include adequate training and proficiency, independence, and due professional care. Standards of fieldwork include adequate planning and supervision, proper study and evaluation of internal control, and obtaining sufficient competent evidence. The audit report must state the following:

1. financial statements are presented in accordance with local and statutory requirements;
2. the Institute's audit standards were applied;
3. company's administrative organization includes an adequate system of internal control
4. financial statements five a true and fair view; and
5. accounting principles used to prepare the financial statements have been consistently applied.

Although there is no standard audit report in Belgium, commericial law and the Institute require that it contain the following (taken from Lois Coordonnees sur les societes commerciales and Vademecum des reviseurs d'enterprises, 1984):

1. a description of how the audit of the accounts has been conducted;

The audit report must be filed with the local court office, where it is available for consultation.

Belgian financial statements must be prepared in comparative format, and include a balance sheet, a profit and loss statement/income statement and notes to the accounts. The Royal Decree of March 1990 requires publicly traded companies and all large companies to file semiannual financial statements and audited consolidated financial statements with the National Bank of Belgium. Annual reports must be filed hardcopy and may be filed electronically. Belgian financial statements, which are prepared in French and Flemish and made available in English, are expressed in Belgian Francs. Annual reports must be filed within six months after the fiscal year, which usually is a calendar year for most companies. In addition, interim financial statements must be filed every six months for publicly traded companies, also with the National Bank of Belgium.

Below is a list of required disclosures, non-required but customary disclosures and disclosures that are not required or customary for publicly traded companies in Belgium (taken from Comparative Analysis of Disclosures Regimes, published by International Organization of Securities Commissions - 1992 --World Accounting; Orsini, McAllister, & Parikh).

1. Competitive Environment: competitive conditions in the markets in which the company competes.

3. Taxation: foreign tax implications for security holders and of the impact of tax treaties

1. Description of Property: location and general character of factories, mines, and important property
2. Legal Proceedings: description of material legal proceedings

To be classified as "Cash," an item must be free from any contractual restriction resulting from an agreement with a third party that limits its use. Examples include coins, currency, checks, and money orders (if remitted to the bank), savings account balances (if less than one month's notice of withdrawal is required), checking account balances, stamps, and certificates of deposit within one month maturity.

Belgium lending institutions does not require minimum cash balances. In addition, there are no required financial statement disclosures.

All receivables are classified as short- or long-term. They include items such as trade receivables; other short-term receivables (i.e., from officers, directors, employees, dividends receivable, etc.); receivables of a long-term investment nature from subsidiaries and associated companies; and other long-term receivables and cash guarantees.

Receivables from customers are recorded at their gross amount. Discounted notes receivables are treated as off balance sheet financing and the contingent liability arising from this type of transaction is disclosed in the notes to the financial statements.

Accounting for bad debts are estimated specific to the customer, rather than on percentages of total customer receivables. However, in cases where credit control is based upon statistical methods, percentage approaches to estimating bad debts are allowed for financial reporting purposes.

Financial statements must include as disclosures accounting policies used; the aggregate amount of receivables from parent companies, subsidiaries, associated companies and directors of the company; allowance for bad debts; and details concerning subordinated receivables (those that can only be collected after related customer has paid other priority debts).

To be classified as a "Temporary Investment" (shown on the balance sheet as "Short-Term Investments"), an investment must be readily marketable, and the company must intend to convert it into cash within one year. Temporary investments include government bonds, preferred stock, common stocks, certificates of deposit more than one month from maturity date, and shares in a subsidiaries to be disposed of with 12 months.

Temporary investments are recorded at cost upon acquisition, but are presented in the balance sheet at the lower of cost or market value. Unrealized losses are recorded in the profit and loss statement (income statement) as "financial charges"; profit or loss upon disposal is recorded as "financial income" or "financial charges," respectively.

Financial statements must include as disclosures accounting policies used; an analysis of amounts regarding equity securities, bonds and preferred stock, deposits, and uncalled (unpaid portion) amounts on equity securities; and provisions (reserves) recorded to reduce the carrying value of investments to the lower of cost or market value.

Inventory (stocks) includes goods held for future sale or use in the manufacture of goods for future sale, and land and buildings purchased for resale. Inventories are divided into two major categories, including:

1. Stocks (raw materials and consumables, work-in-progress, finished goods, goods purchased for resale, immovable property acquired or constructed for resale, advance payments); and
2. Contracts in progress

Inventory items are record at cost at their acquisition date. Costs include direct production costs and sometimes production overhead. As in the U.S., for both financial accounting purposes and tax purposes, companies may use any one of the following inventory cost flow methods: specific identification; weighted average price; FIFO; and LIFO. LIFO monetary methods are not allowed; the only officially accepted LIFO method is based upon actual movement of each inventory item. Inventory must be reported at the lower of cost or market, but market is not specifically defined. In addition, Belgian companies cannot use arbitrary percentages to reduce the cost of inventories.

Financial statements must include as disclosures the accounting policies followed for inventory valuation and the amount of write-down recorded, included any market or net realizable value write-down.

Prepaid expenses are included under "Deferred Charges and Accrued Income," under current assets on the balance sheet, which is different from U.S. requirment.

For all property, plant and equipment, the published financial statements must reflect disclosures about accounting policies and an analysis of changes in each of these accounts during the year.

Land should be recorded at purchase price plus other acquisition costs. Land can be revalued to its market value if there has been an effective and permanent increase in its value. Any gain derived from the revaluation is deferred and recorded on the liabilities side as "Revaluation Surplus" until the land is sold. As mentioned above, land purchased for resale is classified as inventory.

The "Buildings" account includes elements such as original contract price or cost of construction; expenses incurred in preparing it for use (i.e. reconditioning and excavation); and architects' and engineers' fees for design and supervision; and etc. Buildings in use must be depreciated.

Accounts for machinery, furniture and fixtures include elements such as original contract or invoice price; freight, import duties, handling and storage costs; costs of preparing an appropriate location for the asset; installation charges; costs related to testing and preparation for use; and cost of reconditioning for a used item.

Inexpensive machines and hand tools may be accounted for using one of three approaches. Companies can capitalize and periodically inventory loss due to breakage, theft, etc. and charge this amount as a current expense. The second method involves capitalizing these assets at a conservative valuation for normal stock, with all subsequent tool purchases charged to expense. The third method involves expensing these assets as they are acquired.

Interest expense related to debt borrowed for the acquisition of buildings, machinery and equipment can be capitalized. The capitalized interest must be recorded with its respective fixed asset and amortized at the same rate.

Any economically justifiable method of depreciation for buildings, machinery, furniture, and fixtures is acceptable for financial accounting purposes, assuming the method is consistently applied. Examples of acceptable depreciation methods (based on the concept of estimated economic lives) are straight-line, service-hours, units-of-output, sum-of-the-years'-digits, fixed-percentage-on-a declining-base-amount, declining-rate-on-cost, degressive and accelerated.

The depreciation method used, the amount of depreciation expense for the year, and the total accumulated depreciation must be disclosed.

Balance sheets do not include a separate category for deferred charges, which is unlike the policy in the U.S. Below is a list of common deferred charges and their treatment.

1. Machinery Rearrangement Costs: may be capitalized for nonrecurring expenditures made in order to modify the firm's production facilities. If so, the balance is reported as part of machinery and equipment and amortized according to the normal depreciation policies for machinery and equipment.
2. Deferred Taxes: accounting for deferred taxes is not required, but a footnote disclosure regarding timing differences is required.
3. Bond Issue Costs: may be capitalized and amortized over the duration of debt. These costs are reported as part of formation expenses.
4. Reorganization Costs: may be capitalized and amortized (at a rate of at least 20 percent per year) in accordance with firm's accounting policies. These costs are reported as part of formation expenses.
5. Research and Development Costs: reported in the "Intangible Assets" section and amortized in accordance with the firm's accounting policies.
6. Start-Up Costs: capitalized as part of formation expenses and amortized at a minimum rate of 20 percent per year. The U.S.'s comparative account is organizational expenditures.

Disclosure in financial statements must include the amortization policies related to these items discussed above.

At their acquisition date, debt securities are recorded at cost. Amortization of a discount or premium is permitted, but not required, as in the U.S.

Debt securities convertible into equity securities are categorized under "Fixed Revenue Securities," mentioned separately in the notes section of the financial statements, and are accounted for the same way nonconvertible debt securities are. No other disclosures are necessary.

Classification of equity securities depends on the firm's level of ownership. Below are the different classifications presented on the balance sheet.

1. Investments in Affiliates: investor company owns 50 percent or more of investee's stock
2. Investment in Associates: investor company owns 10 percent or more and less than 50 percent of investee's stock
3. Other Financial Assets: investor company owns less than 10 percent investee's stock

Equity securities are normally recorded at cost and are written-down below cost if a permanent decline in market value occurs.

Preferred Stock is unusual, but permitted. It economic purpose is usually fulfilled by the issuance of corporate bonds.

Financial statements must disclose the annual value movements, in aggregate, and a listing of equity investments disclosing the investee's name, number of shares held, and the percentage of total outstanding owned by the company, with the net equity and net results.

Intangible assets include research and development expenditures; licenses, patents, know-how, trademarks, franchises, and similar rights; goodwill; and advance payments. Intangible assets purchased from outside parties are recorded at cost. Internally developed intangibles are included as assets, assuming their cost doesn't exceed their "prudently estimated usage value or future return" for the firm. The firm's board of directors establishes the method and rate of amortization.

Disclosure of intangible assets in financial statements must include the presentation of the major components of the category; changes for the year in the category; and accounting policies.

Normally, companies use the percentage-of-completion method for long-term contracts, but no specific accounting requirements exist. Disclosures in the financial statements are limited to the firm's accounting policy.

Current liabilities are categorized as "Amounts Payable Within One Year." They include items such as obligations resulting from the purchase of goods and services; long-term debts maturing in less than one year; fiscal, payroll tax withholdings, and social security liabilities; other loans and deposits received; liabilities to financial institutions; and accruals (i.e., accrued invoices).

Disclosures in financial statements must include the amount of liability guaranteed by: mortgages, pledged assets, and similar guarantees provided by the company, affiliates or associates, the Belgian state, or the directors of the company. In addition, the aggregate amount due to affiliates or associates; amount of overdue liabilities to fiscal and social security authorities; and an analysis of long-term liabilities maturing within one year must also be disclosed.

Long-term liabilities are categorized as "Amounts Payable After One Year." They include mortgages, loans, bonds payable, notes payable, lease obligations, long-term contracts for plant assets and long-term advance payments received. Long-term obligations are recorded at their issuance price, and any discount or premium may be amortized over the life of the obligation, but its not required.

Disclosures in the financial statements are generally the same as for current liabilities.

Interest on trade receivables/payables or on receivables/payables related to the transfer of a fixed asset or business must be imputed when interest is not charged for long-term receivables or payables; the nominal interest rate is exceptionally low; the price paid for a receivable/payable is materially different from the stated face amount; and interest is implicit in the receivable or payable. The Royal Decree of October 8, 1976, requires that the imputed interest be deferred and amortized over the life of the related receivable or payable.

A termination indemnity is similar to unemployment insurance in the U.S. Belgian companies fully accrue amounts for anticipated indemnities, based employees' length of service, job position and salary level. Accruals are made only if the decision to terminate the employee has been made prior to the year-end or if the employee has been terminated prior to the year-end but the payment of the indemnity occurs after that date. The accrual is categorized on the balance sheet under "Payroll and Social Security Liabilities."

Financial statement disclosures normally include a description of any litigation pending against the company in the event that employees have instituted material claims that have not been accrued.

Loss contingencies include warranty obligations, threatened or actual litigation, potential claims for damages, assessments, guarantees of the debts of others, and possible defaults under government subsidies. Belgian has no specific rules regarding the accrual for loss contingencies, however companies must establish provisions in accordance with the general principles of prudence and true and fair presentation.

Financial statements must include a brief description of the enterprise's accounting policy regarding contingencies and disclose details about provisions for pensions, taxes, major repairs and maintenance costs, and other risks and charges. In addition, the financial statements must include a description of any material loss contingencies for which provisions have not been made.

In Belgium, accounting for deferred taxes is not required, which is opposite the practice in the U.S. However, existing material timing differences must be disclosed in the notes to the financial statements. These timing differences usually arise because certain charges or provisions are temporarily disallowed as a deduction in determining taxable income. In addition, investment credits are not allowed.

Financial statements must include income taxes for the current year and adjustments related to prior years as separate line items on the face of the profit and loss statement (income statement). The notes to the financial statements must disclose income taxes paid and prepaid for the year, amounts recorded as prepayments or excess payments in the balance sheet, and income tax accruals that have been established. In addition, carryforward losses to offset future taxable income, and those expiring must be disclosed.

There are two types of pension plans in Belgium:

1. Legal: pension is paid by the government and funded through employer and employee contributions as a percentage of gross salaries; and
2. Extra-legal: supplementary pension plans offered by companies for certain or all of their employees, which is funded through insurance.

Contributions for the legal pension plan and the insurance premiums for the extra-legal pension plan are expensed when paid. For internally funded plans, accruals to cover pension liability must be set up in a separate legal entity (trust).

Companies with extra-legal plans must disclose the existence, description plan and policies of the resulting liabilities.

Similar to the US, leases are classified as either capital or operating. A lease is classified as capital if the lease contract transfers ownership to the lessee in accordance with contractual provisions. The portion of the installments that represent payment for the asset is recorded as an asset, which is depreciated over its estimated economic useful life, and liability. All other leases are classified as operating and are accounted for as rentals.

Capital-leased assets and related liabilities must be presented in separate balance sheet categories. The notes to the financial statements must specify whether these assets can be classified as land and buildings, equipment and machinery, or furniture and rolling equipment. No financial statement disclosures are required for operating leases.

The owners' equity section includes the following items:

1. capital, both common stock and preferred stock, if any, shown under one caption for the amount subscribed less the uncalled (unpaid) portion;
2. share premiums, consisting of paid-in-capital in excess of par;
3. revaluation surpluses recorded on fixed assets;
4. reserves (legal reserves, reserves available and not available for distribution, reserves exempt from taxes);
5. profit and loss carried forward; and
6. investment grants.

A minimum legal reserve, which is not available for distribution, must be established annually through the appropriation of five percent of net profit for the year until the reserve equals 10 percent of share capital. A statement of changes of reserves must be disclosed in the financial statements.

Companies must disclose the several equity items in the financial statements. Some examples include the amount of issued capital and an analysis of changes during the year; different categories of shares; the amount of uncalled capital and called but unpaid capital; and the amount of authorized, not issued capital.

Government subsidies, including capital and interest, are common in Belgium. The unamortized portion of a capital subsidy appears under the equity accounts and the amount used during the fiscal year appears by crediting the income statement's financial income. Interest subsidies are credit directly to financial income. The amount of either or both subsidies taken to income is disclosed.

The Royal Decree of November 29, 1977 legally requires that holding companies prepare audited consolidated financial statements, using the equity method. However, no legal requirement applies to companies other than holding companies. Because of this, the Banking Commission and Institute of Company Auditors have supplemented the rules on consolidation. Basically, the Banking Commission recommends that uniform and consistent accounting policies be used in preparing consolidated accounts.

In addition to the disclosures required of individual company financial statements, consolidated companies must disclose the following:

1. balance sheet of positive and negative goodwill arising on consolidation, and of minority interest;
2. details of changes in the goodwill account
3. footnote disclosure of consolidation principles used; and
4. a list of consolidated and non-consolidated subsidiaries, and associated companies.

Business combinations are accounted for using the purchase method. The pooling-of-interest method is not allowed. Goodwill is subject to amortization, based on a method and rate established by the board of directors. However, goodwill is not allowed for tax purposes.

If businesses are sufficient diverse, Belgian companies must disclose in a footnote, sales by lines of business and by geographical area.

Interim reporting is not required in Belgium, so very few companies disclose interim results

In December 1987, the Commission for Accounting Principles developed standards on accounting for assets and liabilities denominated in foreign currencies. In its statement, the Commission preferred the accounting method, in which unrealized translation losses are recorded in the profit and loss account and unrealized gains are reported on the balance sheet until realized. Companies can however, use an alternative method, by including gains and losses in the profit and loss account, but only if justified in the notes to the financial statement.

The financial statements of Bekaert Group of Belgium will be compared to those of Cable Design Technologies of the US. A discussion about the specific items included in the annual reports and similarities and differences between the two reports follow.

CABLE DESIGN TECHNOLOGIES

Cable Design Technologies (CDT) Corporation is an international leading designer and manufacturer of technologically advanced electronic data transmission cables made of copper, fiber optic and copper/fiber optic composites.

CDT's 1996 annual report includes a financial summary, a letter to the stockholders, information about its specific product lines, management discussion and analysis (including results of operations, financial conditions, effects of inflation, new accounting standards, forward looking statements), report of independent public accountants, consolidated financial statements, selected historical consolidated financial data, and a section on directors, officers and corporate information, respectively.

The following consolidated financial statements presented in CDT's annual report include comparative statement of income, balance sheets, statements of cash flow, and statements of stockholder's equity, respectively. For the most part, these statements are presented in a typical fashion for U.S. companies; therefore only a brief description will be given.

The first section of the income statement includes net sales; cost of sales; gross profit; selling, general and administrative expenses; non-recurring charges; income from operations; interest expense; net other (income) expense, net; income before income taxes and extraordinary items; income tax provision; income before extraordinary items; extraordinary loss on the early extinguishment of debt; and net income. The second section includes income per share of common stock, before and after extraordinary items.

The balance sheet is divided into assets, liabilities and stockholders' equity. Current assets include cash and cash equivalents; accounts receivable, net of allowance for uncollectible accounts; inventories; prepaid expenses and others; and deferred income taxes. Non-current assets include property, plant and equipment, net; intangible assets; goodwill, net; and other assets. Current liabilities include current maturities of long-term debt; accounts payable; accrued payroll and related benefits; accrued taxes and other accrued liabilities. Non-current liabilities include long-term debt; other non-current liabilities; deferred income taxes and contingencies (note reference instead of amount). The stockholders' equity section includes preferred stock and common stock at par value; paid-in-capital; deferred compensation; retained earnings; and currency translation adjustment.

The statement of cash flows presents cash flows from operating, investing and financing activities. The statement of stockholders' equity includes a detailed presentation of common stock, paid-in-capital, retained earnings, warrants, cumulative translation adjustment and deferred compensation.

The notes provide a detailed presentation of many of the items on the face of the financial statements. Below is a list of the notes included in CDT's annual report.

1. Operations
2. Significant accounting policies
3. Stockholders' equity
4. Inventories
5. Property, plant and equipment
6. Intangible assets
7. Long-term debt
8. Retirement and other employee benefits
9. Post-retirement benefits other than pensions
10. Stock benefit plans
11. Income taxes
12. Net income per share of common stock
13. Business acquisitions
14. Geographic segments and export sales
15. Lease commitments
16. Commitments and contingencies
17. Related party transactions
18. Nature of business and disclosures about fair value of financial instruments
19. Non-recurring charges
20. Initial public offering
21. Unaudited quarterly financial information

This section includes supplemental information related to consolidation; inventory; accounts payable; property, plant and equipment; translation of Foreign Currency financial statements; goodwill; loan origination fees; income taxes; uses of estimates; statement of cash flows; research and development; reclassification; and new accounting standards.

Arthur Andersen, LLP audited CDT's financial statements. The first paragraph states the financial statements audited which include CDT's consolidated balance sheets, statements of income, stockholders' equity and cash flows. The second paragraph states that the audits were conducted in accordance with generally accepted auditing standards. The last paragraph states Andersen's unqualified opinion.

BEKAERT GROUP

Bekaert is an independent manufacturer of wire, wire products and steel cord, operating worldwide. Bekaert is the largest independent wire manufacturer and supplier, with headquarters in Belgium, 65 manufacturing facilities around the world and a global network of sales offices and agencies.

The annual report includes a company profile, highlights of the year, a list including the corporate director and officers, a message from the Chairman and CEO, a business report and financial review, which includes the financial statements. The remainder of this section primarily highlights Bekaert financial statement presentation. The financial statements contained in the annual report include a consolidated balance sheet, consolidated profit and loss statement (income statement), notes to the consolidated financial statements, consolidated statement of changes in reserves and retained earnings, and consolidated statement of changes in cash.

The balance sheet is divided into assets and equity and liabilities sections. These sections are presented below and the accounts are listed in the respective order as they appear on the actual balance sheet. The accompanying notes section, described later, is an integral part of this balance sheet.

1. Fixed Assets include formation expenses, intangible fixed assets, goodwill, tangible fixed assets, and financial fixed assets (i.e. investments).
2. Current Assets include amounts receivable after one year, inventories and contracts in progress, amounts receivable within one year, cash, and deferred charges and accrued income.

Equity and Liabilities

3. Equity section includes capital, revaluation surplus, reserves and retained earnings, cumulative translation adjustment, and investment grants.

The income statement is divided into several sections in the respective order: gross profit, operating profit, profit before extraordinary results and income taxes, profit for the year of the consolidated companies before income taxes, profit of the consolidated companies, consolidated profit for the year. These sections are presented below and the accounts are listed in the respective order as they appear on the actual profit and loss statement. Again, the accompanying notes section is an integral part of the profit and loss statement.

1. Gross Profit includes sales less costs of goods sold.
2. Operating Profit includes gross profit less selling, administrative, and research and development expenses, plus other operating revenue, less other operating charges.
3. Profit before extraordinary results and income taxes includes operating profit plus financial revenue (from financial fixed assets, current assets, other financial sources), less financial charges (from interest and other debt charges, other financial charges).
4. Profit for the year of the consolidated companies before income taxes includes the total from #3 above, plus extraordinary revenue less extraordinary charges. Examples of extraordinary revenue include adjustments to depreciation of (in)tangible fixed assets, adjustments to write-down of financial fixed assets, adjustments to provision for extraordinary liabilities and charges, and gain on disposal of fixed assets. Examples of extraordinary charges include extraordinary depreciation of (in)tangible fixed assets, write-down of financial fixed assets, provision for extraordinary liabilities and charges, and loss on disposal of fixed assets.
5. Profit of the consolidated companies shows profit after income taxes.

Other financial statement information Bekaert presents in its annual includes consolidated statement of reserves and retained earnings and consolidated statement of changes in cash, which are very similar to those presented by U.S. companies and not required of companies in Belgium. In addition, Bekaert provides in a separate statement called proposed appropriation of profit, which includes how profit will be distributed amongst reserves, dividends and taxes withheld on those dividends.

As mentioned earlier, the notes to the financial statements comprise an important part of Belgium financial reporting. Basically, the notes act as detailed supporting information for most or all of the summary numbers presented on the face of the main financial statements. For the purpose of brevity, only a list of the various notes is presented below, outlined in the respective order exhibited in the annual report.

1. Principles of consolidation
2. Investments
3. Joint companies accounted for under the equity method
4. Associated companies accounted for under the equity method
5. Non consolidated companies accounted for at cost
6. Accounting policy
7. Formation expenses
8. Intangible fixed assets
9. Tangible fixed assets
10. Financial fixed assets
11. Goodwill
12. Long-term debt
13. Results of operations
14. Commitments
15. Consolidated statement on relationships with companies accounted for under the equity method
16. Remuneration of directors
17. Significant events after year-end
18. Annual accounts of N.V. Bekaert S.A.

Bekaert includes a section on significant accounting policies, which is divided into valuation principles, translation principles, and profit appropriation. The valuation section includes general and specific principles. Generally, the policies used in the Bekaert's financial statements are in accordance with the principles set forth in the Belgian Accounting legislation, which is in agreement with the Seventh E.E.C. Directive. In all material respects, the financial statements are also in accordance with the accounting principles developed by the International Accounting Standards Committee. The specific policies include statements about formation expenses, intangible fixed assets, goodwill, tangible fixed assets, inventories, receivables, provisions and income taxes.

Arthur Andersen performed the audit. The first paragraph states the various financial statements that were audited (all of those listed above). Andersen also states that its' examination was made in accordance with the auditing standards of the Belgian Institute of Company Auditors and included tests of the accounting records and other auditing procedures considered necessary in the circumstances. The remainder of the report includes Andersen's opinion, which is that consolidated annual accounts and notes to the financial statements, present fairly the financial position of Bekaert and are in conformity with the applicable laws and regulations and generally accepted accounting principles applied on a consistent basis.

The following similarities were observed.

1. The content of their annual reports was similar. Both included financial summaries for the year, information specific to the different products offered, consolidated financial statements, discussions from management and auditors' reports.
2. Relative to financial statements, both included consolidated balance sheets, statements of income (profit/loss), cash flows and stockholders' equity (CDT)/reserves and retained earnings (Bekaert) in comparative format, notes, and significant accounting policies.
3. Both companies expense research and development costs as incurred.
4. Both companies value inventory at the lower of first-in first-out (FIFO) or market.

The following differences were observed.

1. Bekaert organizes its balance sheet differently than CDT. Assets are listed from least liquid to most liquid and least current to most current. The equity section is listed before liabilities and liabilities are listed from least current to more current.
2. Bekaert includes as its first category under fixed assets on the balance sheet "formation expenses," which are pre-operating costs of new plants amortized over five years. Formation expenses similar to organizational costs sometimes classified as an intangible asset for U.S. companies. CDT did not include any organizational costs as intangible assets.
3. Bekaert amortizes goodwill using the straight-line method over 10 years, whereas CDT uses a 20-40 year period.
4. Bekaert states tangible fixed assets at cost less accumulated depreciation, using varying annual depreciation rates, based on their estimated economic useful lives. They include rates of 5% for buildings; 8% for plant, machinery and equipment; 20% for furniture and vehicles; and 33% for computers. CDT states property, plant and equipment at cost and uses straight-line depreciation based on the assets' estimated useful lives.

The American Embassy in Belgium, Trade Regulations and Standards, August 12, 1997, http://belgium.fgov.be

Business Europe, "Political Environment in Belgium," 1997, www.businesseurope.com/belgium/

Bekaert Group, 1996 Annual Report, www.bekaert.com

U.S. Embassy of Belgium, November 20, 1996, www.belgium-emb.org/usa

U.S. Embassy of Belgium, Belgium (A Federal State), November 20, 1996, www.cais.com/usa/geninfos/geninfos.html

U.S. Embassy of Belgium, Statistical Country Information, January 27, 1997, www.cais.com/usa/geninfos/stats.html

Belgian Ministry of Foreign Affairs, A Pocket Guide For the US Executive: 1997 Edition, January 28, 1997, www.cais.com/usa/business/pocket96.html

Cable Design Technologies, 1996 Annual Report, www.cdtc.com/annual_report/annual_toc.shtml

Kim, Haksu, Financial Analysis Worldwide, Belgium/Luxembourg, www.fawpir.com/sample/belgium.htm

Orsini, McAllister, & Parikh. "World Accounting: Belgium." Matthew Bender & Co., Inc., 1994.

Sharp, Curtis, Ted Biddulph, and Brent Shearer, Brigham Young University-Marriott School of Management, Accounting in Belgium; http://msm.byu.edu/c&i/cim/account/Belgium.htm

USDOC, International Trade Administration (Country Commercial Guides), Belgium: Executive Summary, August 21, 1996

General Overview

History

Politics and Government

Economy

Technology and Communications

Business Environment

Legal and Regulatory Environment

Organization of the Accounting Profession

Accounting Standards

Auditing and Reporting

Financial Statements

Comparative Analysis

Sources

Back to the general index

Germany covers an area approximately 356,970 square kilometers and is located at the center of Europe. The population in Germany is roughly 82,012,000. The country's capital city is Berlin. On October 3, 1990, Eastern and Western Germany reunified for the first time in more than four decades with the East adopting the political system of the West. Germany has a gross domestic product of $1.726 trillion US dollars with a per capita income of about $18,110 US dollars in 1996. Natural resources of Germany include iron ore, coal, timber, copper, natural gas and salt.

Education in Germany is very important. Students may take one of two different avenues after completing elementary school. High school (Realschule) is completed at the age of 16 for vocationally oriented students who then enter a 3 year vocational training program. Academically oriented students attend high school (Gymnasium) until age 19 as the basic requirement for admission to a college or university. Ninety-five percent of the population is literate and Germans are recognized as being extremely hard working and focused.

The German legal system is based on the Roman Law system as opposed to the Anglo-Saxon Common Law system. Most of the accounting standards stem from regulations imposed by the government. This system has changed dramatically and continuously since the end of World War II.

In 1937 general accounting standards and principles were codified for the first time in the Stock Corporation Law. Existing accounting practice was failing to protect the creditors of the German companies in increasing cases of bankruptcy. In the mid 1960's, for larger corporations, the German financial reporting system moved toward British-American Ideas. In 1965 in order to give more consideration to the interests of the shareholders, a modification of the law took place, which upheld certain limits. The Anglo turn in German accounting occurred in the late 1960's when more disclosure became a requirement, along with limited consolidation, a corporate management report and certain audit requirements.

The 1970's introduced a European turn on German accounting. The Stock Corporation Law represented generally accepted accounting principles, but there were really no binding rules for non-stock corporations, liability companies and limited partnerships. In 1985 the Comprehensive accounting act was introduced to integrate all existing aspects of German accounting. This changed completely the regulatory system regarding preparation, publication and auditing of single and group accounts. The most important change was the revision of the German Commercial Code, which now included the insertion of a third book with accounting and auditing rules applicable to all businesses.

(Source for whole section: www.eleazar.dartmouth.edu, which no longer exists)

The Federal Republic of Germany is a parliamentary democracy, it guarantees and protects the fundamental rights of citizens and also provides for the establishment of a legislative body representing the people. A system of checks and balances exists to prevent a concentration of power in a single individual or group much like in the United States. The parliament in Germany is composed of two chambers. Members of only one house of parliament (Bundestag) or lower parliament, which has 672 members, are elected directly by the people, while the upper house of parliament, the (Bundesrat), with 68 members, is composed of delegates of the 16 state governments.

The head of government, the (federal chancellor) is elected by the members of the Bundestag. Since 1982 that seat has been held by Helmut Kohl. It is a four year term with no limitation on re-election. The head of state (federal president) is elected by a special assembly. The federal president is elected for a five year term and may be re-elected only once for a second consecutive term. Since 1994 this seat has been held by Roman Herzog. National elections are held every four years and German citizens 18 years of age or older may vote. The judicial system in Germany is rather decentralized with separate courts for different legal areas, much like the US.

Financing in German industry is done primarily through banks and pension accruals. Ownership of corporations is mainly by banks rather than shareholders. The main reason for this is that from a tax point of view, loan financing is preferable compared to equity financing. This also explains why shareholders try to classify a high portion of their investments in firms as loans, not as equity capital. The tax laws in Germany dominate legal decisions on accounting issues and thus the development of accounting principles. This is a much different approach than the one taken in the US where the accounting profession itself develops accounting standards

The German economy is very strong, it is the world's third largest at over two trillion dollars (in nominal terms), but somewhat strained as Eastern Germany imposes on the affluence of the West. The value of the German Mark is carefully monitored and guarded by the central bank in Germany (Bundesbank). The German government plans to strengthen the economy and ensure a lasting turnaround on the job market by introducing a reform in economic policies as well as tax and social policies. Unemployment has long been a problem in Germany, particularly in the East, and has averaged 11.4% for 1997. Unemployment had been predicted to decline but has instead steadily increased and at the end of January 1998 reached its highest level of 11.8% since the end of World War II. (Source: www.germany-inf.org)

Fiscal demands remain high following the reunification of the East and West. The German government is working to narrow the deficit that grew as a result of Western Germany transferring vast sums to the East. Economic source data indicates that conditions for continued economic growth are good. The Federal Government has cited stable prices, low interest rates, increased corporate earnings, moderate wage development and more flexible wage behavior, normalization of DM exchange rates and dynamic growth the export sector. (Source: www.clev.frb.org/research/jan96et)

Inflation in Germany is almost non existent, currently under 2%. This rate is one of the lowest in the world and surprisingly so considering the economic pressures from recent reunification. The low rate is due to the strict monetary policies placed by the Bundesbank, mentioned earlier. It acts independently from government direction, but is obligated to support the economic policy of the government.

Germany's number one trading partner for both imports and exports is France. For exports, Great Britain and Northern Ireland fall in second place, Italy in third and the United States in fourth. Second in imports to Germany is the Netherlands, followed by Italy and again fourth the USA. The most lucrative commodities exchanged are trade and industry materials followed by finished products. Germany's major industries include, mining and quarrying, manufacturing, energy supply and the building industry (proper). (Sources: www.statistik-bund.de/basi/be-ueber.htm and www.state.gov)

There are eight major stock exchanges in Germany located in Hamburg, Bremen, Hannover, Dusseldorf, Frankfurt, Stuttgart, Munich and Berlin. The Frankfurt Stock Exchange is the most important.

(Source for whole section: www.germany-info.org/rights.htm)

The recent Telecommunications act, which became effective on August 1, 1996 has liberalized the telephone market. This act is thought to be a step toward making Germany an even more attractive location for business and industry. Today Deutsche Telekom is the largest telecommunications provider in Europe and with approximately four million customers at the end of 1996, the third largest carrier in the world. Telecommunications has developed into one of the Germany economies fastest growing markets, a large part of this is due to an increasing number of mobile telephone users.

Germany has also increased its lead in the development and marketing of high tech products in Europe recently and is currently the world's third largest export nation in this field. Germany has 17% of the world market behind Japan with 19.5% and the United States with 18%. Cutting edge technologies presently constitute 11.7% of Germany's industrial output. This figure was at 10% in 1994.

Germany has also returned to the top of the list for global patents. Germany produces about 190 of these world market patents for every one million employees. By comparison, Japan produces 180 and the United States 140. In Europe Germany's leadership in this field remains unchallenged because France and Great Britain register only about one half as many world market patents. As a location for innovation Germany is second only to the USA. However, production growth in the R&D intensive industries has not resulted in the creation of new jobs. The employment record in industries high tech branches is actually less favorable than in all other types of industry.

(Sources for whole section: www.gsia.cmu.edu/afs/andrew/gsia/jh38/germany.htm and www.marx.de/businessnf.htm)

There are three major forms of businesses in Germany, Aktiengesellschaft (AG), Kommanditgesellschaft auf Aktien (KGaA) and Gesellschaft mit beschrankter Haftung (GmbH). AG's are typically large corporations with two senior boards, a management board and a board of directors. The KGaA is a mixture of the limited partnership and the corporate form of business organization. It must have at least one shareholder who is personally liable for the companies indebtedness (the remaining shareholders are liable only to the extent of their investment in the company). Privately held companies are the GmbH's. These are quite abundant in Germany and most medium and small sized businesses operate in this form. The GmbH is not required to form a board of directors unless its work force exceeds five hundred people.

A list of some of the larger German companies includes: Adidas, Alsen-Breitenburg Zement, Bayer, Deutsche Bank, Dyckerhoff AG, Puma AG, Schering, Heidelberger Zement, Hoechst and Merck KGaA.

The judicial system encompasses several branches, namely constitutional jurisdiction, general jurisdiction (civil, family and criminal matters) and special jurisdiction (Labor, administrative, fiscal and social matters). There are also special service and disciplinary courts dealing with matters concerning members of selected occupational groups. Each branch of jurisdiction has a Federal court as court of last instance of judicial decision. All others are Lander courts including courts at various lower levels (eg. General jurisdiction: local courts and regional courts).

The Commercial Code (Handelsgesetzbuch) provides the fundamental accounting concepts applicable to all enterprises, regardless of their legal form. The code also provides supplementary regulations for companies based on the EC's fourth company law directive. Included in this compilation are principles relating to clarity and overview, timely preparation, comprehensiveness, prohibition against offsetting, continuity, going concern principle, historical cost principle, individual valuation, accrual method accounting, consistency, conservatism, German language and currency, and prohibition of departure from statutory rules.

The Securities Trading Act (Werpapierhandelsgesetz-WpHG) outlines German law pertaining to the trading of securities. It is amended by the Law Implementing EC Directives for the Harmonization of Regulatory Provisions in the Field of Banking and Securities Supervision. The Security Sales Prospectus Act (VerkProspG), which is amended periodically, also defines laws regarding the sale of securities. In addition, there are various ordinances, announcements and letters available as well.

Accounting is a relatively small profession in Germany, with about 7,000 members. The process one must go through to become a certified public accountant (Wirtschaftsprufer, which translates into Enterprise Examiner) is quite lengthy and demanding. One must complete a series of procedures before being eligible for certification by the government. One must be a college graduate with a minimum of 6 years experience in accounting work. Once the experience requirements are completed, examinations in the areas of accounting, law, ethics, auditing and business administration are required. After the examination process is complete, the candidate must then write a thesis, pass yet another written examination and an oral examination.

Accountants are required to become members of the Chamber of Accountants (Wirtschaftspruferkammer) which was introduced by the law regulating the accountancy profession in 1971. The chamber's legally imposed function is to observe professional standards and educate accountants. (Source: http://msm.byu.edu/c&i/cim/account/germany.htm)

The German Institute (Institut der Wirtschaftsprufer, formed in 1931) sets the auditing standards but also issues recommendations and interpretations over financial accounting matters. They are also permitted to provide consultation in various processes of lawmaking decisions that affect financial accounting and reporting. Its main task is to publish statements on principal accounting and auditing questions which then usually serve as generally accepted standards and principles within the profession. Membership to the IdW is voluntary.

Financial statements are to be drawn up in accordance with generally accepted accounting principles. For corporations, the statements must also present a true and fair view of the net worth, financial position and the results of the company. Statements must be clear, understandable and complete. Offsetting of assets against liabilities and income against expenses is prohibited, amounts in the opening balance sheet must agree with the closing balance sheet of the preceding year. A going concern must be assumed, unless disproved by facts or by law. Anticipated risks or losses which arise up to the balance sheet date are recognized, profits may be recognized only if they are realized. Accounting is done on an accrual basis and valuation principles are applied consistently: valuation is based on historical cost.

There is literally no difference between commercial financial statements prepared for tax purposes and the financial statements published in financial reports. There is never any decision-making concerning any accounting principles choice because tax matters always dominate. As a result, German companies generally evaluate their assets at the lowest amounts possible and liabilities at the highest amount possible under GAAP in order to minimize tax liability. German accounting also relies completely on statutes and court decisions, nothing else has the same binding or authoritative status.

The German Auditing profession is headed by the Chamber of Auditors (Wirtschaftspruferkammer), an independent professional organization which is supervised by the Federal Minister of Economics. Members include both certified auditors as well as certified accountants. The difference between the two is that the certified accountant has more simple admission and examination procedures, and they are only allowed to perform voluntary audits, as well as statutory audits of medium sized limited liability companies. Certified auditors must perform all other audits.

To become a certified auditor one must study business administration, law and general economics or a similar subject. Furthermore candidates must have five years of practical experience, including four years as an auditor. In addition certain personal criteria need to be met before being admitted for the professional examination, which includes accounting, auditing, law, business administration, taxation and general economics. Because of stringent admission, examination and supervisory regulations, the German Professional Law is widely regarded as one of the strictest world wide.

Some of the major accounting firms in Germany include Arthur Andersen, Coopers and Lybrand, Ernst & Young and KPMG. Also some of the larger mid-size firms include Siegfried Heinzelmann, Steuerkanzlei and Securs Lauri Sellam & Partners.

(Source for whole section: www.fawpir.com/news/ws950315.htm)

Growth in international capital markets has increased the need to be able to compare financial statements across borders. The limitations of financing through banks are causing German companies to look elsewhere for capital, primary investors. The Justice Minister has acknowledged that financial statements prepared in accordance with international accounting standards (IAS) are to be recognized under German Law. The creation of a standard setting body similar to FASB has also recently been suggested as the accounting environment becomes increasingly more complex.

Traditionally the Federal Bank has enjoyed a great deal of power: however, this power may be yielded to the European Central Bank in the near future, which would cause great concern with regard to the stability of low inflation and interest rates.

Recently German companies have been issuing their financial statements according to International Accounting Standards with the hope of enticing professional investors by effecting greater comparability with international rivals. While Internationally Accepted Accounting Standards have not been approved here in the United States, German companies are still drawing quite a lot of attention from US investors. Ultimately many German companies hope to trade on the New York Stock Exchange. Hoechst began trading on NYSE on September 24, 1997. They achieved this only after performing the cumbersome task of translating their foreign financial statements to conform with US GAAP standards.

Financial statements consist of a balance sheet, income statement and explanatory notes. In many cases, an auditors report, a management report and/or a report by the supervisory board (if one is in existence), may be required. The financial statements must reflect a true and fair view of net worth, financial position and results of the corporation keeping up with the required accounting principles. For public filing, the financial papers must always be prepared in German and must be expressed in Deutsche marks.

For purposes of contrast, the financial statements of the German based pharmaceutical company, Hoechst and the US based Eli Lilly are employed for this example. The information utilized was the most recently available audited financial statements from the year ended 1996. The recent exchange rate for the German mark to the US dollar is about 1.7 DM per US dollar.

Eli Lilly

Eli Lilly begins with a brief look at financial highlights for the year. An overview from CEO Randall L. Tobias, focuses on growth in comparison to recent years and the description of new products that have been introduced as part of their strategy for innovative pharmaceutical solutions. They take their broad perspective and narrow it to what they are focusing on in the future. They go on to list items such as their priorities, key results and organizational changes. In conclusion to the basic introductory information Eli Lilly gives detailed perspectives on new and existing products which have inspired their present year growth. They also give insight to their most recent research and developments before walking through the review of operations for the year past.

Operating results and net income for 1996 are presented by COO, Sidney Taurel. This section of the annual report reveals gain or loss due to fluctuation in the exchange rates, percentage increase (decrease) in pharmaceutical sales, anti-infectives and animal health products. Research and development expenses in these areas are also cited and an analysis of what percentage of sales occurred outside the US. The consolidated statements of income are presented beginning with net sales, cost of sales, research and development costs, acquired research cost, marketing and administrative costs, special charges, interest expense and other income. Before and after tax amounts are presented, as well as discontinued operations net of tax. Finally, we are left with the net income for the year-end 1996 and the earnings per share.

A consolidated statement of cash flows is then presented beginning with net income of cash flows from operating activities, adjustments are then made to reconcile net income. These adjustments include depreciation and amortization, change in deferred taxes, net gain on dispositions of discontinued operations and other non-cash income (expense). Changes in operating assets and liabilities are then presented which include, an increase (decrease) in receivables, inventories, and other assets, and accounts payable and other liabilities. This yields the net cash from operating activities.

Next cash flow from investing activities is presented, this includes acquisitions, additions to property and equipment, disposals of property and equipment, additions to other assets, reductions of investments and additions to investments to give a total of net cash used for investing activities. Finally, there is cash flow from financing activities which includes, dividends paid, common stock purchases and other capital transactions, issuance under stock plans, increase (decrease in short term borrowings, additions (reductions) in long term debt and proceeds from initial public offering. A total is then presented for net cash used in financing activities. Next the effect of the exchange rate on cash is considered and the net increase (decrease) of cash equivalents. At the bottom of the consolidated statement of cash flows there is a total for cash and cash equivalents at the beginning of the year and at the end of the year.

The Executive Vice President Charles E. Golden presents segment information regarding Eli Lilly Company and all of its Subsidiaries. Industry data is presented by sector, net sales in millions of dollars. Net sales are then broken down geographically according to country. A brief discussion of the company's financial condition is then presented including capital expenditures and dividends per share. Environmental and legal matters are then updated along with an overview of the Private Securities Litigation Reform Act of 1995 which was written with concern to forward looking statements made by a company.

The annual report then covers all notes to the financial statements which in 1996 number one through twelve and include the following:

1. Summary of significant Accounting policies
2. Acquisitions
3. Restructuring of Special Charges
4. Discontinued Operations
5. Implementation of New Financial Accounting Standards
6. Financial Instruments
7. Borrowings
8. Stock Plans
9. Shareholders Equity
10. Income Taxes
11. Retirement Benefits
12. Contingencies

Eli Lilly concludes by briefly stating its responsibility for financial statements and presenting its Report of Independent Auditors. This is followed by a page of miscellaneous corporate information such as the annual meeting date and 10-K and 10-Q reports along with a list of all senior management.

Hoechst

Hoechst's annual report begins with a brief overview of financial highlights much the same as Eli Lilly listing items such as sales, stockholders equity and capital expenditures in DM. Hoechst presents a time line of their year of change with dates outlining what has occurred and when. A letter follows, from the Chairman of the Board of Management Jurgen Dormann, a management report and a segment report of sales and operating profit by division and affiliate.

The consolidated income statement opens with net sales, cost of sales and gross profit. Subtractions of distribution/selling costs, research and development costs, general and administrative costs and other operating costs are taken and other operating income is added for a total operating profit. Gain on the sale of discontinued operations is presented and then a non-operating expense total is derived from a, investment income (net), interest expense (net) and other financial expense (net). Profit before taxes on income is then stated, tax is subtracted, income before minority interest is stated, minority interest is subtracted leaving the total net income.

The consolidated balance sheets non-current assets at the top of the balance sheet, this is unlike the US where cash and most liquid assets are listed first. Intangible assets, property plant and equipment and investments are totaled. Inventories are then listed alone, followed by receivables and other assets, which include, accounts receivable, trade and other receivables and other assets. Total liquid assets are then listed which include marketable securities and cash or cash equivalents followed by prepaid items. All of these items (inventory through cash and cash equivalents) are totaled and listed as current assets and added to the non-current assets for an asset total.

Stockholders equity and liability is listed beginning with the Subscribed Capital of Hoechst AG, additional paid in capital, Hoechst AG reserve for own shares, retained earnings, net income and currency translation adjustments for a total Equity of Hoechst AG stockholders. Minority interest is then added in for a total stockholder's equity amount, allowances are then made for provisions for pensions and similar obligations and other provisions. Finally, Corporate debt, accounts payable, trade and miscellaneous liabilities are totaled and labeled other liabilities followed by deferred income. This too is the reverse of what is done in the US where liabilities are listed first and then stockholders equity.

A series of short analyses follow the financial statements beginning with one on employees and leadership, an analysis of shareholdings and affiliate disposal, financing as pertinent to an increase in corporate debt, sales developments, health care, agriculture and nutrition, industrial business and capital expenditure. An abridged version of the Hoechst AG financial statements is then presented followed by several more brief analyses on Europe, The Americas and Asia, communication, environment and safety and finally an outlook with the realignment of the Hoechst Group concluding with a summary analysis on company shares.

Financial statements and methods of annual reporting are somewhat similar; many of the topics covered in analysis and discussion are the same. There are however, many differences as well. One of the major differences between the US and Germany is the format in which they arrange financial statement information. Other points of interest include:

1. Capitalization of interest, as a general rule, interest must be expensed immediately.
2. In most cases, depreciation is calculated at the rates permitted by tax law and practice and may be deducted for tax purposes only if the same amount is charged to commercial financial statements.
3. Proposed dividends are not usually shown on the financial statements, although the proposal concerning the appropriation of results must be filed in the commercial register.
4. Fixed asset values must not exceed historical cost. Depreciation over an assets estimated useful life is permitted, and the straight line method or an accelerated method is generally used.
5. Only purchased goodwill may be shown in a company's own financial statements. It must be amortized over 5 years or its estimated economic life.
6. Inventories are valued at the lower of cost or market, this comparison being made item by item.

Germany has an impressive display of standards and strict educational ethics, which are playing a large part in its overall success in the world of accounting as well as other areas. Although there are a number of differences from what we see here in the US, there are many similarities that make for a somewhat interesting, topical comparability.

Brigham Young University-Marriott School of Management, Accounting in Germany; http://msm.byu.edu/c&i/cim/account/germany.htm

Comparative International Accounting; Fourth Edition, Christopher Nobes and Robert Parker, pp. 268-270.

Doing Business in Germany; John Hooker, www.gsia.cmu.edu/afs/andrew/gsia/jh38/germany.htm

Doing Business in Germany; Dr. Thomas Marx, www.marx.de/businessnf.htm

Dynamic Forms to Boost Employment: Federal Minister Economics, Dr. Gunter Rexrodt,www.germany-inf.org

Economic Policy & Trade Practices: Germany; US Department of State,www.state.gov

Eli Lilly and Company: Financial Information; www.elililly.com/company/financial/index.html

Germany; Bill Tiszai February 1996

German Economy; Telecommunications and Technology; www.germany-info.org/rights.htm

The German Economy, www.clev.frb.org/research/jan96et

German Firms Shift to More Open Accounting; Wall Street Journal, March 15, 1995,

Peter Gumbel & Greg Steinmetz, www.fawpir.com/news/ws950315.htm

German Trade; www.statistik-bund.de/basi/be-ueber.htm

The Hoechst Magazine; www.hoechst.com/who/future/001_fu.htm

International Accounting; F.D.S. Choi & G.G. Mueller, 2^ND Edition; Prentice Hall 1992, pp. 95-100.

Two Systems of Democracy; www.eleazar.dartmouth.edu.

General Overview

Politics, Government and Legal System

Economy

Business Environment

Financial Reporting

Sources

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Luxembourg lies between Belgium, France and Germany. Its 420,000 inhabitants are spread amongst three districts, including Diekirch, Grevenmacher and Luxembourg. About 85,000 live in Luxembourg City and its immediate surroundings. The average population density is 145 people per square kilometer. The number of foreign residents in Luxembourg has already exceeded 32% of the population and is slightly higher than 50% in the capital. It is the highest proportion of foreigners of any EU country. An intelligent policy of integration has thus far helped to avoid any frictions between the various communities. The Belgians, Germans, and French constitute the largest groups among these, closely followed by the Portuguese and the Italians. "Lëtzebuergesch" or Luxembourgsch is the everyday spoken language of the people, and the main symbol of the Luxembourgers' national identity.

After a long period of foreign sovereignty (Burgundian / Spanish / French / Austrian / Revolutionary French) Luxembourg regained its national independence in 1815. Currently, Luxembourg is a constitutional monarchy and is lead by H.R.H. Grand Duke Jean. The legislative branch is a unicameral Chamber of Deputies or Chambre des Deputes consists of 60 seats, in which members are elected by direct popular vote to serve five-year terms. Political parties include the Christian Social People's Party; Luxembourg Socialist Workers' Party; Democratic Party; Action Committee for Democracy and Pension Rights; the Green Alternative; and other minor parties.

Luxembourg's legal system is a civil law system. The judiciary system includes the Superior Court of Justice and the Administrative Court. Judges are appointed for life by the Grand Duke.(Source: The 1997 World Factbook)

The stable, prosperous economy features moderate growth, low inflation, and low unemployment. Agriculture is based on small family-owned farms. The industrial sector, until recently dominated by steel, has become increasingly more diversified. During the past decades, growth in the financial sector has more than compensated for the decline in steel. Services, especially banking, account for a growing proportion of the economy. Luxembourg participates in an economic union with Belgium on trade and most financial matters, is also closely connected economically to the Netherlands, and, as a member of the EU, enjoys the advantages of the open European market. (Source: The 1997 World Factbook)

Tax rebates, help in obtaining credits, and a host of other incentives are offered to companies intending to set up a plant in the Grand Duchy. However, despite these continuing efforts, Luxembourg's industrial labor is dropping in numbers, marking a slide into the service sector. In this way, Luxembourg plays a major role as a prominent international financial center. Numerous banks and important investment trusts have settled in the capital, as the fiscal legislation, which dates back to 1929, favors Banks and Holding Companies. A severe law against "laundering" of drug money has been in effect since 1992.

Luxembourg as an international center at this printing numbers more than 7000 domiciled Holding Companies, some 900 investment funds, and 222 banks which represent the greatest banking concentration in the European Community. More recently still, Luxembourg has reaffirmed its importance as a center for Eurobonds with a big emphasis in ECU's, and the future seems likely to attract more and more investment funds in European Currency Units to this comparatively young, but steadily growing center.

Big Insurance and Re-insurance companies have set up subsidiaries in the capital, and it looks like Luxembourg will soon be one of the major centers in this area of business.

Because of its economic structure and its geographical position, Luxembourg has developed close ties with other countries in the region. Specifically, it has worked closely with Belgium since 1921, and with Belgium and the Netherlands since the second World War, with the creation of BENELUX, an economic Union of Belgium, Netherlands and Luxembourg was the first step towards the present larger European Community. (Source for whole section on business environment: www.luxembourg.lu)

No special financial reporting regulations in Luxembourg existed until the enactment of the Law of May 4, 1984, which adopted the EU's Fourth Directive. Subsequently, the EU's Seventh Directive was adopted in July 1988.

Financial Services companies are supervised by special institutions such as the Institut Monetaire Luxembourgeois (IML) for banks, and the Insurance Commission for insurance companies. The large numbers of investment funds are subject to the Law of March 30, 1988.

The Luxembourg Institute of Auditors (Institut des Revisours d'Enterprises, or IRE) has a great deal of authority in interpreting the law and issuing detailed guidelines. In addition, the guidelines of the International Accounting Standards Committee (IASC) are generally accepted, unless they conflict with Luxembourg laws. Financial statements are audited by the IRE and an independent auditors. Audits for companies with fiscal years ending in December are generally conducted in the middle of May.

Large companies must prepare their financial statements according to law and submit them to the registrar of the Commercial Court within a month after the annual shareholder's meeting. The financial statements, which are filed with the registrar and furnished to the shareholders consist of an income statement, a balance sheet, and statutory auditor's report. The law does not require that financial statements contain explanatory footnotes, the director's report, or the report of the IRE. However, most corporate annual reports include these items. Annual reports, which are available in French, German and English, are usually available in June for company's with fiscal years ending in December.

Financial statements published in full must be accompanied by the entire text of the auditor's report. Balance sheets are prepared "before appropriations," which is not common in the rest of Europe. The financial statement must also be accompanied by the proposed appropriation of the current year's earnings. (Source for whole section on financial reporting: www.faw.com/sample/belgium.htm)

Kim, Haksu, Financial Analysis Worldwide, Belgium/Luxembourg, www.fawpir.com/sample/belgium.htm

A Survey of Luxembourg, www.luxembourg.lu

The 1997 World Factbook, www.odci.gov/cia/publication/factbook/index.html

General Overview

History

Economy

Business Environment

Legal Environment

Organization of Accounting Profession

Accounting Standards

Auditing

Financial Reporting

Accounting Policies

Comparative Analysis

Sources

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Switzerland is located in west central Europe and is approximately 16,101 square miles. Germany borders it to the north, Austria to the East, Italy to the south and France to the west. There are three main regions in the country; the Alps, the mainland, and the Jura. The land is mostly mountainous and has been nearly inaccessible until the efforts of modern engineering. Between 1872 and 1911 the Saint Gothard, Alberg, Simplon, and Lotschberg tunnels were constructed which made train travel though the Alps possible. In fact, two of the four railways that connect central Europe to Italy run through the Swiss Alps.

Due to its location and the fall of the Roman Empire, Switzerland is likely the most multilingual of the European countries. There are four national languages, German, French, Italian, and Romansch. About 65% speak Schwyzertutsch, a German dialect, 18% speak French, 12% speak Italian, 1% Romansch, and 4% other. These percentages are approximately the same for the make up of the population as well.

The 1998 estimation of the Swiss population is 7,391,000 and is ranked 91^st in the world. The projected population growth rate for the years 1995 - 2000 is 0.8% per year. In 1995 the population distribution was 64% urban and the age distribution was 0 - 14 at 17.9%, 15 - 64 at 67.9%, and 65 + at 14.2% with the median age being 37. Although roughly split between Roman Catholic and Protestant, the considerably ethnic diverse population is mostly segmented by language.

Because of its central location, Switzerland has been the target of many conquerors throughout history. But, in 1291 Uri, Schwyz, Unterwalden, the three original Swiss Cantons, declared their independence from the Hapsburgs, the ruling house of Austria. Today there are 26 cantons and since 1815 the Swiss have maintained their independence as well as the country's borders.

During the 16^th century, Reformation, a conflict between the Roman Catholics and the Protestants threatened Switzerland's political stability and led to civil war. However, an outside threat from the Thirty Years War jeopardized Switzerland's political balance and in turn helped unite the country. This led to the formal recognition of their independence by the Holy Roman Empire in 1648 but would not be the last challenge that they would face.

In 1798, French troops occupied Switzerland and formed the Helvetic Republic. However, following Napoleon's defeat in 1815, authority was restored to Switzerland and their independence was secured by the powers of Europe. Since then, Switzerland's neutrality has been recognized by the entire world.

The 1848 constitution established the 22 Swiss cantons (today there are 26), individual civil liberties, and a representative form of democracy. There was some political unrest during World War I between the German and French segments of the population, but their neutrality was maintained and in 1920 Geneva was named the home of the League of Nations.

The Swiss economy is made up of three sectors; agriculture, industry, and services. Services is the leading sector as it employs about 50% of the work force. This sector includes banking, assurances, tourism, etc. Banking is one of the most important businesses in Switzerland with Zurich being a world center for international financial transactions. Industry is next after services and employs 38% of the people. This includes the machine, metal, watch, chemical, precision instruments, and textile industries. The agriculture sector employs about 11% of the population and is the only sector subsidized by the government where dairy and processed foods receive state subsidies.

Switzerland has been one of the richest economies in the world with one of the highest per capita incomes despite its almost total lack of natural resources. However, even after recovering from a recession in 1994-95, since 1990 their economy has grown only about 1% per year and has been one of the weakest in Europe. This is largely attributed to a weak consumer demand and high value of the Swiss Franc.

This is a difficult situation for the leading sectors because with a weak consumer demand they now have to rely on exports. Unfortunately the high valued Swiss Franc causes Swiss goods to be overvalued in international markets and therefore exports remain low. Not being a part of the European Union further escalates the situation.

In addition, savings rates among Swiss citizens remain high because of an uncertain employment future. There are also indications that demand for imported goods are higher than domestic goods, which also can be linked to the high Swiss Franc. This has led to large deficits and public debt. But in an effort to spur the economy, in 1996 the National council voted to financially support projects in the construction and energy industries.

Industrial engineering has been a key factor in the success of the Swiss economy. But prior to the industrial revolution, products of Swiss labor were well known throughout Europe. Products such as watches, clocks, and machine tools were known for their precision and quality and were being produced in all Swiss medieval cities. In mid 19^th century with the processing of water power into electrical energy, they began mass producing textiles and at the same time plants were built to produce machine tools and chemical dyes.

With industry being the second largest sector in the Swiss economy, many regions have a significant industrial presence. Most of the industrial complexes are located in the midland, the pharmaceutical industry is centered around Basel, and some of the larger watch making plants are in Geneva and the Jura.

For the most part, Swiss businesses are small family owned companies. Large businesses are usually in the form of publicly held corporations with large numbers of shareholders.

There is only limited involvement by the public sector with respect to the private sector and a relatively small number of state-owned enterprises. The state-owned enterprises are the majority of the railways and the postal service.

The third section of the Swiss Commercial Law governs the forms of business organizations in Switzerland. The forms of business organizations as outlined by Price Waterhouse in "Doing Business in Switzerland" are:

• Corporation (Aktiengesellschaft - AG, Societe anonyme - SA, Societa anonima - SA) - business entity with authorized capital and shareholders have limited liability.
• Private limited company (Gesellschaft mit beschrankter Haftung - GmbH, Societe a responsabilite limitee - Sarl,Societa a responsabilita limitata - Sarl) - business entity with limited liability and a change of capital requires an amendment of the statutes.
• General partnership (Kollektivgesellshaft, Societe en nom collectif, Societa in nome collettivo) - partnership of two or more people and partners have unlimited liability.
• Limited partnership (Kommanditgesellschaft, Societe en commandite, Societa in acomandita) - two or more partners with one or more having unlimited liability and other partners have limited liability.
• Ordinary partnership (Einfache Gesellschaft, societe simple, societa semplice) - joint venture of two or more persons for the realization of a particular project.
• Cooperative society (Genossenschaft, societe cooperative, societa cooperativa) - business entity of at least seven people and no upper limit and mainly used for agriculture and large retail organizations.
• Branch of foreign corporation.
• Sole proprietorship.

Foreign investment is welcome by the federal government but the responsibility of economic development is mainly left up to the cantons. The cantons offer equal incentives for investment among foreign and domestic investors and there are even some added benefits for new foreign investors. With respect to federal taxes, both foreign and domestic companies are treated the same however some cantonal laws offer privileges to foreign owned companies that are not available to domestically owned enterprises.

From an industry point of view, foreign investment is not so welcome. The reasons are mainly due to there being increases in business competition associated with the increase in foreign companies. On the other hand from the labor point of view, Swiss labor is more concerned with job security and good labor/management relations and are therefore neutral towards the origin of investment and management.

Free trade is the underlying policy for all sectors with the exception of agriculture. Switzerland is not a member of the European Community (EC) but is a member of the European Free Trade Association (EFTA). In 1972 they established the Free Trade Agreement between Switzerland and the EC which removed trade restrictions and customs duties.

Some barriers do exist involving exports into Switzerland such as those in the telecommunications industry. However, as of January 1, 1998 the Swiss telecommunications industry has been liberalized and privatized which means the markets are now open to foreign investment and competition. With regard to foreign insurance companies doing business in Switzerland, the company must first establish a subsidiary or branch there in order to conduct business.

Total exports for years 1994 - 1996 were:

$79,503,000,000 (1996); $81,352,000,000 (1995); $70,474,000,000 (1994).

Major trading partners for exports in 1996 were:

Germany - 22.6%; US - 9.3%; France - 9.2%; Italy - 7.5%; UK - 7.6%

Due to the non-existence and any natural resources available for profitable exploitation, Switzerland mainly relies on outside sources for raw materials, fuels, agricultural products and machinery. In terms of importing automobiles made in the US to Switzerland, the US is at somewhat of a competitive disadvantage. In 1995, Switzerland adopted EU automobile standards allowing cars made in the EU into the Swiss market without undergoing further testing. The US is currently seeking the same treatment received by EU models and is encouraging the Swiss to recognize test and US standards.

Total imports for years 1994 - 1996 were:

$78,176,000,000 (1996); $80,050,000,000 (1995); $68,044,000,000 (1994).

Major trading partners for imports in 1996 were:

Germany - 31.4%; France - 11.6%; Italy - 10.7%; US - 7.1%; UK - 6.4%.

The Swiss banking industry is extremely well developed, offers a wide range of services and is especially well known for its secrecy. Individual privacy is well respected in Switzerland and is expressed in this secrecy. It's also protected by criminal law and any violation of banking privacy could lead to legal proceedings.

The Swiss National Bank was incorporated in 1905 and is mainly influenced by the Swiss Federal Banking Law. It is supervised by the Bank Council which is made up of 40 members. Of the 40 members, the federal government appoints 25 of them including the president, vice president, and board of directors. More than half of the National Banks capital is owned by the cantons, cantonal banks, and other public bodies. The rest is owned by the citizens and none of the capital is held by the federal government.

Swiss National Bank statistics as summarized by Price Waterhouse have distinguished eight categories of banks and finance companies. They are:

• 29 Cantonal Banks - with at least one for each canton.
• 5 Big Banks - that engage in all types of banking business.
• 210 Regional and Savings Banks - mostly mortgage and savings banks but are expanding their services.
• 2 Loan Societies - branches all over Switzerland that are local community institutions mainly used by farmers and small businesses.
• 209 Other banks - domestically owned and mostly closely held private corporations
• 137 Finance Companies - primarily long term loans and investments in other companies.
• 22 Private Banks - usually partnerships and engage in portfolio management, underwriting and stock exchange transactions.
• 17 Branches of Foreign Banks - banks of foreign origin with operating branches in Switzerland.

Swiss stock exchanges are located in eight cities throughout Switzerland. The three major ones are in Zurich, Basel, and Geneva. The largest of the Swiss stock exchanges is the Zurich exchange and is regulated by the Zurich cantonal law. Like the exchange in Zurich, the other Swiss stock exchanges are governed by their respective local cantonal laws.

There are many foreign companies quoted on Swiss exchanges and therefore Swiss stock markets are some of the most important in all of Europe. Also, there are no restrictions to foreign investors investing in Swiss markets including government securities and debt instruments of Swiss quoted companies.

At first there was a wide variety of legal systems among the cantons influenced by the diverse population. The French and Italian speaking cantons were based on the Napoleonic Code, German speaking cantons were based on the Austrian Civil Code, and other cantons used a codified customary law. It wasn't until the 19^th and 20^th centuries that these different systems became unified.

Today, responsibilities of the system are distinguished between the Confederation (federal) and the cantons. All civil and criminal law matters fall under the legislative competence of the Confederation and the organization and procedures of the courts and the administration of justice is the responsibility of the cantons.

Purposely Swiss law has attempted to be simple and easy to understand by everyone rather than technical and complicated. This however has been a difficult tradition to maintain given today's complex global environment.

The accounting profession in Switzerland is undergoing some significant changes. These changes, although occurring slowly, are evidenced by the rapid growth of the profession, as well as the reporting methods by Swiss companies. Much of this can be attributed to the increases in global competition for business and financial markets.

With respect to reporting, the nature of financial information disclosure seems to be moving from being conservative and secretive in nature to being more open and in line with international accounting standards. This in turn has led to an increase in the need for assurance services and hence the growing accounting and auditing profession.

There are essentially two objectives for independent accountants in Switzerland. They are to report on compliance and to provide support to businesses in financial matters. Services provided by the accounting profession in Switzerland include reporting on annual financial statements, special examinations, and advisory and coordination services. This is quite similar to that of the US.

The principal professional body of accounting is Switzerland is the Swiss Institute of Certified Accountants and Tax Consultants (Treuhand Kammer Chambre Fiduciaire). Membership to this institute requires experience and an examination which are at least as rigorous as the CPA requirements in the US. Swiss bank auditors must also meet additional requirements and be approved and recognized by the Swiss Federal Banking Commission.

The two official influences on accounting and auditing in Switzerland are the Swiss Corporation Law, or Code of Obligations (Obligationenrecht - Code des Obligations), and the Swiss Federal Banking Law (see World Accounting, Switzerland, pg. 6). The Corporation Law applies to all companies and business entities, and the Banking Law applies to banks and bank-like finance companies. Local cantonal laws including tax laws tend to adhere to the two federal laws and thus are less influential.

Commercial Law is the main source of accounting regulation and provides general principles of bookkeeping which are accounting rules to be followed by all enterprises. Under this law, companies are required to annually prepare a balance sheet and statement of income conforming to Swiss generally accepted accounting principles.

The law was considered unsatisfactory, as disclosure requirements for information to shareholders were minimal. As a result, proposals to reform the law began in 1983. In 1992, Commercial Law reform was approved with changes inspired by the EU's 4^th and 7^th directives.

The objective of the reform was to improve the disclosure of information and protection of shareholders interest. As outlined by Radebaugh et al. the reform includes requiring all public and private companies to publish annual accounts, incorporating generally accepted accounting principles into law, allowing the revaluation of investments in land and buildings, disclosures in the notes to the accounts, and making the presentation of consolidated accounts compulsory for listed and large companies. Furthermore, the current trend is that more and more Swiss companies are making extensive voluntarily disclosures of financial information that is more harmonious with international accounting standards.

In addition to Commercial Law reform, the accounting profession has begun developing its own standard setting process inspired by the FASB in the US. In 1984 the Foundation for Accounting and Reporting Recommendations, or FER (Fachkommission fur Empfehlungen zur Rechnungslegung) was established by the Swiss Institute of Certified Accountants and Tax Consultants. The Foundation overlooks an independent accounting standards board with a broad based membership of about of 25 part time members that serve 5 year terms. They are responsible for establishing accounting and reporting recommendations (ARR's), and as defined by Orsini, McAllister, & Parikh et al., ARR's are intended to achieve the following:

1. improve the quality and clarity of financial reporting;
2. clarify Commercial Law;
3. make current requirements more agreeable with international accounting standards; and
4. offer guidelines for specific areas such as consolidation issues (ARR No. 2).

As described by Bloom and Naciri et al., the accounting standards setting process encompasses the following phases:

1. an executive committee of the Board proposes the issues that are to be examined;
2. the board then decides on the work agenda;
3. the Board assigns projects to project directors;
4. research is conducted on each project;
5. project papers or discussion memoranda are prepared, though circulated only to Board members. Such memoranda are not published. There is a discussion of the first draft by the executive committee;
6. the first draft is then presented to the Board for discussion and approval;
7. if the draft is approved, it then represents an exposure draft, which is published and widely circulated for public feedback;
8. the letters of comment from the public are examined by the executive committee and the board; and
9. the statement is adopted generally by consensus. At least two-thirds of the members must agree to adopt a standard.

Once a standard is adopted, and ARR can be issued. The following is a list from "Accounting in Switzerland" http://msm.byu.edu/c&i/cim/account/swiss.htm of currently issued ARR's:

ARR No. 0: Objectives, subjects, and procedures of the ARR in Switzerland, issued December 1985. All companies that adopt the ARR in their financial reporting are invited to state this fact in their financial statements. If this is the case, the company's independent auditors should examine and report on such compliance.

ARR No. 1: Components of financial statements, issued December 1985. The financial statements of an enterprise comprise a balance sheet and an income statement (profit and loss account), as well as an annex with explanatory notes and information concerning the cash flow (funds flow). In March of 1993 this recommendation was revised to require an actual funds flow statement as opposed to merely including cash flow information in the explanatory notes.

ARR No. 2: Consolidated financial statements, issued September 1986. Consolidated financial statements must be prepared according to the method of full consolidation. Any exceptions must be explained in the annex. The minority interest in the equity and in the net income (loss) of consolidated subsidiaries must be disclosed as separate items in the consolidated balance sheet and the consolidated income statement. The consolidation policies must be disclosed in the annex to the consolidated financial statements. In particular, the following must be disclosed: criteria for inclusion in consolidation, accounting for non-consolidated investment, accounting for joint ventures, valuation principles, foreign currency translation, treatment of intercompany profits, and changes of shareholders equity.

ARR No. 3: Generally accepted accounting principles, issued November 1990. The annual financial statements should provide as reliable as possible a view of the economic situation of the business; thereby the situation as presented in the financial statements as s whole ( taking into consideration the principle of materiality) should not be shown more favorable than is in fact the case.

ARR No. 4: The translation of financial statements expressed in foreign currencies for consolidation purposes, issued February 1990. For the purpose of consolidation, the individual local currency accounts must be translated into the currency in which the group accounts are expressed (the reporting currency). This translation can be achieved by means of one of the following methods: closing/current rate method, monetary/non-monetary method, temporal method, and current/non-current method. A combination of methods should be avoided. The only exception permitted occurs when the net investment approach is used.

ARR No. 5: Valuation directives for consolidated financial statements, issued November 1990. Valuation directives applied in consolidated financial statements should ensure valuation uniformity and consistency. Valuation bases for consolidated financial statements are historical cost (acquisition cost and production cost) and current cost (e.g. replacement cost or actual current cost).

ARR No. 6: Funds Flow Statement, dating from May 1992. Clarifies that the funds flow statement presents the flows of funds from operation, investing activities and financing activities. The flow of funds generated from operations is to be presented separately from the other fund flows. Either the direct or indirect presentation method may be used. The composition of the fund selected is to be disclosed.

ARR No. 7: Covers the presentation and format of the consolidated balance sheet and profit and loss account, dating from May 1992. It lists a considerable number of items that have to be separately disclosed and demands the same for all other material items. The consolidated profit and loss account may be prepared either according to the period-based costing method or according to the activity-based costing method. Minority items are to be separately disclosed under both these methods.

ARR No. 8: Notes to the Consolidated Financial Statements, dating from May 1992. Gives a list of information that has to be included in the notes. It specifies that the accounting principles used in consolidation should be detailed, together with explanations about other components of the consolidated financial statements and additional information not included in other parts of the consolidated financial statements. Furthermore, the change in gross values and related accumulated depreciation of fixed sectors, details of the net financial income/expense and other income/expense, unusual pending business transactions and related risks and items which are mentioned in other ARR's have to be disclosed. Further disclosures include information about research and development as well as events subsequent to the balance sheet date.

Note: Additional ARR's being worked on consist of ARR No. 9 - intangible assets; ARR No. 10 - contingencies and off-balance sheet financing; ARR No. 11 - taxes on income; ARR No. 12 - accounting of insurance companies; ARR No. 13 - leases; ARR No. 14 - interim reporting; ARR No. 15 - related parties; and ARR No. 16 - pension accounting.

Unlike Commercial Law, FER does not have any legal authority and the application of the recommendations is voluntary. Nevertheless companies that do apply the recommendations are invited to pronounce so in their financial statements and have compliance of such reported on by their independent auditors. Acceptance has been slow, but as application of ARR's by companies increases, so does its acceptance.

All corporations must have their financial statements audited and these statements must be filed within six months following the end of the accounting period. Small non-publicly held companies can be audited by non-qualified persons but auditors of large corporations require higher professional standards.

Commercial Law revisions provide that auditors of large corporations must meet the necessary requirements and be independent of the Board of Directors and the Stockholders. The threshold for the higher professional standards is according to the size and characteristics of the company. Some of these characteristics are bonds outstanding, stock exchange listing, and more than 200 employees.

The Institute of Certified Accountants and Tax Consultants publishes handbooks on auditing, accounting, and the legal aspects of the profession. These handbooks are only guidelines and are not referred to in auditors' reports as generally accepted principles.

While members of the Institute do apply them, the Institute does not have the legal authority to enforce the guidelines so not all auditors fully apply them. Furthermore, since membership to the Institute in not mandatory, anyone can conduct and sign an audit report so as long as they maintain their independence from the corporation. There is however a trend in that the number of unqualified individuals performing audits is declining, but the practice does still exist.

The standard auditing report in Switzerland has some significant features. There is a legally defined format that includes stating such that the financial statements comply with the law and the company's articles of incorporation. Approval must be recommended, and the names of the auditors must be listed. Other features include stating that the independence requirement has been met and when reporting on consolidated statements, the auditor must meet special qualifications and identify whether the statements meet the law regarding consolidated reporting.

The Big Six international auditing firms have a substantial presence in Switzerland and account for a large portion of the auditing profession there. In 1994 Price Waterhouse was the largest public accounting firm in Switzerland with 23 offices and 1,100 partners. According to the 1987 UBS Economic Survey of Switzerland, there were about 30,000 people employed in the auditing profession and it accounted for billings of approximately SFr2.5 billion.

The contents of a typical annual report in Switzerland are a balance sheet, income statement, and annual report by the board of directors. The audited financial statements must be filed within six months following the accounting period and interim statements are not required. Also, it's becoming more common for companies to include a statement of cash flows, especially if they are applying Swiss ARR's or complying with IAS's.

The financial statement format is the responsibility of those preparing them and not regulated by law. There are however some exceptions where banks, insurance companies, transport enterprises and mutual funds are required to follow a specific format.

Financial reporting in Switzerland, like the culture has a reputation for being very conservative and secretive. Prior to Commercial Law reform, a key characteristic of Swiss financial reporting is that it was mainly in the interest of creditors as opposed to shareholders. Although this has changed considerably, secret reserves (described below) are still allowed today and this is not likely to change any time soon.

In addition to required disclosures, it's common for companies to include additional, non-required information, as alluded to earlier for reasons of being more in line with IAS's. Below is a list of some required disclosures, non-required but customary disclosures and disclosures that are not required or even customary. (see World Accounting; Orsini, McAllister, & Parikh)

General requirements:

1. the business done by the company;
2. the products or services accounting for a specified percentage of revenues;
3. principal products or services;
4. competitive conditions in the business;
5. identification and description of directors;
6. effect of government regulations; and
7. material contracts.

Required disclosures about the company's stocks:

1. significant holdings of a class of securities;
2. where the stock is traded;
3. convertible securities; and
4. identity of persons holding specified amounts of stock;

Required and showing data for two years:

1. net sales or operating revenues;
2. total assets;
3. long-term obligations.

General customary disclosures:

1. industry segments as well as details relating to subsidiaries;
2. the number of persons employed;
3. a description of products or services being developed;
4. details of patents, licenses, trademarks,
5. practices relating to working capital items;
6. revenue attributed to a company's geographical areas; and
7. location and character of property.

Customary disclosures relating to stocks:

1. warrants, options, or other rights to equity securities;
2. dividends;
3. price history of a company's stock; and
4. changes in capital and variations in class rights.

Discussion and analysis of financial condition and operations:

1. commitments for capital expenditures;
2. unusual factors affecting income from operations;
3. liquidity issues; and
4. trends or uncertainties.

The following items are not customarily disclosed:

1. changes in and disagreements with auditors;
2. executive compensation;
3. related party transactions;
4. material legal proceedings; and
5. restrictions on foreign security holders.

Likely one of the most significant features of Swiss accounting practices is the allowance of secret reserves. Swiss companies are allowed to set up unrequired reserves as long as they are for the purpose of supporting the continuing prosperity of the organization or to maintain the profit distribution level. These reserves are achieved as a result of valuation principles which are described in more detail in the Asset Valuation section below.

Commercial Law does set limits as to maximum valuation of assets to be included in a company's balance sheet but does not set limits for minimum values. It is therefore possible for a company to immediately write off an asset. This means the asset won't be recorded which leads to the undervaluation of assets and understatement of income and hence the opportunity for secret reserves. There is however a drawback here in that only the expenses recorded in the books are allowed for tax deduction purposes and therefore companies largely use maximum asset values.

Although limits are set for maximum asset valuation, it's permissible to revalue tangible fixed assets, such as buildings, to their net replacement value each year. The net replacement value is the amount it would cost to replace the asset less accumulated depreciation. This varies considerably from US practices. In the US tangible fixed assets must be recorded at historical cost and depreciated over the assets useful life.

Land listed in the balance sheet is usually un-built land and it is common practice to include the price of land in the acquisition cost in buildings. When land is listed in the balance sheet it can include costs such as brokers commissions, legal fees, razing, and permanent improvements. In individual financial statements, land can be valued at lower of cost or market value and can even be immediately written off for the purposes of hidden reserves as described above.

Companies are required to make a physical count of inventory at least once each year. Usually their auditors will request this to be done at year end and observe the count.

The inventories have to be reported at lower of cost or market value and although this is not defined, they can't be valued higher than their net realizable value. Also, the inventory cost flow methods available for accounting and tax purposes are - specific identification, weighted average cost, FIFO, and LIFO. A specific method of inventory cost flow is not required and for the most part no one method is used more than the other. In addition, specific disclosure requirements for inventories are not required.

Intangible assets on a balance sheet might include goodwill, patents, copyrights, trademarks, and franchises. They can not be carried at values that exceed the realizable values to the company and are therefore carried at the lower of cost or market.

It's common for a company to even write-off an intangible asset to reserves immediately after acquisition. Write-downs are recognized for both financial accounting and tax purposes and amortization is permissible for tax purposes. However, the amortization period is not permitted by law because they have to be amortized at values not to exceed market value. So, usually each year the unamortized balance is reviewed and if the balance exceeds market value, the difference would be charged to the income statement. Also, financial statement disclosure is not required for intangible assets.

There are some significant differences here between US requirements and those in Switzerland, notably goodwill. In Switzerland goodwill can't be amortized over a period of more than 5 years. In the US goodwill must be amortized over a period of not more than 40 years. Also, in the US, companies are not allowed to write-off assets immediately after acquisition.

Per Commercial Law, customers' receivables can't be stated above their estimated realizable value and are initially recorded at their face value. Regarding doubtful accounts, generally 5% is used for domestic accounts and 10% for foreign accounts. These amounts are allowed for tax purposes and there is a tax deduction for doubtful accounts.

These investments are usually in the form of government or corporate bonds, and certificates of deposit. To be considered a temporary investment they must be readily convertible into cash although the intent to do so within one year does not need to exist. Therefore there is a lot of flexibility regarding the difference between temporary and long term as the distinction is usually based on intent and not time.

Staying consistent with the Swiss practice of not overstating assets, unrealized exchange or transaction gains should not be recognized but losses should be. ARR No. 4 provides guidance for the translation of financial statements expressed in foreign currencies for consolidation purposes but in practice there is still a lot of flexibility.

Prior to July 1, 1993 Swiss companies were not required to present consolidated financial statements. But due to Commercial Law reform, this is now mandatory for companies that control one or more other companies. This includes companies that also have bonds outstanding, or shares listed on a stock exchange, or when at least 10 percent of the stockholders request so. This requirement has been anticipated for quite some time and as a result many large publicly held companies have been preparing consolidated statements for a number of years.

According to ARR No. 2, companies applying Swiss ARR's must prepare their consolidated financial statements under the method of full consolidation and any exceptions disclosed in the annex. The full consolidation method is also required for companies reporting under US GAAP but unlike ARR No. 2, US GAAP does not allow any exceptions.

To gain a further understanding about some of the differences in financial reporting among Swiss and US companies, the following section examines the annual reports of Hershey Foods Corporation of the US, and Nestle SA of Switzerland. Since some of the key differences between the statements are related to presentation and disclosure, this will be the main focus of the comparison. For both companies, the latest audited financial statements are being used which are for the year ended December 31, 1996.

For our purposes the Hershey annual report can be broken up into two sections. The first section begins with the letter to the stockholders written by Kenneth Wolfe CEO, and Joseph Viviano COO. It also includes a summary of products, financial information, and information about the organization. The second section is the 1996 consolidated financial statements and management's discussion and analysis.

Hershey's financial statements are that of a typical US company conforming to US GAAP. They begin with the management's discussion and analysis which among other things include specific information about net sales, costs and expenses, financial position, liquidity, and dividends paid. The consolidated financial statements are presented in order of income statement, balance sheet and statement of cash flows. Also included is the consolidated statement of stockholders equity for the years 1993 - 1996.

Following the financial statements are the notes which among other things discuss information about principles of consolidation, acquisitions, restructuring activities, short and long-term debt, income taxes, segment information, and quarterly data. The report is then concluded with the section by the company claiming responsibility for financial statements and finally the report of independent public accountants. Incidentally, the Hershey Food Corporation received a clean opinion for the year ended 1996 by Arthur Anderson LLP.

Some significant disclosure information in the notes are:

1. Consolidation - disclosure is limited in that it just mentions the statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany accounts and transactions. Note 2 explains that two acquisitions were completed in December 1995 & 96 and that both acquisitions were in accordance with the purchase method of accounting.
2. Property, Plant and Equipment - stated at cost and depreciation of buildings, machinery, and equipment is computed using the straight-line method over the estimated useful lives
3. Inventories - the majority of inventories are valued using the LIFO method and the remainder is valued under the FIFO method. It is mentioned that all inventories were stated at amounts that did not exceed realizable value.
4. Intangibles Resulting from Business Acquisitions - goodwill is amortized on a straight-line basis over 40 years. Other intangibles are amortized on a straight-line basis over the estimated useful lives.
5. Segment Information - no financial data is given with respect to segment information and can be attributed to the fact that their principal operations and markets are located in North America, the European businesses were sold in 1996, and the transfer of products between geographic areas have not been significant. There is however mention of the fact that in 1996 and 1995 approximately 12% and 11% of net sales, respectively, were to Wal-Mart stores.

   Nestle Group

   The Nestle report will also be separated into two sections for purposes of comparison. Nestle presents their statements in accordance with IAS's but there is no mention in the statements, the notes, or the auditors report that Swiss ARR's have been applied.

   The first section begins the same way as the Hershey report with the letter to the shareholders written by Helmut Maucher, Chairman of the Board and CEO. Also included is some key consolidated financial information and a detailed description and breakdown of their presence around the world. There seems to be much more detail provided in the Nestle statements about the companies operations, history, and products including financial revenues from the products broken down by region.

   The second section contains the consolidated financial statements. Like the Hershey statements, there is an income statement, balance sheet, and statement of cash flows. Unlike the Hershey statements there is no consolidated statement of stockholders equity or a management's discussion and analysis.

   The notes to the statements begin with the Annex to the Group Accounts which basically serve the same purpose as note 1 - Summary of Significant Accounting Policies in the Hershey statements. Some of the topics discussed in the annex are accounting policies which state that they are prepared in accordance with IAS's and that all disclosures required under the EU's 4^th and 7^th directives as well as Commercial Law are provided. Also discussed is the scope of consolidation, foreign currencies, and valuation methods.

   An important difference between the two companies is in the way the notes are presented. The notes in the Hershey statements are mostly detailed descriptions in prose of the disclosure topic where as the notes in the Nestle statements are presented in terms of financial data with very little or no description at all.

   Significant disclosure information in the Nestle statements are:

   1. Consolidation - The scope of consolidation is presented in the annex to the group accounts where a full description of the consolidation methods used is given. The company uses both the full and proportional consolidation methods. The basis given for using full consolidation is when there is major participation in, and responsibility for the management. This is in accordance with ARR No. 2 but even despite their stated compliance with IAS's, this is not in accordance with those standards. Furthermore, this is not in accordance with US GAAP and represents a difference in accounting practices among the two countries.
   2. Research and Development Costs - these costs are charged to the income statement in the year in which they are incurred. The same practice is followed at Hershey in accordance with US GAAP.
   3. Inventories - the FIFO cost flow method is used for goods considered the most important raw materials and finished goods. The weighted average method is used for other inventories. Also, a provision is established when the net realizable value of any inventory item is lower than the values using the above methods.
   4. Tangible Fixed Assets - these assets are shown on the balance sheet at their net replacement values and in effect re-values them upwards. These amounts are arrived at using a market value on a prudent basis for land, and theoretically what it would cost to replace the asset with a new one for other tangible fixed assets. This practice serves to enhance the strength of the balance sheet and produces a more conservative measure of income than historical cost and is characteristic of Switzerland's conservative accounting practices. It's also very different from US standards in that US companies must record tangible fixed assets at historical cost less depreciation.
   5. Intangible Assets - until January 1, 1995 the excess cost of intangible assets over fair value was immediately written off through reserves. However since then, this portion is now capitalized and amortized on a straight-line basis not exceeding 20 years. A likely reason for the change is because this practice is frowned upon by the international business community. It is also mentioned that the components of intangible assets such as trademarks, industrial property rights, and goodwill are not separately identified and valued. Further, the unamortized balance is reviewed annually and when the balance exceeds expected future benefits, the amount is charged to income.
   6. Segment Information - In Switzerland, there are no disclosure requirements for segment information but IAS 14 does require such disclosure. In the Nestle report, segment information is broken down by sales and trading profit and further broken down by geographic area and major business. This appears to be in compliance with IAS 14.

   Conclusion

   The main differences between US and Swiss accounting standards and reporting practices can largely be attributed to the differences in the two cultures. This does seem to be changing as the evolving international business environment calls for more informative and uniform accounting practices and policies.

   Evidence of this can be seen in the changing financial reporting practices and requirements of Swiss companies. After examining financial statements from the US and Switzerland, it seems apparent that both statements will provide an informed user with the necessary information to make the appropriate decisions.

   Sources

   Radebaugh, & Gray. "International Accounting and Multinational Enterprises, Fourth Edition". John Wiley & sons, Inc. 1997.

   Price Waterhouse. "Doing Business in Switzerland." Price Waterhouse, 1994.

   Orsini, McAllister, & Parikh. "World Accounting: Switzerland". Matthew Bender & Co., Inc., 1994.

   Bloom, & Naciri. "The International Journal of Accountancy. Accounting Standard Setting and Culture: A comparative Analysis of the United States, Canada, England, West Germany, Australia, New Zealand, Sweden, Japan, and Switzerland". The University of Illinois, Volume 24, November 1, 1989.

   Coopers & Lybrand. "International Accounting Standards versus US-GAAP Reporting: Empirical Evidence Based on Case Studies." South-Western College Publishing, 1995.

   "The 1996 Grolier Multimedia Encyclopedia". Grolier Electronic Publishing Inc., 1996.

   "Swiss Home Page" http://heiwww.unige.ch/switzerland/

   "1996 CIA Fact Book" http://www.theodora.com/wfb/abc_world_fact_book.html

   Stephen Day & Barton Jones. "Accounting in Switzerland". Brigham Young University. http://msm.byu.edu/c&i/cim/account/swiss.html