NOTE: These notes are prepared solely for the benefit of the students in Acc 611 at the State University of New York at Albany, and are not to be used for any other purpose without the permission of Jagdish S. Gangolly

COMPARATIVE FINANCIAL ACCOUNTING PRACTICES

• A Global Perspective:
  • Pre-WWII
    • English speaking world / Common Law tradition : Influence of the British.
    • Franco-German / Code law tradition: Europe, Japan.
    • Post-WWII : American influence.
  
  
• World Accounting Practices:
  • Assets & Liabilities (Definition & Measurement)
  • Historical cost v. Current Value.
  • Off-balance sheet items/financing (parking transactions, complex transactions).
  • Accounting for leases, R & D costs, tax loss carryforwards, deferred taxes, deferral of costs.
  • Accounting for pension costs, post-employment benefits.
  • Income & Owners' Equity
  • Current operating performance, Comprehensive Income.
  • Charges to retained earnings, prior period adjustments.
  • Periodicity-- Accounting period.
  • Accounting & Tax bases.
  • Legal influence: par/no-par stocks, stock dividends (bonus shares), stock options.
  • Consolidation (group accounts) practices: Cost, Equity, amortisation of goodwill.
  
  
• Consequences:
  • Accounting rules and global competitiveness:
  • Rules add to the cost of doing business.
  • Rules affect business decisions.
  • Information overload for the users of financial statements.
  • Disclosures limited to requirements (?).
  • Measurement rules do not affect decisions of capital market participants, but disclosure rules do. (Choi & Levich).
  • Decision to list a stock depends on the disclosure requirements. (Biddle & Saudagaran).
  
  
  
• National Accounting Systems:
  
  • AUSTRALIA:
    • Corporate organization: Public, Private-exempt and Private-non-exempt.
    • Accounting profession: ICAA and ASA.
    • Australian Acctg. Research Foundation: Acctng. Standards Board & Public Sector Acctng. Standards Board.
    • National Companies & Securities Commission.
    • Standards approved by Accounting Standards Review Board have the force of law under Companies Act, 1981.
    • No pooling, no treasury stock, no LIFO, no prior period adjustments for accounting changes.
    • Limited enforcement.
    • Disclosure requirements dependent on company size.
    • Unaudited half-yearly statements, disclosure of 20 largest stockholders.
    • Disclosure of expected income/loss within 3 months of the prior fiscal year end.
    
    
  • FRANCE:
    • Advocate of uniform general accounting.
    • uniform chart of accounts, definitions/explanation of terminology, standard forms for financial reports.
    • Taxation based on the national chart of accounts.
    • Influence of law on accounting. Accounting records accorded previleged role in judicial proceedings.
    • Official registration of all accounting records required.
    • Requirement of accounting manuals in all enterprises.
    • preoccupation with corporate efficiency and social responsibility.
    • requirement of audited forecasts.
    • Commercial law extended to include accounting laws.
    • Historical cost principle is the rule, but revaluations permitted. (revaluation gains/losses subject to tax.)
    • No pooling, no LIFO, no capitalization of leases.
    • Capitalization of interest on major construction projects permitted, but must be expensed for tax.
    • Depreciation/amortization may not be related to cost, because of laws/tax laws.
    • Future pension committments rarely recognized.
    • True and fair view, since EC's Fourth Directive.
    • Publication requirement of "social balance sheet" for companies with 300 or more employees.
    • Profession: expert comptable (public accounting) & commissaire aux comptes (statutory auditors).
    • Standard setting:
    • Conseil National de la Comptabilite (National Accounting Board) of the Ministry of Finance.
    • Commission des Operations de Bourse (COB)
    • Ordres des Experts-Comptables et des Comptables Agrees (OECCA)
    • Compagnie Nationale des Commissaires aux comptes (CNCC)
    
    
  • GERMANY
    • Code law country with heavy influence of law on accounting, but moving somewhat closer to U.S./U.K. and subsequently European Community.
    • Massgeblichkeitsprinzip or determination principle: taxable income determined by the financial books.
    • Accounting entirely determined by statutes and court decisions.
    • Perfunctory application of "true and fair". Law is presumed to be fair, and hence its application deemed to yield "true and fair" financials.
    • Business organizations:
      • Aktiengesselschaft (AG) public companies.
      • Kommanditgesselschaft auf Aktien (KGaA) sort of incorporated limited partnership.
      • Gesselschaft mit beschrankter Haftung (GmbH) private companies.
    • Accounting prescribed by the Comprehensive Accounting Act of 1985. Reporting depends on company size, and not its form of organization.
    • Lack of "accounting" profession" as we know it. The profession of aoditors, called Wirtschaftsprufers (WPs).
    • Membership in Institut der Wirtschaftsprufer e.V. is voluntary, but membership in the Chamber of Accountants
    • (Wirtschaftspruferkammer), the regulatory body for accountants, is mandatory.
    • AGs must be audited by WPs. Recently, audit requirements have been introduced for GmbHs, and so the second tier of statutory auditors, called Sworn Book Examiners or Vereidigte Buchprufer is evolving.
    • Staunch supporter of historical cost principle.
    • FIFO/LIFO permitted if they correspond to physical flows.
    • Since taxable income based on financial books, tendency to set up provisions for deferred maintenance expenses, potential losses from pending transactions, product guarantees, business reversals, international business risks, future major repairs, etc.
    • Allocation of legal reserves (appropriation of retaines earnings). Provision of legal reserve of 5 per cent of net income until such reserve and capital in excess of par reaches 10 per cent of legal capital. Corporate charters may mandate higher appropriations.
    • Mandatory consolidated financial statements required since 1990 for large companies. However, there are many exceptions to this.
  • JAPAN
    • Corporate Cultural differences: senior managers from engineering & sciences, life time employment.
    • Bureaucratic control of accounting by the Ministry of Finance (including its Bureau of Taxation) and the Ministry of Justice.
    • Huge inter-corporate investments yielding giant industrial conglomerates, including banks.
    • Dominant role of bank credit and debt financing.
    • Significant off-balance sheet assets and liabilities, leading to deceptively low earnings per share (and consequently unrealistically high price-earnings ratio.
    • The concept of corporate earnings as funds that can be distributed to stockholders, as opposed to the US/UK concept of measure of corporate performance.
    • Requirement of statutory audit. Filing (with the Ministry of Finance) requirements for large companies.
    • Japanese Institute of certified Public Accountants (JICPA): CPas and Junior CPAs.
    • Pervasive influence of Commercial Code (protection of creditors).
    • Accounting standard setting by the Ministry of Finance through its Business Accounting Deliberation Council (BADC), whose pronouncements are binding on all kabuskiki kaishas covered by MOF's reporting requirements.
    • Deductions can be claimed for tax only if they have been booked in the financial accounts.
    • Staunch supporter of historical cost. Departures can not even be disclosed in supplementary information.
    • Tax laws allow creation of reserves for 40 per cent of retirement payment liability computed on the basis that all employees retired at the current balance sheet date. Such reserves are not usually funded.
    • Consolidation required, but many exceptions/loopholes.
    
    
  • NETHERLANDS
    • Dutch civil code governs accounting, Registeraccountants Act of 1967 governs auditing.
    • The Netherlands Institute of Registeraccountants code of professional conduct has statutory status.
    • Dutch Enterprise Chamber and the developing jurisprudence of accounting.
    • Council on Annual Reporting (CAR) voluntary guidelines generally acceptable accounting principles.
    • The impact of practising professionals on the academia, and the important role of accounting academics in the profession.
    • Acceptability of current value accounting. (Impact of economics)
    • Accounting for leases, contingencies, pensions similar to US/UK.
    • Deferred taxes: comprehensive allocation measured using liability method.
    • Statutory financial statements may be filed in English, Dutch, French, or German. Translation in Dutch to be provided on demand.
    • Annual statements on parent-company-only basis and consolidated basis.
    • Cashflow/fundsflow statements not required, but CAR-recommended.
    • Social reporting voluntary, but common for large companies.
    
    
  • U.K.
    • Financial reporting governed by the Companies Acts, butprofessional recommendations binding on members.
    • Professional bodies: (Consultative Committee of Accountancy Bodies)
    • Institute of Chartered Accountants in England & Wales
    • Institute of Chartered Accountants in Ireland
    • Institute of Chartered Accountants if Scotland
    • Chartered Association of Certified Accountants
    • Institute of Cost and Management Accountants
    • Chartered Institute of Public Finance & Accountancy
    • Corporate organisation: private limited and public limited companies.
    • EC reporting practice on small/medium/large companies.
    • Consolidated financial statements in response to EC's seventh directive.
    • Some companies publishing value-added statements.

Updated on Febryary 18, 1997 by Jagdish S. Gangolly