Discussion 8 - IFRS vs GAAP

Worldwide Accounting Diversity

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Learning Objectives

Provide evidence of the diversity that exists in accounting internationally

Explain the problems caused by accounting diversity

Describe the major environmental factors that influence national accounting systems and lead to accounting diversity

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Worldwide Accounting Diversity

Nature of diversity in accounting

Format

Terminology

Recognition rules

Measurement rules

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Worldwide Accounting Diversity: Reasons

Legal systems

Common law

Fewer statutes—more court interpretation

Creation of precedents or case laws

Great Britain and other English-speaking countries

Accounting law is detailed and specific

Sources are nonlegislative organizations

Code law

More statutes

Non-English-speaking countries

Legislated accounting rules

Accounting law is general

Other guidance required

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Worldwide Accounting Diversity: Reasons

Basis for taxation

Published financial statements

Germany—same taxable income and book income

Financial statements adjusted for tax purposes

U.S.—different taxable income and book income

Difference between tax and accounting income gives rise to deferred income taxes

Providers of financing

Accounting and disclosure is less important where major sources are families, banks, and the government

Accounting and disclosure is more important where major sources are diverse shareholders

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Worldwide Accounting Diversity: Reasons

Inflation

Some countries have historically high rates of inflation

Necessitates adjustments to offset inflation

Common in Latin American countries

Political and economic ties affect how accounting rules are conveyed

Correlation of factors

Common law countries have domestic listed companies relying on equity for capital.

Code law countries tend to link taxation to accounting statements and rely less on financing provided by shareholders

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Problems caused by Accounting Diversity

Preparation of consolidated financial statements

Access to foreign capital markets

Comparability of financial statements

Lack of high-quality accounting information

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Preparation of Consolidated Financial Statements

Problems due to:

Local regulations

Books In local currency

Local accounting principles

Requires:

Considerable effort

Additional cost

Expertise in different country’s accounting standards

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Access to Foreign Capital Markets

Requires financial statements as per local accounting standards

Considerable effort and cost involved

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Comparability of Financial Statements

Lack of comparability between financial statements from different countries

This adversely affects:

Investment decisions

Lending decisions

Performance analysis

Foreign acquisition decisions

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Lack of High-Quality Accounting Information

Lack of high-quality accounting standards

Inadequate risk assessment

Lack of appropriate disclosure requirements

Disclosure deficiencies

Related-party transactions and off-balance-sheet financing

High exposure to foreign exchange risk

Investments in highly speculative assets

Contingent liabilities guaranteeing foreign currency loans

Loan loss provisions

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Accounting Clusters

Accounting models

The Fair Presentation/Full Disclosure Model (Anglo-Saxon or Anglo-American model)

Oriented toward the decision needs of large numbers of investors and creditors

Used in English-speaking countries influenced by the United Kingdom or the United States

The Legal Compliance Model (Continental European model)

Legalistic

Used to provide information for taxation and government-planning

Used in Europe, Japan, and code law countries

The Inflation-Adjusted Model

Resembles the Continental European model

Requires extensive use of adjustments for inflation

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