Domande Accounting PDF

Domande di accounting Hofstede Accounting practices are affected by the environment of the country in which they operate, and so culture can play a big role in shaping them. Hofstede (1980) defined culture as the collective programming of the mind and defined four basic dimensions of culture, based...

Domande di accounting Hofstede Accounting practices are affected by the environment of the country in which they operate, and so culture can play a big role in shaping them. Hofstede (1980) defined culture as the collective programming of the mind and defined four basic dimensions of culture, based on a study on IBM employees in 39 countries: individualism vs. collectivism: the degree of interdependence that a society maintains among individuals, and the extent to which people take care of themselves and their families and be emotionally independent from others; We have countries where the focus is more on individuals and not always on families and society. This dimension can suggest a link to countries where there is a good welfare system (ex. Sweden = welfare system to help families and support their choices). strong vs. weak uncertainty avoidance: whether a society tries to control the future or lets it happen. Societies with a strong uncertainty avoidance follow strict principles and codes, while with weak uncertainty avoidance, practices count more than principles and codes; Level of prudence/conservatism: those countries that have a practice-oriented accounting system usually are not conservative and need less rules; countries that are strongly regulated by rules (ex. Germany, Italy) are more conservative. large vs. small power distance: how society handles inequalities among people. A large power distance causes the creation of hierarchies in which every individual has a place; Large power distance refers to countries where there is a strong hierarchical system (ex. China = lack of the middle class). Small power distance means that there is a regular distribution of economic wealth over several levels of society. masculinity vs femininity: masculinity stands for heroism and material success, while feminism stands for modesty and quality of life; This is directly connected to the first dimension, but relates to the degree of involvement of women in society and how much they can participate in different roles in the society/ economy /political system. These 4 dimensions were adapted by Gray (1988), who introduced several measures for giving a value to the differences between and within the countries’ accounting systems. Gray offered a closer approach to each dimension proposed by Hofstede and introduced the following dimensions: professionalism vs. statutory control: countries with a practice-oriented approach to accounting uniformity vs. flexibility: ex. the Chinese accounting system is not flexible. conservatism vs. optimism: ex. Germany has one of the most conservative accounting systems. secrecy vs. transparency. The first two (professionalism\statutory & uniformity\flexibility) relate to the difference between Anglo- Saxon and Asian cultures. The last two ( conservatism\optimism & secrecy\transparency) relate to the differences between Anglo- Saxon and Latin and German cultures. Legal systems Accounting practices are affected by the environment of the country in which they operate, and legalsystems have always played a big role in shaping them. Nowadays legal systems are basically divided into two main clusters: common law systems: these legal systems are based on a limited amount of statute law and they rely on a large amount of case law. Case law helps providing answers to a specific case (problem-solver approach) instead of formulating a general rule. This legal system originated from England, and is nowadays used in Ireland, US, Australia, India etc. This system has influenced commercial law, which doesn’t prescribe detailed rules for financial statements, but relies on accounting practices rather than recommendations and standards; civil law systems: it is derived by the Roman ius civile compiled by Justinian and is based on codification of rules that follow principles of justice and morality. It’s used mainly in Continental European countries. The system also had a strong influence on commercial law, which is based on codes and rules; The distinction of these two systems has created differences in accounting, especially in the fields of providers of finance and taxation: In common law countries providers of finance are shareholders, so there’s a strong equity market and tax rules are independent from accounting rules. In civil law countries the main providers of finance are banks, so there’s a small equity market and tax authorities are the main users of financial statements. Financial providers/ providers of finance The main differences in accounting practices are based on providers of finance and taxation. These are caused by the different type of legal system a country adopts: in common law systems, providers of finance are mainly shareholders, because of this there is a large equity market capitalization; in civil law systems, providers of finance are mainly banks, so there is a small equity market capitalization; These differences explain why common law countries usually have lower gearing ratios than civil law countries (that rely less on equity and more on external debt). According to Zysman (1983), there are 3 types of financial system: capital-market system: capital is provided by institutional investors rather than individual shareholders. Institutional investors can be either pension funds, mutual funds, insurance companies, money managers, investment banks etc). US and UK have a capital-market system; credit-based governmental system: main shareholders are governments. An example can be seen in France or Japan; credit-based financial institution system: main shareholders are governments, banks or funding families. (Examples are Germany, Italy, France) Taxation Common law system: - tax purposes and accounting figures are quite independent, as pragmatism determine the method chosen for tax calculation rather than the exact rule - tax rules operates separately from commercial rules, as financial statements are designed for shareholders’ investment decisions. Civil (Roman) (Codified) law system: - tax rules are the accounting rules - tax authorities are external users of financial statements, so financial statements are designed to show taxable income. Other external differences Economic crisis, for example the economic crisis in the US in the late 1920s and early 1930s, which produces the Securities Exchange Act requiring extensive disclosure and state control of accounting standards Adoption of or convergence with a new set of accounting standards, for example the mandatory adoption of international accounting standards for listed companies within EU Level of inflation, for example in the South American countries where the methods of general price-level adjustments are adopted for specific price change Theory, for example in the Netherlands where accounting theorists support accounting practices, while in the Continental European and the Anglo-Saxon countries theory is less relevant as accounting depends on the state and accounting practices just give little importance to theorists, respectively. Accounting profession Lack of private shareholders and public companies means lack of auditors (as Germany vs. UK) Organization of auditing profession: - government agencies set the companies to be audited and who is eligible as auditor (UK and US) - - membership of the auditing professional bodies (mostly state-controlled) is part of the way for qualification such as auditor (Germany and France). Why classifying financial reporting into groups Nowadays there are still many differences in accounting systems across countries. These differences can be between countries (for example when it’s influenced by different main users of financial statements) and within the same country (for example when there are different accounting rules for company groups and individual companies). Therefore, it becomes extremely important to classify financial reporting systems into groups. The main reasons to do so are: classification is an efficient way of describing and comparing different systems; classification records the evolution of a country’s accounting system, it shows how a country moved from one system to another; classification better explains the reasons and obstacles facing accounting harmonization; classification can help to decide which system is the most appropriate for a country by studying the characteristics of the system of other countries in the same group. It is useful especially for developing countries; classifications can be used to predict problems and find solutions relating to the adoption of an accounting system (by looking at other countries in the same group); to assist auditors and accountants operating internationally. There are basically two types of classification of accounting systems: extrinsic classifications, which are based on the observation of a company’s accounting practices; intrinsic classifications, which are based on the content of accounting rules; Mueller Classification The Mueller classification is one of the most known extrinsic classifications. He classified financial reporting systems considering the differences between economic, political and business factors, while not taking into considerations directly the differences in accounting practices. He elaborated 4 groups of systems: ①. accounting within a macroeconomic framework: where accounting is the result of national economic policies (for example Sweden’s welfare policies); ②. accounting within a microeconomic framework: where accounting is the result of a market- oriented economy, with a predominance of individual private businesses (for example the Netherlands); ③. accounting as an independent discipline: this system is present in UK and US, and is the result of business pragmatism; ④. uniform accounting: where governments use accounting as an administrative tool to control businesses (France). This classification however had many problems. There were only 4 exclusive groups with no hierarchy, it didn’t include Communist accounting systems as it considers just published financial reporting, it did not consider that German accounting has some peculiarities with both macroeconomic accounting and uniform accounting; it did not show the similarities between Dutch accounting with Anglo-Saxon and Swedish ones.  - Four groups without any hierarchy - The Netherlands in the only country in one group - It does not show the similarities between Dutch accounting is similar to both Anglo-Saxon and Swedish ones - It does not consider that German accounting has some peculiarities with both macroeconomic accounting and uniform accounting - The Communist accounting is not included as it considers just published financial reporting The following year Mueller proposed another classification, that focused on business environment, not financial reporting: different business environments call for different accounting systems, and this statement should be considered when standardizing accounting. By using proxies of economic development, business complexity, political and social climate and legal system, he identified ten groups. However, this classification also had the problem of being too general for being helpful in classification of financial reporting system. Nobes Classification The Nobes classification, elaborated in 1983, is one of the main intrinsic classification. Nobes tried to overcome the problems of previous intrinsic classifications, which where: a lack of precision on the definition of what to be classified, a lack of a model of comparison of statistical results, a lack of hierarchy as a tool for highlighting the differences between countries, and a lack of judgement in choosing the discriminating variables. In classifying accounting systems, he mainly focused on financial statements of listed companies in developed Western countries. The reporting practices were investigated by considering their measurement and valuation, as they determine the size of the accounting figures. The model was hierarchical and used labels of biological classification as explanatory variables. The discriminating variables were nine factors that were relevant for development countries: 1. Type of users of the published financial statements of listed companies; 2. Degree to which law or standards prescribe in detail and exclude judgement; 3. Importance of tax rules in measurement. 4. Conservatism\ prudence (e.g. valuation of buildings, inventories, debtors) 5. Strictness of application of historical cost ( in the main statements) 6. Susceptibility to replacement cost adjustments in main or supplementary statements. 7. Consolidation practices; 8. Ability to be generous with provisions (as opposed to reserves) and to smooth income; 9. Uniformity between companies in application rules. He later revised its classification in 1998, this was motivated by the fall of Communism, and by the globalization of business, that implied the creation and application of accounting international rules instead of domestic ones : this resulted in the addition of China and Russia in the classification and inclusion of systems like IFRS and US GAAP. Furthermore, Nobes published in 2011 another classification related to IFRS practices in 2008-9 of large listed companies from 8 countries. Australia and UK are in the same group, while Continental European countries are in another group. Factors for harmonization Accounting harmonization is defined as the process of increasing the compatibility of accounting practices by limiting their degree of variation. It is different from standardization, as the latter refers to an imposition of the same set of rules. The two terms are used in an interchangeably way, even if harmonization is mainly associated to the supranational legislation applied to Member States, while standardization is mostly associated to IASB. De jure harmonization: rules, standards. De facto harmonization: corporate financial reporting practices. There are many reasons why accounting harmonization is needed: Users, regulators and preparers of financial statements call for international harmonization; both MNEs and SMEs see the advantages of accounting harmonization, especially when the parent company and its subsidiaries are based in different countries; Investors and financial analysts demand comparable and reliable financial statement of foreign companies whose shares they want to exchange, regulators of stock exchanges, who are interested in protecting investors, demand financial statements that are consistent with local accounting standards. International accountancy firms also support harmonization because it is good for their large clients. In addition, tax authorities could have their work greatly simplified if measurement of profit in different countries was the same. Obstacles to harmonization Accounting harmonization is defined as the process of increasing the compatibility of accounting practices by limiting their degree of variation. It is different from standardization, as the latter refers to an imposition of the same set of rules. However, there are many obstacles that are preventing harmonization from being achieved: one of the main is the length of differences between accounting practices of different countries; As the purposes of financial reporting vary by country, a country may follow both domestic and international set of accounting rules that are applied to different business types and different financial statements (consolidated or unconsolidated); The lack of an international regulatory agency. For example, While the European Union only rules on its Member States, IOSCO brings together the world’s securities regulators; Nationalism, which can be seen as resistance to change accounting standards as it implies a change of circumstances or the privation of supremacy of some local accounting bodies, The unpredictability of the economic consequences that harmonization may cause; Measurement of harmonization Statistical methods for the measurement of de facto harmonization: - Van der Tas indexes (1988, 1992): H index of national harmony, I index of international harmony and C comparability index - Archer et al. (1995) revise the Van der Tas indexes: between-country C index (correction of C) and within-country C index (correction of I)  The further studies focus on revisions and ad hoc applications of the former indicators of de facto harmonization Evolution IASC-IASB IASB is nowadays the most important international accounting standard setter together with the FASB in US. IASB was originally founded by 9 countries as the IASC (International Accounting Standards Committee) in 1974. The number of members rapidly grew to over 100 countries, in particular from 1983, when the IFAC (International Federation of Accountants) joined the Committee. In 2001 IASC was reformed, this happened for a number of reasons: to reduce the load on the part-time Board representatives; and proposing technocratic executive board and supervisory board; to enlarge the members of the Board with entries of new countries and organizations, to increase the degree of partnership with national standard setters. After 2001 the IASC Board was succeeded by the IFRS Foundation, and its operating arm became the IASB (International Financial Accounting Standards Board). IASB was governed by a Board composed of 16 members, who were appointed by Trustees, who were also appointed by a Monitoring Group. While IASC issued a set of accounting standards called IAS, IASB issued a new set of accounting standards known as IFRS. The IASB has been entrusted with different tasks: to issue new improvement projects by preparing exposure drafts for amending previous standards; to continue previous projects; major reforms; Program of accounting converge with the FASB (Memorandum of Understanding between the FASB and the IASB): - convergence of accounting standards through the development of high quality, common standards over time. - development of new common standard that improves the financial information reported to investors. - serving the needs of investors means replacing weaker standards with stronger standards. Influence of the IASB Adoption of IFRSs as national rules: mandatory application in European Union, and other countries such as Australia, Canada, China, Japan Influence on national regulators: IASB asks for national (national standard-setters) and international (international standard-setters) collaboration, and as a result several standard- setters were joined IASB with several accounting standards and avoiding differences from IFRSs Voluntary adoption of IFRSs by companies: from 1990s onwards, many large European companies (mostly in France, Germany, and Switzerland) adopt IFRSs on a voluntary basis; then this adoption became mandatory from 2005 onwards IFAC – International Federation of Accountants The body came into being in 1977  Its members are 150 accountancy bodies from around the world Its work includes setting of international auditing standards, ethics, education and management accounting, involvement in education and technical research, organization of international congress of accountants The AISG, the G4+1 and the national standards setters The Accountants’ International Study Group was formed in 1966 with the purpose to study and report accounting standards in Canada, the UK and the US. Since the early 1990s the G4+1 group comprises the standards setters of Australia, the UK, the US and New Zealand with the aim to produce discussion papers on several accounting issues in order to improve the efforts of such standard setters. After 2001 the G4+1 was no longer necessary as main of its former members of Anglo-Saxon standard setters became IASB members. In 2005 a group of the world major National Standard Setters (NSS) became active in monitoring and discussing the IASB projects. IOSCO – International Organization of Securities Commissions The body was founded in 1983 as an association of governmental securities regulators (for example the SEC), whose main task is to decide if foreign or international accounting standards are acceptable for the financial reporting of domestic or foreign listed companies. The IOSCO was active in supporting the activities of the IASC and IASB: - In the late 1980 the IASC and the IOSCO made an agreement whereby the IASC improve its standards and the IOSCO recommend such standards to the stock exchanges. This agreement worked till the 1990s. - In 2000 the IOSCO approve the application of the IASC standards by foreign registrants. (extra) FEE/EFRAG The mandatory adoption of IAS/IFRS principles in the European Union led to the establishment of key committees to support this process. Among these is EFRAG, the European Financial Reporting Advisory Group, which acts as an intermediary technical body between the European Commission and the IASB. EFRAG provides expertise on the acceptability of new and amended IASB standards, ensuring their suitability for adoption within the EU. In parallel, the Fédération des Experts Comptables Européens (FEE), a non-profit organization active in Europe, works to promote and enhance international accounting harmonization. Founded in 1987 through the merger of the Groupe d’Etudes and the Union Européenne des Experts Comptable, FEE represents European accountancy bodies and collaborates with the EU and the European Commission on company law and accounting harmonization. Since 2001, EFRAG has advised the European Commission on the adoption of IASB standards, while FEE continues to play a key role in supporting international harmonization efforts within Europe. (extra) differences in adoption of/convergence with IFRS Adoption: national rules are set aside and replaced by a requirement to use IFS (by jurisdiction: 2002 EU Parliament and Council of Ministers approved the mandatory adoption of IFRS for consolidated financial statements of listed companies. Voluntary: Regulation 1606/2002 allowed unlisted companies to prepare fin. stat. under IFRS). Convergence: the aim of establishing a single set of accounting standards that will be used internationally, and the efforts of standard setters towards achieving such aim (Aus:full, Canada: partial). Adoption by jurisdiction In 2002, the European Parliament and the Council of Ministers approved the mandatory adoption of IAS/IFRS for consolidated financial statements of companies operating and listed in a stock exchange of Member States, in the form of Regulation 1606/2002. In 2005, IAS/IFRS were turned into Australian standards (AASB – Australian Accounting Standards Board), some paragraphs of IAS/IFRS were deleted and other standards were with no IAS/IFRS equivalents. The AASB standards claim that compliance with them means compliance with IAS/IFRS, bus it seems that their turning out is closer to an IAS/IFRS converge rather than IAS/IFRS adoption. A similar process has been issued in Canada, where IAS/IFRS are turning out into Canadian French standards. Voluntary adoption by companies The EU Regulation 1606/2002 allows unlisted companies to prepare consolidated/ unconsolidated financial statements under IAS/IFRS. The response of Member states has varied Motivations for IAS/IFRS voluntary adoption: - assurance of good quality reporting - improvement of investor protection and capital market access - provide greater transparency and uniformity IFRS in the EU In 2002, the European Parliament and the Council of Ministers approved the mandatory adoption of IAS/IFRS for consolidated financial statements of companies operating and listed in a stock exchange of Member States, in the form of Regulation 1606/2002 The purpose of this Regulation was the creation of powerful harmonized European financial markets  The Regulation extended – compulsorily or optionally – the application of IAS/IFRS to unlisted and unconsolidated financial statements. For any financial statements under such a Regulation, the national laws and accounting standards were overridden by the Regulation. For the other financial statements, the national rules are still in effect The Regulation came into force for 2005 onwards. IFRS in the EU The move to IFRS was facilitated by the acceptance of IAS by large European companies and government - since 1994 voluntary adoption of international accounting standards in Germany, then formalized in 1998 The EU Regulation set up the ARC – Accounting Regulatory Committee in order to assist EU to endorse IFRS and to achieve EU influence over the IASB. The EU Regulation set up the EFRAG – European Financial Reporting Advisory Group in order to assist the Commission in having an opinion on new or amended IFRS, within such group the EFRAG’s Technical Expert Group assists for the acceptability of IFRSs for endorsement in the EU. The Commission set up the Standards Advice Review Group for advising its decisions are not influenced by governments, audit firms and companies. Qualitative characteristics of IASB framework The qualitative characteristics are the fundamental principles that can be found in IASB’s Framework, they are applied for the preparation of financial statements. They can be summed up as 4 core principles and 4 enhancing characteristics: Usefulness of financial information: fair representation of the state of affairs and performance of a business, in order to allow users of financial information to make good decisions; Accrual accounting: to achieve a fair representation, it is important that the information presented faithfully represents the underlying economic events. This is why accrual accounting is used: transactions are recognized when they occur, not by reference to the date of receipt or payment in cash (matching principle: to match expenses with related revenues states the  calculation of income) relevance: an information is relevant if its capable of making a difference in the economic decision mad by users. - Materiality is an entity-specific aspect of relevance, but focuses more on the type of relevant information in terms of its nature or magnitude (or both); faithful representation (reliability): financial information must be presented in a non-misleading way and without errors. There are 3 main principles connected to reliability: - Economic substance is an accounting principle used to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events. If an entity practices the 'substance over form' concept, then the financial statements will show the overall financial reality of the entity (economic substance), rather than the legal form of transactions (form). In accounting for business transactions and other events, the measurement and reporting is for the economic impact of an event, instead of its legal form. (→ economic aspects of transactions overcomes the legal aspect). - Neutrality and prudence: information contained in the financial statements must be free from bias as well as not overstated neither understated. (→free from bias) - Completeness: financial information should be as complete as possible without omissions and taking into account the cost-benefits trade-off. (→ without omissions and detailed). Enhancing characteristics: The 4 enhancing characteristics help improve the application of qualitative characteristics: - Comparability, including consistency: information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. - Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. - Timeliness: information is available to decision-makers in time to be capable of influencing their decisions. - Understandability: the way a financial statement classifies and presents information must be clear and concise; IASB Conceptual framework - Concepts related to the reporting entity Business unit: the entity has an identity and existence distinct form its owners, whatever their legal position.  Accounting period: on an annual basis (one year, annual financial statements), or on a semi- annual basis (half-early or quarterly, infra-annual/interim financial statements) Accrual basis, including matching: transactions are recognized when they occur, not by reference to the date of receipt or payment of cash (matching principle: to match expenses with related revenues states the calculation of income) Going concern: the business of the entity will continue in the future. Contents/format of statement of financial position IAS 1 (issued by IASB) and the 4th Directive (issued by EU) prescribe the rules to follow when preparing a statement of financial position (balance sheet). The statement of financial position must be presented by separating current or non-current assets and liabilities, unless presentation based on the liquidity principle provides information that is reliable. Assets can be considered: current if they are: - expected to be realized within the entity’s normal operating cycle, - held for the purpose of trading, - realized within 12 months after the reporting period. - cash and cash equivalents. Liabilities can be considered: current if they are: - expect to be settled within the entity’s normal operating cycle, - held for the purpose of trading, - due to be settled within 12 months. -for which the entity does not have an unconditional right to defer settlement beyond 12 months (settlement by the issue of equity instruments does not impact classification) The others are all non-current assets and liabilities. A format for the statement of financial position is not prescribed. Assets can be presented current then non-current, or vice versa, and liabilities and equity can be presented current then non-current then equity, or vice versa Other than liabilities, the statement must present equity (with reserves and retained earnings). IAS 1 doesn’t require a format or a structure, but just a minimum of line items. The 4th Directive however prescribes 3 format presentations: horizontal format: debits are in one side and credits on the other, it’s mainly used in Continental European countries; vertical format: this format follows the UK tradition, so items are shown as fixed assets + current assets –short term payables = long-term debt + equity;  abridged accounts: when companies fall under a certain size, they can use this format, however it is not allowed for companies applying IFRS; Statement of comprehensive income IAS 1 (issued by IASB) and the 4th Directive (issued by EU) prescribe the rules to follow when preparing a statement of comprehensive income. There are two options for the preparation of comprehensive income: - a single statement of profit or loss and other comprehensive income, with profit/loss in one section and other comprehensive income in another section; - two separate statements, one for profit or loss and the other for other comprehensive income; Profit or loss section There are minimum line items that must be presented in the profit or loss section/statement. - revenue - finance costs - share of the profit or loss of associates and joint ventures accounted for using the equity method - certain gains or losses associated with the reclassification of financial assets - tax expense - discontinued items Expenses should be analyzed either by nature e (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc.). If an entity categorizes by function, then additional information on the nature of expenses – at a minimum depreciation, amortization and employee benefits expense – must be disclosed. Other comprehensive income section This section or statement (it depends on the choice of presentation) presents line items which are classified by their nature, and grouped between those items that will or will not be reclassified to profit and loss in subsequent periods. The most common items are: - gains and losses on translating items of foreign subsidiaries’ financial statements into the group’s presentation currency - revaluations of assets - actuarial gains and losses on pension plans Statement of changes in equity The statement has to show: - total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests - the effects of any retrospective application of accounting policies or correcting errors - reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity - distribution of cash (dividends) or other assets to owners Cash flow statement The statement must show the information about the historical changes in cash and cash equivalents of an entity, which are classified during the period according to operating, investing, and financing activities Notes to financial statements The notes has to: - present information about the basis of preparation of the financial statements and the specific accounting policies used - disclose any information that is not presented elsewhere in the financial statements - provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them The notes should be presented as follows: - a statement of compliance with IFRSs - a summary of significant accounting policies applied - supporting information for items presented on the face of the statement of financial position (balance sheet), statement(s) of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows, in the order in which each statement and each line item is presented. Financial reporting in China To better understand the development of financial reporting in China, we must look at its history: China has a long history of being subjected to a very centralized imperial control. However, its commercial law was based on the commercial codes borrowed from Western Europe. During the Maoist period, a Soviet- style uniform accounting system was established: all funds were provided by the State and were supplemented by a reference report on its use. From 1970s onwards the socialist model gradually shifted to a social market economic system, which caused important economic reforms: separation of management from ownership; funding didn’t only come from government, but banks allowed equity funding; new regulations on issued shares, large amount of foreign investments began to flow to China. The first two Stock Exchanges were established in Shanghai and Shenzhen. Initial quotation of Chinese firm in foreign stock exchanges. Following these economic reforms, new regulations were issued on profit distribution and audit, the most important change in this sense was the publication of ASBE (Accounting Standards for Business Enterprises) in 1993, which imposed: double-entry bookkeeping, cash or fund statement, consolidated financial statements a conceptual framework close to the ones of US and IASC: - no identification of primary user (bust just an hierarchy including government and management) or purpose of financial statements.  - prevalence of a basic equation focusing on revenue/expense instead of asset/liability - high conformity between tax and accounting figures - application of historical cost without revaluations other detailed rules of financial reporting (for example historical cost for fixed assets; choice of FIFO, LIFO, average cost for evaluation of inventories) In 1997 China joined IASC, and in 2006 a new set of ASBEs largely in line with IFRS was issued, and in the following year it became a requirement for listed companies. Reasons for and obstacles to EU Harmonization (→ 4th directive) Reasons: The Treaty of Rome was the first driver of accounting harmonization in Europe, by creating the free movement of persons, goods and services, and capital with the elimination of customs duties, imposition of common tariffs and establishment of coordination of economic policies. This implies the harmonization of company law and taxation, and the creation of common capital market in order to protect the activities of companies and the shareholders beyond the national frontiers. Obstacles: the differences between the different national accounting systems, which we discussed in chapter 2. Directives and Regulations Two instruments for harmonization: Directives, which are incorporated into the law of Member states, and Regulations, they are becoming law by EU approval without to pass the national legislature The 4th directive In the last years the European Union has undergone a process of accounting harmonization. The 4th Directive is the most important Directive in this sense. The Directive covers both public (listed) and private (unlisted) companies, however it doesn’t cover consolidation ( → consolidation accounting is covered by the 7th directive). The content of the Directive refers to valuation rules, disclosure requirements and formats of financial statements. Its first draft in 1971 was influenced by German company law (valuation rules were conservative, disclosure was limited, and formats were rigid). However, after the entry of UK, Ireland and Denmark in the EU, a second draft was issued in 1974 under their influence: it introduced the concept of true and fair view as a predominant principle in the preparation fo the financial statement, and 4 other fundamental accounting principles were added (prudence, consistency, going concern and accruals); there were more requirements for disclosure by including more notes, in particular on the effects of taxation; what didn’t change was the application of historical costs principle. The result of the Directive was evident, as it influenced also countries not being paer of the EU, such as Switzerlandand Poland, and countries being Members of European Economic Area. The European professional accountancy took an interest on the effect of such Directive, in particular the FEE – Fédération des Experts Comptables Européens also played an important role in promoting the EU harmonization. The 4th Directive was amended in 2001 and 2003, relating respectively to the fair valuation of financial instruments and the removal of some incompatibilities with IFRS. In 2013 a new Directive came into force, and it replaced both the 4th Directive and the 7th Directive. The 7th directive The Seventh Directive covers the consolidated accounting Its adoption started in 1983 Main purpose: it enables international comparison of consolidated financial statements for multinational companies. SLIDES Differences in financial reporting Causes of differences are both intra-countries (different accounting systems influenced by for example the tax authorities as the main users of financial statements) and inter-countries (such as rules governing company groups and individual companies) Therefore, accounting standard setters (IASB – International Accounting Standards Board) issued International Accounting Standards (IASB) and European Union applied Directives and Regulations (EU) overcoming financial reporting differences The purpose of comparative international accounting is to understand differences in the past, why they persist in the present, why they will not disappear in the future. Understanding the global environment of accounting 1) Accounting and world politics 2) Economic globalization, international trade and foreign direct investment 3) Globalization of stock markets 4) Patterns of share ownership 5) International financial systems 6) Nature and growth of MNEs (multinational enterprises) 1) Accounting and world politics US influence on accounting and financial reporting is the most leading in the world. An example is the collapse of Enron in 2001, and the fall of auditing profession has repercussion in the all worldwide economies The rise of International Accounting Standards Board (IASB) dominated by members from British Empire  Accounting system of developing countries are influenced by colonial powers: British colonies, influenced by civil code accounting system; French colonies, influenced by accounting plans and commercial code Accounting system of Member States within EU have been influenced by the EU process of accounting harmonization, based on rules, Directives and mandatory adoption of international accounting standards for listed companies Collapse of communism in Central and Eastern Europe. 2) Economic globalization, international trade and foreign direct investment (FDI) Globalization of economic activity: spreading of goods and services, people, technologies and concepts Globalization index: quantification of economic globalization by ranking countries in terms of several components (Journal of Foreign Policy) as political engagements (membership of international organizations), technological connectivity (use of internet), personal contact (travel and tourism and telephone traffic), economic integration (international trade and foreign direct investment) Top 20 countries include the US, the UK and Germany; Top small open economies include Singapore, Switzerland and Ireland Two important components linked to financial reporting are international trade (merchandise exports) and foreign direct investment (equity interest in a foreign enterprise held with the intention of acquiring control or significant influence) 3) Globalization of stock markets Reasons of increasing globalization of stock markets (Tables 1.5 & 1.6): deregulation of national financial markets (such as Big Bang on London Stock Exchange, 1986); speed of financial innovation (new trading techniques); advances in electronic technology of communications (internet); growing agreements between domestic and world financial markets Benefits for being listed on foreign stock exchanges: to attract extra investors; to increase and differentiate the shareholders; to raise its profile among potential customers, employees or regulators. Costs for being listed on foreign stock exchanges: expense in increasing demanding and provision of extra or different accounting treatment or financial disclosure by foreign standards setters or exchange regulators (a solution for a non-US company is to be listed “over the counter”, i.e. not fully listed); publication of financial statements in different languages (English is the most common secondary language) 4) Patterns of share ownership Different patterns of share ownership means different nature of investors in listed companies, which has implications on financial reporting According to the split between owners and managers, companies can be distinguished into several groups depending on the major shareholders (La Porta et al., 1999): family controlled (Mexico, Hong Kong and Argentina), state controlled (Austria, Singapore, Israel, Italy, Finland and Norway), controlled by widely financial corporation (Belgium, Germany, Portugal and Sweden), controlled by widely nonfinancial corporation (the UK, Japan, the US, Australia, Ireland, Canada, France and Switzerland) Why a company might seek foreign investors: international mergers, subsidiaries controlled by foreign parent companies, companies moving headquarters abroad, privatization of state-owned business attract foreign investors Why an investor might seek foreign opportunities to invest: to differentiate his overseas investments, as share price movements in different regions are not correlated Obstacles to foreign opportunities to invest: different accounting practices means additional costs for adjusting the foreign financial statements, currency risk, political risk, language barriers, transactions costs and taxation. 5) International financial system 1945-1972, international monetary system based on fixed exchange rates with periodic devaluations (Bretton Woods Agreement) 1973-onwards, flotation of major currencies with volatile exchange rates 1999-onwards, most national EU currencies replaced by the single currency Euro 2008-2009, world financial system under exceptional stress due to collapse of financial institutions 6) Nature and growth of MNEs (multinational enterprises) In the early XIVs, MNEs are companies producing a good or a service in two or more countries In the late XVIs, MNEs are companies “resource-seeking” for having access to natural resources not available in the home country In the period 1870-1914, MNEs are companies exporting investments in other countries, especially Europe-based In the XXs, MNEs are companies “market-seeking” by establishing subsidiaries whose main function is produce goods to supply the markets in which they are located; “efficiency-seeking” by establishing subsidiaries whose main function is to be a small part of a wider product range, or in discrete stages in the production of a particular product; manufacturing companies by establishing subsidiaries specialized in trade and distribution, or in providing financial, banking or insurance services. Comparative and international aspects of accounting Reasons for choosing a comparative approach: 1) US and Anglo-Saxon countries are not the only contributors to accounting; 2) preparers, users and regulators based on different countries can learn from each other; 3) explanation of why the accounting international harmonization have been difficult to achieve, even if desired First reason: - Several countries have been contributors to accounting: Romans with forms of bookkeeping and calculation of profit; Muslims improving arithmetic and bookkeeping; the Italian method of bookkeeping based on double-entry - In the XIXs Britain, in the XXs the US took the lead in accounting matters, most of accounting bodies are Anglo-Saxon. Second reason: - A way for a country to improve its own accounting is to observe how other countries approach problems - If some accounting differences are present between countries, it is possible to compare such differences and to search for them into the economic, legal and social environment - Examples of adoption and adaptation of accounting methods from other countries are: the UK found useful the financial statements’ layout of Continental European countries for improving uniformity; France and Germany accepted US and UK approaches to consolidated financial statements. Third reason: - Some major problems to accounting harmonization relate to the different accounting treatment of leases, consolidation methods, and foreign currency translation, as they diverge over the countries - Influential solution have been devised by the FASB – Financial Accounting Standards Board in the US, then revised by the IASB and finally debated by European Union - The process of EU accounting harmonization has been seen as a process of regulatory competition by the IASB and the FASB, then revolved in a collaboration between the EU and the two international accounting standards setters Differences between national rules and IFRS or US GAAP In many countries unconsolidated (individual) and consolidated financial statements of unlisted companies (private companies) follow national rules, including those countries requiring to apply international accounting standards for consolidated accounts and allowing or requiring these standards for unconsolidated ones. Companies listed on foreign stock exchanges (such as foreign companies not applying IFRS listed at NYSE, as well as European companies listed at NYSE before the IFRS mandatory application in 2005) might be required by the stock exchange regulators (such as the SEC in the US) to prepare a reconciliation of the accounting figures (profit and shareholders’ equity) Such reconciliations are required for consolidated accounts instead of unconsolidated accounts, because internationally-based investors are not interested in the latter. Survival of national rules Why a country does not adopt IFRS: reluctant to lose control of rule-making resistance to IFRS application because written in English and non-compliant with the legal system IFRS are too complex and require too much disclosure no separation of tax and financial reporting IFRS comprise too many adoption not sufficiently detailed. Non-adoption of IFRS in the US: the SEC does not accept IFRS for domestic registrants, as it is not interested in consolidated financial statements and does not impose specific requirements to individual parent company and subsidiary of its registrants. in 2011 a working group starts to examine how to simplify US GAAP for private companies by considering a special version of US GAAP for SMEs. Main purpose of unconsolidated financial statements is the calculation of taxable income rather than to provide useful information to investors for their decisions. This would explain the reluctance of some countries to require or allow the IFRS adoption for unconsolidated accounts. Further, this would explain why IFRS for unconsolidated financial statements might be different from the consolidated ones. Special rules for small or unlisted companies In the first version of EU Directives small companies are not required to be audited and to prepare a full version of financial statements under some conditions. In the new version of EU Directives (issued in 2014), the Directives comprise requirements firstly for small companies and then for large ones, further they classify small companies according to their size in micro and macro.  Other countries (UK, Hong Kong, Malta and New Zealand) have a special version of their accounting standards for small companies. In the UK, the FRSSE – Financial Reporting Standard for Smaller Enterprises abbreviates the main standards and reduces the disclosure requirements, even though once a small company has a problem not covered by the FRSSE it refers to the main standards. Special rules for small or unlisted companies IFRS were written for consolidated financial statements of large listed companies In 2003, the IASB started a project on a version of IFRS for SMEs, at a first glance suitable in those countries applying IFRS for all purposes (Australia, Cyprus, New Zealand and South Africa). In 2004 and then in 2007 a first two version of draft were ready, the latter taking into account when financial reporting is closely linked to tax reporting. In 2009 a first standard was ready addressing that it was intended for private and nonfinancial entities. In 2010 the SMEIG – SME Implementation Group was set up by the IASB Foundation in order to support the IASB in implementing the IFRS for SMEs Some countries adopted the IFRS for SMEs (Argentina, Jamaica, Peru, South Africa, Hong Kong and Singapore with amendment. In the EU area, the Member States are still considering their application, just the UK has announced the intention to replace the existing UK GAAP with a special version of SMEs IFRS.