Topic 1: Causes of International Accounting Differences Flashcards
(20 cards)
What are the main drivers of international accounting differences?
Five key drivers: 1) FINANCING SYSTEMS (equity markets vs. bank financing), 2) LEGAL SYSTEMS (common law vs. code law), 3) TAX INFLUENCE (connected vs. disconnected systems), 4) ACCOUNTING PROFESSION (age, size, influence), 5) CULTURAL FACTORS (Hofstede/Gray). Financing is considered most convincing.
What is Maßgeblichkeitsprinzip and how does it affect accounting?
It’s the ‘tax-accounting conformity principle’ in Germany where tax rules and financial accounting are linked, so accounting choices directly affect tax payments. This creates incentives for conservative accounting to minimize taxable income.
What are Hofstede’s five cultural dimensions and how do they relate to accounting?
Hofstede identified: 1) Power Distance, 2) Individualism vs. Collectivism, 3) Masculinity vs. Femininity, 4) Uncertainty Avoidance, 5) Long-term vs. Short-term Orientation. High uncertainty avoidance cultures typically develop more conservative accounting with detailed rules.
How did Gray adapt Hofstede’s framework for accounting systems?
Gray (1988) developed four accounting values: 1) Professionalism vs. Statutory Control, 2) Uniformity vs. Flexibility, 3) Conservatism vs. Optimism, 4) Secrecy vs. Transparency. Countries with high uncertainty avoidance tend toward uniformity and conservatism in accounting.
What evidence supports or challenges Gray’s framework?
Limited empirical support exists. Some researchers found Gray’s hypotheses explained differences better than Hofstede alone but still with weak explanatory power. The framework struggles to explain cases like the Netherlands and Germany’s early IFRS adoption.
What evidence most clearly demonstrates the financing system explanation for accounting differences?
1) UK/US developed investor-focused accounting alongside dispersed shareholding. 2) Continental systems focused on creditors alongside bank financing. 3) Netherlands has Roman law but Anglo accounting due to strong capital markets.
How do legal systems influence accounting development?
Common law countries (UK/US) developed principles-based standards through professional bodies with ‘true and fair view’ focus. Code law countries embedded detailed accounting rules in legislation emphasizing legal compliance.
Why is legal system considered less convincing than financing as an explanation?
The Netherlands case contradicts it - despite Roman law, it developed investor-oriented accounting. Also, German companies were early voluntary adopters of IFRS despite code law tradition, suggesting financing needs override legal tradition.
How does tax influence specific accounting practices internationally?
It creates country-specific approaches to: 1) LIFO inventory (tax-advantageous), 2) ACCELERATED DEPRECIATION (maximizes tax deductions), 3) COMPLETED CONTRACT (defers income recognition), 4) CONSERVATIVE PROVISIONS, 5) LIMITED FAIR VALUE.
How did accounting profession development differ internationally?
UK/US bodies formed early (ICAEW 1870, ICAS 1854, AICPA 1887) with standard-setting powers. Continental bodies developed later (Germany IDW 1932, France OEC 1942, Japan JICPA 1948) with less influence.
What are the key characteristics of Class A (Anglo-American) accounting systems?
Investor-focused reporting, strong equity markets with dispersed ownership, tax separate from accounting, strong profession, fair presentation and substance over form, focus on consolidated reporting, extensive disclosure.
What are the key characteristics of Class B (Continental European) accounting systems?
Creditor protection and tax calculation focus, bank/family financing, tax shapes accounting rules, younger profession, legal compliance over substance, focus on individual accounts, limited disclosure, prudence principle dominance.
How does the two-class model explain hybrid systems like the Netherlands?
Nobes (1998) argues financing system is primary - Netherlands developed strong equity markets despite Roman law, creating demand for Class A accounting.
How do accounting treatments for goodwill differ internationally?
Historically, UK/Germany allowed immediate write-off to reserves, US required amortization (up to 40 years), France/Germany used shorter amortization periods (5-20 years). Now IFRS/US require impairment testing without amortization.
How does accounting for provisions/reserves differ between systems?
Class B systems traditionally allow broader recognition of provisions for future uncertainties and risks, creating hidden reserves. Class A systems require present obligations with probable outflows that can be reliably measured.
How have different accounting systems responded to long-term contracts?
Class A systems prefer PERCENTAGE-OF-COMPLETION (profit recognized during project). Class B systems traditionally used COMPLETED CONTRACT (all profit deferred until finished, more conservative and tax-advantageous).
How do international approaches to fair value accounting differ?
Class A systems permit or require fair value for many assets. Class B systems traditionally emphasized historical cost with limited revaluation, reflecting prudence principle and tax considerations.
How does the balance sheet presentation differ between accounting traditions?
UK/US typically present in liquidity order with net assets subtotal, reflecting equity focus. Continental format emphasizes matching of long-term assets with long-term financing, often presenting total assets rather than net assets.
How do income statement formats differ internationally?
UK/US typically use function of expense format (cost of sales, distribution expenses). Continental Europe often uses nature of expense format (materials, personnel, depreciation), reflecting different analytical focus.
Why is financing considered the most convincing explanation for accounting differences?
It explains the fundamental PURPOSE of reporting (investors vs. creditors/tax), while other factors largely follow from this.
