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Universität Potsdam

Sprachenzentrum – Bereich Englisch


Wolfgang Lüer
Englisch für Studierende der Wirtschaftswissenschaften UNIcert IV/l und
Wahlpflichtfach „Englisch und Wirtschaft“, Part 1
Wintersemester 2006/2007

INTERNATIONAL ACCOUNTING – AN OVERVIEW

Verfasser:

Hans Müller
Stahnsdorfer Str. 152b
14482 Potsdam
hans.mueller@uni-potsdam.de
Matrikelnummer 717348
7. Fachsemester Betriebswirtschaftslehre

Potsdam, den 09.02.2007


CONTENTS

1. What is International Accounting? .................................................................................... 1


2. Accounting Diversity ............................................................................................................ 1
2.1 Reasons for Accounting Diversity ............................................................................... 2
2.2 Problems connected with Accounting Diversity .......................................................... 3
3. Efforts to overcome Accounting Diversity ......................................................................... 3
3.1 Harmonization .............................................................................................................. 3
3.2 Standardization ............................................................................................................. 4
4. Adoption of IFRS ................................................................................................................. 5
5. References ............................................................................................................................. 6

LIST OF FIGURES
Figure 1: Reasons for and problems connected to Accounting Diversity (own illustration) ..... 1
Figure 2: Structure of the IASB (IASB 2007a) .......................................................................... 4
Figure 3: IFRS around the world (IASB 2007b) ........................................................................ 5

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1. What is International Accounting?
Many people have a more or less clear understanding of what Accounting is. Usually it means
double-entry bookkeeping and preparing a financial statement at the end of the year. But what
International Accounting means is not as obvious.
Taken literally, the term implies bookkeeping across national boarders. And that is part of
it. Companies who have their headquarter in one country and subsidiaries in other countries
need to incorporate the financial statements of their subsidiaries into the “principal” financial
statement of the headquarter which is bookkeeping across national boarders.
Another part is the process of transforming differing national accounting standards into
international standards that already are or will be relevant for every firm in the world. Both
aspects of International Accounting are subject of this paper.

2. Accounting Diversity
Each country has its own unique set of accounting and financial reporting rules (Hoyle,
Schaefer 2004, p. 527). Before dealing with efforts trying to transform these differing Nation-
al Accounting Standards into International Standards, it is necessary to know why Accounting
Diversity exists in the world. There are specific reasons that are covered in the first part of
this chapter. In the second part the reader finds problems connected with Accounting Diversi-
ty and thus will understand why it is necessary to harmonize and since recent years to stan-

Legal system Taxation Financing Inflation rate

ACCOUNTING
DIVERSITY

Financial
statements of Lack of
multinational comparability
companies

Figure 1: Reasons for and problems connected to Accounting Diversity (own illustration)

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dardize Accounting rules and principles. Figure 1 shows the interdependence of reasons for
and problems connected to Accounting diversity.

2.1 Reasons for Accounting Diversity


The first reason for Accounting diversity is the difference in legal systems in the world. In
most English speaking countries a common law system is in place, which has its origins in
Britain. Many other countries have a code law system that began with the first Roman civil
law “jus civile”. Common law has a limited amount of statute law, which is interpreted by the
courts that thus create case law. In these countries the Accounting profession or independent
bodies establish specific Accounting rules and standards. Code law was further developed in
European Universities, and in many countries a distinctive corporation law resulted. In code
law countries the Accounting profession tends to have little influence on developing account-
ing rules (Hoyle, Schaefer 2004, pp. 531-532).
Why is the legal system a reason for Accounting Diversity? In common law countries the
Accounting profession uses its power to establish rules and principles in great detail as for
example the Financial Accounting Standards Board (FASB) in the USA. Accounting rules in
Germany as a code law country are very different compared to rules in the USA because the
Accounting profession is mainly responsible only for interpreting the Accounting rules and
principles set by the government.
Another reason for Accounting diversity is the fact, that in some countries the financial
statement forms the basis for taxation while in others it is predominantly made to serve the
stakeholder. If in Germany – a country where the financial statement is the basis for taxation –
accelerated depreciation is used in the financial statement, it must also be used for taxation.
That is not the case in the United States where accelerated depreciation can be used for taxa-
tion if the company uses for example straight-line depreciation in the financial statement
(Hoyle, Schaefer 2004, p. 532).
The third reason is the source of financing. In some countries families, banks and the state
dominate the financing of companies whereas in others the public offering of shares is much
more important. This has a great influence on what the accounting rules and principles look
like. In the first kind of countries there is not much pressure to be found for public accounta-
bility and information disclosure because families, banks and the state can quite easily access
information regarding the company in contrast to the second kind of countries where stake-
holders do not have that opportunity and thus demand more information (Hoyle, Schaefer
2004, p. 532).

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And the last important reason is the difference in inflation rates. Countries like Brazil that
constantly experienced high inflation rates in the past had to react by adding inflation adjust-
ment rules to the accounting principles. Countries with low inflation in the past naturally did
not have to react which results in differing Accounting rules and principles (Hoyle, Schaefer
2004, p. 532).

2.2 Problems connected with Accounting Diversity


Now it should not only be clear, that many reasons for Accounting diversity exist, but also,
that those reasons are the cause for many differing accounting rules and principles in about
200 nations worldwide. This section contains two major problems directly connected to dif-
fering accounting rules and principles.
A tremendous problem is creating the financial statement of a multinational company.
Take for instance the Coca-Cola Company based in Atlanta, GA. It needs to prepare individu-
al financial statements in every single one of its over 100 national subsidiaries observing the
corresponding national accounting rules and principles. In addition it is necessary for Coca
Cola to assemble a consolidated financial statement according to Generally Accepted Ac-
counting Principles (GAAP) of the United States including data from all the financial state-
ments of its subsidiaries. Given the Accounting diversity worldwide, this is not a trivial task
and potentially costs enormous amounts of money (Hoyle, Schaefer 2004, pp. 533).
Another problem is the lack of comparability between companies preparing their financial
statements in two different countries. Especially for investors who for example would like to
compare the profitability of companies located in different countries, it is very hard to do so
because of different accounting rules and principles (Hoyle, Schaefer 2004, pp. 534).

3. Efforts to overcome Accounting Diversity


In order to cope with these problems the International Accounting community set up the In-
ternational Accounting Standards Committee (IASC) which just a few years ago transformed
itself into the International Accounting Standards Board (IASB). This chapter is about these
two organizations.

3.1 Harmonization
The IASC was formed in 1973 by 16 professional Accounting bodies from Australia, Canada,
France, Germany, the United Kingdom, Japan, Mexico, the Netherlands and the United States
that were appointed by their respective national professional Accounting bodies (Chatfield,
Vangermeersch 1996, p. 344).

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The main objectives were to “formulate […] accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance and observa-
tion.“ The IASC worked “[…] for the improvement and harmonization of regulations, ac-
counting standards and procedures relating to the presentation of financial statements.” (Chat-
field, Vangermeersch 1996, p. 344).
During its first years until about 1988 the IASC produced 26 generic International Ac-
counting Standards (IAS) of which many still contained multiple options showing the least
common denominator. In the second phase until about 1995 the IASC went a step further and
launched the comparability project. It included revising ten of the IAS already eliminating as
many alternatives as was possible at that time. During its final phase until 2001 the IASC was
responsible for 30 core standards that would already be the prelude for the work of the IASB
(Doupnik, Perera 2007, pp. 81-82).
Support for the IASC grew to an unexpected high degree. Prior to its dissolution in 2001
the IASC represented 156 professional accounting bodies in 114 countries representing 2 Mil-
lion accountants (Doupnik, Perera 2007, p. 81).

3.2 Standardization
Why was there a need to create International Accounting
the IASB if the IASC had ex- Standards Committee Foundation
isted already? The IASC had (22 Trustees)
severe legitimacy problems.
First of all it lacked the consti-
tuent support it needed. Second-
Standards International
ly it was criticized for being not Advisory Council Accounting
being independent enough and Standards Board

thirdly some members lacked (14 Board Members)


the technical expertise that was
necessary to fulfill such an im- Key

portant position (Doupnik, Pe- Appoints Advisory


rera 2007, p. 84). Reports to Committees

These were some reasons Figure 2: Structure of the IASB (IASB 2007a)
for creating the IASB. It was the new institution, which decided about new International Ac-
counting rules and incorporated 14 members with a very high expertise to ensure the highest
possible quality of International Accounting Standards. The 14 members of the IASB are cho-
sen by the IASC foundation, which is comprised of trustees now representing the geographic
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diversity (Doupnik, Perera 2007, p. 85). Thus the IASC foundation only indirectly decides on
Accounting rules and Standards and is no longer responsible for the Accounting Standards
itself. Figure 2 shows the structure of the IASB.
The objectives of the IASB are to create a “set of high quality […] global accounting
standards […], to promote the […] rigorous application of these standards; and to bring about
convergence of national accounting standards and International Accounting Standards to high
quality solutions.” (Doupnik, Perera 2007, p. 85). As one can notice, the objectives from the
IASB are stronger compared to the objectives of the IASC. No longer is the board just harmo-
nizing standards, it is converging national accounting standards into high quality International
Financial Reporting Standards (IFRS) as they are called now. The rigorous promotion also
has a stronger meaning than just to promote the worldwide acceptance as the IASC did.
How does the IASB work? The IASB staff identifies and reviews all issues related to an
upcoming topic. A steering committee may be formed in order to give advice. A first draft
statement of principles is created by the board and sent out to participating Accountants all
over the world. They can make comments that are included in the following exposure draft. In
the end the IASB approves and issues a final standard. Approval requires a positive vote from
8 of the 14 members of the board (Doupnik, Perera 2007, p. 85).

4. Adoption of IFRS
This paper outlined reasons for
accounting diversity, two prob-
lems connected to it, harmoni-
zation efforts by the IASC and
standardization efforts by the
IASB. What was the interna-
tional response these efforts?
Figure 3 gives an overview of
that response.
The European Union
Figure 3: IFRS around the world (IASB 2007b) adopted the new rules almost
completely. Member countries are obliged to transform IFRS into national law at least allow-
ing IFRS. Some countries as for example the Slovak Republic or Malta even abolished their
own standards. In these countries it is mandatory for every company to use IFRS. On the
American continent, the United States do not allow IFRS yet but are harmonizing their rules

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with IFRS at the moment. In Peru and Ecuador IFRS are required for all companies already.
Most African countries except in the southeastern part did not adopt IFRS yet. Russia recently
introduced IFRS. Australia and New Zealand introduced national standards that they describe
as IFRS-equivalent. In China IFRS are required for a specific group of companies.

5. References
Chatfield, M., Vangermeersch, R. (1996): The History of Accounting, New York & London,
pp. 344-345
Doupnik, T., Perera, H. (2007): International Accounting, New York, pp. 26-142
Hoyle, J.B., Schaefer, T.F., Doupnik, T.S. (2004): Advanced Accounting, New York,
pp. 527-533
IASB (2007a): http://www.iasb.org/About+Us/About+Us.htm, 02/08/2007
IASB (2007b): http://www.iasb.org/About+Us/About+IASB/IFRS+Around+the+World.htm,
02/08/2007