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Chapter 6:
Comparative
Accounting
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Chapter Topics

Accounting environment, profession, regulation,
practices/principles and differences in national
accounting practices with IFRS in:





China
Germany
Japan
Mexico
United Kingdom
6-2
Learning Objectives
1.
2.
3.
4.
Describe some aspects of the environment in which
accounting operates in five countries: China,
Germany, Japan, Mexico, and the United Kingdom
Explain the nature of the accounting profession in
the selected countries
Discuss the mechanisms in place for regulating
accounting and financial reporting in the selected
countries
Examine some of the accounting principles and
practices used by companies in these countries
6-3
Learning Objectives
5.
Identify the areas where national accounting
practices in these countries differ from International
Financial Reporting Standards (IFRS)
6-4
PEOPLE’S REPUBLIC OF CHINA (PRC)
Background
 World’s largest country with population of 1.34
billion(2008)
 People’s Republic of China (PRC) established in 1949
 Politically:


Economically:

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Communist, one-party state
Until the 1980s, all firms state-owned
Currently in transformation to socialist market
economy
World’s second largest economy (in terms of GDP)
and fastest growing among large economies, and is
largest recipient of FDI
6-5
PEOPLE’S REPUBLIC OF CHINA (PRC)
Background
 First securities regulations adopted in1984
 Two major stock exchanges:


Government controls capital market via:


Chinese Security Regulatory Commission (CSRC) similar
to SEC
Domestic companies list four types of shares:


Shanghai and Shenzhen established in1990 and1991
A, B, C, H
Market characterized by speculation, high share
turnover
6-6
PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Profession
 Profession less prestigious than in U.S./U.K
 Accounting and auditing have developed separately



Chinese Institute of Certified Public Accountants (CICPA)
and Chinese Association of Certified Practicing Auditors
(CACPA) merged in1998
Economic reform and the large number of joint
ventures with foreign companies has led to
emergence of the audit profession
In October 2007, the ICAEW in the UK and CICPA set
up a joint project for cooperation between the
accounting professions in the two countries
6-7
PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Profession
 Most domestic Chinese accounting firms are “hooked
up” to a government-sponsoring body, although the
government has encouraged independence
 “Guanxi” or tight, close-knit networks

Common way of doing business, but may collide
ethically for accountants
6-8
PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Regulation
 Government continues to act as accounting regulator
 Recent activity is focused on harmonizing variety of
domestic systems which vary by industry
 Committed to converging with IFRS, spurred by
desired membership in World Trade Organization
(WTO)
 Audits of financial statements widely required
 Death penalty in an accounting fraud case suggests
that it is taken very seriously
 Ministry of Finance (MoF) in similar role as FASB
 MoF has issued several pronouncements to achieve
harmony
6-9
PEOPLE’S REPUBLIC OF CHINA (PRC)
Accounting Principles and Practices
 Computation of taxable income is of primary
importance
 Conservatism is criticized as a method by which
owners can understate income and justify low wages
 Lack of conservatism is still a major difference with
IFRS
 Lack of accounting infrastructure contributes to the
gap between accounting principles and practices
 Accounting System for Business Enterprises (ASBE) is
followed by over 500,000 firms, including all listed
companies
6-10
PEOPLE’S REPUBLIC OF CHINA (PRC)


Differences with IFRS
Property, plant, and equipment:


Asset impairments:

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Historical cost, whereas IAS16 permits revaluations
Chinese standards are silent, whereas IAS 36 requires
impairment test and recognition of loss
Pre-operating expenses deferred, then expensed
when operations begin, whereas, under IAS 38,
expense immediately
Business combinations:

No specific rules, whereas IAS 22 specifically discusses
accounting for business combinations
6-11
Germany
Background
 European Union’s largest country, population 82.2 million
 West Germany and East Germany established in 1949,
were reunified in 1990
 Historically, banks have been primary source of finance
via both loans and equity
 Since reunification, the economy has been affected by
internationalization
 German companies increasingly listing on foreign
exchanges, e.g., New York Stock Exchange
 Most common business forms are Aktiengesellschaft (AG)
and Gesellschaft mit beschrankter Haftung (GMBH)
6-12
Germany
Background
 AG are publicly traded/GMBH are non-publicly
traded
 Historically had significant influence on accounting
systems in a number of other countries
 Japan’s commercial code is modeled on Germany’s
commercial code
6-13
Germany
Accounting Profession
 Profession has traditionally been less influential than
in U.S./U.K
 Auditing is dominant part of profession and certified
auditors title of Wirtschaftsprufer (WP) was created
in 1931
 Institut der Wirtschaftsprufer similar to the AICPA
 Obtaining WP title is extremely rigorous
 Wirtschaftspruferkammer (WPK) is a state-sponsored
group that oversees auditing profession
6-14
Germany
Accounting Regulation
 Commercial code and tax laws are main sources of
accounting rules
 Traditionally has not used a system of independent
institutional oversight
 Stock exchange rules have less influence than in U.S
 Prudence (conservatism) is fundamental:

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Recognition of revenues only when realized
losses when they appear possible
Began change away from creditor orientation in 1960s
towards shareholder orientation
As of 2009 the German Accounting Standards Board
(GASB) worked on IASB projects relating to the financial
crisis
6-15
Germany
Accounting Principles and Practices
 Historical cost attribute for measuring tangible assets
is strictly adhered to
 Traditional focus on creditor protection is at odds with
the true and fair view concept
 Importance of tax laws led to the reverse
authoritative principle


Requires expenses to be deducted from accounting
income if they are to be tax deductible
Differences between accounting and tax income are
minimal, thereby reducing need for deferred taxes
6-16
Germany
Accounting Principles and Practices
 In contrast to China, conservatism has been used to resist
labor’s wage demands
 Standards allow for income smoothing, frequently
accomplished via early recognition of losses
 EU fourth directive requires true and fair view, but
Germans have a unique interpretation of the concept
 Commitment to globalization reflected in rule that allows
public companies to use IFRS for consolidated statements
 Main intention of German Accounting Law Modernization
Act is conformity with IFRS
 In August 2010, only about 10 German companies were
listed on the NYSE due to NYSE overregulation
6-17
Germany
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Differences with IFRS
Goodwill:
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Internally generated intangibles:
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Not recognized, whereas, under IAS 38, recognized as an
asset under some conditions
Leases:


Deducted immediately against equity, whereas, under IFRS 3,
accounted for as an indefinite life intangible asset
Accounting uses tax rules, with capitalization rare, whereas
IAS17 criteria result in more frequent capitalization
Accounting for subsidiaries:

Allow exclusion of dissimilar subsidiaries, which are
consolidated under IAS 27
6-18
Japan
Background
 Population 127.2 million, world’s third largest
economy
 Banks are primary source of finance via both loans
and equity, and cross-corporate equity ownership is
also common
 Keiretsu (and predecessor Zaibatsu) emphasize close
business ties and reflect cultural value of collectivism
 1990s recession led to an increase in Japanese firms’
attempts to obtain capital internationally
6-19
Japan
Accounting Profession
 Certified Public Accountants Law (1948) established the
profession
 JICPA is one of the nine founding members of the IASC
 Profession is significantly less influential than in U.S./U.K.
and is also much smaller in numbers than U.S
 Obtaining CPA title is extremely rigorous, as in Germany
 Low status within Japanese society vs. engineers and
scientists
 Collectivism leads to lack of trust of auditors
 Tax advising is a much larger, separate, profession
6-20
Japan
Accounting Regulation
 Government influences accounting via:
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Similar to Germany, strong creditor orientation and
accounting rules closely tied to tax rules
“Big Bang” financial reforms are leading to
harmonization with international standards


Commercial Code, Corporate Income Tax Law and
Securities and Exchange Law
These reforms included requirements for consolidation
and fair value accounting for tradable securities
Business Accounting Principles issued by Ministry of
Finance consist of 7 guidelines (the equivalent of a
conceptual framework)
6-21
Japan
Accounting Regulation
 In December 2009, Japan Financial Services Agency
(FSA) permitted domestic use of IFRS and established
framework for voluntary adoption of IFRS starting
with fiscal years ending on or after March 31, 2010
6-22
Japan
Accounting Principles and Practices
 In contrast to U.S., net income is less a measure of
performance and seen more as funds available for
dividends
 Since providers of financing tend to be close to the
firm, there has historically been little pressure for
disclosure
 Lack of disclosure is apparent in segment reporting
 2007 Tokyo Agreement goals to eliminate all
Japanese GAAP and IFRS differences by June 2011
(except major new IFRS developed after 2011
6-23
Japan
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Differences with IFRS
Revaluation of Land:
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Pre-operating costs:
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Capitalization is allowed, whereas, under IAS 38,
expensed immediately
Construction contracts:


Allowed, but updating not required, whereas, under
IFRS16, revaluations require regular updating
Completed contract method is allowed, whereas IAS11
essentially requires percentage-of-completion
Provisions:

Allows for provisions prior to actual obligation, whereas
IAS 37 only allows for present obligations based on
past transaction
6-24
Mexico
Background
 History of significant inflation:
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Government control of business is partially blamed
Significant changes in1990s, including privatization of
state-owned firms and NAFTA
Historically, most businesses family-owned--even the very
large:

Prefer to raise capital via debt vs. equity
 Gradually changing


Mexico’s one stock exchange, the Bolsa Mexicana de
Valores, is privately-owned
Represents one of the largest U.S. trading partners (threequarters of Mexico’s imports, more than 80% of her
exports, and 60% of all FDI)
6-25
Mexico
Accounting Profession
 The Asociacion de Contadores Publicos, first
professional accountant organization, established in
1917



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This group was succeeded by the Mexican Institute of
Public Accountants (MIPA) in 1964
MIPA establishes accounting and auditing principles
In order to practice public accounting in Mexico, one
needs a “professional diploma”
Contador Publico Certificado (CPC) is equivalent of
U.S. CPA:

Can have reciprocal privileges in U.S. and Canada
based on passing certain exams
6-26
Mexico
Accounting Regulation
 The Mexican Securities Law (1975), was amended in
1993 to comply with NAFTA issues
 Accounting standards, grounded in a conceptual
framework:



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Have four classes of Bulletins, A, B, C, and D, and, with
few exceptions, are similar to U.S. GAAP
Fairness-oriented vs. legal compliance
Corporate tax rules require a report in accordance
with Mexican GAAP audited in accordance with
Mexican GAAS
Enforcement mechanisms (e.g. for insider trading) not
effective
6-27
Mexico
Accounting Principles and Practices
 Mexican GAAP heavily influenced by U.S. GAAP

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Due to NAFTA, geographical proximity, and
comprehensiveness of U.S. GAAP
Despite international influences, Mexico’s Bulletin B10 on inflation accounting shows how harmonized
accounting may not be appropriate for all
circumstances
In November 2008, the Mexico Securities and
Exchange Commission announced that all companies
listed on the Mexican Stock Exchange will be
required to use IFRS in 2012
6-28
Mexico
Accounting Principles and Practices
 Bulletin B-10, Recognition of the Effects of Inflation,
reflects a major difference to U.S. GAAP
 Nonmonetary assets and liabilities to be restated for
purchasing power changes of the peso



Inventory can be restated using current replacement
costs
Recognition in income (generally) of the gain or loss
from the net monetary position, asset or liability
In line with IAS 29, Mexico has given up on inflation
accounting recently, due to low rate of inflation
6-29
Mexico


Differences with IFRS
Statement of cash flows:


Inflation Accounting:

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Statement of changes in financial position required,
whereas IAS 7 requires a statement of cash flows
Requires inflation adjustments regardless of inflation
rate, whereas IAS 29 required only for
hyperinflationary countries
Negative Goodwill:

Recorded as a deferred credit and amortized over a
period of up to five years, whereas IFRS 3 requires
immediate recognition of gain
6-30
United Kingdom
Background
 Population of about 62 million, comprised of England,
Northern Ireland, Scotland, and Wales
 Among the five countries in this chapter, its financial
structure is closest to the U.S
 15,000 Private Limited Companies (PLCs) with about
2,500 of these listed on the London Stock Exchange
6-31
United Kingdom
Accounting Profession
 World’s first association of professional accountants:



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The Society of Accountants in Edinburgh, established in
1853
Six professional chartered bodies coordinated
through Consultative Committee of Accountancy
Bodies (CCAB)
The profession developed in response to the needs of
industry and has influenced the development of
professions in a number of other countries
Compared to the U.S. the certification requirements
focus more on work experience and less on university
education
6-32
United Kingdom
Accounting Regulation
 The Companies Act, accounting pronouncements, and
stock exchange rules comprise accounting regulation
 Similar to the U.S., and unlike Germany and Japan,
tax rules do not significantly influence financial
reporting
 Standard-setters have historically taken a principlesbased approach using a statement of principles as a
conceptual framework
 Has not historically had a strong, SEC type agency,
but recent scandals have led to increased regulation
6-33
United Kingdom
Accounting Regulation
 The Financial Reporting Council (FRC) annual report
for 2008/2009-- key themes for 2009/2010 would
be to influence:
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Market participants to high standards of reporting and
governance
Legislators and standard-setters to encourage
proportionate and principles-based approach in
furtherance of the first goal
International regulatory authorities to encourage
effective cooperation
6-34
United Kingdom
Accounting Principles and Practices
 A primary objective of accounting is to support an
effective capital market
 The true and fair view principle is paramount
 True and fair view override requires that companies
not comply with standards that would result in
misleading financial statements
 Professional judgment is essential additional
component to true and fair view
 Financial Reporting Review Panel 2010 annual report
says there has been continuous improvement in the
general quality of IFRS financial reporting
6-35
United Kingdom

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Differences with IFRS
Goodwill:


Related party disclosures:


Amortization allowed, whereas IFRS 3 prohibits
amortization and requires an annual impairment test
Requires disclosure of related party names, whereas IAS
24 requires disclosure by type, not name, of related
party
Revaluation gains/losses:

Generally not taken to income statement, whereas IAS
40 requires gains and losses to affect net income
6-36
End of Chapter 6
6-37