IA1 Lecture 10 Exeter

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Introduction, The communication of accounting information varies significantly. across different locations and due to different influencing factors. Comparison between financial statements is important to enable. company benchmarking in financial statement analysis. However benchmarking becomes difficult if there exists flexibility in. measuring and reporting financial information i e the same kinds of. transactions can be reported differently across companies. Thus comparing the financial statements of companies which are. located is different countries is difficult, Accounting policies are influenced greatly be the national. environment and by national accounting standards and practices. It is therefore useful to consider the main drivers of differences in. national accounting practices across countries,Main Causes of International. Differences in Financial Statements,External Legal Systems Providers of Finance. Environment and,Main Causes of,Taxation International The Accounting.
Differences in Profession,Financial Statements,Inflation Theory Accident. External Environment and Culture, Accounting is affected by its environment including the culture of the country. in which it operates,Hofstede 1980, Develops a model of culture as the collective programming of the mind that. distinguishes the members of one human group from another. Culture includes a set of societal values that drive institutional form and. Study based on 100 000 IBM employees in 39 countries. Societal values are determined by ecological influences and modified by. external factors, In turn societal values have institutional consequences in the form of the legal. system political system nature of capital markets patterns of corporate. ownership and on on,Hofstede s 1984 Four Dimensions of Culture.
Individualism versus Collectivism Large versus Small Power Distance. Individualism preference for a loosely knit social Power distance extent to which the members of a. framework in society wherein individuals are society accept that power in institutions and. supposed to take care of themselves and their organisations is distributed unequally. immediate families only Large power distance society accepts hierarchical. Collectivism preference for tightly knit social order in which everybody has a place which needs no. framework in which individuals expect their relatives further justification. and other groups to look after them in exchange for Focuses on how society handles inequalities among. their loyalty people when they occur,Fundamental issue here degree of. interdependence that a society maintains among,individuals. Strong versus Weak Uncertainty Masculinity versus Femininity. Avoidance Masculinity preference in society for achievement. Uncertainty avoidance degree to which the heroism assertiveness material success. members of a society feel uncomfortable with Femininity preference for relationships modesty. uncertainty and ambiguity caring for the weak quality of life. Strong uncertainty avoidance strive towards,achieving certainty institutions which protect. conformity rigid codes of belief intolerance of,Weak uncertainty avoidance more relaxed. deviance from rules is tolerated,Gray s 1988 Application of.
Hofstede to Accounting Practices, Gray applied cultural differences to explain international differences in. the behaviour of accountants and accounting practices. Gray s Contrasting,Accounting Values, Professionalism versus Uniformity versus Conservatism versus Secrecy versus. Statutory Control Flexibility Optimism Transparency. The first two relate to authority and enforcement, Clear contrast between Anglo culture area and Asian areas. The second two relate to measurement and disclosure. Contrast between Anglo and Latin Germanic cultures. Gray s Model, Professionalism versus statutory control Uniformity versus flexibility. Professionalism individualism emphasis on Uniformity strong uncertainty avoidance. I society with small power distance self detailed regulations embedded in law. regulation consistency large power distance emphasis. on we rather than I,Statutory control large power distance.
regulation by government strong uncertainty Flexibility can be associated with weak. avoidance uncertainty avoidance small power distance. and individualism, Conservatism versus optimism Secrecy versus transparency. Conservatism uncertainty avoidance Secrecy preference for confidentiality. conservative profit recognition and asset uncertainty avoidance large power distance. measurement dictates behaviour of reinforced by information asymmetry less. accountants especially European model with disclosure by companies. strong link between taxable and accounting,Gray s 1988 Application of. Hofstede to Accounting Practices,Issues with Hofstede and Gray s models. 1 Soeters and Schreuder 1988 models are useful for explaining. differences in auditor behaviour but less useful for explaining differences in. accounting systems, 2 Salter and Niswander 1995 Gray s model was difficult to test how do. we measure accounting values in the real world, 3 Perhaps more direct measures of accounting environment are better e g.
legal systems corporate financing tax systems etc, 4 Historical influences such as imperialism may have a greater impact than. current influences,Legal Systems,Two main types of legal system in the world. 1 Common Law, Legal system relies upon a limited amount of statute law which is. then interpreted by courts, Builds up a large amount of case law to supplement the statutes. Seeks to provide an answer to a specific case rather than to. formulate a general rule for the future, Found in England and countries influenced by England.
commonwealth countries,Accounting here is not dependent upon law. Company law is kept to a minimum, Accountants establish rules for accounting practice which may be. written down as standards or recommendations,Legal Systems. 2 Roman Law, Codified law characterised by a wide set of rules which try to give. guidance in all situations,Developed in continental Europe.
Company law is very detailed and accounting standards are often. embodied in the company law, Accounting regulation is in the hands of government and financial. reporting is often reduced to complying with a set of very detailed. legal rules,Common Law Codified Roman Law,England and Wales France. Ireland Italy,United States Germany,Canada Spain,Australia Netherlands. New Zealand Portugal,Singapore Japan,Providers of Finance. Countries can be grouped in relation to the types of companies and how they are. 1 Bank family group, Germany France Italy Belgium small family owned businesses bank financed.
2 Shareholder group, US UK equity finance is important millions of private shareholders active stock. Tucker s 1994 study of gearing ratios supports the usefulness of this grouping. Zysman 1983 types of business organisation and ownership differ across countries. 1 Capital market systems e g UK US, 2 Credit based governmental systems e g France Japan. 3 Credit based financial institution systems e g Germany. Parker 1994 found that this grouping had explanatory power for explaining financial. reporting differences,Providers of Finance,Bank Family Group Shareholder group. Few listed companies often Often institutional shareholders. dominated by bankers who are Great pressure for quality. shareholders governments published information audit by. families outsiders, Banks or state will nominate Institutional shareholders place. directors greater pressure on information,Less need for published providers.
information audit as most are Tendency for accountants to. insiders work out their own technical, Financial reporting to protect accounting rules generally. creditors and for governments tax accepted accounting principles. Establishment of laws rather than GAAPs,rules Governments intervene only to. impose disclosure filing etc,Classification based on Corporate Financing. TYPE A TYPE B,Strong equity market Weaker equity market. Many outside shareholders Core insider shareholders. Large auditing profession Small auditing profession. Separate accounting and tax Tax dominates accounting. rules rules,Examples Examples,Australia France,United Kingdom Germany.
United States Italy, In some countries tax authorities use financial statement information to. determine taxable income financial reporting becomes tax. influenced biased, In Germany tax accounts published financial accounts accounts are. not really prepared for the benefit of the investor. In US UK and Netherlands link between taxable income and. accounting income is much weaker with separate tax accounts and. financial accounts different measurement and recognition rules. Independence between tax and Dependence between tax and. accounting accounting,Denmark Germany,Ireland France. UK Belgium,Netherlands Italy,Czech Republic Sweden. Poland Norway, Important issue here is the extent to which taxation regulations determine.
accounting measurements, One of the main differences between countries is in the treatment of deferred. Problem here, Tax payable does not relate to accounting profit in income statement. i e accounting profit is adjusted by tax authorities. Tax incentives by governments encourage businesses to invest in fixed. Tax authorities reverse adds back these incentives depreciation figures from. to profit and deducts tax allowance on profit, A deferred tax liability account can be formed to deal with this. THUS timing differences arise,The Accounting Profession. The strength size and competence of the accountancy profession in a. country can help us understand accounting system differences across. Large body of shareholders and public companies,Need better quality financial information.
Greater need for auditors,German system UK system, System of tax experts Some accountants specialise in tax. Accountants must be in practice Accountants can be in industry. government education etc,Longer training period,Much shorter training period. Level of inflation affects accounting practices across countries. In some countries inflation can be overwhelming particularly in. South America, Tweedie and Whittington 1984 study the use of methods of. general price level adjustment inflation accounting adjusting. accounting items by inflation indices, In France Spain Italy and Greece governments instituted inflation. accounting in the 1970s, In US UK and Australia accountants have developed responses to.
inflation in the 1970s, THUS how well a country s accounting system deals with periods of. high inflation gives us a good basis of comparison between countries. In some countries accounting theory has strongly influenced. accounting practice, In the Netherlands microeconomic factors influence accounting. Accounting theory Accounting practice, Theodore Limperg advanced the case that users of financial. statements would be given the fairest view of the performance and. state of affairs of a company by allowing accountants to use. judgement to select and present accounting figures. Dutch law and tax requirements are very loose and accounting. system is based on fairness through judgement rather than fixed. accounting rules or laws replacement cost accounting. In other countries theory is less important though arguably. accounting is becoming a more theoretical subject as time. progresses, Economic and political factors give rise to accounting practice. differences across countries, 1 Economic crisis in US in 1920s 30s Securities Exchange Acts.
and extensive disclosure requirements, 2 Change of government impact of EU directives change in. accounting system, 3 Impact of war influence of German upon French accounting. 4 Western imperialism Singapore has GAAP similar to the UK. African companies employ French accounting, 5 Economic development Eastern European countries moving. towards IAS Europeanization but debate whether appropriate. Differences in GAAP Across Countries, Economic and environmental differences lead to differences in. 1 Accounting systems e g regulation,2 Accounting values e g Gray 1988.
3 Differences in orientation of financial reporting. All of these influence national accounting standards and practices. and these can be compared on the basis of six main factors. 1 Shareholder versus stakeholder orientation,2 Fairness versus legality. 3 Conservatism versus accruals,4 Uniformity accounting plans and formats. 5 Consolidated accounts,6 Deferred taxation,Differences in GAAP Across Countries. 1 Shareholder orientation versus stakeholder orientation. In countries with widespread ownership there is a need for high quality. published financial information, Existing and potential shareholders do not have access to internal. information on the firm they might want to invest or increase their. investment in, Here pressure for disclosure is much greater than in countries where.
providers of finance have the power to obtain internal information. Debt versus equity orientation has a direct influence on valuation issues. a Equity orientated countries financial reporting aims at communicating. 1 Investment Analysis 1 BEAM011 Lecture 10 International Investment Analysis Dr Jon Tucker Xfi Centre for Finance and Investment University of Exeter

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