2.2 Causes for differences in International Accounting

Question 1

What are potential causes for Differences in Accounting?

1.
2.
3.
4.
5.

Answer 1

• differences in legal systems (common vs code law)
• differences in main providers of finance to corporations
• taxation
• cultural differences
• education

Question 2

Common Law vs Code Law | Differences

1.
2.
3.
4.

Answer 2

Common
- provides answers to specific cases, rather than formulates a general rule for the future
- thus, commercial law doesnt prescribe rules about financial reporting

Code
- much more prescirbes/ structured
- company law has established rules on how companies need to prepare financial statements

Question 3

What are the two main sources where companies can get funding from?

1.
2.

Answer 3

• debt (bank loans, corporate bonds; very common in germany or france and thus equity funding not that pronounced)
• equity (issue new ordinary shares; UK and USA very common, here we have well developed equity markets)

Question 4

What is the link between common law countries and strong equity markets?

Answer 4

• strong link here
• here we have stronger legal protection of investors, compared to code law

Question 5

Countries in which banks are important providers of finance tend to have… (1)
Banks here are also… (2)

In countries where there is a widepsread ownership of companies, there is a greater need of… (3)

Answer 5

1. small ownership dispersion ->only a little number of owners within the company
2. the primary shareholders -> smaller need for publsihed info on company performance (because you have subsitute information channels and you can directly demand it from the people running it)
3. greater need for disclosure of quality accounting information (negotiation power way smaller; you have no substitutes for information channels and need stronger regulation in accounting information)

Question 6

Continental Europe and Japan | What does the lack of widespread ownership imply here?

Answer 6

• external financial reporting are created for the purposes of protecting creditors and for governments (tax collectors)
• Consequence: financial reporting lacks flexibility and judgement; importance is placed on uniformity, precision and conservatism (tend to make manipulate earnings lower)
• over time, this pattern has been changing

Question 7

What can be said about the extend of Taxation that determines accounting measurements?

1.
2.

Answer 7

• in some countries, tax rules ARE accounting rules (eg France), but even here they dont influence the consolidared FS
• in others, tax rules are seperate to accounting rules (eg UK) -> seperate accounts prepared for tax purposes