Chapter 1, Global Accounting Diversity

Question 1

3 Types of Worldwide accounting diversity

Answer 1

1. Presentation Differences
2. Terminology Differences
3. Differences in recognition and measurement rules

Question 2

2 Main accounting systems

Answer 2

International Financial Reporting Standards (IFRS)

U.S. Generally Accepted Accounting Principles (U.S. GAAP)

Question 3

What is a consequence of different recognition and measurement rules

Answer 3

Financial results such as net income can differ significantly

Question 4

5 Main reasons of accounting diversity

Answer 4

1. Legal System
2. Taxation
3. Providers of financing
4. Inflation
5. Political and economic ties

Question 5

2 main legal systems

Answer 5

• Common law (accounting standards developed by non-legislative organisations, fair presentation, high transparency, full disclosure and clear separation between financial accounting and tax accounting. More reliance on equity financing than debt financing)
• Code law (accounting standards developed by legislative organisations, more general and broad accounting laws, low disclosure and alignment between financial and tax accounting. More reliance on debt financing than equity financing)

Question 6

What is the consequence when there is no clear separation between financial and tax accounting? (as in code law countries)

Answer 6

The net income fails to reflect the economic reality and there is no need for account deferred taxes

Question 7

2 providers of financing

Answer 7

• Debt financing (banks, family state) (code law)

- Equity financing (shareholders) (common law)

Question 8

4 problems caused by accounting diversity

Answer 8

1. Preparation of consolidated statements (challenging for MNCs when subsidiaries have different accounting rules and currencies)
2. Access to foreign capital markets or financing abroad ( costly when financial statements need to be adjusted)
3. Comparability of financial statements
4. Lack of high quality disclosure standards in some parts of the world.

Question 9

Gray’s accounting values (4)

Answer 9

1. Professionalism vs statutory control
2. Uniformity vs Flexibility
3. Conservatism vs optimism
4. Secrecy and transparency