Chapter 5 - Financial Accounting Flashcards
What is the international adoption of IFRS pros according to IASB?
The international adoption of IFRS is claimed by the IASB as a means of improving the reporting practices of organisations in many countries and improving the ability of report readers to compare the financial performance and position of organisations in different countries.
Why will the adoption of IFRS and IAS vary between countries?
Differences in taxation systems, Differences in economic and political influences on financial reporting, Modifications made to the IFRS, Issues of translation and differences in implementation, monitoring and enforcement.
What role does “differences in taxation systems” play in the variation of the adoption of IFRS between countries?
Depending on whether some costs are deductible or not because of differences in taxation systems, accountants in different countries will have different incentives and may thus vary in their application of the IFRS and IAS. For example, asset impairments are deductible in Germany (not in the UK), so there is a bias for them.
What roles does “Differences in economic and political influences” on financial reporting” play in the variation of the adoption of IFRS between countries?
There is also an expectation that differences in the economic and political forces operating within a country will have implications for various decisions and judgements made throughout the accounting process regardless of whether IFRS has been adopted. Powerful local economic and political forces determines how managers, auditor, courts, regulators and other parties influence the implementation of rules. Will affect the judgement of cash flows which affect accounting accruals. Judgements of useful lives, residual values, existence of impairment losses and depreciation methods will vary within the framework.
What roles does “Modifications made to the IFRS” play in the variation of the adoption of IFRS between countries?
Regulatory bodies within particular countries might make the decision to modify a particular IFRS before it is locally released. For example, the EU in relation to its acceptance of IFRS 39. They “carved out” much due to political forces from France.
What role does “issues of translation” play in the variation of the adoption of IFRS between countries?
IFRS are initially developed in english. Then translated to various other languages for local use. How accurate are such translations? Errors in translation has been noted historically.
What role does “differences in implementation, monitoring and enforcement” play in the variation of the adoption of IFRS between countries?
Differences in implementation, monitoring and enforcement will affect how IFRS is applied, which in turn will diminish the international comparability. Differences in accounting profession, quantitatively and qualitatively. Difference in audit profession. Difference in oversight of subjective judgements. Free-ride problem: If a symbol of legitimacy - such as IFRS - can be acquired at low cost, some countries with low levels of financial accounting proficiency will make the choice to adopt IFRS because of the reputational benefits such a choice may generate. However, such a choice will have costly implications for countries with higher levels of accounting proficiency and who put in place appropriate implementation, monitoring and enforcement mechanism.
Which factors underpin the factors contributing to the variability in practice?
Culture, Religion, Legal system, Business Ownership and financing systems, Taxation systems, Strength of accounting profession, Accidents of history.
Culture
Culture is a broad concept that would be expected to impact on legal systems, tax systems, the way businesses are formed and finance, and so on. Culture describes a system of societal or collectively held values (Gray, 1988, p.4) rather than values held at an individual level. Gray (1988) argues that a methodological framework incorporating culture may be used to explain and predict international differences in accounting systems and patterns of accounting development internationally. Different cultures have different values which in turn affect their view of useful information etc. Hofstede (1984) introduces four societal value dimensions: Individualism vs collectivism, large versus small power distance, strong versus weak uncertainty avoidance, masculinity versus femininity. Individualism promotes use of judgement, and in combination with weak uncertainty avoidance and masculinity promotes more disclosure. Anglosaxan branch of accounting. Continental Europe has stronger uncertainty avoidance and collectivist and more extensively promotes regulations. Individualistic more concerned with investors, creditors and lenders as users of financial reporting than society as a whole. IFRS promotes principle based standards rather than rule based standards. Culture also affects how corporate executives communicate information.
One objective of this branch of research was to explain how differences between countries in respect of their culture may either impede any moves towards international harmonisation of accounting standards or bring into question efforts to generate some form of harmonisation or standardisation. Zarzeski (1996) provides evidence that supports a view that entities located in countries classified as relatively more individualistic and masculine and relatively less in terms of uncertainty avoidance provides greater level of disclosure. Some scholars critique the notion of coherent national cultures, however there could be characteristics that are similar.
Religion
Religion is one of the main cultural influences. Western accounting practices are extensively incompatible with islamic principles. Islam does have notion of stewardship but to god rather than to suppliers of equity or debt capital. Additionally, the religion prohibits the payment of interest, which affects the effort for international harmonisation, as interest calculations are integral in Western accounting practices. Time-value of money can hardly be determined without the use of interest.
Legal
Common law systems (CLS) vs. Roman law systems (RLS). CLS fewer prescriptive statutory laws. The body of law has been developed by judges applying both the limited amount of statutory law and the outcomes of previous judicial decisions to the facts of a specific case. Conversely, in Roman law systems parliamentary (statutory) law tends to be very detailed and cover most aspects of daily life. Expected that in CLS the historically development of accounting practices would have been left much more to judgement of professionals (accountants and auditors).
Business Ownership and financing systems
Outsider vs. insider system. In outsider system, external shareholder are a significant source of finance. They will have the need to access detail management information to facilitate their investment decisions. Conversely, in insider systems there is a dominance of family owned businesses, which have access to detailed internal management accounting information, and less need for financial statements. In insider systems also banks are important sources of finance, they have often had representatives on the board and thus less need for financial reports.
Outsider system linked to common law system (anglosaxan)
Insider system linked ro roman law system (contintental europe)
Taxation systems
Outsider system provides decision usefulness primary to potential investors therefore values economic reality. While, insider system has an important role to facilitate the calculation of tax.
Strength of accounting profession
Outsider system often common law systems where judgements of accountants has been more important. Therefore a more established accounting and auditing profession. Conversely, roman law systems with larger insider systems of finance and where compliance with the details of taw law exerts a substantial influence of the financial accounts, there was less need for professional judgement, and less development of the accounting profession.
Accidents of history
Even though US and UK both have had outsider systems and common law systems their accounting should be similar which was not the case for AstraZenece. The author attribute this to accidents of history. Wall Streeet crash in 1929 led to more regulation in US while UK did not experience this. Lobbying activities that affect the regulations and practice of accounting have also been different between the two.
Different information demands or expectations lead to different enforcement mechanisms.
One key obstacle to the establishment and maintenance of the international standardisation of accounting is the international cultural and institutional differences that caused financial accounting to vary in the first place.
