Lecture 1

Question 1

What are the common visual differences in financial statements? (4)

Answer 1

1. Differences in terminology
2. Differences in order of assets on the balance sheet.
3. Differences in order of sections
   ○ For the US, the order is:
   § Assets
   § Liabilities
   § Equity
   ○ For the EU, the order is:
   § Assets
   § Equity
   § Liabilities
4. Inclusion of notes and provisions in UK’s balance sheet.

Question 2

Provide the 2 main reasons for accounting diversity

Answer 2

1. Institutional & Economic Determinants
2. National Culture

Question 3

Describe what aspects of Institutional & Economic Determinants cause accounting diversity (5)

Answer 3

1. Legal system
2. Taxation
3. Providers of financing
4. Inflation
5. Political and Economic Ties

Question 4

What affects accounting diversity in the Legal System? (2,2)

Answer 4

1. Code Law (Civil Law)
   - Originated in the Roman jus civile and found in non-English speaking countries
   - Accounting rules are legislated by the government
2. Common Law (Anglo-Saxon Law)
   - Began in England and found in the English-speaking countries of the world
   - Accounting rules are determined by non-legislative countries

Question 5

What affects accounting diversity in Taxation? (2)

Answer 5

1. Conformity between tax statement and financial statement:
   - Published financial statements
   ○ i.e. Germany - (before 2009) - same taxable income and book income
2. No conformity between tax statement and financial statement is not required
   - Financial statements adjusted for tax purposes.
   - Submitted to the government separately from the reports sent to stockholders
   - US - different taxable income and book income.
   ○ Case of USA:
   § In US companies are allowed to use accelerated depreciation for tax statement (to reduce the reported income and thus, the tax liability) and straight-line depreciation in the financial statement.
   Difference between tax and accounting income gives rise to deferred income taxes.

Question 6

What affects accounting diversity in Providers of Finances? (2,4)

Answer 6

1. Debt financing
   - Financing from family members, banks, state (creditors)
   - Creditors are in company’s board and/or have direct access to information.
   - Firms experience less accountability pressures.
   - Creditors focus on downside risk
2. Equity financing
   - Financing from investors (potential shareholders)
   - All shareholders cannot be in the company’s board and do not have direct access to information
   - Firms provide extensive accounting disclosure.
   - Investors focus on downside risk and upside potential.

Question 7

What affects accounting diversity in Political and Economic ties? (2)

Answer 7

• Accounting can be easily borrowed from or imposed on another country.
• Historical events shaping the political arena; i.e colonialism, trade relations
  ○ India and United Kingdom
  ○ Dutch Antilles and The Netherlands
  ○ Mexico and United States

Question 8

Give a summarized explanation of how each factor that affects accounting diversity may link to each other (2,1)

Answer 8

• Common law countries have domestic listed companies relying on equity for capital
  ○ Legal system <–> Providers of financing
  
  • Code law countries tend to link taxation to accounting statements and rely less on financing provided by shareholders
    ○ Legal system <–> Providers of financing <–> Taxation

Question 9

What are Hofstede’s 5 cultural dimensions

Answer 9

1. Individualism
2. Power Distance -the extent to which a company is tolerating a hierarchy.
3. Uncertainty Avoidance
4. Masculinity
5. Long-term orientation

Question 10

What are the Country’s Accounting Sub-Cultures - Accounting Values (4)

Answer 10

1. Professionalism vs Statutory Control
2. Uniformity vs Flexibility
3. Conservatism vs Optimism
4. Secrecy vs Transparency

Question 11

Elaborate on Professionalism vs Statutory Control

Answer 11

Professionalism vs Statutory Control:
○ Exercising individual professional judgement and the maintenance of professional self-regulation
Vs
○ Compliance with prescriptive legal requirements and statutory control.

Question 12

Elaborate on Uniformity vs Flexibility

Answer 12

Uniformity vs Flexibility:
○ Uniform accounting practices between companies
Vs
○ Flexibility in accordance with the perceived circumstances of individual companies.

Question 13

Elaborate on Conservatism vs Optimism

Answer 13

Conservatism vs Optimism
○ Cautious measurement to cope with uncertainty of future events.
Vs
○ A more optimistic, laissez-faire, risk-taking approach.

Question 14

Elaborate on Secrecy vs Transparency

Answer 14

Secrecy vs Transparency
○ Confidentiality and restriction of disclosure of information
Vs
○ A more transparent, open and publicly accountable approach

Question 15

What are potential problems caused by accounting diversity? (4)

Answer 15

• Preparation of consolidated financial statements
  ○ It may be costly for companies to hire professionals to consolidate financial statements in a recognizable form for global investors.
• Access to foreign capital markets
• Comparability of financial statements
• Lack of high quality accounting information

Question 16

What are the 3 different accounting models?

Answer 16

1. The fair presentation/full disclosure model (Anglo-Saxon or Anglo-American model)
   - Oriented toward the decision needs of large numbers of investors and creditors.
   –> Used in English speaking countries influences by the UK or US.
2. The Legal Compliance Model (Continental European Model)
   - Legalistic
   - Used to provide information for taxation and government-planning
   –> Used in Europe, Japan, and code law countries.
3. The Inflation-Adjusted Model
   - Resembles the Continental European Model
   - Requires extensive use of adjustments for inflation.

Question 17

How can you solve problems caused by accounting diversity? (2)

Answer 17

• Overcome the accounting diversity problems by performing the reconciliation of financial statements.
• Reconciliation of financial statements:
  Converting financial statement from one GAAP to another.

Question 18

What are some recent changes that have been made in the EU regarding accounting diversity? (3)

Answer 18

Recent Changes in Europe:
- Several EU countries developed a two-tiered financial reporting system in the late 1990’s (Austria, France, Germany)
- Stock-exchange-listed companies have the option to use International Financial Reporting Standards (IFRS) in preparing their consolidated financial statements.
- Since 2005 the EU Commission requires all publicly traded companies to use IFRS.
○ Accountants need to develop expertise in both local GAAP and IFRS.