COMPARATIVE ACCOUNTING

Chapter 5

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Comparative Accounting
Chapter Topics:
Accounting environment, profession,
regulation, principles/practices, and
differences with IFRS in
China
Germany
Japan
Mexico
United Kingdom
5-2

Comparative Accounting
Learning Objectives
1. Describe some aspects of the environment in
which accounting operates in five countries:
China, Germany, Japan, Mexico, and the
United Kingdom.
2. Explain the nature of the accounting profession
in the selected countries.
3. Discuss the mechanisms in place for
regulating accounting and financial reporting in
5-3
the selected countries.

Comparative Accounting
Learning Objectives
4. Examine some of the accounting principles
and practices used by companies in these
countries.
5. Identify the areas where national accounting
practices in these countries differ from
International Financial Reporting Standards
(IFRS).
5-4

China
Background
Worlds largest country with population of over 1.2
billion
Peoples Republic of China (PRC) established in 1949
Politically: Communist, one-party state
Economically: Until the 1980s, all firms state-owned
Currently in transformation to socialist market economy
Worlds fourth largest economy and fastest growing
among large economies, and is largest recipient of FDI

Learning Objective 1

5-5

China
Background
First securities regulations adopted in 1984
Two major stock exchanges, Shanghai and Shenzhen
established in 1990 and 1991
Government controls capital market via Chinese Security
Regulatory Commission (CSRC) similar to SEC
Domestic companies list four types of shares: A, B, C, H.
Market characterized by speculation, high share turnover

Learning Objective 1

5-6

China
Accounting Profession
Profession less prestigious than in U.S./U.K.
Accounting and auditing have developed separately.
Chinese Institute of Certified Public Accountants (CICPA) and Chinese
Association of Certified Practicing Auditors (CACPA) merged in 1998.
Economic reform and the large number of joint ventures with foreigners has
led to emergence of the audit profession.
In October 2007, the ICAEW (Institute of Chartered Accountants in England
and Wales) and CICPA launched a joint project for cooperation between the
professional bodies in the two countries.
Most domestic Chinese accounting firms are hooked up to a governmentsponsoring body, although the government has encouraged independence.
Guanxi or tight, close-knit networks, is common way of doing business,
but may collide ethically for accountants.

Learning Objective 2

5-7

China
Accounting Regulation
Government continues to act as accounting regulator.
Recent activity is focused on harmonizing variety of domestic
systems which vary by industry.
Committed to converging with IFRS, spurred by desired
membership in World Trade Organization (WTO)
Audits of financial statements widely required
Death penalty in an accounting fraud case suggests that it is taken
very seriously.
Ministry of Finance (MoF) in similar role as FASB.
MoF has issued several pronouncements to achieve harmony.

Learning Objective 3

5-8

China
Accounting Principles and Practice
Computation of taxable income is of primary importance.
Conservatism is criticized as a method by which owners
can understate income and justify low wages.
Lack of conservatism is still a major difference with IFRS.
Lack of accounting infrastructure contributes to the gap
between accounting principles and practice.
Accounting System for Business Enterprises (ASBE) is
followed by over 500,000 firms, including all listed
companies.

Learning Objective 4

5-9

China
Differences with IFRS
Property, plant, and equipment -- historical cost, whereas
IAS 16 permits revaluations.
Asset impairments Chinese standards are silent, whereas
IAS 36 requires impairment test and recognition of loss.
Preoperating expenses deferred, then expensed when
operations begin, whereas, under IAS 38, expense
immediately.
Business combinations no specific rules, whereas IAS 22
specifically discusses accounting for business combinations.

Learning Objective 5

5-10

Germany
Background
European Unions largest country, population 83 million
West Germany and East Germany established in 1949,
were reunified in 1990.
Historically, banks have been primary source of finance
via both loans and equity.
Since reunification, the economy has been affected by
internationalization.

Learning Objective 1

5-11

Germany
Background
German companies increasingly listing on foreign
exchanges, e.g., New York Stock Exchange.
Most common business forms are Aktiengesellschaft (AG)
and Gesellschaft mit beschrankter Haftung (GMBH).
AG are publicly traded/GMBH are non-publicly traded
Historically had significant influence on accounting
systems in a number of other countries
Japans commercial code is modeled on Germanys.

Learning Objective 1

5-12

Germany
Accounting Profession
Profession has traditionally been less influential than in
U.S./U.K.
Auditing is dominant part of profession and certified
auditors title of Wirtschaftprufer (WP) was created in 1931
Institut der Wirtschaftprufer similar to the AICPA
Obtaining WP title is extremely rigorous
Wirtschaftpruferkammer (WPK) is a state-sponsored
group that oversees auditing profession.

Learning Objective 2

5-13

Germany
Accounting Regulation
Commercial code and tax laws are main sources of accounting
rules.
Traditionally has not used a system of independent institutional
oversight
Stock exchange rules have less influence than in U.S.
Prudence (conservatism) is fundamental--recognition of revenues
only when realized, losses when they appear possible.
Began change away from creditor orientation in 1960s towards
shareholder orientation
Starting in the 1980s, EU directives began having major influence.

Learning Objective 3

5-14

Germany
Accounting Principles and Practices
Historical cost attribute for measuring tangible assets is
strictly adhered to.
Traditional focus on creditor protection is at odds with
the true and fair view concept.
Importance of tax laws led to the reverse authoritative
principle which requires expenses to be deducted from
accounting income if they are to be tax deductible.
Differences between accounting and tax income are
minimal, thereby reducing need for deferred taxes.

Learning Objective 4

5-15

Germany
Accounting Principles and Practices
In contrast to China, conservatism has been used to resist
labors wage demands.
Standards allow for income smoothing, frequently
accomplished via early recognition of losses.
EU fourth directive requires true and fair view, but Germans
have a unique interpretation of the concept.
Commitment to globalization reflected in rule that allows
public companies to use IFRS for consolidated statements.
Main intention of German Accounting Law Modernization Act
is conformity with IFRS
Learning Objective 4

5-16

Germany
Differences with IFRS
Goodwill deducted immediately against equity, whereas,
under IFRS 3, accounted for as an indefinite life intangible
asset.
Internally generated intangibles not recognized, whereas,
under IAS 38, recognized as an asset under some conditions.
Leases accounting uses tax rules, with capitalization rare,
whereas IAS 17 criteria result in more frequent capitalization.
Accounting for subsidiaries allow exclusion of dissimilar
subsidiaries, which are consolidated under IAS 27.

Learning Objective 5

5-17

Japan
Background
Population 127 million, worlds third largest economy
Banks are primary source of finance via both loans and
equity, and cross-corporate equity ownership is also
common.
Keiretsu (and predecessor Zaibatsu) emphasize close
business ties and reflect cultural value of collectivism.
1990s recession led to an increase in Japanese firms
attempts to obtain capital internationally.

Learning Objective 1

5-18

Japan
Accounting Profession
Certified Public Accountants Law (1948) established the
profession.
JICPA is one of the nine founding members of the IASC.
Profession is significantly less influential than in U.S./U.K. and
is also much smaller in numbers than U.S.
Obtaining CPA title is extremely rigorous, as in Germany.
Low status within Japanese society vs. engineers and scientists
Collectivism leads to lack of trust of auditors.
Tax advising is a much larger, separate, profession.

Learning Objective 2

5-19

Japan
Accounting Regulation
Government influences accounting via Commercial Code,
Corporate Income Tax Law and Securities and Exchange Law.
Similar to Germany, strong creditor orientation and accounting
rules closely tied to tax rules
Big Bang financial reforms are leading to harmonization with
international standards.
These reforms included requirements for consolidation and fair
value accounting for tradable securities.
Business Accounting Principles issued by Ministry of Finance
consist of 7 guidelines (the equivalent of a conceptual framework)

Learning Objective 3

5-20

Japan
Accounting Principles and Practices
In contrast to U.S., net income is less a measure of
performance and seen more as funds available for
dividends.
Since providers of financing tend to be close to the
firm, there has historically been little pressure for
disclosure.
Lack of disclosure is apparent in segment reporting.

Learning Objective 4

5-21

Japan
Differences with IFRS
Revaluation of Land allowed, but updating not required,
whereas, under IFRS 16, revaluations require regular updating.
Preoperating costs capitalization is allowed, whereas, under
IAS 38, expensed immediately.
Construction contracts completed contract method is allowed,
whereas IAS 11 essentially requires percentage-of-completion.
Provisions allows for provisions prior to actual obligation,
whereas IAS 37 only allows for present obligations based on past
transaction.

Learning Objective 5

5-22

Japan
Differences with IFRS
In August 2007, IASB and Accounting Standards Board
of Japan agreed to accelerate convergence between
Japan GAAP and IFRS with goal to eliminate all
differences by June 2011.

Learning Objective 5

5-23

Mexico
Background
History of significant inflation-- government control of business is
partially blamed for this.
Significant changes in 1990s, including privatization of state-owned firms
and NAFTA
Historically, most businesses family-owned-- even the very largeprefer
to raise capital via debt vs. equitybut gradually changing
Mexicos one stock exchange, the Bolsa Mexicana de Valores, is
privately-owned.
Represents one of the largest U.S. trading partners (75% of Mexicos
imports, more than 80% of her exports, and 60% of all FDI

Learning Objective 1

5-24

Mexico
Accounting Profession
The Asociacion de Contadores Publicos, first professional
accountant organization, established in 1917
This group was succeeded by the Mexican Institute of Public
Accountants (MIPA) in 1964.
MIPA establishes accounting and auditing principles.
In order to practice public accounting in Mexico, one needs a
professional diploma.
Contador Publico Certificado (CPC) is equivalent of U.S. CPA and
can have reciprocal privileges in U.S. and Canada based on
passing certain exams

Learning Objective 2

5-25

Mexico
Accounting Regulation
The Mexican Securities Law (1975), was amended in 1993 to
comply with NAFTA issues.
Accounting standards, grounded in a conceptual framework, have
four classes of Bulletins, A, B, C, and D, and, with few exceptions,
are similar to U.S. GAAP.
Fairness-oriented vs. legal compliance
Corporate tax rules require a report in accordance with Mexican
GAAP audited in accordance with Mexican GAAS.
Enforcement mechanisms (e.g. for insider trading) not effective

Learning Objective 3

5-26

Mexico
Accounting Principles and Practices
Mexican GAAP heavily influenced by U.S. GAAP due
to NAFTA, geographical proximity, and
comprehensiveness of U.S. GAAP.
Despite international influences, Mexicos Bulletin B-10
on inflation accounting shows how harmonized
accounting may not be appropriate for all
circumstances.

Learning Objective 4

5-27

Mexico
Accounting Principles and Practices
Bulletin B-10, Recognition of the Effects of Inflation, reflects a
major difference to U.S. GAAP.
Nonmonetary assets and liabilities to be restated for purchasing
power changes of the peso
Inventory can be restated using current replacement costs.
Recognition in income (generally) of the gain or loss from the net
monetary position, asset or liability
In line with IAS 29, Mexico has given up on inflation accounting
recently, due to low rate of inflation.

Learning Objective 4

5-28

Mexico
Differences with IFRS
Statement of cash flows statement of changes in
financial position required, whereas IAS 7 requires a
statement of cash flows.
Inflation Accounting requires inflation adjustments
regardless of inflation rate, whereas IAS 29 required only for
hyperinflationary countries.
Negative Goodwill recorded as a deferred credit and
amortized over a period of up to five years, whereas IFRS 3
requires immediate recognition of gain.

Learning Objective 5

5-29

United Kingdom
Background
Population of about 60 million, comprised of England,
Northern Ireland, Scotland, and Wales
Among the five countries in this chapter, its financial
structure is closest to the U.S.
15,000 Private Limited Companies (PLCs) with about
2,500 of these listed on the London Stock Exchange.

Learning Objective 1

5-30

United Kingdom
Accounting Profession
Worlds first association of professional accountants, The
Society of Accountants in Edinburgh, established in 1853
Six professional chartered bodies coordinated through
Consultative Committee of Accountancy Bodies (CCAB)
The profession developed in response to the needs of
industry and has influenced the development of professions
in a number of other countries.
Compared to the U.S. the certification requirements focus
more on work experience and less on university education.

Learning Objective 2

5-31

United Kingdom
Accounting Regulation
The Companies Act, accounting pronouncements, and
stock exchange rules comprise accounting regulation.
Similar to the U.S., and unlike Germany and Japan, tax
rules do not significantly influence financial reporting.
Standard-setters have historically taken a principles-based
approach using a statement of principles as a conceptual
framework.
Has not historically had a strong, SEC type agency, but
recent scandals have led to increased regulation.

Learning Objective 3

5-32

United Kingdom
Accounting Principles and Practices
A primary objective of accounting is to support an effective
capital market.
The true and fair view principle is paramount.
True and fair view override requires that companies not
comply with standards that would result in misleading
financial statements.
Professional judgment is essential additional component
to true and fair view.

Learning Objective 4

5-33

United Kingdom
Differences with IFRS
Goodwill amortization allowed, whereas IFRS 3
prohibits amortization and requires an annual
impairment test.
Related party disclosures requires disclosure of
related party names, whereas IAS 24 requires
disclosure by type, not name, of related party.
Revaluation gains/losses generally not taken to
income statement, whereas IAS 40 requires gains and
losses to affect net income.

Learning Objective 5

5-34