Chapter 3 Comparative Accounting. The environment in a given nation will affect the following accounting factors:

Transcription

1 Chapter 3 Comparative Accounting The environment in a given nation will affect the following accounting factors: 1. the need for accounting information by decision makers 2. the basic approach to the setting of accounting standards 3. the level of sophistication in the accounting standards 4. the status of accounting and accountants in society 5. the importance of the accounting profession within society 6. the specific accounting principles and procedures that are followed Setting Accounting Standards There are four categories of approaches and organizations that set accounting rules in various countries: 1. a purely political approach, relying on legislation to establish the accounting rules

2 2. a private, professional approach in which the accounting rules are set by the accounting profession 3. a public-private mixed approach in which the rules are established by a private sector agency that acts as a public agency, supported and enforced by governmental action 4. a mixed approach in which a combination of private, public, government, and other groups are involved in accounting rule setting and enforcement United States FASB is the main organization that has been designated to establish accounting standards. Auditing standards for publicly traded firms will be established by the Public Accounting Oversight Board (part of the SEC) and for privately held firms by the AICPA. The SEC has statutory authority to establish financial reporting standards for public

3 companies under the Securities Exchange Act of The SEC maintains an influence through its Staff Accounting Bulletins and Financial Reporting Releases. The FASB consists of seven full-time board members appointed for a five-year term, which may be renewed once. FASB follows its own due process procedure when issuing a new accounting standard: 1. select and prioritize issues for the board s agenda 2. appoint a representative task force to identify and define the problems and alternatives related to each issue, and conduct research and analysis about the issue 3. prepare a discussion memorandum on the issue and distribute it to interested parties 4. invite public comment on the discussion memorandum 5. schedule a public hearing 6. decide whether to issue a standard. If the decision is yes, prepare an exposure

4 draft of the standard and distribute it to all interested parties 7. allow a public comment period 8. hold a public hearing 9. approve or disapprove the exposure draft as revised United Kingdom Cadbury Committee set up in May 1991 by the Financial Reporting Council, the Stock Exchange, and the accountancy profession in response to their concern about the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected. At the heart of the Cadbury Committee s recommendations was the Code of Best Practice, with which all listed firms were to comply. The Code was based on three principles:

5 1. openness (subject to commercial confidentiality) 2. integrity (honest, balanced and complete financial reporting) 3. accountability (the requirement for directors to provide quality information, and for shareholders to exercise their powers as owners responsibly) In the UK, there are two sources of accounting rules. The first consists of various Companies Acts, which are commercial legislation that cover a number of topics, some of which directly relate to the information content of financial statements. Although the acts deal mainly with financial issues such as the incorporation of the firm, its management, administration and dissolution, they also contain provisions concerning financial statements. The Acts require that a firm keep proper accounting records and that its directors present an income statement and balance sheet to its shareholders within a specific time period after the end of the year. These

6 statements must be accompanied by an audit opinion. The Acts also implement the EU s Fourth Directive. As a member of the EU, the UK must incorporate the EC Directives into its business statutes. The Fourth Directive concerns the form and content of financial statements. Please note that all listed companies in the EU will be required to prepare consolidated accounts in accordance with IFRS no later than Significant Accounting Policies Companies that lease assets under finance leases are required to treat such assets as though they were owned. A finance lease must meet specified criteria; all other leases are considered operating leases. Lease commitments and the method of accounting for leases must be disclosed.

7 Research costs must be expensed as incurred. Development costs are usually expensed as incurred but may be deferred and amortized if there are grounds for expecting that such costs will be covered by future revenues. UK firms use the partial tax allocation of deferring taxes. Inventories are carried at the lower of cost or net realizable value. The most popular method of determining the cost of inventory is FIFO. The base stock method and LIFO are not permitted. France The main statutes governing company law in France are the Companies Act of July 1996 and the related Decree of March Under the provisions of the Companies Act, a company must prepare financial statements to be presented to a general meeting of shareholders within 6 months after the end of its fiscal year. Quoted companies are

8 required to prepare consolidated financial statements. The French law, Loi de Securite Financiere, published on August 2, 2003, is a significant regulation that has 3 objectives: 1. to merge the COB (the French SEC), the CMF, and the CDGF into a unique institution the AMF that controls all financial activities in France 2. to reinforce security for stockholders 3. to require more transparency from every listed and not listed Society Anonyme (SA) in France. Every SA will have to comply with the LSF. The two major requirements are: --a new report signed by the president of the board with detailed information on the way the board is actually organized, all internal control procedures, and limitations placed by the board on the prerogatives and power of the CEO

9 --a new report by the external auditors on internal control procedures related to financial and accounting processes The Plan Comptable prescribes the form and content of financial statements. It contains a uniform chart of accounts that specifies the classification of items to be included in the financial statements. It also includes an explanation of terminology, principles of valuation, and cost accounting methods. The Plan Comptable has been amended to incorporate financial reporting changes brought about by the 4 th and 7 th Directives. Among the major changes are a requirement that a company s financial statements must present a true and fair view of its financial position and results of operations, the combination of the trading account and profit and loss account into one statement, and the requirement that

10 supplementary information and notes be mandatory. For statutory financial statements, all leases are considered operating leases. For consolidated financial statements, leases that would fall under general definitions of finance leases may be capitalized. R&D costs are normally expensed as incurred. If the commercial feasibility of the project has been established and the costs are identifiable for the project, such costs may be capitalized. Inventories are valued at the lower of cost or either realizable value or replacement cost. The two costing methods allowed are FIFO and weighted average.

11 Netherlands In 1970, the Act on Annual Accounts of Enterprises was issued, which made obligatory the auditing of a large number of companies by registered accountants. This requirement applies to all public companies and certain private companies. The influences have come mainly from the following groups: accounting academicians, business community, and the Netherlands Institute.

12 There are no formal pronouncements on accounting or auditing standards from the National Institute and there has been no codification of accounting standards such as the statements of generally accepted accounting principles issued by various national bodies. Selected Accounting Policies In most cases, finance leases are capitalized in both the lessee s and lessor s books. The majority of companies expense R&D as incurred; they may be capitalized if there is a strong expectation of future benefit. Deferred taxes are primarily accounted for on a full allocation basis using the liability method of tax allocation. The cost of inventories may be stated at actual cost, replacement cost, or another current cost method, but may not exceed the market value. LIFO and the base stock method may also be used, but if so, the current value of the inventory must be disclosed.

13 Germany German banks offer their clients a wide range of credit and finance services. Longterm financing by banks has resulted in their participation in industry, particularly in the electrical and chemical sectors. Banks power of intervention in the affairs of industry has been increased because many of their clients assign voting rights to the banks. German accounting profession The compulsory audit of public corporations in Germany dates back to the 1920s. In 1932, in order to meet the need for auditors, the first professional code and title of wirtschaftspruefer (WP) or certified public accountant, were established. The German Commercial Code specifically requires that the compulsory audits of public corporations or aktiengesellschaft (AG) be performed by WPs. WPs are members of the Wirtschaftsprueferkammer or Chamber of Certified Public Accountants. Another

14 group of accountants known as vereidigte buchpruefer (VB) are also members. Besides the WP, two other groups, whose function is tax advising, have arisen because of the complexity of the German tax laws. These are the steuerberator and the steuerbevollmachtigte. A WP must hold a university degree in economics, business, law or engineering. The candidate must have had six years of business experience including four years of auditing. Because of the comprehensive requirements for entry into the profession, it is almost impossible to fulfill all of them before the age of thirty. German financial reporting is regulated by law and not by accounting principles. The provisions of the law are supplemented by accounting principles.

15 There appears to be a great concern for uniformity in the presentation of financial statements. German law has attempted to reduce the use of secret reserves which is a method commonly used by management to conceal corporate profits from shareholders. German tax law also influences financial accounting. To take advantage of tax benefits, book and tax accounting must conform. When an audit is legally required, the format is mandated by law. Significant Accounting Policies The treatment of leases is determined by tax law which is complex. R&D costs are expensed as incurred. If accounting income is greater than taxable income, the Commercial Code requires that a net deferred tax liability be recorded using the liability method.

16 German companies are required by law to value inventories at cost or market, whichever is lower. Common inventory methods are specific identification, moving average, and cost. Japan The two major forms of business enterprise are the limited stock company (kabushiki kaisha) and the private company (yugen kaisha). Some factors in Japan s economic environment have had an important impact on the practice of accounting. There is extensive cross-ownership within the Japanese business community. Many firms are jointly owned by other firms and assembled into business groups with a central leadership.

17 Another somewhat unusual factor is the widespread use of credit and debt capital rather than equity capital to finance large firms. Instead of having to answer to a large number of stockholders, most firms answer to a limited number of financial institutions. Japanese Accounting Profession Accounting in Japan has been a governmental function. After 1945, Japan adopted a Securities Exchange Law. In national economic and accounting matters, the Ministry of Finance is dominant and the role of the Japanese Institute of CPAs is minimal. Japanese GAAP All limited stock companies or KKs, are required by law to prepare financial statements for each fiscal year. The law also prescribes certain kinds of accounting treatments and how the firms are to maintain their basic accounting records.

18 Under Japanese law, all items used for tax purposes must also be used for financial accounting purposes. Large Japanese firms that publicly trade their securities are subject tohe disclosure requirements of the Justice Ministry under the Japanese Securities Exchange Law. The Business Accounting Deliberation Council is the single most authoritative source of Japanese GAAP. Significant Accounting Policies R&D costs may be capitalized for new products. Other R&D costs are expensed as they are incurred. Inventories are valued at either cost or lower of cost or market. Weighted average cost is the predominant inventory cost method.