INTERNATIONAL FINANCIAL REPORTING
MASTER FINANCE 2022-2023 – B ELECTIVE COURSE
1. ACCOUNTING DIVERSITY AND CLASSIFICATION OF ACCOUNTING SYSTEMS
In this course, we take an international perspective to financial accounting (other forms of accounting are
managerial accounting, auditing, taxation).
There are different layers of international financial accounting:
• Comparative accounting: standards, accounting rules, auditing rules, taxation of different countries
• Supranatural accounting: standards, accounting rules, auditing rules, taxation rules issued by supranatural
organizations (e.g., IASB)
• International business activities and foreign investments: accounting standards, guidelines, and practices of
multinational corporations (MNCs).
Knowing the layers of international accounting is relevant because of the global economy:
• International trade
• Foreign direct investment/multinational corporations
• International capital markets
o Cross-listing: e.g., the stocks of AkzoNobel are also offered on a foreign stock exchange, resulting
in that U.S. investors can also buy the Dutch AkzoNobel stock using U.S. dollars.
Accounting system: a collection of accounting standards, rules, guidelines, practices, and institutions.
Accounting systems arise from and reflect the environment in which they operate. There is diversity in
accounting systems worldwide.
Radebaugh, Gray & Black (2006) developed potential influential factors on accounting systems:
• Culture
• Legal system
• Accounting regulation
• Inflation
• Economic growth and development
• Social climate
• Political system
• Accounting education and research
• Accounting profession
• Taxation
• Finance and capital markets
• Enterprise activities & ownership
• International factors
Legal system: common versus code law
Common law Code law (codified or civil law)
English-speaking countries: US, UK, Canada, Non-English-speaking countries: Europe, Mexico, South-
Australia America, Russia, China, Japan
Limited amount of statutory law More comprehensive, continuously updated statutory
Case law (based on precedent) supplementary to law
statutory law
Influence on accounting: Influence on accounting:
• Corporation law might exist • Government governs accounting practices by law
• Non-governmental organizations govern • Corporation law (commercial law/companies act)
accounting practices by more rules • Accounting law is rather general
• More detailed accounting rules • Use of other sources for guidance (tax law, auditing
• More influence from accounting bodies profession, academicians)
,Taxation:
• Differences between financial and tax accounting (base for taxation)
• GAAP determine taxable income or separate tax rules do
o France, Germany: financial statements are the basis for taxation
o United States: separate tax rules (exception: LIFO)
• Influence on accounting: incentives to minimize reported income for tax purposes
Providers of finance (who is funding the company): banks, governments, family and external shareholders.
• Influence on accounting:
o Dispersion of ownership: shareholders need information disclosure and public accountability
o Orientation is either towards profits (equity) or solvency and liquidity (debt)
o Creates incentives for aggressive vs. conservative accounting
▪ Banks prefer conservative accounting: recording the bad news as soon as possible and
delay recording good news until you are sure that they will materialize.
▪ When companies focus on profits, banks can also be aggressive trying to maximize profits.
Relationship between some factors:
Common Law Code Law
Anglo-Saxon origin Continental European origin
Fair presentation Legal compliance
Reporting aimed at outside investors Reporting aimed at creditor protection
Accounting standards setting by private sector Accounting standards setting by public sector
Stronger accounting profession Weaker accounting profession
Separation between financial and tax accounting Link between financial and tax accounting
Stronger protection of minority investors Weaker protection of minority investors
Stockholder CG-model Stakeholder CG-model
Inflation
• Inflation accounting: adjustments of historical costs for increasing prices
• High relevance if financial statements are the basis for taxation (fictitious profits)
o We need to correct for inflation, because we pay taxes on fictitious profits
• Example: South America uses inflation accounting (is similar to continental European but with inflation)
Political, economic and historical ties
• EU: IFRS used by listed firms from members states
• US: dominant economy worldwide, influence on IFRS
• Colonialism (e.g., British, French inheritance)
Culture (!): social values influence humans, thus they influence accounting practice
• Hofstede’s cultural dimensions: dimensions of social values that can describe differences in cultures:
o Individualism versus collectivism → I versus them
o Large versus small power distance → accept power distance or strive for equality?
o Strong versus weak uncertainty avoidance → feeling uncomfortable with uncertainties then
maintain codes, while weak uncertainty avoidance is more relaxed.
o Masculinity versus femininity → tough versus tender, striving for achievement, assertiveness and
success, or having preference for corporation, modesty and caring for the weak.
o Long-term versus short-term orientation
o Indulgence versus restraint → being more relaxed and enjoying life or following strict rules?
• Gray’s cultural accounting framework: there are the following accounting values:
o Professionalism versus statutory control: individual professional judgment or following rules
o Uniformity versus flexibility: do all companies apply same accounting standards or do they have a
choice and can they present the real situation of the company?
, o Conservatism versus optimism: recording the bad news as soon as possible and delaying good news
or the other way around?
o Secrecy versus transparency
Accounting values and cultural dimensions:
Reasons why there is a positive or negative correlation between cultural dimension and accounting value:
• Power distance and professionalism: a larger power distance indicates there is less professionalism and
more statutory control.
• Uncertainty avoidance and professionalism: If there is more uncertainty avoidance companies have to
follow the guidelines from statutory control.
Accounting systems will be influenced by culture.
Modified Gray Framework: emphasizes the role of accounting values on top of accounting systems. Accounting
practices will be mainly influenced by the people involved in the company. Even if we have the same accounting
rules, we still have different outcomes due to the different values between people.
How the values influence the accounting systems of different countries:
, Problems caused by diversity:
• Consolidation of financial statements
o Translating foreign currency to parent currency
o Converting financial reports to parent GAAP
o Parent company will have to prepare financial statements showing the group in the same set of
financial standards.
▪ Example: Apple is a U.S. company with subsidiaries all over the world. A subsidiary in the
Netherlands uses Euro instead of U.S. dollar. A problem arises in translating Euro to U.S.
Dollar. The U.S. parent company will use U.S. GAAP, while the subsidiary uses local Dutch
accounting standards as the Dutch subsidiary is required by law to follow Dutch standards
and provide financial reports. For the consolidation, they can have two standards (Dutch
and U.S. standards) or they can follow the Dutch standard and then translate into U.S. This
is a costly process and takes lots of effort as you need to know at least two sets of financial
standards.
• Access to foreign capital markets
o Lower financing cost versus higher reporting cost
o IFRS is accepted until 2007
o Show investors how this two items would look like, this creates higher reporting costs
• Comparability of financial statements
o Affects investment/lending decisions
• Quality of accounting information
o Low quality accounting standards in some countries
o Some companies in East Asia went bankrupt because the accounting standards did not ask the
companies to report some balance sheet liabilities. Not reporting all liabilities leads to investors
not having all information about the company; some obligations of the company that might arise
in the future.
o You still have to give information in the notes.
o If it is not mentioned in the statement, investors will not know about it.
Multinational companies will take advantage. Example: Google used an intellectual property licensing scheme,
known as the “Double Irish, Dutch sandwich, which allowed it to delay paying U.S taxes. The subsidiary in the
Netherlands was used to shift revenue from royalties earned outside the U.S. to Ireland, where companies pay
no income tax.
Classification of accounting systems:
• Purpose: to what extent do accounting systems resemble each other or move away from each other; and
which systems are dominant and why?
• Relevance: to identify main influential factors and to facilitate international harmonization.
Gernon & Meek (2001) classify accounting systems in three models:
Fair presentation/full disclosure Legal compliance model Inflation-adjusted model
model (Anglo-Saxon) (Continental European)
Accounting oriented to large Accounting oriented to banks, Similar to legal compliance
numbers of investors and creditors taxation, government-planning model, but extensive
purposes adjustments for inflation
UK, US, most other English-speaking Most European countries, Japan South America
countries (common law countries) (code law countries)
Nobes’ (1983, left picture next page) judgmental classification of financial reporting systems: Nobes created
clustered based on his expectations.
• Species are the individual countries
• Countries that are part of the same family will be the most similar ones
• Countries that are part of different classes are the most different ones. Briefly there are two classes:
