Chapter 5

Comparative Accounting

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_ China
_ ermany
_
apan
_ exico
_ nited Kingdom

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 !" 

#$ Öescribe some aspects of the environment in
which accounting operates in five countries:
China, ermany,
apan, exico, and the
nited Kingdom.

$ Explain the nature of the accounting profession
in selected countries.
$ Öiscuss the mechanism in place for regulating
accounting and financial reporting in selected
countries.

ð
   

 !" 

%$ Examine some of the accounting principles
and practices used by companies in these
countries.
ð$ Identify the areas where national accounting
practices in these countries differ from
International Financial Reporting Standards
(IFRSs).

ð%
 

& '

V orld¶s largest country with population of over
1.2 billion.
V People¶s Republic of China (PRC) established
in 1949.
V Politically: Communist, one-party state.
V Economically: ntil the 1980s, all firms state-
owned.
V Currently in transformation to market economy.
V orld¶s fourth largest economy and fastest
growing among large economies, largest
recipient of FÖI.

Learning Objective 1 ðð
 

& '

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

Learning Objective 1 ð(
 

  *
V Profession less prestigious than in .S./K.
V Accounting and auditing have developed
separately.
V Chinese Institute of Certified Public
Accountants (CICPA) and Chinese Association
of Certified Practicing Auditors (CACPA)
merged in 1998.
V Economic reform and the large number of joint
ventures with foreigners has led to emergence
of audit profession.

Learning Objective 2 ð)
 

  
V Recent activity is focused on harmonizing
variety of domestic systems which vary by
industry.
V Committed to converging with IFRS, spurred by
desired membership in orld Trade
Organization (TO).
V Audits of financial statements widely required.
V Öeath penalty in an accounting fraud case
suggests that it is taken very seriously.
V inistry of Finance (oF) in similar role as
FASB.

Learning Objective 3 ð+
 

  *   *  

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

Learning Objective 4 ð,
 

.   
V A
 

 
 -- historical
cost, IAS 16 permits revaluations.
V 






  
â require capitalization, IAS 23 allows
capitalization or expensing.
V =  
 â Chinese standards are
silent, IAS 36 requires impairment test and
recognition of loss.
V A 
 

 â deferred, then
expensed when operations begin, under IAS
38, expense immediately.

Learning Objective 5 ð #-
 /0

& '

V European nion¶s largest country, population
83 million.
V est ermany and East ermany established
in 1949, reunified in 1990.
V Historically, banks have been primary source of
finance via both loans and equity.
V Since reunification, the economy has been
affected by internationalization.

Learning Objective 1 ð ##
 /0

& '

V erman companies increasingly listing on foreign
exchanges, e.g., New York Stock Exchange.
V ost common business forms are
Aktiengesellschaft (A ) and esellschaft mit
beschrankter Haftung ( BH).
V A are publicly traded/ BH are non-publicly
traded.
V Historically had significant influence on accounting
systems in a number of other countries.
V
apan¶s commercial code is modeled on
ermany¶s.

Learning Objective 1 ð #

 /0

  *
V Profession has traditionally been less influential
than in .S./K.
V Auditing is dominant part of profession, certified
auditors title of irtschaftprufer (P) was
created in 1931.
V Institut der irtschaftprufer similar to the
AICPA.
V Obtaining P title is extremely rigorous.
V irtschaftpruferkammer (PK) is state
sponsored group that oversees auditing
profession.

Learning Objective 2 ð #
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V Commercial code and tax laws are main
sources of accounting rules.
V Stock exchange rules have less influence than
in .S.
V Prudence is fundamental, recognition of
revenues only when realized, losses when they
appear possible.
V Began change away from creditor orientation in
1960s.
V Starting in the 1980s, E directives began
having major influence.

Learning Objective 3 ð #%
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  *   *  

V Historical cost attribute for measuring tangible
assets is adhered to.
V Traditional focus on creditor protection is at
odds with the true and fair view concept.
V 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.

Learning Objective 4 ð #ð
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  *   *  

V In contrast to China, conservatism has been
used to resist labor¶s wage demands.
V Standards allow for income smoothing,
frequently accomplished via early recognition of
losses.
V E fourth directive requires true and fair view,
but ermans have a unique interpretation of
the concept.
V Commitment to globalization reflected in rule
that allows public companies to use IFRS for
consolidated statements.

Learning Objective 4 ð #(
 /0

.   
V p

â deducted immediately against
equity, under IFRS 3, accounted for as an
indefinite life intangible asset.
V 


 

 â not
recognized, under IAS 38, recognized as an
asset under some conditions.
V '  â accounting uses tax rules with
capitalization rare, IAS 17 criteria result in more
frequent capitalization.
V =



   â allow exclusion
of dissimilar subsidiaries, which are
consolidated under IAS 27.

Learning Objective 5 ð #)
 1

& '

V Population 127 million, world¶s third largest
economy.
V Banks are primary source of finance via both
loans and equity, cross-corporate equity
ownership also common.
V Keiretsu (and predecessor Zaibatsu)
emphasize close business ties and reflect
cultural value of collectivism.
V 1990s recession led to and increase in

apanese firms attempts to obtain capital
internationally.

Learning Objective 1 ð #+
 1

  *
V Certified Public Accountants Law (1948)
established the profession.
V Profession is significantly less influential than in
.S./K and is also much smaller in numbers
than .S.
V Obtaining CPA title extremely rigorous, like in
ermany.
V Collectivism leads to lack of trust of auditors.
V Tax advising is a much larger, separate,
profession.

Learning Objective 2 ð #,
 1

  
V overnment influences accounting via
Commercial Code, Corporate Income Tax Law
and Stock Exchange Law.
V Similar to ermany, strong creditor orientation
and accounting rules closely tied to tax rules.
V Big Bang financial reforms are leading to
harmonization with international standards.
V These reforms included requirements for
consolidation and fair value accounting for
tradable securities.

Learning Objective 3 ð
-
 1

  *   *  

V In contrast to .S., net income is less a
measure of performance and seen more as
funds available for dividends.
V Since providers of financing tend to be close to
the firm, there has historically been little
pressure for disclosure.
V Lack of disclosure is apparent in segment
reporting.
V In 2005, IASB and Accounting Standards Board
of
apan agreed to work toward reducing
differences.

Learning Objective 4 ð
#
 1

.   
V 4  


'
 â allowed but updating
not required, under IFRS 16, revaluations
require regular updating.
V A 
 

 â capitalization is allowed,
under IAS 38, expensed immediately.
V 

 



  â completed contract
method is allowed, IAS 11 essentially requires
percentage-of-completion.
V A


â allow for provisions, prior to
actual obligation, IAS 37 only allows for present
obligations.

Learning Objective 5 ð


 23 

& '

V History of significant inflation, government
control of business is partially blamed for this.
V Significant changes in 1990s, including
privatization of state-owned firms and NAFTA.
V Historically, most businesses family-owned,
even the very large.
V exico¶s one stock exchange, the Bolsa
exicana de Valores, is privately-owned.

Learning Objective 1 ð

 23 

  *
V The Associacion de Contadores Publicos, first
professional accountant organization,
established in 1917.
V This group was succeeded by the exican
Institute of Public Accountants (IPA) in 1964.
V IPA establishes accounting and auditing
principles and was an original founding member
of the IASC in 1973.
V In order to practice public accounting in exico,
one needs a ³professional diploma.´

Learning Objective 2 ð
%
 23 

  
V The exican Securities Law (1975), was
amended in 1993 to comply with NAFTA
issues.
V Accounting standards, grounded in a
conceptual framework, have four classes of
Bulletins, A, B, C, and Ö.
V Corporate tax rules require a report in
accordance with exican AAP audited in
accordance with exican AAS.

Learning Objective 3 ð
ð
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  *   *  

V exican AAP heavily influenced by .S.
AAP due to NAFTA, geographical proximity,
and comprehensiveness of .S. AAP.
V Öespite international influences, exico¶s
Bulletin B-10, on inflation accounting, shows
how harmonized accounting may not be
appropriate for all circumstances.

Learning Objective 4 ð
(
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  *   *  

V Bulletin B-10, Recognition of the Effects of
Inflation, reflects a major difference to .S.
AAP.
V Nonmonetary assets and liabilities to be restated
for purchasing power changes of the peso.
V Inventory can be restated using current
replacement costs.
V Recognition in income (generally) of the gain or
loss from the net monetary position, asset or
liability.

Learning Objective 4 ð
)
 23 

.   
V K 

 
 â statement of
changes in financial position required, IAS 7
requires a statement of cash flows.
V 
 

=


 â requires inflation
adjustments regardless of inflation rate, IAS 29
requires only for hyperinflationary countries.
V  p

 â recorded as a deferred
credit and amortized over five years, IAS 3
requires immediate recognition of gain.

Learning Objective 5 ð
+
 4 5

& '

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

Learning Objective 1 ð
,
 4 5

  *
V orld¶s first association of professional
accountants, The Society of Accountants in
Edinburgh established in 1853.
V The profession developed in response to the
needs of industry and has influenced the
development of professions in a number of
other countries.
V Compared to the .S. the certification
requirements focus more on work experience
and less on university education.

Learning Objective 2 ð -
 4 5

  
V The Companies Act, accounting
pronouncements, and stock exchange rules
comprise accounting regulation.
V Similar to the .S., and unlike ermany and

apan, tax rules do not significantly influence
financial reporting.
V Standard-setters have historically taken a
principles-based approach using a statement of
principles as a conceptual framework.
V Has not historically had a strong, SEC type
agency, but recent scandals have led to
increased regulation.
Learning Objective 3 ð #
 4 5

  *   *  

V A primary objective of accounting is to support
an effective capital market.
V The true and fair view principle is paramount.
V True and fair view override requires that
companies not comply with standards that
would result in misleading financial statements.

Learning Objective 4 ð 

 4 5

.   
V p

 â amortization allowed, IFRS 3
prohibits amortization and requires an annual
impairment test.
V 4  
  â requires
disclosure of related party names, IAS 24
requires disclosure by type, not name, of
related party.
V 4  

 

 â generally not
taken to income statement, IAS 40 requires
gains and losses to affect net income.

Learning Objective 5 ð