FINANCIAL ACCOUNTING THEORY

Craig Deegan

WEEK 3: CHAPTER 4

International (experiences in) financial

accounting

Slides written by Craig Deegan

Adapted by Kazi, CQU
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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-1
Learning objectives
1 Understand the issues with the adaptation and
implementation of a uniform set of accounting
standards (now known as International Financial
Reporting Standards or, in abbreviated form, IFRS)
for worldwide use.
2 Understand the concepts, benefits and problems of
harmonisation and standardisation of accounting
standards/practices.

continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-2
Evidence of international differences
in accounting
• Although many countries now adopt IFRS, if we go back a
decade and apply different countries’ former accounting rules
to the same transactions we can find significant differences in
profits and net assets (consider evidence provided in the
textbook)
• The (sometimes significant) differences in accounting profits
have been used by many parties to justify the ongoing efforts
of the IASB to standardise international accounting
• But do we really need to standardise accounting on an
international basis because of these differences, and if we do,
what are some of the costs and benefits? This lecture covers
these issues

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-3
Standardisation versus harmonisation

• In relation to international accounting, two terms that are

commonly used are standardisation and harmonisation
• We can define ‘harmonisation’ as a process of increasing the
compatibility of accounting practices by setting bounds to their
degree of variation
• ‘Standardisation’, by contrast, appears to imply the imposition
of a more rigid and narrow set of rules (than harmonisation)
• Therefore, the term ‘harmonisation’ appears to allow more
flexibility than standardisation
• What is happening through the efforts of the IASB is a process
of standardisation

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-4
Does it really matter if different countries
use different accounting methods?
• There are many varied views about the costs and
benefits of international standardisation
• Some perceived benefits would include:
– international investors are better able to understand the
financial performance and position of local companies
– tied to the above point, there is an expectation that
standardisation will facilitate greater capital inflows
– also tied to the above point, standardisation will make it
easier for local companies to list on foreign securities
exchanges

continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-5
Does it really matter if different countries
use different accounting methods? (cont.)
– companies listed on several securities exchanges would only
need to produce one set of financial statements and this will
have implications for cost savings
– the accounting and auditing staff employed by international
organisations will be better able to move to other member
companies
– there will be cost savings in the accounting-standard setting
function—rather than individual companies duplicating the
efforts of others, the majority of functions of the standard-setting
process will be centralised at the IASB
– A perception is that IFRS will lead to more accurate,
comprehensive and timely financial statements than those
under national accounting standards

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-6
But obviously it is very difficult to
quantify any benefits associated with
international standardisation
• There is very little empirical research or theory that
actually provides evidence of the advantages or
disadvantages of uniform accounting rules nationally,
or internationally

• For example, whilst the FRC in Australia said that real

benefits would flow from Australia adopting IFRS there
is no quantifiable evidence of such benefits

• Whether the benefits of adopting IFRS are shared by

a majority of corporations within a country, or whether
the benefits are confined to larger multi-national
corporations, is a matter of conjecture

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-7
 The IASB
• The Institute of Chartered Accountants of England and Wales, the
Canadian Institute of Chartered Accountants and the American
Institute of Certified Public Accountants initially established an
Accountants’ International Study Group in 1967

• The Accountants’ International Study Group then formed the basis for
the establishment of the IASC in 1973. The IASB replaced the IASC in
2001

• Purpose: standardisation of GPFR:

– it seeks to formulate and publish accounting standards and to
promote their worldwide acceptance
– it seeks to work on the improvement and standardisation of
regulations, accounting standards and procedures
– the IASB does not appear to believe that the many reasons
provided as to why different nations should have different
accounting standards

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-8
Australia’s adoption of IFRS
• Australia decided in the mid-1990s to harmonise
its standards with those of the IASC

• But then in 2002, a decision was made by the

Financial Reporting Council that Australia would
adopt standards released by the IASB

• IFRS still not accepted by the US SEC for US

domestic companies, however the US FASB and
the IASB are currently working on a convergence
project which might ultimately see the US adopt
IFRS (far from certain)

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-9
The United States’ role in the international
standardisation of accounting
• One notable exception to the global adoption of IFRS is the US
– in a sense the reluctance of the US to adopt IFRS is undermining the efforts
and even credibility of the IASB

• Within the US, accounting standards are developed by the FASB

• The SEC has the power to override the standards developed by
the FASB
• US was traditionally strong in its resolve not to adopt IFRS but
this resolve diminished in the light of collapses such as Enron
• US standards are considered to be more ‘rules-based’ whereas
IFRS are more ‘principles-based’
• A belief grew that ‘principles-based’ standards may be more
effective in reducing ‘accounting fraud’

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-10
Does the international standardisation of
accounting standards necessarily lead to
the international standardisation of
accounting practice?
• Somewhat obviously, the IASB was seeking to
standardise practice
• However, there are a number of reasons why the
standardisation of accounting standards will not
necessarily lead to standardisation of accounting
practice (there is a difference)
• Hence, consistent with Nobes (2006), we would
argue that the study of international differences in
accounting practice (and the reasons and motivations
underlying the differences) will remain an important
area of research despite the ongoing standardisation
efforts of the IASB continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-11
Reasons why international differences in
accounting practice will survive beyond the
introduction of IFRS
• Differences in taxation systems
– tax-driven accounting choices, which are domestic,
might flow through to IFRS statements
• Differences in economic and political influences
on financial reporting
– powerful local economic and political forces determine
how managers, auditors, courts regulators and other
parties influence the implementation of rules. These
forces have exerted a substantial influence on financial
reporting practice historically, and are unlikely to
suddenly cease doing so, IFRS or no IFRS (Ball, 2006).
continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-12
Reasons why international differences...will
survive beyond the introduction of IFRS (cont.)

• Modifications made to IFRS at a national level

– the IASB has no ability to enforce the application of its

accounting standards in countries that have made the
decision to adopt IFRS. This is a key impediment to
any efforts to standardise accounting practice globally.

– regulatory bodies in particular countries may take the

decision to modify a particular IFRS before it is
released (for example, the EU in relation to their
acceptance of IFRS 39).

continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-13
Reasons why international differences...will
survive beyond the introduction of IFRS (cont.)

• Differences in implementation, monitoring and

enforcement
– Unless there is international consistency in the
implementation of accounting standards and subsequent
enforcement mechanisms then we cannot expect
accounting practices to be uniform despite the actions of the
IASB.
– Investors might be misled into believing that IFRS adoption
has created a consistency in international accounting
practices. That is, the adoption of IFRS might (incorrectly)
be construed as a signal that a country has improved its
quality of reporting.

continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-14
Reasons why international differences...will
survive beyond the introduction of IFRS (cont.)
• Differences in implementation, monitoring and
enforcement (continued)
– In a sense, the adoption of IFRS brings a level of legitimacy
to a country's financial reporting despite any limitations in
the level of enforcement of the standards.
– All this disadvantages those countries who have high quality
implementation, monitoring and enforcement of IFRS
 Some countries are ‘free-riding’ on the efforts of others

continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-15
Reasons why international differences...will
survive beyond the introduction of IFRS (cont.)
• Ball discussed the ‘free rider’ problem associated
with IFRS.
– If a 'symbol of legitimacy' - such as IFRS - can be acquired
at low cost then some countries with low accounting
proficiency will make the choice to adopt IFRS because of
the reputational benefits such a choice may generate
– Such a choice will have costly implications for countries
with higher levels of accounting proficiency and who put in
place appropriate implementation, monitoring and
enforcement mechanisms

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-16
So is a belief in the international
standardisation of accounting practice
realistic?
• Global adoption of IFRS will lead to consistency in
international accounting practices.
• However, ‘one-size-fits-all’ approach may not be
effective due to international differences:
– in the nature of capital, labour and product markets
– in monitoring and enforcement mechanisms
– in economic and political influence
– in cultures
• Such differences will continue to provide an
interesting area of research for accounting
academics. continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-17
International financial accounting models
• Historically there have been two main models of financial
accounting adopted internationally:
• Anglo-American model
– strongly influenced by professional accounting bodies rather than
government, emphasises importance of capital markets,
emphasises concepts such as true and fair, and considerations of
economic substance over legal form
 in these environments funds were generally sourced from capital
markets and there was a reliance on general purpose financial reports

• Continental European Model

– relatively small input from accounting profession, little reliance on
qualitative concepts such as true and fair, and strong reliance on
government
 In these environments, funds were generally sourced from government,
banks or family members and interested parties were able to obtain
information through special purpose financial reports
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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-18
Reasons for international accounting differences
• Underlying laws and political systems
• Tax systems
• Level of education
• Level of economic development
• Nature of business ownership and financing system
• Colonial inheritance
• Culture
• History
• Language
• Religion
continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-19
 The effect of culture on AS
• Research undertaken prior to the efforts of the IASB reveals
differences in national cultures have effects on the fundamental
differences between nation’s accounting practices. Culture impacts
on legal systems, tax systems and the way businesses are formed
and financed etc.
• Previously used to explain differences in social systems
• Culture can be defined as ‘… an expression of norms, values and
customs which reflect typical behavioural characteristics’ (Takatera &
Yamamoto 1987)
• ‘Culture’ reserved for societies as a whole or nations
• ‘Subculture’ used for the level of an organisation, profession or
family (for example, the accounting sub-culture in Australia is derived
from Australian society’s cultural norms, values and customs)
• International differences in accounting systems may be explained by
a framework incorporating culture
continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-20
 Classifying a country’s culture:
Hofstede’s cultural dimensions
• Four underlying societal dimensions along which
countries could be positioned
– Individualism versus Collectivism
– Large versus Small Power Distance
– Strong versus Weak Uncertainty Avoidance
– Masculinity versus Femininity
• The value systems of accountants will be derived
from and related to societal values
• Without the intervention of organisations such as the
IASB, these societal values will in turn impact on the
development of accounting standards at a national
level (as they would also influence other forms of
legislation or guidance)
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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-21
Individualism versus Collectivism

• Addresses the degree of interdependence a

society maintains among individuals
– Individualism refers to a preference for a loosely knit
social framework wherein individuals care for
themselves and their immediate families

– Collectivism stands for a tightly knit social framework

where relatives, clan or other in-group look after each
other

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-22
 Power Distance
• The extent to which members of a society accept
that power in institutions and organisations is
distributed unequally
– Large Power Distance societies accept a hierarchical
order in which everyone has a place

– Small Power Distance societies strive for power

equalisation

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-23
 Uncertainty Avoidance
• The degree to which the members of a society feel
uncomfortable with uncertainty and ambiguity
– Strong Uncertainty Avoidance societies maintain rigid
codes of belief and behaviour

– Weak Uncertainty Avoidance societies maintain a more

relaxed atmosphere where practice counts more than
principles

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-24
 Masculinity versus Femininity
• Addresses the way in which a society allocates
social roles
– Masculinity stands for a preference for achievement,
heroism, assertiveness and material success

– Femininity stands for a preference for relationships,

modesty, caring for the weak, and quality of life

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-25
Societal dimensions and accounting
subculture: Linking the work of Hofstede
to that of Gray

• The value systems of accountants are derived from

related societal values

• The values of the accounting subculture will in turn

impact on the development of the respective
accounting systems at a national level
– should accounting systems be developed in a globalised
‘one-size-fits-all’ approach?

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-26
 Gray’s accounting values
• Gray developed four accounting values deemed to
relate to the accounting subculture, with the intention
of linking them to Hofstede’s four societal values
– professionalism versus statutory control
– uniformity versus flexibility
– conservatism versus optimism
– secrecy versus transparency

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-27
 Gray’s hypotheses
• H1: The higher a country ranks in terms of Individualism and the
lower it ranks in terms of Uncertainty Avoidance and Power
Distance, the more likely it is to rank highly in terms of
Professionalism
• H2: The higher a country ranks in terms of Uncertainty Avoidance
and Power Distance and the lower it ranks in terms of Individualism,
then the more likely it is to rank highly in terms of Uniformity
• H3: The higher a country ranks in terms of Uncertainty Avoidance
and the lower it ranks in terms of Individualism and Masculinity, then
the more likely it is to rank highly in terms of Conservatism
• H4: The higher a country ranks in terms of Uncertainty Avoidance
and Power Distance and the lower it ranks in terms of Individualism
and Masculinity, then the more likely it is to rank highly in terms of
Secrecy
• Note: Gray further hypothesised relationships between (i) accounting values
and the authority and enforcement of accounting systems and (ii) the
measurement and disclosure characteristics of accounting systems
continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-28
Table of Gray’s accounting values: Hypothesised
relationships between Gray’s accounting values
and Hofstede’s cultural values (Deegan, p. 143)

Accounting values (Gray)

Cultural Professionalism Uniformity Conservatism Secrecy
values
(Hofstede)

Power
Distance - + ? +
Uncertainty
Avoidance - + + +
Individualism
+ - - -
Masculinity
? ? - -
continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-29
 The effect of religion on accounting systems
• Another factor that has been used to explain differences in
accounting is religion
• Religion transcends national boundaries
• Impacts on global harmonisation of accounting standards
• Hamid, Craig and Clarke (1993) examined how Islamic cultures
have failed to embrace ‘Western’ accounting practices
– compliance with Islamic beliefs can affect the structure of
business and finance
– many Western accounting practices are incompatible with
Islamic principles
– relevance of IASB standards to such cultures?
• Religion can affect how people do business and how they make
decisions, for example, Islam precludes debt financing and
prohibits payment of interest

continued

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-30
 Legal systems
• Another factor that will cause international
differences in accounting is the legal system in
operation
• Legal systems can be broadly divided into common
law and Roman law systems
– in Roman Law systems the law tends to be very detailed
– in Common Law systems —which is how Australia can be
classified—law typically evolves from the ruling of judges
• In Common Law countries accounting practices tend
to rely relatively heavily on professional judgment

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-31
Business ownership and financing system
• Another factor is the business ownership and financing
system
• At a country level, the financing system is relevant to the
purpose of financial reporting
• Three types of financing systems
– capital market-based (e.g. UK and US)
– credit-based system: governmental (e.g. France and
Japan); financial institutions (e.g. Germany)
• Systems relying on equity markets demand greater public
disclosures
• Credit-based systems more concerned with the protection of
creditors
• Colonial inheritance also a major explanatory factor

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-32
 Taxation systems
• Differences in accounting methods internationally
have also been linked to differences in taxation
systems
• Where there are ‘insider systems of finance’
(common in continental European countries) financial
accounting practices have typically been linked to
taxation law

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-33
Impact of international agencies

• Various international agencies have also had an

effect on the accounting systems used within
particular countries
• Examples of institutions or bodies which can
impact on a country’s accounting policies are
– multinational companies
– international accounting firms
– large monetary organisations e.g. World Bank

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-34
So there are many forces ‘working against’
international standardisation
• Hence, we can now hopefully understand that there are many
explanations for international differences in accounting practice
• Given the many factors that explain why international differences in
accounting will, or perhaps should exist, then how logical are efforts
towards international standardisation?
• Do we think that the global standardisation efforts of the IASB are
likely to succeed in the long-run?
• Will diverse countries with different cultures, religions, finance
systems and so forth start to question a ‘one-size-fits-all’ approach
emanating from the IASB boardroom in London?
• Is the apparent reluctance of the United States to commit to IFRS
the start of the demise of the IASB’s efforts to standardise
accounting internationally?
• Time will tell …..

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PPTs to accompany Deegan, Financial Accounting Theory 4e 4-35