Chapter 02 – Worldwide Accounting Diversity
1. Companies in North America commonly present assets in order of liquidity, beginning with
2. The two major types of legal system are “code law” and “common law.” Code law countries
3. In those countries in which published financial statements form the basis for taxation, there is
4. The major providers of financing are equity investors (shareholders), banks, family members,
5. Worldwide accounting diversity causes additional complexity for MNCs in the preparation of
6. Comparisons of companies across countries for making portfolio investment decisions are
complicated by the diversity in accounting practice that exists worldwide. There is a so-
called “apples and oranges” problem associated with trying to directly compare a company
that uses one set of accounting standards to measure income and report financial position
with another company that uses a different set of accounting standards.
7. Strong uncertainty avoidance countries are hypothesized to favor conservative measures of
8. The Anglo cultural area is expected to favor less conservatism and more disclosure and the
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Chapter 02 – Worldwide Accounting Diversity
9. Nobes (1998) argues that the two most important factors influencing differences in
accounting systems across countries are (a) nature of culture and (b) type of financing
10. Financial statements can differ across countries in terms of:
a. which financial statements are included in an annual report;
b. the format used to present individual financial statements;
c. the level of detail provided in financial statements;
11. Cost of goods sold is comprised of materials, labor, and overhead. In a type of expenditure
format income statement, such as that presented by Südzucker AG in Exhibit 2.10, separate
12. A statement of added value added presents information on the wealth created by the
13. Fixed assets can be reported on the balance sheet subsequent to acquisition at:
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Chapter 02 – Worldwide Accounting Diversity
Solutions to Exercises and Problems
1. a.
Callaway Sudzücker Cemex Sol Melia Thai Airways
Gross profit margin
Gross profit 343,763 N/A 58,129 N/A N/A
Operating profit
margin
13,844,81
Net profit margin
* We use Total revenues.
** We assume that “EBIT” is an approximation of operating profit for Sol Melia.
*** We use Total Revenue from Sale or Revenues from Services.
b. In addition to the obvious caveat about comparing profit margins across companies
2. The solution to this exercise will depend upon the companies selected for examination.
Instructors might want to forewarn students that depending upon the companies selected it
might not be possible to identify five differences for parts c. and d.
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Chapter 02 – Worldwide Accounting Diversity
3. The solution to this exercise will depend upon the companies selected for examination.
4. Gray’s secrecy hypothesis – high secrecy = high PD, high UA, low IND, low MASC, high
LTO
PD UA IND MASC LTO #
High Secrecy High High Low Low High
Belgium High High High High Low 2
5. Completing this assignment requires students to integrate the information in the chapter on
factors affecting accounting development. There are no absolutely correct responses.
Some of the factors that might be relevant are presented below:
6. The response to this exercise will depend upon the student’s home country. U.S. students
should mention (1) the importance of the equity market (strong equity-outside shareholder
financing system), (2) the separation of taxation and financial reporting, and (3) the fact that
accounting standards are developed by a non-governmental entity as important factors
influencing accounting in the United States. Historical ties to the U.K. also could be
mentioned.
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Chapter 02 – Worldwide Accounting Diversity
7. There are no correct answers to these questions. Different opinions among students can
generate an interesting debate.
8. There are no correct answers to these questions. Different opinions among students can
generate an interesting debate.
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Chapter 02 – Worldwide Accounting Diversity
Case 2-1 The Impact of Culture on Conservatism
Part I.
If cultural values affect the development of financial reporting rules, and countries differ with
respect to cultural values, then financial reporting rules will differ across countries. If financial
reporting rules are strongly influenced by culture and cultural values do not change significantly
over time, culture acts as an impediment to reducing differences in financial reporting rules that
exist across countries.
Part II.
Even if all countries agreed to use the same financial reporting standards (harmonization), to
the extent that application of those standards involves judgment, cultural differences could lead
to differences in the application of those standards. For example, in applying a rule that
requires recognition of a contingent loss when its realization is “probable,” accountants in more
highly conservative countries might err on the side of conservatism by establishing a lower
probability threshold than would accountants in less conservative countries.
Other areas in which culture might lead to differences in the application of financial reporting
rules include areas in which estimation and judgment are involved: warranty expense, bad debt
expense, revenue recognition, asset impairment tests, obsolete inventories, etc.
Part III.
Cancan’s internal auditors need to be aware that accountants in these different countries might
have culturally-determined biases in the way that they apply the company’s accounting policies.
Accountants in Brazil and Korea are likely to be more conservative (higher UA, lower IND) in
applying Cancan’s accounting policies than the accountant in Sweden (lower UA, higher IND).
The internal auditor needs to plan to conduct tests to determine whether this bias is operating.
Contingencies, warranty expense, bad debt expense, revenue recognition, asset impairment
tests, and obsolete inventories are all areas that require considerable judgment. In addition, the
accountants in Brazil and Korea may be less willing to provide information requested by the
internal auditors because of a higher level of secrecy.
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Chapter 02 – Worldwide Accounting Diversity
Case 2-2 SKD Limited
1. Goodwill
a. There is no goodwill amortization expense in Country A, so the goodwill amortization
2. Capitalized Interest
a. The adjustment labeled “Capitalized interest” relates to the interest that is not expensed
3. Fixed Assets
a. When fixed assets are revalued to a higher amount, there is an increase in their carrying
value with an offsetting increase in stockholders’ equity to keep the balance sheet in
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