CHAPTER 6
COMPARATIVE ACCOUNTING
Chapter Outline
China
I. There are some unique features in the accounting profession in China. They include the
following:
A. Until the 1980s, those who carried out accounting work were not held in high regard in
society, and this has had an adverse effect on the development of the accounting
profession in China.
B. Accounting and auditing in China have taken different paths in their development
processes. Auditing firms audited mainly domestic companies, and were under the
State Administration of Audit (SAA), whereas accounting firms focused on companies
using foreign investments and were sponsored by the Ministry of Finance.
C. Unlike in the U.K., where there was a good legislative and judicial environment during
the early stages of the development of the profession, in China, a market-oriented
legislative and judicial environment is still emerging.
D. Unlike in the U.K., where auditors receive support from the established professional
bodies, these support mechanisms are still lacking in China.
II. The recent economic reform program stimulated the growth of the accounting profession
in China.
A. With the recognition by the State of joint stock company form, the demands for
financial information from investors and other interested parties increased.
B. The establishment of two stock exchanges helped rapid growth of the accounting
activities.
C. Various government regulations on the implementation of economic reform measures
require the involvement of independent auditors.
D. The laws on joint ventures with foreign companies require the audit of annual
statements.
E. International accounting firms were allowed to be involved in training local auditors and
setting auditing standards.
III. There are clear signals that Anglo-American accounting principles are replacing Soviet-
style accounting.
A. This was required as a result of the movement towards private ownership.
B. The Ministry of Finance is following international accounting practices in setting
Chinese standards; a conceptual framework was promulgated in 1992 (The
Accounting Standards for Business Enterprises- ASBE), and the China
Accounting Standards Committee (CASC) was established in1988. The
ASBE issued in February 2006, which replaced the 1992 ASBE, and CASs
previously issued, became mandatory for all PRC listed companies in
January 2007. The 2006 ASBE adopted a significant number of the
accounting standards laid out by the IASB.
C. The Chinese Security Regulatory Commission (CSRC) has improved disclosure
requirements for companies. For example, it requires listed companies to post their
annual reports on the web site of the relevant stock exchange.
D. Both CSRC and the two stock exchanges have developed new corporate governance
rules based on those that are common in Anglo-American countries.
E. The CSRC and Ministry of Finance, consistent with the Sarbanes-Oxley Act, require
auditor rotation every five years.
IV. Major differences between IFRS and Chinese GAAP include:
A. Accounting standards and practices in China lack conservatism.
B. There are no coherent interpretations of the relevant requirements.
C. In some areas covered by IFRS there are no specific rules in China, including
business combinations, impairment of assets, and the definitions of operating and
finance leases.
Germany
I. Unique features in German accounting include:
A. The primary source of finance for German companies is bank loans rather than equity,
and this determines to a large extent the purpose for financial reporting by companies.
B. Auditing dominates the financial reporting related professional activities.
C. The auditing profession is headed by the Chamber of Auditors, a State-supervised
organization.
D. The Commercial Code contains most of the German financial reporting principles, and
sanctions for non-compliance.
E. Unlike in the U.S., partnership accounting is regulated in Germany.
F. The principle of prudence (conservatism) is established in the law.
II. There are signs of a change in financial reporting from a creditor orientation towards a
shareholder orientation.
A. The Companies Act 1965 was the initiator of this change.
B. In 1998, German law was amended to allow a private sector body (GASC) to develop
accounting standards (until then the Ministry of Justice coordinated the accounting rule
development process).
C. Since 1998, German accounting standards have been developed by following due
process, and promotion of international convergence is a main objective.
D. GASB (the standard-setting body of GASC) has been modeled on the U.S. FASB.
E. In 2004, the Financial Reporting Enforcement Panel (FREP) was created.
III. Traditionally, the primary function of financial accounting has been the conservative
determination of distributable income, rather than presentation of a true and fair view.
A. Traditionally bank credit plays a major role in corporate finance.
B. German accounting is heavily influenced by tax law.
C. German accounting rules allow companies to smooth income over time by using
hidden reserves.
D. Although the EU’s Fourth Directive requires companies to present a true and fair view
in their financial statements, it appears that extensive note disclosures are seen as a
way of achieving this without changing the tax-based, income smoothing approach to
financial reporting.
IV. Since January 2005, all German listed companies are required to use IFRS in preparing
their consolidated financial statements. However, German accounting practices differ from
IFRS in some important respects.
A. German accounting law contains no specific rules in some areas. Examples include
the translation of foreign currency financial statements of foreign subsidiaries,
disclosures of fair values of financial assets and liabilities, and earnings per share.
B. There are inconsistencies between IFRS and German rules in some areas. For
example, according to German rules, goodwill arising on consolidation can be
deducted immediately against equity, and inventories can be valued at replacement
cost.
C. According to German tradition, a management report is an important part of a
company’s financial statements, whereas IFRS do not include specific requirements in
this regard.
D. The new regulations (BilMoG) introduced in May 2009 incorporated IFRS related
elements into German GAAP. For example, the capitalization of internally generated
intangible assets such as self created patents is now permissible option while
prohibited under previous rules, and the abolition of tax accounting for external
financial reporting.
Japan
I. Unique features in the Japanese business environment include:
A. The economy is dominated by a few conglomerates known as Keiretsu.
B. The main sources of finance for business are bank credit and cross-corporate
ownership, rather than outside equity finance.
C. Corporate earnings are regarded as the source of funds that can be distributed, and
not as a measure of corporate performance.
D. Stock exchanges in Japan are government regulated rather than self-regulated. The
stock exchange law is administered by the Ministry of Finance.
II. There are differences between the Japanese accounting profession and its counterparts in
Anglo-American countries, including:
A. The Ministry of Finance plays a major role, through its Business Accounting
Deliberation Council (BADC), in developing financial reporting standards in Japan, and
the influence of the Japanese Institute of Certified Professional Accountants (JICPA) in
this respect has been minor compared to that of its counterparts in Anglo-American
countries.
B. The accounting profession has a relatively low social status in Japan.
C. For cultural reasons, the concept of independent auditor is not readily acceptable
within Japanese companies.
D. Unlike in the U.S., and similar to Germany, financial reporting is heavily influenced by
tax law.
III. Recently, major attempts have been made to ensure that Japanese accounting standards
fall into line with international standards.
A. A Big Bang approach has been taken to achieve this.
B. In 2001, the Accounting Standards Board of Japan (ASBJ), modeled on FASB, was
formed.
C. In January 2005, the ASBJ and IASB agreed to launch a joint project to reduce
differences between IFRS and Japanese GAAP. Accordingly, efforts are being made to
bring Japanese accounting principles and practices closer to international standards.
IV. There are several important differences between IFRS and Japanese GAAP.
A. In general, companies are not under pressure from their main providers of finance to
disclose information publicly, and Japanese companies are reluctant to provide
information voluntarily.
B. There are no specific rules in some areas covered by IFRS, such as impairment of
assets, discontinuing operations and segment reporting.
C. There are inconsistencies between Japanese GAAP and IFRS; for example,
inventories can be valued at cost under Japanese GAAP rather than at the lower of
cost and net realizable value as required by IFRS. Mexico
I. Many features of the Mexican business environment are common to other developing
countries.
A. Until recently, a substantial portion of the Mexican business sector was government
controlled, and a large number of business enterprises were government owned.
B. The economy has suffered from persistent balance of payments problems.
C. As a result of the effect of the “Tequila crisis,” Mexico accepted a bailout package from
the IMF and the U.S. Treasury.
D. In recent years, there has been an effort to privatize state-owned enterprises, and
many of the restrictions to foreign investment have been removed.
E. The measures aimed at achieving economic growth stimulated the activities of the
stock exchange.
F. Mexico has experienced several years of record-low inflation, low interest rates, a low
external debt and a strong peso.
II. Mexico has an established accounting profession with a long history.
A. The first professional body was established in 1917.
B. The Mexican Institute of Public Accountants (MIPA) was one of the nine founding
members of the IASC.
C. Public accounting firms mainly provide bookkeeping, tax, and audit services.
D. A professional diploma is required to practice as a public accountant.
III. Regulation of accounting and financial reporting is through legislation, stock exchange
listing requirements, and bulletins issued by MIPA.
A. The law requires that annual financial statements of listed companies must be audited
by a Mexican CPA and published in a nationally circulated medium.
B. The National Banking and Securities Commission (NBSC), an equivalent of U.S. SEC,
oversees information disclosure by publicly owned companies.
C. In June 2004, the Mexican Board for Research and Development of Financial
Reporting Standards (CINIF) assumed responsibility for issuing accounting standards
(until then this responsibility was with the Accounting Principles Commission of MIPA).
D. MIPA has developed a Code of Ethics which prohibits advertising for public
accountants.
E. Mexican financial reporting standards (FRS) framework requires companies to follow
IFRS as supplementary, when no specific guidance is provided by Mexican FRS for a
particular transaction or event.
IV. As a result of Mexico’s membership with NAFTA, Mexican accounting principles are
heavily influenced by U.S. accounting practices in recent years.
A. The U.S. influence also is exerted through the presence of subsidiaries of U.S.
companies and the Big 4 international accounting firms.
B. International Qualifications Appraisal Board, the CICA’s International Qualifications
Appraisal board, and Mexican Institute of Public Accountants and Mexican Committee
for the International Practice of Accounting, agreed on the principal elements for
granting accounting certification and licenses, which included education, examination,
and experience. NAFTA’s Free Trade Commission affirmed the PMRA in October
2003.
V. A unique feature of Mexican accounting practice is the treatment of the effects of inflation
in financial statements by using general purchasing power accounting.
VI. Bulletin B-10 introduced a novel concept known as the “integrated result of financing,”
which is calculated by adding the nominal interest expense, the gain or loss due to price
level changes on the company’s net monetary position, and the gains and losses due to
exchange rate fluctuations on the company’s monetary assets and liabilities denominated
in foreign currencies.
VII. There are several differences between Mexican GAAP and IFRS. For example, according
to Mexican rules, research and development costs are to be expensed as incurred, pre-
operating costs can be capitalized, a statement of inflation is mandatory irrespective of the
inflation rate.
United Kingdom
I. In the U.K. the capital market provides the main source of funding for companies, and the
limited liability company is the main form of business organization.
A. The primary purpose of accounting in the U.K. is to provide information for the efficient
functioning of the capital market.
B. Accounting in the U.K. grew as an independent discipline, responding to business
needs.
C. The first professional accounting body in modern times was established in the U.K. in
1853, and currently there are six professional bodies in that country, coordinated by
the Consultative Committee of Accountancy Bodies (CCAB).
D. The U.K. accounting profession has favored a principles-based approach rather than a
rules-based approach to standard setting.
II. Accounting regulation in the U.K. has been driven by the idea that determination of
acceptable accounting principles and standards should be left in the hands of the
profession.
A. U.K. legislators did not feel the need to have a powerful securities commission to
regulate accounting and financial reporting with detailed rules.
B. The responsibilities for developing accounting standards and auditing standards lie
with the Accounting Standards Board (ASB) and Auditing Practices Board (APB),
respectively, both independent bodies.
C. Changes to traditional thinking began as a result of U.K. joining the EU in 1973. The
amendments to the 1948 Companies Act in 1981 as a result of integrating the EU’s
Fourth Directive in British law made U.K. company legislation highly prescriptive.
D. In 2003 the Financial Reporting Council (FRC) became the single, independent
regulator of accounting and auditing in the U.K.
E. ASB is one of the several national accounting standard-setters that have formal liaison
with the IASB, and is committed to align U.K. accounting standards with IFRS.
III. In recent years, accounting standard setting in the UK has undergone major changes.
A. In July 2012, setting accounting standards became the responsibility of the FRC
Board, whereas this was previously done by the ASB. In addition to being responsible
for issuing accounting standards and dealing with their enforcement, the FRC is also
responsible for promoting high quality corporate governance and reporting to foster
investment. It also monitors and takes action to promote the quality of corporate
reporting and auditing; operates independent disciplinary arrangements for
accountants and actuaries; and oversees the regulatory activities of the accountancy
and actuarial professional bodies.
B. In October 2012, in an effort to make narrative reporting simpler, clearer and more
focused, the UK Department for Business, Innovation and Skills (BIS) published draft
regulations for narrative reporting. It replaces a summarized P&L and balance sheet
with what is essentially a narrative discussion about the company’s strategy and
performance.
C. The FRC developed a suite of three standards: FRC 100 – Application of Financial
Reporting Requirements (Published in November 2012); FRC 101- Reduced
Disclosure Framework (Expected early 2013); and FRC 102 – The Financial
Reporting Standard applicable in the UK and Republic of Ireland (Expected in
January 2015) with the stated aim of simplifying accounting and reporting for unlisted
entities, improving reporting of financial instruments and providing cost savings for
subsidiaries of listed groups.
IV. Accounting principles and practices in the U.K. emphasize investor needs and the
importance of transparency.
A. The 1985 Companies Act requires corporate financial statements to provide a true and
fair view of the firm’s financial position and results of operations for the financial year.
Auditors are given the corresponding duty to render an opinion on whether this
requirement is fulfilled. Provision of a true and fair view is an overriding requirement in
the U.K.
B. Since January 2005, U.K. listed companies are required to use EU adopted IFRS to
prepare their group (consolidated) financial statements.
C. Financial statements generally are prepared on the basis of historical cost, but
companies are allowed to revalue tangible assets.
D. U.K. accounting standards are generally similar to IFRS, but there are also differences
in some areas. For example, U.K. GAAP allows companies to amortize goodwill at
their discretion, whereas IFRS require goodwill to be tested for impairment annually.