Accounting Chapter 3 Homework Netherlands Extent Not Seen Elsewhere Expenses Should

Chapter 3

Comparative Accounting: Europe

Discussion Questions

1. Regulating and enforcing financial reporting is a government function in France. The

National Accounting Board (CNC) and the Accounting Regulation Committee (CRC) set

accounting standards under the jurisdiction of the Ministry of Economy and Finance. The

Financial Markets Authority (AMF) ensures compliance with French accounting rules (for

listed companies). It is also a government agency.

Public and private sector bodies are involved in the regulation and enforcement of financial

reporting in Germany. The German Accounting Standards Board is a private sector body

that develops German reporting standards for consolidated financial statements. However,

The regulation and enforcement of financial reporting is in the public sector in the Czech

Republic. The Ministry of Finance is responsible for setting accounting principles and it

also oversees the Czech Securities Commission which is responsible for enforcing

compliance with Czech requirements. Some observers question the effectiveness of the

Czech system.

A private sector group is responsible for regulating financial reporting in the Netherlands.

The Dutch Accounting Standards Board issues guidelines on acceptable accounting

principles. Enforcement is handled by the Enterprise Chamber, a special accounting court.

2. Given the requirement that all EU listed companies must use International Financial

Reporting Standards in their consolidated financial statements, all five countries follow fair

presentation principles for this group of companies’ financial statements. The difference

among the countries comes with listed companies’ individual financial statements and with

nonlisted companies. The overall picture is quite confusing.

At the individual company level, France and Germany require local accounting standards.

Both can be characterized as legal compliance, conservative, and tax-driven. Individual

company financial statements in the Netherlands and United Kingdom may use either local

3. The recently established auditor oversight bodies discussed in this chapter are:

a. France—Haut Conseil du Commissariat aux Comptes (High Council of External

Auditors)

4. Consolidated financial statements are the statements of a group of companies under

common management or control. Individual company financial statements are the

statements of the separate legal entities (parent and subsidiaries) that make up the group.

5. This quote paraphrases a statement in the preamble to the charter establishing the German

Accounting Standards Committee. We agree. Private sector initiatives (self-regulation)

have been more successful than governmental initiatives in developing financial reporting

regulations for national and international capital markets.

Two noteworthy examples are the Accounting Standards Board in the United Kingdom

(discussed in Chapter 3) and the Financial Accounting Standards Board in the United States

6. Existing French companies’ legislation in the form of the Plan Comptable Général and

7. The statement is true. The German Accounting Standards Board is a private-sector body

like the FASB (United States), ASB (United Kingdom), and IASB. The process for

8. Accounting requirements in the Czech Republic are based on EU Directives. Examples

noted in the chapter are the following:

a. True and fair view embodied in the Accountancy Act.

b. Required audit.

9. The Dutch Enterprise Chamber of the Court of Justice of Amsterdam helps ensure that filed

or published Dutch financial statements conform to all applicable laws. Shareholders,

employees, trade unions, or public prosecutors may bring proceedings to the Chamber by

alleging that officially filed or published financial statements do not conform to applicable

requirements.

10. British financial statements must present a “true and fair view” of a company’s financial

position and results of operations. The intent is similar to the U.S. “presents fairly” test.

However, the “presents fairly” test in the United States is whether financial statements

Exercises

1. France

a. The Conseil National de la Comptabilité, or CNC (National Accounting Board) through

the latest Plan Comptable Général and the Comité de la Réglementation Comptable, or

CRC (Accounting Regulation Committee). The CNC and CRC are attached to the

Ministry of Economy and Finance.

b. The Autorité des Marches Financiers (AMF) for French listed firms. The Division of

Corporate Finance (SOIF) conducts a general review of legal and other filings with the

AMF. The Accounting Division (SACF) verifies compliance with accounting standards.

The Ministry of Justice is indirectly responsible for compliance with reporting

requirements by nonlisted companies through its role in supervising statutory auditors.

Germany

a. The German Accounting Standards Board for consolidated financial statements.

Czech Republic

a. The Ministry of Finance.

b. The Ministry of Finance also has supervisory responsibilities. Audits are regulated by the

The Netherlands

a. Dutch Accounting Standards Board.

United Kingdom

a. Accounting Standards Board.

b. Both the Department of Trade and Industry and the Financial Reporting Review Panel of

2. Good arguments can be made that France and Germany have the most effective accounting

and financial reporting supervision mechanism for publicly traded companies. In France, the

Autorité des Marches Financiers (AMF) is a government agency that supervises the stock

market. It is the French equivalent of the U.S. Securities and Exchange Commission (SEC).

Two divisions within the AMF enforce compliance with reporting rules. The Division of

Corporate Finance (SOIF) conducts a general review of legal and other filings with the AMF

(including the annual report). The Accounting Division (SACF) verifies compliance with

accounting standards. The AMF has the power to force compliance with accounting

requirements. Germany has a two-tiered system. A private sector body, the Financial

3. At the time of writing, the following accounting organizations discussed in this chapter were

linked to IFAC’s Web site:

France

Compagnie Nationale des Commissaires aux Comptes

Conseil Supérieur de l’Ordre des Experts-Comptables

Germany

Institut der Wirtschaftsprüfer

Wirtschaftsprüferkammer (WPK)

Czech Republic

Chamber of Auditors of the Czech Republic

4. The question asked for five expressions, terms, or short phrases unfamiliar or unusual in the

student’s home country. Taking the United States as the home country, here are sixteen:

a. Duality in individual company and consolidated statements—the idea that the two sets of

financial statements may be based on different GAAP, as in France in Germany.

b. Social report—required in France for companies with 300 or more employees, it

f. National chart of accounts—a formal chart of accounts designed for an entire economy

and typically used for strong central economic control.

g. Secret reserves—undisclosed and deliberate understatements of assets or overstatements

of liabilities.

h. Plan Comptable Général—French uniform national chart of accounts.

i. Sworn book examiners—a class of statutory auditors legally sanctioned in Germany to

conduct independent audit examinations of companies.

n. Legal reserves—appropriations of retained earnings required by law in most code law

countries.

o. Coupon voucher privatization system—the method used by the Czech Republic to

privatize large-scale, government-owned enterprises. Vouchers allowed CR citizens to

buy shares for a nominal price.

5. For each country discussed in the chapter, there are several financial accounting practices or

principles at variance with international norms. The items below are illustrative only.

a. France—Liabilities for post-employment benefits do not have to be recognized and

finance leases do not have to be capitalized. Both accounting treatments are examples of

form over substance and violate fair presentation. The treatment of post-employment

b. Germany—Two different purchase methods are allowed, and goodwill can be treated

several ways. The effects on reported earnings and the debt-to-asset ratio are unclear and

it is unlikely that an analyst can adjust for these variances.

c. Czech Republic—Goodwill may be written off in the first year of consolidation or

capitalized and amortized over a maximum of 20 years. The international norm is now to

capitalize goodwill and impairments test it each year. If goodwill is written off

d. The Netherlands—Comprehensive current value accounting. Though only used by a

minority of Dutch companies, this microeconomics approach to measurement is

e. United Kingdom—Assets may be valued at historical cost, current cost, or a combination

of the two. To the extent that current cost is used, the effects on reported earnings and the

6. The country whose GAAP is most oriented toward equity investors appears to be the United

Kingdom. Its GAAP is closest to IFRS, which is clearly aimed at equity investors. Under

7. The role of government in developing accounting and auditing standards is strongest in

France. Government agencies are responsible for both activities and government involvement

is all-encompassing. The private sector has little or no influence. The government plays the

8. The European Commission has set up the European Group of Auditors’ Oversight Bodies

(EGAOB) to coordinate the new public oversight systems of statutory auditors and audit

firms within the European Union. The EGAOB may also provide input to the Commission on

issues such as endorsing International Standards on Auditing and assessing the public

oversight systems in individual European countries. These public oversight systems have

responsibility for overseeing:

At the time of writing, the EU Web site listed the following EU countries with an auditing

oversight body:

a. Austria (Qualitätskontrollbehörde—Austrian Audit Quality Control Oversight Board)

b. Belgium (High Council for Economic Professions)

c. Bulgaria (Bulgarian Commission for Public Oversight of Registered Auditors)

j. Greece (Accounting & Auditing Oversight Board)

k. Hungary (Auditors’ Public Oversight Committee)

l. Ireland (Irish Auditing & Accounting Supervisory Authority)

m. Italy (CONSOB)

n. Latvia (Ministry of Finance)

o. Lithuania (The Authority of Auditing and Accounting)

p. Luxembourg (Commission de Surveillance du Secteur Financier)

q. Malta (Accountancy Board)

r. Netherlands (Netherlands Authority for the Financial Markets, AMF)

s. Portugal (Conselbo Nacional de Supervisao de Auditoria, Somissao do Mercado de

Valores Mobiliarios)

9.

Account-

ing

profes-

sion

Users/Pre-

parers

Organized

Labor

Tax

Authorities

Commercial

Law

Securities

Commissions

Stock

Market

France

Yes

(some)

No

Yes

(some)

Yes

Yes (some)

No

Germany

Yes

No

Yes

No

Czech

Republic

Yes

(some)

No

Yes

No

United

10.

a. All countries require the purchase method, so there is no effect on the ratios for this

b. All countries require that goodwill be capitalized and amortized, so there is no effect on

the ratios for this method. Compared to the IFRS treatment (capitalize and impairments

The more rapid write-off of fixed assets will cause lower total asset values. Thus, the

debt-to-asset ratio should increase. The debt-to–equity ratio and both liquidity ratios

should be unaffected.

f. LIFO is permitted in Germany and the Netherlands, but not widely used. Companies

using LIFO should have lower income, so lower profitability ratios. Inventory will

book-tax conformity. The effects on the six ratios depend on other differences. The

liquidity ratios are likely to be unaffected. The effects on the solvency and profitability

ratios are unclear.

j. Income smoothing has an indeterminate effect on income in any given year. Therefore it

is not possible to know how the profitability ratios are affected. The effect of creating

Case 3-1 Old Habits Die Hard

This case shows that old habits die hard and that requirements for information do not ensure that it will be

provided.

1. The article suggests that the key feature of Czech financial reporting is a reluctance to

2. Apparently, Czech managers are only slowly recognizing the value of full and prompt

disclosure to the investment community. There are several reasons for this. One is the 50-year

legacy of Communism, where public disclosure was unnecessary or even inadvisable.

3. Investors kept in the dark will seek opportunities elsewhere. They will invest in other

companies or in other countries besides the Czech Republic. Secretive companies lose when

4. A program of changes needed to correct the problems identified in this case include the

following:

a. Improving accounting expertise through comprehensive professional education at

Case 3-2A What Difference Does It Really Make?

1. (Amounts in millions of euros)

a.

IFRS

U.S. GAAP

Percentage Difference

2006 net income

4,006

4,034

-0.7%

equity

45,600

46,023

-0.9%

b.

IFRS

U.S. GAAP

Percentage Difference

2005 net income

2,258

2,202

+2.5%

equity

46,128

46,403

-0.6%

The percentage differences for net income and stockholders’ equity are both close to zero

for both years. However, as discussed next, the items responsible for most of the

c. The two largest reconciliation differences for 2006 are as follows:

Income statement items: restructuring provision (+173) and Aventis business

combination (+258 [783 – 525 = +258]).

2. The financial statement reconciliations once required by the SEC for non-U.S. registrants

would seem to be useful to U.S. readers of non-U.S. financial statements. Although the

individual percentage changes are at best imprecise measurements, they convey a sense of the

3. Note to instructors: This question will tweak students’ interest in discussions of IFRS–U.S.

GAAP differences and the SEC’s decision to accept IFRS filings, as found in Chapters 4 and

8. The analysis above suggests a loss of information for investors. There are some significant

individual differences between IFRS and U.S. GAAP as they affect net income and the

balance sheet. The company discusses these differences quite extensively over several pages

of its footnote disclosure. Of course, the question is whether IFRS and U.S. GAAP were

Case 3-2B Do The Differences Really Matter?

1. (Amounts in millions of euros)

a.

IFRS

U.S. GAAP

Percentage Difference

2006 net income

5,015

4,385

+14%

equity

11,672

17,068

-32%

IFRS

U.S. GAAP

Percentage Difference

2005 net income

3,975

2,855

+39%

equity

8,765

15,396

-43%

The percentage differences for net income are not the same between the two years. IFRS

income is 14 percent higher than U.S. GAAP net income in 2006 and 39 percent higher in

2005. The percentage differences for stockholders’ equity are also not the same. IFRS

c. The two largest reconciliation differences for 2006 are as follows:

Income statement items: pensions and other similar obligations (-464) and profit/loss on

disposal of group companies (-167).