110.

309
Advance Financial Accounting

Week 12
Accounting and Culture

Readings: Rankin Ch12 and Archer

(2013)
Learning Objectives

Be able to:
1. Discuss the nature of international accounting;
2. Outline evidence of diversity of international accounting;
3. Explain the institutional and religious factors that have led to diversity of international accounting;
4. Discuss the influence of culture on accounting;
5. Discuss international adoption of IFRSs and harmonisation vs convergence;
6. Evaluate the impact of international accounting and tax issues on multinationals.
Nature of international accounting

Definition
International accounting refers to the description or comparison of accounting
in different countries and accounting for international transactions.

Can be defined at three levels:

1. Universal or world accounting – e.g., IFRS
2. The company level standards, guidelines and practices that companies
follow to account for foreign subsidiaries, investments and international
transactions (FX)
3. Comparative accounting – comparing standards, rules etc across
countries.
Evidence of the diversity of international
accounting

Diversity results in significant differences in company accounts, e.g.:

• US does not allow goodwill amortizaton but is written down if impaired.
• Japan and Korea allows goodwill amortization over its useful life not to exceed
20 years.
• No goodwill amortization under IFRS.
• No capitalization of R&D in the US, but R&D allowed under IFRS.
• LIFO is permitted in the US but not under IFRS.
Institutional factors leading to diversity of
international accounting practice
Institutional factors (cont.)
1. Legal system – common law vs. code law
• Common law – fewer statutes and more interpretation by courts to apply laws to specific
situation; leads to the creation of precedents and case law; in UK and other English-speaking
counties; the source of accounting rules tends to be non-governmental.
• Code law – more statues; in most non-English speaking countries; accounting rules in those
countries tend to be legislated.

2. Taxation: high vs. low conformity between taxable income vs accounting income
3. Corporate/enterprise ownership: concentrated vs. dispersed ownership structures
• Concentrated ownership structures – presence small number of large shareholders; low level
of corporate disclosures and lower transparency.
• Dispersed ownership structures – presence of large number of small shareholders; demand
for public disclosures and higher transparency
Institutional factors (cont.)

4. Finance and capital markets: debt financing vs. equity financing; sources of capital are
shareholders, families, banks and the government.
5. Political systems: history, invasions, colonial heritage. This may be reflecting on political
philosophies or objectives and their impact on accounting systems.
6. Economic growth and development: Industrial vs agricultural vs service. Impact of
inflation etc.
Institutional factors (cont.)
Accounting clusters Characteristics Countries
Anglo-American Model • Oriented to the information needs of investors and USA, UK, Canada,
(fair presentation/ disclosure creditors; Australia, New Zealand
model) • Influenced by capital markets & professional bodies
• Common law countries
• Fair presentation
• Substance > form

Continental European Model • Oriented to the information for tax & government France, Germany, Italy,
(legal compliance model) planning purposes; Spain
• Reliance on government & banks, little input from
professional bodies;
• Civil/Code law – legal compliance
Religious factors leading to diversity of
international accounting
Religion is seen as a subset of culture
Can have a significant influence on business/accounting e.g.,
• Sanitarium – tax exemptions
• Islam – no interest

Islamic and accounting:

Muslims’ business/economic principles and ethics are anchored in Shari’ah. The Shari’ah has four
sources (Rizk, 2008):
1. The Quran- expresses the work and will of God
2. The Sunnah- body of customs and practices based on the words and deeds of prophet Muhammad
3. Islamic law- draws on (1) and (2) and solidified by consensus of scholars
4. Individual's own conscience when not clarified by (1) through (3).
Religious factors (cont.)
Islamic and accounting:
The transaction under Shari’ah must meet six principles (Lepeshkina, 2013)
1. Interest is prohibited (rhiba)
2. Risk should be shared
3. Speculative behaviour including short selling is prohibited (maysir)
4. Use of asymmetric information is banned – vague or ambiguous contracts (gharar)
5. Contracts should be respected
6. Prohibits certain transactions e.g., alcohol, pork, gambling and armaments.

A further significant requirement is the obligation to pay a religious levy (zakat)

• collected by the state/Islamic banks to redistribute wealth
• to provide basic need such as food clothes, shelter, health education etc. (social
accountability)
Religious factors (cont.)
Development of Islamic Accounting Standards
• Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) set up in 1991
in Bahrain to issue standards for Islamic financial institutions and industry;
• Adopted as mandatory in many countries (e.g., Bahrain, Jordan, Nigeria, Pakistan);
• AAOIFI has issued (http://aaoifi.com/standard/accounting-standards/?lang=en as at
08/06/2020):
– 26 accounting standards, 5 auditing standards, 7 governance standards; 2 codes of ethics.

Two versions of Islamic accounting (Archer, 2013):

1. Minimalist version which promotes fair presentation of certain transactions where
conventional US GAAP of IFRS fails to do so.
2. Radical sense of Islamic accounting which promotes Islamic Accounting as different in
principle from conventional financial accounting, reporting, and corporate governance.
Influence of Culture on accounting
(‘Culture’ – a term used to explain different social systems)

Hofstede (1980/1988) – surveyed IBM employees worldwide and identified 5 cultural dimensions:
Cultural Dimensions Descriptions
1. Individualism vs Prefer loose knit society/nuclear family vs tightly knit social framework/ extended
Collectivism clans
2. Power Distance Acceptance of hierarchy and unequal power vs demand for equality
(large vs small)
3. Uncertainty avoidance Rigid coded of behaviour & avoid uncertainty/ambiguity vs tolerate uncertainty
(strong vs weak) ambiguity.
4. Masculinity vs Prefers assertiveness, performance & achievement vs relationship, nurture & care
Femininity
5. Confucian Dynamism Prefer to save/persevere/preserve vs overspend/waste due to social
(short-term vs long-term) status/appearance
Influence of Culture on accounting
(‘Culture’ – a term used to explain different social systems)

Gray (1988) – reviewed literature and identified 4 accounting values that can be used to explain international
difference in accounting systems:
Accounting Values Descriptions

Professionalism vs Prefer individual professional judgement & self-regulation vs prescriptive legal

Statutory Control requirements and statutory control

Uniformity vs Prefer enforcement of uniform accounting practices (e.g., France) vs flexibility for
Flexibility circumstances of individual companies (e.g., UK and US)

Conservatism vs Prefer cautious approach to measurement to cope with uncertainty of future events
Optimism (e.g., Continental Europe) vs optimistic, laissez-faire, risk-taking approach (e.g., UK and
US)
Secrecy vs Prefer confidentiality & disclosure to only those who are closely involved with
Transparency management & financing vs transparent, open, & publicly accountable approach
Influence of Culture on accounting
(‘Culture’ – a term used to explain different social systems)

Relationships between Gray’s Accounting values and Hofstede’s cultural dimensions

Cultural Dimension Accounting Values
Professionalism Uniformity Conservatism Secrecy
Power distance Neg. Pos. N/A Pos.

Uncertainty Avoidance Neg. Pos. Pos. Pos.

Source: Lee H. Radebaugh and Sidney J. Gray, International Accounting and Multinational Enterprises, 5 th ed. (New
Individualism
York: Wiley, 2001) p.49. Pos. Neg. Neg. Neg.

Masculinity Pos. N/A Neg. Neg.

Lon-term orientation Neg. N/A Pos. Pos.

International adoption of IFRS and
harmonisation vs convergence
Accounting diversity creates challenges for international business and investment:
• Costly for firms to restate accounts in every jurisdiction in which they report;
• Costs and risks increase for investors comparing results of companies reporting
across jurisdictions using different GAAP.
Harmonisation
• implies reconciling differences to reduce diversity, while allowing countries to
have different sets of accounting standards.
Convergence
• A process that takes place over time, implies the adoption of one set of standards
across the globe.
International adoption of IFRS
- Costs vs Benefits
Benefits
• Cost-effective way to institute a comprehensive system of accounting standards.
‒ Especially for developing countries with limited resources/expertise.

• Globalisation of capital markets

‒ easier for investors to compare, and
‒ diversifying investments reduces their risks
‒ may give MNC access to less expensive capital in other countries

• Reduce costs for:

‒ Consolidation and financial report preparation for MNC who cross-list;
‒ Audit of the financial report

• Transportable accounting skills – benefits for accountants and their employers

International adoption of IFRS
- Costs vs Benefits
Costs
• Diversity of legal & political systems = costly/impossible to overcome differences.
‒ E.g., Japan and Korea interlocking companies – not clear which has control.

• FV requirements in IFRS
‒ May result in unreliable figures in jurisdictions without active asset pricing markets

• Religion
‒ IFRS assumes a profit motive, while Islam assumes ethical motives

• Increased compliance costs

– benefits for accountants and their employers

• Options available under IFRS may still mean limited comparability

International adoption of IFRS
- Use around the world
(The reading, Ranking [pg 351-355] is mostly out of date on this topic)

Per IASB website ifrs.org, IFRS is required for all or most domestic publicly accountable entities
in 144 jurisdictions https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/:
– 43 jurisdictions in Europe (since 2005);
– 27 jurisdictions in the Americas (not the USA)
– 25 jurisdictions in Asia‐Oceania;
– 36 jurisdictions in Africa; and
– 13 jurisdictions in the Middle East.

Even though there is extensive convergence, differences in culture, legal, tax, political
and socio‐economic systems still may lead to divergent accounting
International adoption of IFRS and
harmonisation vs convergence
• Jurisdictions will have differing degrees of convergence with IFRSs.

• Some researchers suggests that the factors that have previously been associated with
international differences in accounting (institutional, religious, cultural factors) still can
be used to explain differences in IFRS adoption practices across jurisdictions.

• Standards developed by the IASB are primarily aimed at countries with highly
developed capital markets, and it can be questioned whether the resulting standards
are optimal for developing and emerging economies that lack the infrastructure to
monitor financial reporting decisions.

• Challenges also come from the diversity in the institutional, religious, cultural factors.
International adoption of IFRS
- FASB and IASB convergence
(The reading, Ranking [pg 351-355] is mostly out of date on this topic)

Per IAS Plus, the FASB-IASB convergence project is still ongoing:

• Started in 2002 with the Norwalk Agreement between the two boards;
• The G20 issued a statement in 2009 calling for convergence by 2011;
• Subsequent G20 meetings have reaffirmed commitment to convergence;
• IFRS cannot be considered truly global until adopted by the USA.
• Key issue has been that IASB standards are ‘principles ‐based’, while the FASB’s were ‘rules ‐based’ .
International accounting and tax issues for
multinational corporation (MNCs)
• Multinational enterprises are affected by the range of institutional factors and accounting
systems in the different countries in which they operate.
• They tend to be larger and have more complex business operations than local companies.
• Other issues arising include:
– Organizational culture and delegation of decision making to local managers
– Tax implications and incentives;
– Intra‐entity transactions
– Transfer pricing tensions between management control objectives v tax laws
Questions?
Tutorial/workshop Questions
1. Accounting and culture
a.Is culture likely to be a significant influence on the development of accounting internationally?
Justify your answer.
b.Using Hofstede (1980/1988), discuss at least the cultural and institutional factors that influence
the approach to IFRS adoption.

2. Islamic accounting
a.How would accounting be different in a society where lending money at interest was
forbidden?
b.Identify three IAS/IFRS standards that explicitly rely on the existence of interest-bearing
contracts. Reference the specific paragraphs in each case.
c. What accounting standards have been issued by the Accounting Standards Committee of
the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)?
Tutorial/workshop Questions (cont.)

3. Outline the arguments both for and against full adoption rather than harmonization with IFRSs.

4. Explain at least TWO benefits of IFRS adoption.