2.2.3
Practical Differences In Accounting Development and Annual Accounts -An EC
Perspective
Different EC countries have diverse influential factors in
their accounting development process. While in some countries, legal and tax
considerations, or traditions may be significant contributors; in others the
stock and capital markets are of significant influence. The reasons for this
may be diverse, but in some cases are meaningful. For example, in countries
where the users of accounting information are significantly large corporations
exposed to disclosure pressures from international capital markets, the capital
market is of utmost importance to them, thus their disclosure need must be
fully satisfied and bearing information for the financial statements. We have
chosen banks from different accounting areas with different accounting
backgrounds so as to show how such differences in accounting backgrounds may
influence information presented in the financial statements. The Banks chosen
are: Barclays and HSBC, having the Anglo Saxon accounting background SEB bank
and Foreningsparbanken with the Nordic accounting background; and Deustche Bank
and Dresdner Bank with the Germanic accounting background; In the United
Kingdom, for example, the Company Act of 1985, which consolidated all previous
existent Company Acts, includes accounting requirements for all limited
liability companies.
In the United Kingdom, the stock exchange market and the
accounting profession are also influential in the accounting regulatory
process. UK annual reports and accounts consist of consolidated profit and
loss accounts, a balance sheet and a cash flow statement. To assess a review of
operations on a yearly basis, a director's report is necessarily always
included. In consolidation practices, the purchase method is usually followed
though in some cases, and merger accounting or pooling method may be required.
With regards to their measurement practices, the UK applies a conservative
approach than most Anglo Saxon countries where there is constant revaluations
of assets like land and buildings to market values. Inventory cost is also
determined using the first-in-first-out method (FIFO) permitted for tax
purposes, while the last-in-first-out (LIFO) method is not allowed.
In Sweden, for instance, the development of accounting has
been strongly influenced by legal and taxation requirements. There is also a
tradition of involving the accounting profession in the standard setting
process. (Radebaugh and Gray, 1997). Sample Swedish annual reports and accounts
always consists of a consolidated balance sheet, an income statement and a
board a directors annual report. The parent company financial statement is also
always provided. Valuations are sometimes on the basis of historical cost,
although revaluations are sometimes permitted, especially in circumstances
where valuations are materially in excess of book values.
Depreciation is mostly on a straight-line basis. Inventory
cost is determined using the FIFO method. Research and development expenses are
frequently capitalized and amortized over a period of five years, although in
practice most companies charge research and development as an expense. The
purchase method used in consolidation practices is consistent with the EU
7th Directives. Goodwill is written off immediately against reserves
or amortized over its useful life. Foreign currency translation follows the
closing rate method with the temporal method used in highly inflationary
economies.
In the Germanic group of countries, accounting is greatly
influenced by company law and taxation. The accounting profession and the stock
market are relatively small and play a less influential role in these
countries. The situation has changed in recent years where many German
companies have gone to foreign stock markets for listings. The Germans have an
attitude of presenting transparent and reliable financial information, while
interpreting the EU Directives concept of true and fair view as carrying just
that meaning. Tax rules dominate legal decisions on accounting issues and the
development of accounting principles. German financial statements consist of a
consolidated balance sheet and an income statement together with those of the
parent. Regularly included are annual reports from the board of directors. The
Information therein is frequently very detailed. The Germans are quite
conservative in their measurement practices with historic cost accounting
applied and revaluations not permitted. Inventory cost is measured with the
average method, although LIFO and FIFO are frequently used especially when they
correspond to physical usage. Research and development expenses are written off
against reserves. The purchase method is used in business combinations and the
pooling method is rarely used. No legal requirements exist for foreign currency
translation (Radebaugh and Gray, 1997).
Although Radebaugh and Gray's classification may be a reliable
basis for identifying differences in development process and the reasons for
such differences, other authors have attempted to make what may be looked upon
as a more reliable classification. In attempting to identify differences in
annual accounts among EC nations, Nobes (1992) made his classification with
respect to accounting harmonization in the European community and significant
developmental processes by first examining areas where significant differences
exist that have a major influence on accounting development. He identified the
following areas: publication and audit; formats of accounts; conservatism in
providing accounting information; fairness of published information; valuation
bases; consolidation practices and others as being realized from different
accounting backgrounds; hence, influencing the accounting development in those
countries.
According to Nobes (1992), The history of consolidation
practices is different among EC countries. In the United Kingdom, for example,
consolidation accounting developed shortly after the First World War when
holding companies became prevalent. In the Netherlands, for instance,
consolidation was practiced, as early as the 1930s but, in most of continental
Europe, consolidation is a recent development dating from when most countries
adopted the seventh directive in 1985.
In France, for example, there was no law on consolidation
until 1985, while in West Germany, consolidation dates back to 1965 when it was
made obligatory for public companies. It has been noted that in countries where
there has been no tradition of professional accounting measurement standards,
and in cases where there were no law or tax requirements, practice has been
varied. Valuation bases are another area with significant differences in
accounting development. The use of replacement costs and other current values
at the expense of historic cost varies greatly among EC countries. In the
Netherlands, some Dutch companies have used replacement cost as far back as the
1950s. In the United Kingdom, for instance, there have been frequent
revaluations to market values. These fundamental differences in methods of
asset valuation made international comparisons difficult for net assets,
shareholders funds and many ratios (Nobes, 1992). Looking at the way accounting
information is published, there have also been significant differences. In the
Anglo-Saxon and many other English speaking countries, accounts have always
been published after they have been liquidated. Looking at the UK back in the
19th century, publication and audit have always been required for
all companies except dormant ones. The published annual accounts have been
available to the public.
Conservatism has also influenced accounting values in
different ways. In Germany, for example, bankers have a long history of trying
to satisfy that long-term loans were safe by disclosing only information that
protects such values; while in the United Kingdom, reference is usually made to
the concept of prudence. As far as the issue of fairness in financial
information is concerned, corporate laws in UK, Ireland, and The Netherlands
were the only ones in EC countries requiring fairness in audited financial
statements. This was incorporated in the 4th Directives as a
«true and fair view». In German financial statements, there is still
little preference for fairness. Financial reporting is still an exercise of
accurate bookkeeping, which has to satisfy detailed rules and the scrutiny of
the tax inspector (Nobes, 1992). Unlike Radebaugh and Gray, Nobes identifies
principal differences among EC countries in what he calls a two-group
classification. He identified specific features in their background, general
accounting features, specific accounting features and examples of EC countries
that follow this system. See table figure 3 below.
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ANGLO-SAXON
CONTINENTAL
BACKGROUND
English law
Roman law
Large, old and strong profession Small
young and weak profession.
Large stock exchange Small
stock exchange
GENERAL ACCOUNTING
FEATURES
Fair
Legal
Shareholder orientation
Creditor orientation
Disclosure
Secrecy
Tax rules separate
Tax dominated
Substance over form
Form over substance
Professional standards
Government rules
SPECIFIC ACCOUNTING
FEATURES.
Percentage of completion method Completed
contract method
Depreciation over useful lives
Depreciation by tax rules
No legal reserves
Legal reserves
Finance leases capitalized No
lease capitalization
Funds or cash statements No
funds flow statements.
Earnings per share disclosed No
earnings per share disclosed
No secret reserves
Secret reserves.
No tax induced provision Tax
induced provisions
Preliminary expenses expensed
Preliminary expenses capitalized
SOME EXAMPLES OF COUNTRIES.
UK
FRANCE
IRELAND
GERMANY
DENMARK
AUSTRIA
THE NETHERLANDS SWEDEN
SPAIN
ITALY
PORTUGAL
BELGIUM
GREECE.
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FIGURE 3: GROUPS OF COUNTRIES WITH
COMMON ACCOUNTING PRACTICES.
Source: Adapted from Nobes, (1992) «Accounting harmonization
in Europe: process, progress and prospects and survey data.»
It is important to mention the fact that in choosing of our
case study, we have used Radebaugh and Grays's analysis, by sub-classifying
countries, cultural groups. They based their differentiation on several values
that influenced accounting development and differences. Values looked upon in
detail included a country's culture, capital markets and the stock exchange
development, the influences of taxation, the accounting profession and others.
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