Advanced International Financial Accounting

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AC1001A - Advanced International Financial Accounting



The aim of the IASB, as published is, “To provide the world’s integrating capital markets with a common language for financial reporting”. As more companies now trade worldwide there is a greater need for consistency regarding financial reporting to ensure that the accounts can be understood by any stakeholder who looks at them without the need for them to be translated.

Companies who have subsidiaries in different countries could also have issues with accounts as with companies thinking about mergers. Accounts would need to be translated in order to match those of the parent company or to make a decision.

There are many reasons why different countries use different methods when it comes to preparing their accounts. These could be cultural issues or legal issues regarding company law or tax laws.

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Professor Hofstede identified four different cultural dimensions.

  1. Power Distance Index (PDI) Power distance index is how power is distributed and accepted
  2. Individualism (IDV) Individualism is where everyone is expected to look after themselves and their family
  3. Masculinity (MAS) Masculinity refers to the differing male values from one country to another whereas women’s values tend to remain constant or vary less
  4. Uncertainty Avoidance Index (UAI) Uncertainty Avoidance Index is regarding society’s intolerance to uncertainty and ambiguity. If a culture is uncertainty avoiding it tries to reduce the likelihood of uncertain situations arising by using strict laws, safety and security measures and on having a belief in one absolute truth. Uncertainty accepting cultures are more tolerant of different opinions and try to have as few rules as possible.

A fifth dimension was added later Long-Term Orientation (LTO) which shows values differing between long term and short term orientation. For example long term orientation values include “thrift and perseverance and the values associated with short term orientation are respect for tradition, fulfilling social obligations and “protecting ones face”.”

Gray (1988), using Hofstede’s analysis, suggested 4 accounting value dimensions that affect a nations financial reporting practices. A framework linking culture and accounting

  1. Professionalism vs Statutory Control according to (Freedman, n.d.) Cultures which have an individualist dimension may prefer self-regulation whereas cultures which value a more uncertainty avoidance dimension are more likely to favour greater legislative control.
  2. Uniformity vs Flexibility
  3. Conservatism vs Optimism
  4. Secrecy vs Transparency secrecy may be linked to uncertainty avoidance as a company may not want to disclose information if they are unsure how the disclosure of that information will affect the business. (Freedman, n.d.)

Tax and legal issues

Although it would be ideal if there was a universal accounting system it would be incredibly difficult to implement and have a completely harmonised accounting system in place. A company could look either worse or better than previous years even though it has not changed which could confuse stakeholders and may result in decisions being made which may have not been made had the accounting practices stayed the same.

There may be a lack of transparency as a company may feel that they do not need to disclose, or want to disclose as much information as set down in the accounting standards. This would be a cultural issue which may be hard to overcome as the company may not feel the need to conform and comply with IASB accounting standards as they feel that they do not apply to them.

Differing tax and company laws as well as culture hinder the goal of the ISAB and would require countries to not only amend accounting practices but laws and the ways that the people in different countries think and act, for example could a conservative thinking country and a liberal thinking country meet and find a middle ground? And what about developing countries, retraining accountants and amending laws would be costly; is this fair? Do the benefits of global harmonisation outweigh the costs? There are many questions regarding the harmonisation of accounting standards and there may never be a “one size fits all solution”.

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Example A)

At the start of the current year, Aber had issued a 10 year bond for $20m. It was issued at par which carries a coupon rate of 8%, the market rate at that date for bonds of similar risk and maturity. This bond is held within a portfolio managed on a fair value basis and accordingly Aber accounts for the bond by applying the fair value option in IFRS 9. At the year end the bond was valued by the market at $16,600,000, and the market interest rate for 10 year bonds had risen to 10%

Example B)

Bard PLC operates from a retail outlet provided by the government in an area of high unemployment. The government has recently altered the terms of their lease to require that the company pay, on the 1st January each year, a levy equal to 1% of the previous year’s revenue. Bard prepares their accounts to 30th November each year and their revenue for the year ended was £240,000, earned evenly over the year. They are hoping to earn £300,000 revenue in December.

A liability to pay a levy is to be recognised when an obligating event occurs, as this company has to pay a levy on January 1st it cannot be recognised until this date as even though the accounts are created assuming the company is a going concern the obligating event to pay the levy has not yet occurred. Therefore the levy cannot be recognised in full in the accounts until January 1st.

Example C)

Cook Inc operates in a sector that has been hit by recession. They manufacture and sell high value production machinery and their customers are finding it hard to arrange lease terms and loans. They have therefore decided to introduce deferred payment terms in an attempt to win orders. This has proved a successful strategy and in the year ended they have sold 100 machines on the following terms:

Total Price (per machine)$1,500,000

Payable over 3 years in equal instalments.

Relevant imputed annual rate of interest is 8%

Example D)

Darius supplies a product to customers at a price that also includes two years ‘free’ servicing of the product. The total price has been set at a competitive $20,000 to encourage sales in a difficult trading period. Darius estimates that the annual cost of servicing the product will be $2,400 and Darius normally earns a margin of 20% on service revenue. The normal selling price of the product without any ‘free’ servicing is $18,000.

Previously

Recorded Product and Servicing as a complete sale

DR Bank 20,000

CR Revenue20,000

Make a provision for the liability of servicing

DR Expenses

CR Provision

Under new system

Cost of providing 2 years servicing $2,400x2x(100/80)=$6,000

*service 2,400 per year 20% margin

Revenue on sale 20,000 x (18/24) 15,000

Revenue of Servicing 20,000 x (6/24) 5,000

20,000

DR Bank 20,000

CR Revenue 15,000

CR Deferred Income 5,000

Under the preferred system revenue is recognised once the factor has taken place. For example if it’s a straight forward sale revenue is recognised straight away, if it is a warranty or service agreement with the cost included in that of the goods, then the revenue for the agreement is recognised at the time it is performed. As can seen from the above calculations there is a difference in the figures and how they will appear in the accounts. Even though the bank will still receive payment of $20,000 in both circumstances the revenue figures are different with $5,000 of the revenue not being recognised until the date of servicing in year one and year two. This smaller revenue may make the company appear on the outside that it may not be performing as well as in previous years. Under the new system if the company sells 1,000 of the units then on paper it would appear that the company has made significantly less the bank would show income of $20,000,000 ($20,000 x 1000) however revenue would show ($15,000 x 1000) 15,000,000. Under the previous system these figures would be the same. Ratios, for example EPS and ROR would also be affected with the EPS being used to measure profitability and ROR measuring profitability comparing the company’s net income to its revenue.

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Bibliography

Anon., n.d. Chapter 4 - International Accounting. [Online] Available at: http://www.ectraining.com.hk/Account/Accounting Theory/Chp 6 - International Accounting.doc [Accessed 06 01 2014].

Freedman, J., n.d. Cultural Differences in Accounting. [Online] Available at: http://www.ehow.com/info_8674318_cultural-differences-accounting.html [Accessed 06 01 2014].

Mtetwa.M, 2011. Barriers to the Harmonisation of Accounting Standards. [Online] Available at: http://suite101.com/a/barriers-to-the-harmonisation-of-accounting-standards-a339559 [Accessed 06 01 2014].

Choi, F. D. S. and Meek, G. K. 2011. International Accounting. 7th edition. New Jersey: Pearson