Chapter 5Slide 2Slide 3Slide 4ChinaSlide 6Slide 7Slide 8Slide 9Slide 10GermanySlide 12Slide 13Slide 14Slide 15Slide 16Slide 17JapanSlide 19Slide 20Slide 21Slide 22MexicoSlide 24Slide 25Slide 26Slide 27Slide 28United KingdomSlide 30Slide 31Slide 32Slide 33McGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 5Comparative Accounting5-2Chapter TopicsAccounting environment, profession, regulation, principles/practices, and differences to IFRSs in•China•Germany•Japan•Mexico•United KingdomComparative Accounting5-3Learning Objectives1. Describe some aspects of the environment in which accounting operates in five countries: China, Germany, Japan, Mexico, and the United Kingdom.2. Explain the nature of the accounting profession in selected countries.3. Discuss the mechanism in place for regulating accounting and financial reporting in selected countries.Comparative Accounting5-4Learning Objectives4. Examine some of the accounting principles and practices used by companies in these countries.5. Identify the areas where national accounting practices in these countries differ from International Financial Reporting Standards (IFRSs).Comparative Accounting5-5ChinaBackgroundWorld’s largest country with population of over 1.2 billion.People’s Republic of China (PRC) established in 1949.Politically: Communist, one-party state.Economically: Until the 1980s, all firms state-owned.Currently in transformation to market economy.World’s fourth largest economy and fastest growing among large economies, largest recipient of FDI.Learning Objective 15-6ChinaBackgroundFirst securities regulations adopted in 1984.Two major stock exchanges, Shanghai and Shenzhen established in 1990 and 1991.Government controls capital market via Chinese Security Regulatory Commission (CSRC) similar to SEC.Domestic companies list four types of shares: A, B, C, H.Market characterized by speculation, high share turnover.Learning Objective 15-7ChinaAccounting ProfessionProfession less prestigious than in U.S./UK.Accounting and auditing have developed separately.Chinese Institute of Certified Public Accountants (CICPA) and Chinese Association of Certified Practicing Auditors (CACPA) merged in 1998.Economic reform and the large number of joint ventures with foreigners has led to emergence of audit profession.Learning Objective 25-8ChinaAccounting RegulationRecent activity is focused on harmonizing variety of domestic systems which vary by industry.Committed to converging with IFRS, spurred by desired membership in World Trade Organization (WTO).Audits of financial statements widely required.Death penalty in an accounting fraud case suggests that it is taken very seriously.Ministry of Finance (MoF) in similar role as FASB.Learning Objective 35-9ChinaAccounting Principles and PracticeComputation of taxable income of primary importance.Conservatism criticized as a method by which owners can understate income and justify low wages.Lack of conservatism still a difference with IFRS.Lack of accounting infrastructure contributes to gap between accounting principles and practice.Accounting System for Business Enterprises (ASBE) followed by over 500,000 firms, including all listed companies.Learning Objective 45-10ChinaDifferences to IFRSsProperty, plant, and equipment -- historical cost, IAS 16 permits revaluations. Borrowing costs for self-constructed assets – require capitalization, IAS 23 allows capitalization or expensing.Asset impairments – Chinese standards are silent, IAS 36 requires impairment test and recognition of loss.Preoperating expenses – deferred, then expensed when operations begin, under IAS 38, expense immediately.Learning Objective 55-11GermanyBackgroundEuropean Union’s largest country, population 83 million.West Germany and East Germany established in 1949, reunified in 1990.Historically, banks have been primary source of finance via both loans and equity.Since reunification, the economy has been affected by internationalization.Learning Objective 15-12GermanyBackgroundGerman companies increasingly listing on foreign exchanges, e.g., New York Stock Exchange.Most common business forms are Aktiengesellschaft (AG) and Gesellschaft mit beschrankter Haftung (GMBH).AG are publicly traded/GMBH are non-publicly traded.Historically had significant influence on accounting systems in a number of other countries.Japan’s commercial code is modeled on Germany’s.Learning Objective 15-13GermanyAccounting ProfessionProfession has traditionally been less influential than in U.S./UK.Auditing is dominant part of profession, certified auditors title of Wirtschaftprufer (WP) was created in 1931.Institut der Wirtschaftprufer similar to the AICPA.Obtaining WP title is extremely rigorous.Wirtschaftpruferkammer (WPK) is state sponsored group that oversees auditing profession.Learning Objective 25-14GermanyAccounting RegulationCommercial code and tax laws are main sources of accounting rules.Stock exchange rules have less influence than in U.S.Prudence is fundamental, recognition of revenues only when realized, losses when they appear possible.Began change away from creditor orientation in 1960s.Starting in the 1980s, EU directives began having major influence.Learning Objective 35-15GermanyAccounting Principles and PracticesHistorical cost attribute for measuring tangible assets is adhered to.Traditional focus on creditor protection is at odds with the true and fair view concept.Importance of tax laws led to the reverse authoritative principle which requires expenses to be deducted from accounting income if they are to be tax deductible.Learning Objective 45-16GermanyAccounting Principles and PracticesIn contrast to China, conservatism has been used to resist labor’s wage demands.Standards allow for income smoothing, frequently accomplished via early recognition of losses.EU fourth directive requires true and fair view, but Germans have a unique interpretation of the concept.Commitment to globalization reflected in rule that allows public companies to use IFRS for consolidated statements.Learning Objective 45-17GermanyDifferences to IFRSsGoodwill – deducted immediately against equity, under IFRS 3, accounted for as an indefinite life intangible asset.Internally generated intangibles – not