Accounting Theory Diggan Chapter 4

FINANCIAL ACCOUNTING THEORY
Craig Deegan
CHAPTER 4
International accounting
Slides written by Craig Deegan
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

PPTs to accompany Deegan, Financial Accounting Theory 4e 4-1
Learning objectives
4.1 Understand the background to actions undertaken by the
International Accounting Standards Board and other
standard-setting bodies to implement the adoption of a
uniform set of accounting standards for worldwide use
(this set of accounting standards being known as
International Financial Reporting Standards or, in
abbreviated form, IFRS).
4.2 Understand some of the perceived advantages and
disadvantages for countries that adopt IFRS.
4.3 Appreciate that prior to many countries adopting IFRS
there were a number of important differences between
the accounting policies and practices adopted within
various countries; such differences are decreasing as
countries elect to adopt accounting standards released
by the International Accounting Standards Board. continued

Learning objectives (cont.)
4.4 Understand various theoretical explanations about why
countries might adopt particular accounting practices in
preference to others, and be able to evaluate whether, in
light of the various theories, it is appropriate to have one
globally standardised set of accounting standards.
4.5 Be able to explain what is meant by the terms
‘harmonisation’ and ‘standardisation’ of accounting.
4.6 Be able to identify and explain some of the perceived
benefits of, and obstacles to, harmonising or standardising
accounting practices on an international scale.
4.7 Understand the key factors that are leading to greater
international harmonisation of accounting.

Evidence of international
differences in accounting
• Although many countries now adopt IFRS, if we go back a
decade and apply different countries’ former accounting rules
to the same transactions we can find significant differences in
profits and net assets (consider evidence provided in the
textbook)
• The (sometimes significant) differences in accounting profits
have been used by many parties to justify the ongoing efforts
of the IASB to standardise international accounting
• But do we really need to standardise accounting on an
international basis because of these differences, and if we do,
what are some of the costs and benefits? This lecture covers
these issues

Standardisation versus
harmonisation
• In relation to international accounting, two terms that are
commonly used are standardisation and harmonisation
• We can define ‘harmonisation’ as a process of increasing the
compatibility of accounting practices by setting bounds to their
degree of variation
• ‘Standardisation’, by contrast, appears to imply the imposition
of a more rigid and narrow set of rules (than harmonisation)
• Therefore, the term ‘harmonisation’ appears to allow more
flexibility than standardisation
• What is happening through the efforts of the IASB is a process
of standardisation

Does it really matter if different countries
use different accounting methods?
• There are many varied views about the costs and
benefits of international standardisation
• Some perceived benefits would include:
– international investors are better able to understand the
financial performance and position of local companies
– tied to the above point, there is an expectation that
standardisation will facilitate greater capital inflows
– also tied to the above point, standardisation will make it
easier for local companies to list on foreign securities
exchanges
continued

use different accounting methods? (cont.)
– companies listed on several securities exchanges
would only need to produce one set of financial
statements and this will have implications for cost
savings
– the accounting and auditing staff employed by
international organisations will be better able to move
to other member companies
– there will be cost savings in the accounting-standard
setting function—rather than individual companies
duplicating the efforts of others, the majority of
functions of the standard-setting process will be
centralised at the IASB

use different accounting methods? (cont.)
– a perception that IFRS will lead to more accurate,

comprehensive and timely financial statement
information, relative to the information that would have
been generated from the national accounting standards
they replaced
– to the extent that the resulting financial information would
not be available from other sources, this should lead to
more-informed valuations in the equity markets, and
hence lower the risks faced by investors
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But obviously it is very difficult to
quantify any benefits associated with
international standardisation
• There is very little empirical research or theory that
actually provides evidence of the advantages or
disadvantages of uniform accounting rules nationally,
or internationally
• For example, whilst the FRC in Australia said that real

benefits would flow from Australia adopting IFRS there
is no quantifiable evidence of such benefits
• Whether the benefits of adopting IFRS are shared by

a majority of corporations within a country, or whether
the benefits are confined to larger multi-national
corporations, is a matter of conjecture

Objectives of the IASB
• The body at the centre of international
standardisation of general purpose financial reporting
is the IASB
– it seeks to formulate and publish accounting standards and
to promote their worldwide acceptance
– it seeks to work on the improvement and standardisation of
regulations, accounting standards and procedures
– the IASB does not appear to believe that the many reasons
provided as to why different nations should have different
accounting standards (e.g. tied to differences in culture,
religion and so forth) outweigh the benefits of international
standardisation. (We will consider some arguments against
international standardisation shortly.)

The IASB
• The Institute of Chartered Accountants of
England and Wales, the Canadian Institute of
Chartered Accountants and the American Institute
of Certified Public Accountants initially
established an Accountants’ International Study
Group in 1967
• The Accountants’ International Study Group then

formed the basis for the establishment of the
IASC in 1973
• The IASB replaced the IASC in 2001

Australia’s adoption of IFRS
• Australia decided in the mid-1990s to harmonise
its standards with those of the IASC
• But then in 2002, a decision was made by the

Financial Reporting Council that Australia would
adopt standards released by the IASB
• IFRS still not accepted by the US SEC for US

domestic companies, however the US FASB and
the IASB are currently working on a convergence
project which might ultimately see the US adopt
IFRS (far from certain)

The change-over to IFRS
• The decisions made in various jurisdictions that the
respective countries would adopt IFRS created a
great deal of work for organisations in those
countries, in that they had to make quite significant
changes to their accounting practices
• There were some significant accounting changes
– for example, within Australia, the adoption of IAS/IFRS
required companies to write off a great deal of assets,
particularly intangible assets
• Was it all worth the effort?

The United States’ role in the international
standardisation of accounting
• One notable exception to the global adoption of IFRS is the US
– in a sense the reluctance of the US to adopt IFRS is undermining the
efforts and even credibility of the IASB
• Within the US, accounting standards are developed by the

FASB
• The SEC has the power to override the standards developed by
the FASB
• US was traditionally strong in its resolve not to adopt IFRS but
this resolve diminished in the light of collapses such as Enron
• US standards are considered to be more ‘rules-based’ whereas
IFRS are more ‘principles-based’
• A belief grew that ‘principles-based’ standards may be more
effective in reducing ‘accounting fraud’
Does the international standardisation of
accounting standards necessarily lead to
the international standardisation of
accounting practice?
• Somewhat obviously, the IASB was seeking to
standardise practice
• However, there are a number of reasons why the
standardisation of accounting standards will not
necessarily lead to standardisation of accounting
practice (there is a difference)
• Hence, consistent with Nobes (2006), we would
argue that the study of international differences in
accounting practice (and the reasons and motivations
underlying the differences) will remain an important
area of research despite the ongoing standardisation
efforts of the IASB continued

Reasons why international differences in
accounting practice will survive beyond the
introduction of IFRS
• Differences in taxation systems
– tax-driven accounting choices, which are domestic,
might flow through to IFRS statements
• Differences in economic and political influences
on financial reporting
– powerful local economic and political forces determine
how managers, auditors, courts regulators and other
parties influence the implementation of rules. These
forces have exerted a substantial influence on financial
reporting practice historically, and are unlikely to
suddenly cease doing so, IFRS or no IFRS (Ball, 2006).
continued

Reasons why international differences...will
survive beyond the introduction of IFRS (cont.)
• Modifications made to IFRS at a national level
– the IASB has no ability to enforce the application of its

accounting standards in countries that have made the
decision to adopt IFRS. This is a key impediment to
any efforts to standardise accounting practice globally.
– regulatory bodies in particular countries may take the

decision to modify a particular IFRS before it is
released (for example, the EU in relation to their
acceptance of IFRS 39).
continued

• Differences in implementation, monitoring and

enforcement
– Unless there is international consistency in the
implementation of accounting standards and subsequent
enforcement mechanisms then we cannot expect
accounting practices to be uniform despite the actions of the
IASB.
– Investors might be misled into believing that IFRS adoption
has created a consistency in international accounting
practices. That is, the adoption of IFRS might (incorrectly)
be construed as a signal that a country has improved its
quality of reporting.
continued

• Differences in implementation, monitoring and
enforcement (continued)
– In a sense, the adoption of IFRS brings a level of legitimacy
to a country's financial reporting despite any limitations in
the level of enforcement of the standards.
– All this disadvantages those countries who have high quality
implementation, monitoring and enforcement of IFRS
 Some countries are ‘free-riding’ on the efforts of others
continued

• Ball discussed the ‘free rider’ problem associated
with IFRS.
– If a 'symbol of legitimacy' - such as IFRS - can be acquired
at low cost then some countries with low accounting
proficiency will make the choice to adopt IFRS because of
the reputational benefits such a choice may generate
– Such a choice will have costly implications for countries
with higher levels of accounting proficiency and who put in
place appropriate implementation, monitoring and
enforcement mechanisms

So is a belief in the international
standardisation of accounting practice
realistic?
• Given the arguments just provided we might question
the belief that the global adoption of IFRS will lead to
consistency in international accounting practices.
• There will arguably continue to be international
differences in accounting practice and such
differences will continue to provide an interesting
area of research for accounting academics.
• However, at a more fundamental level, is it really a
good idea that there should be global consistency in
accounting practice anyway?
continued

So is a belief in the international
standardisation of accounting practice
realistic? (cont.)
• Is it appropriate to have a globalised ‘one-size-fits-
all’ approach to financial reporting when there are
international differences:
– in the nature of capital, labour and product markets?
– in monitoring and enforcement mechanisms?
– in economic and political influence?
– in cultures?
• The next part of this lecture explores various reasons
why, in the absence of globalisation efforts such as
those being undertaken by the IASB, we would
expect to find international differences in accounting
practices

International financial accounting models
• Historically there have been two main models of financial
accounting adopted internationally:
• Anglo-American model
– strongly influenced by professional accounting bodies rather than
government, emphasises importance of capital markets,
emphasises concepts such as true and fair, and considerations of
economic substance over legal form
 in these environments funds were generally sourced from capital
markets and there was a reliance on general purpose financial reports
• Continental European Model

– relatively small input from accounting profession, little reliance on
qualitative concepts such as true and fair, and strong reliance on
government
 In these environments, funds were generally sourced from government,
banks or family members and interested parties were able to obtain
information through special purpose financial reports
Reasons for international
accounting differences
• Underlying laws and political systems
• Tax systems
• Level of education
• Level of economic development
• Nature of business ownership and financing system
continued

Reasons for international accounting
differences (cont.)
• Colonial inheritance
• Culture
• History
• Language
• Religion

The effect of culture on
accounting systems
• Differences in national cultures has been used by many
researchers to explain why, prior to the efforts of the IASB,
there were fundamental differences between nation’s
accounting practices (although, keep in mind the previous
discussion that suggests that the global use of IFRS will not
necessarily standardise accounting practice)
• Culture impacts on legal systems, tax systems and the way
businesses are formed and financed etc.
• Previously used to explain differences in social systems
• Culture can be defined as ‘… an expression of norms, values
and customs which reflect typical behavioural characteristics’
(Takatera & Yamamoto 1987)
continued

The effect of culture on accounting
systems (cont.)
• ‘Culture’ reserved for societies as a whole or nations

• ‘Subculture’ used for the level of an organisation,
profession or family
– for example, accountants in Australia are a sub-cultural
group
– the accounting sub-culture in Australia is derived from
Australian society’s cultural norms, values and customs
• International differences in accounting systems may
be explained by a framework incorporating culture

Classifying a country’s culture: The role of
Hofstede’s cultural dimensions
• Four underlying societal dimensions along which
countries could be positioned
– Individualism versus Collectivism
– Large versus Small Power Distance
– Strong versus Weak Uncertainty Avoidance
– Masculinity versus Femininity
• The value systems of accountants will be derived
from and related to societal values
• Without the intervention of organisations such as the
IASB, these societal values will in turn impact on the
development of accounting standards at a national
level (as they would also influence other forms of
legislation or guidance)
Individualism versus
Collectivism
• Addresses the degree of interdependence a
society maintains among individuals
– Individualism refers to a preference for a loosely knit
social framework wherein individuals care for
themselves and their immediate families
– Collectivism stands for a tightly knit social framework

where relatives, clan or other in-group look after each
other

Power Distance
• The extent to which members of a society accept
that power in institutions and organisations is
distributed unequally
– Large Power Distance societies accept a hierarchical
order in which everyone has a place
– Small Power Distance societies strive for power

equalisation

Uncertainty Avoidance
• The degree to which the members of a society feel
uncomfortable with uncertainty and ambiguity
– Strong Uncertainty Avoidance societies maintain rigid
codes of belief and behaviour
– Weak Uncertainty Avoidance societies maintain a more

relaxed atmosphere where practice counts more than
principles

Masculinity versus Femininity
• Addresses the way in which a society allocates
social roles
– Masculinity stands for a preference for achievement,
heroism, assertiveness and material success
– Femininity stands for a preference for relationships,

modesty, caring for the weak, and quality of life

Possible lecture exercise
Individually
For your country of birth, or ethnic origin, decide where you
think that country would sit on the four original Hofstede
dimensions

Societal dimensions and accounting
subculture: Linking the work of Hofstede
to that of Gray
• The value systems of accountants are derived from

related societal values
• The values of the accounting subculture will in turn

impact on the development of the respective
accounting systems at a national level
– should accounting systems be developed in a globalised
‘one-size-fits-all’ approach?

Gray’s accounting values
• Gray developed four accounting values deemed to
relate to the accounting subculture, with the intention
of linking them to Hofstede’s four societal values
– professionalism versus statutory control
– uniformity versus flexibility
– conservatism versus optimism
– secrecy versus transparency

Gray’s hypotheses
• H1: The higher a country ranks in terms of
Individualism and the lower it ranks in terms of
Uncertainty Avoidance and Power Distance, the
more likely it is to rank highly in terms of
Professionalism

Uncertainty Avoidance and Power Distance and
the lower it ranks in terms of Individualism, then
the more likely it is to rank highly in terms of
Uniformity
continued

Gray’s hypotheses (cont.)
Uncertainty Avoidance and the lower it ranks in
terms of Individualism and Masculinity, then the
more likely it is to rank highly in terms of
Conservatism

Uncertainty Avoidance and Power Distance and
the lower it ranks in terms of Individualism and
Masculinity, then the more likely it is to rank
highly in terms of Secrecy
continued

Table of Gray’s accounting values: Hypothesised
relationships between Gray’s accounting values
and Hofstede’s cultural values (Deegan, p. 143)
Accounting values (Gray)

Cultural Professionalism Uniformity Conservatism Secrecy
values
(Hofstede)
Power
Distance - + ? +
Uncertainty
Avoidance - + + +
Individualism
+ - - -
Masculinity
? ? - -
continued

Gray’s hypotheses (cont.)
• Gray further hypothesised relationships between
accounting values and
– the authority and enforcement of accounting systems
– the measurement and disclosure characteristics of
accounting systems

Other research using
Hofstede’s cultural dimensions
• Zarzeski (1996)
– used Hofstede’s dimensions to explain corporate
disclosure
– entities with a higher international profile tend to be less
secretive
– local enterprises are more likely to disclose information
commensurate with the secrecy of their culture than are
international enterprises

Other research using Hofstede’s cultural
dimensions (cont.)
• Perera (1989)
– used Hofstede’s cultural dimensions and Gray’s accounting
subcultural value dimensions to explain differences in the
accounting practices of European and Anglo-American
countries
• Baydoun and Willett (1995)
– investigated the use of the French United Accounting System
in Lebanon
• Chand and White (2007)
– explored various cultural attributes within the Fijian society to
determine whether the recent adoption of IFRS within the
Fijian context made sense. Their view was that rules-based
standards would be more appropriate than the principles-
based standards that have been developed by the IASB

The effect of religion on
accounting systems
• Another factor that has been used to explain
differences in accounting is religion
• Religion transcends national boundaries
• Impacts on global harmonisation of accounting
standards
• Hamid, Craig and Clarke (1993) examined how Islamic
cultures have failed to embrace ‘Western’ accounting
practices
– compliance with Islamic beliefs can affect the structure of
business and finance
– many Western accounting practices are incompatible with
Islamic principles
– relevance of IASB standards to such cultures? continued

The effect of religion on accounting systems
(cont.)
• Religion can affect how people do business and
how they make decisions, for example
– Islam precludes debt financing and prohibits payment of
interest
– the Western objective of financial reporting of rational

economic decision making (refer to the conceptual
frameworks discussed in Chapter 5) may not be a relevant
objective in some societies

Legal systems
• Another factor that will cause international
differences in accounting is the legal system in
operation
• Legal systems can be broadly divided into common
law and Roman law systems
– in Roman Law systems the law tends to be very detailed
– in Common Law systems —which is how Australia can be
classified—law typically evolves from the ruling of judges
• In Common Law countries accounting practices tend
to rely relatively heavily on professional judgment

Business ownership and
financing system
• Another factor is the business ownership and
financing system
• At a country level, the financing system is relevant
to the purpose of financial reporting
• Three types of financing systems
– capital market-based (e.g. United Kingdom and United
States)
– credit-based system: governmental (e.g. France and
Japan)
– credit-based system: financial institutions (e.g. Germany)

Business ownership and financing
system (cont.)
• Systems relying on equity markets will have
greater demand for public disclosures
– more reliance on general purpose financial reports
prepared for a broad cross-section of report users who
might have an economic interest in an organisation but
are not involved with the management of the organisation
• Credit-based systems more concerned with the
protection of creditors
• Colonial inheritance also a major explanatory
factor

Taxation systems
• Differences in accounting methods internationally
have also been linked to differences in taxation
systems
• Where there are ‘insider systems of finance’
(common in continental European countries)
financial accounting practices have typically been
linked to taxation law

Impact of international
agencies
• Various international agencies have also had an
effect on the accounting systems used within
particular countries
• Examples of institutions or bodies which can
impact on a country’s accounting policies are
– multinational companies
– international accounting firms
– large monetary organisations e.g. World Bank

So there are many forces ‘working against’
international standardisation
• Hence, we can now hopefully understand that there are many
explanations for international differences in accounting practice
• Given the many factors that explain why international
differences in accounting will, or perhaps should exist, then how
logical are efforts towards international standardisation?
• Do we think that the global standardisation efforts of the IASB
are likely to succeed in the long-run?
• Will diverse countries with different cultures, religions, finance
systems and so forth start to question a ‘one-size-fits-all’
approach emanating from the IASB boardroom in London?
• Is the apparent reluctance of the United States to commit to
IFRS the start of the demise of the IASB’s efforts to standardise
accounting internationally?
• Time will tell …..

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FINANCIAL ACCOUNTING THEORY

Slides written by Craig Deegan

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

– a perception that IFRS will lead to more accurate,

• For example, whilst the FRC in Australia said that real

• Whether the benefits of adopting IFRS are shared by

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

• The Accountants’ International Study Group then

• The IASB replaced the IASC in 2001

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd

• But then in 2002, a decision was made by the

• IFRS still not accepted by the US SEC for US

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• Within the US, accounting standards are developed by the

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• Modifications made to IFRS at a national level

– the IASB has no ability to enforce the application of its

– regulatory bodies in particular countries may take the

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• Differences in implementation, monitoring and

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• Continental European Model

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• ‘Culture’ reserved for societies as a whole or nations

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– Collectivism stands for a tightly knit social framework

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– Small Power Distance societies strive for power

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– Weak Uncertainty Avoidance societies maintain a more

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– Femininity stands for a preference for relationships,

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• The value systems of accountants are derived from

• The values of the accounting subculture will in turn

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• H2: The higher a country ranks in terms of

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• H4: The higher a country ranks in terms of

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Accounting values (Gray)

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