Chapter 06 - Comparative Accounting

CHAPTER 6
COMPARATIVE ACCOUNTING
Chapter Outline
China
I.

There are some unique features in the accounting profession in China. They include the
following:
A. Until the 1980s, those who carried out accounting work were not held in high regard in
society, and this has had an adverse effect on the development of the accounting
profession in China.
B. Accounting and auditing in China have taken different paths in their development
processes. Auditing firms audited mainly domestic companies, and were under the
State Administration of Audit (SAA), whereas accounting firms focused on companies
using foreign investments and were sponsored by the Ministry of Finance.
C. Unlike in the U.K., where there was a good legislative and judicial environment during
the early stages of the development of the profession, in China, a market-oriented
legislative and judicial environment is still emerging.
D. Unlike in the U.K., where auditors receive support from the established professional
bodies, these support mechanisms are still lacking in China.

II.

The recent economic reform program stimulated the growth of the accounting profession
in China.
A. With the recognition by the State of joint stock company form, the demands for
financial information from investors and other interested parties increased.
B. The establishment of two stock exchanges helped rapid growth of the accounting
activities.
C. Various government regulations on the implementation of economic reform measures
require the involvement of independent auditors.
D. The laws on joint ventures with foreign companies require the audit of annual
statements.
E. International accounting firms were allowed to be involved in training local auditors and
setting auditing standards.

III.

There are clear signals that Anglo-American accounting principles are replacing Sovietstyle accounting.
A. This was required as a result of the movement towards private ownership.
B. The Ministry of Finance is following international accounting practices in setting
Chinese standards; a conceptual framework was promulgated in 1992 (The
Accounting
Standards for Business Enterprises- ASBE), and the China
Accounting Standards Committee (CASC) was established in1988. The
ASBE issued
in February 2006, which replaced the 1992 ASBE, and CASs
previously issued,
became mandatory for all PRC listed companies in
January 2007. The 2006 ASBE
adopted a significant number of the
accounting standards laid out by the IASB.

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Chapter 06 - Comparative Accounting

C. The Chinese Security Regulatory Commission (CSRC) has improved disclosure

requirements for companies. For example, it requires listed companies to post their
annual reports on the web site of the relevant stock exchange.
D. Both CSRC and the two stock exchanges have developed new corporate governance
rules based on those that are common in Anglo-American countries.
E. The CSRC and Ministry of Finance, consistent with the Sarbanes-Oxley Act, require
auditor rotation every five years.
IV.

Major differences between IFRS and Chinese GAAP include:

A. Accounting standards and practices in China lack conservatism.
B. There are no coherent interpretations of the relevant requirements.
C. In some areas covered by IFRS there are no specific rules in China, including
business combinations, impairment of assets, and the definitions of operating and
finance leases.

Germany
I.

Unique features in German accounting include:

A. The primary source of finance for German companies is bank loans rather than equity,
and this determines to a large extent the purpose for financial reporting by companies.
B. Auditing dominates the financial reporting related professional activities.
C. The auditing profession is headed by the Chamber of Auditors, a State-supervised
organization.
D. The Commercial Code contains most of the German financial reporting principles, and
sanctions for non-compliance.
E. Unlike in the U.S., partnership accounting is regulated in Germany.
F. The principle of prudence (conservatism) is established in the law.

II.

There are signs of a change in financial reporting from a creditor orientation towards a
shareholder orientation.
A. The Companies Act 1965 was the initiator of this change.
B. In 1998, German law was amended to allow a private sector body (GASC) to develop
accounting standards (until then the Ministry of Justice coordinated the accounting rule
development process).
C. Since 1998, German accounting standards have been developed by following due
process, and promotion of international convergence is a main objective.
D. GASB (the standard-setting body of GASC) has been modeled on the U.S. FASB.
E. In 2004, the Financial Reporting Enforcement Panel (FREP) was created.

III.

Traditionally, the primary function of financial accounting has been the conservative
determination of distributable income, rather than presentation of a true and fair view.
A. Traditionally bank credit plays a major role in corporate finance.
B. German accounting is heavily influenced by tax law.
C. German accounting rules allow companies to smooth income over time by using
hidden reserves.
D. Although the EUs Fourth Directive requires companies to present a true and fair view
in their financial statements, it appears that extensive note disclosures are seen as a
way of achieving this without changing the tax-based, income smoothing approach to
financial reporting.

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Chapter 06 - Comparative Accounting

IV.

Since January 2005, all German listed companies are required to use IFRS in preparing
their consolidated financial statements. However, German accounting practices differ from
IFRS in some important respects.
A. German accounting law contains no specific rules in some areas. Examples include
the translation of foreign currency financial statements of foreign subsidiaries,
disclosures of fair values of financial assets and liabilities, and earnings per share.
B. There are inconsistencies between IFRS and German rules in some areas. For
example, according to German rules, goodwill arising on consolidation can be
deducted immediately against equity, and inventories can be valued at replacement
cost.
C. According to German tradition, a management report is an important part of a
companys financial statements, whereas IFRS do not include specific requirements in
this regard.
D. The new regulations (BilMoG) introduced in May 2009 incorporated IFRS related
elements into German GAAP. For example, the capitalization of internally generated
intangible assets such as self created patents is now permissible option while
prohibited under previous rules, and the abolition of tax accounting for external
financial reporting.

Japan
I.

Unique features in the Japanese business environment include:

A. The economy is dominated by a few conglomerates known as Keiretsu.
B. The main sources of finance for business are bank credit and cross-corporate
ownership, rather than outside equity finance.
C. Corporate earnings are regarded as the source of funds that can be distributed, and
not as a measure of corporate performance.
D. Stock exchanges in Japan are government regulated rather than self-regulated. The
stock exchange law is administered by the Ministry of Finance.

II.

There are differences between the Japanese accounting profession and its counterparts in
Anglo-American countries, including:
A. The Ministry of Finance plays a major role, through its Business Accounting
Deliberation Council (BADC), in developing financial reporting standards in Japan, and
the influence of the Japanese Institute of Certified Professional Accountants (JICPA) in
this respect has been minor compared to that of its counterparts in Anglo-American
countries.
B. The accounting profession has a relatively low social status in Japan.
C. For cultural reasons, the concept of independent auditor is not readily acceptable
within Japanese companies.
D. Unlike in the U.S., and similar to Germany, financial reporting is heavily influenced by
tax law.

III.

Recently, major attempts have been made to ensure that Japanese accounting standards
fall into line with international standards.
A. A Big Bang approach has been taken to achieve this.
B. In 2001, the Accounting Standards Board of Japan (ASBJ), modeled on FASB, was
formed.

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Chapter 06 - Comparative Accounting

C. In January 2005, the ASBJ and IASB agreed to launch a joint project to reduce
differences between IFRS and Japanese GAAP. Accordingly, efforts are being made to
bring Japanese accounting principles and practices closer to international standards.
IV.

There are several important differences between IFRS and Japanese GAAP.
A. In general, companies are not under pressure from their main providers of finance to
disclose information publicly, and Japanese companies are reluctant to provide
information voluntarily.
B. There are no specific rules in some areas covered by IFRS, such as impairment of
assets, discontinuing operations and segment reporting.
C. There are inconsistencies between Japanese GAAP and IFRS; for example,
inventories can be valued at cost under Japanese GAAP rather than at the lower of
cost and net realizable value as required by IFRS.

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Chapter 06 - Comparative Accounting

Mexico
I.

Many features of the Mexican business environment are common to other developing
countries.
A. Until recently, a substantial portion of the Mexican business sector was government
controlled, and a large number of business enterprises were government owned.
B. The economy has suffered from persistent balance of payments problems.
C. As a result of the effect of the Tequila crisis, Mexico accepted a bailout package from
the IMF and the U.S. Treasury.
D. In recent years, there has been an effort to privatize state-owned enterprises, and
many of the restrictions to foreign investment have been removed.
E. The measures aimed at achieving economic growth stimulated the activities of the
stock exchange.
F. Mexico has experienced several years of record-low inflation, low interest rates, a low
external debt and a strong peso.

II.

Mexico has an established accounting profession with a long history.

A. The first professional body was established in 1917.
B. The Mexican Institute of Public Accountants (MIPA) was one of the nine founding
members of the IASC.
C. Public accounting firms mainly provide bookkeeping, tax, and audit services.
D. A professional diploma is required to practice as a public accountant.

III.

Regulation of accounting and financial reporting is through legislation, stock exchange

listing requirements, and bulletins issued by MIPA.
A. The law requires that annual financial statements of listed companies must be audited
by a Mexican CPA and published in a nationally circulated medium.
B. The National Banking and Securities Commission (NBSC), an equivalent of U.S. SEC,
oversees information disclosure by publicly owned companies.
C. In June 2004, the Mexican Board for Research and Development of Financial
Reporting Standards (CINIF) assumed responsibility for issuing accounting standards
(until then this responsibility was with the Accounting Principles Commission of MIPA).
D. MIPA has developed a Code of Ethics which prohibits advertising for public
accountants.
E. Mexican financial reporting standards (FRS) framework requires companies to follow
IFRS as supplementary, when no specific guidance is provided by Mexican FRS for a
particular transaction or event.

IV.

As a result of Mexicos membership with NAFTA, Mexican accounting principles are

heavily influenced by U.S. accounting practices in recent years.
A. The U.S. influence also is exerted through the presence of subsidiaries of U.S.
companies and the Big 4 international accounting firms.
B. International Qualifications Appraisal Board, the CICAs International Qualifications
Appraisal board, and Mexican Institute of Public Accountants and Mexican Committee
for the International Practice of Accounting, agreed on the principal elements for
granting accounting certification and licenses, which included education, examination,
and experience. NAFTAs Free Trade Commission affirmed the PMRA in October
2003.

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Chapter 06 - Comparative Accounting

V.

A unique feature of Mexican accounting practice is the treatment of the effects of inflation
in financial statements by using general purchasing power accounting.

VI.

Bulletin B-10 introduced a novel concept known as the integrated result of financing,
which is calculated by adding the nominal interest expense, the gain or loss due to price
level changes on the companys net monetary position, and the gains and losses due to
exchange rate fluctuations on the companys monetary assets and liabilities denominated
in foreign currencies.

VII. There are several differences between Mexican GAAP and IFRS. For example, according
to Mexican rules, research and development costs are to be expensed as incurred, preoperating costs can be capitalized, a statement of inflation is mandatory irrespective of the
inflation rate.
United Kingdom
I.

In the U.K. the capital market provides the main source of funding for companies, and the
limited liability company is the main form of business organization.
A. The primary purpose of accounting in the U.K. is to provide information for the efficient
functioning of the capital market.
B. Accounting in the U.K. grew as an independent discipline, responding to business
needs.
C. The first professional accounting body in modern times was established in the U.K. in
1853, and currently there are six professional bodies in that country, coordinated by
the Consultative Committee of Accountancy Bodies (CCAB).
D. The U.K. accounting profession has favored a principles-based approach rather than a
rules-based approach to standard setting.

II.

Accounting regulation in the U.K. has been driven by the idea that determination of
acceptable accounting principles and standards should be left in the hands of the
profession.
A. U.K. legislators did not feel the need to have a powerful securities commission to
regulate accounting and financial reporting with detailed rules.
B. The responsibilities for developing accounting standards and auditing standards lie
with the Accounting Standards Board (ASB) and Auditing Practices Board (APB),
respectively, both independent bodies.
C. Changes to traditional thinking began as a result of U.K. joining the EU in 1973. The
amendments to the 1948 Companies Act in 1981 as a result of integrating the EUs
Fourth Directive in British law made U.K. company legislation highly prescriptive.
D. In 2003 the Financial Reporting Council (FRC) became the single, independent
regulator of accounting and auditing in the U.K.
E. ASB is one of the several national accounting standard-setters that have formal liaison
with the IASB, and is committed to align U.K. accounting standards with IFRS.

III.

In recent years, accounting standard setting in the UK has undergone major changes.
A. In July 2012, setting accounting standards became the responsibility of the FRC
Board, whereas this was previously done by the ASB. In addition to being responsible
for issuing accounting standards and dealing with their enforcement, the FRC is also
responsible for promoting high quality corporate governance and reporting to foster

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Chapter 06 - Comparative Accounting

investment. It also monitors and takes action to promote the quality of corporate
reporting and auditing; operates independent disciplinary arrangements for
accountants and actuaries; and oversees the regulatory activities of the accountancy
and actuarial professional bodies.
B. In October 2012, in an effort to make narrative reporting simpler, clearer and more
focused, the UK Department for Business, Innovation and Skills (BIS) published draft
regulations for narrative reporting. It replaces a summarized P&L and balance sheet
with what is essentially a narrative discussion about the companys strategy and
performance.
C. The FRC developed a suite of three standards: FRC 100 Application of Financial
Reporting Requirements (Published in November 2012); FRC 101- Reduced
Disclosure Framework (Expected early 2013); and FRC 102 The Financial Reporting
Standard applicable in the UK and Republic of Ireland (Expected in January 2015)
with the stated aim of simplifying accounting and reporting for unlisted entities,
improving reporting of financial instruments and providing cost savings for subsidiaries
of listed groups.
IV.

Accounting principles and practices in the U.K. emphasize investor needs and the
importance of transparency.
A. The 1985 Companies Act requires corporate financial statements to provide a true and
fair view of the firms financial position and results of operations for the financial year.
Auditors are given the corresponding duty to render an opinion on whether this
requirement is fulfilled. Provision of a true and fair view is an overriding requirement in
the U.K.
B. Since January 2005, U.K. listed companies are required to use EU adopted IFRS to
prepare their group (consolidated) financial statements.
C. Financial statements generally are prepared on the basis of historical cost, but
companies are allowed to revalue tangible assets.
D. U.K. accounting standards are generally similar to IFRS, but there are also differences
in some areas. For example, U.K. GAAP allows companies to amortize goodwill at
their discretion, whereas IFRS require goodwill to be tested for impairment annually.

Answers to Questions
1. Gradual capital market liberalization will open up international investment opportunities for
national investors. Poor rating assignments of national firms could therefore trigger an
immense outflow of investment capital providing national firms with strong incentives to
implement sound and internationally comparable accounting practices.
2. The economic reforms have increased demand for accounting services in many ways. Key
aspects of the economic reforms in China include privatization of SOEs, liberalization of
controls, commitment to encourage private investment in business and to attract foreign
investment, and emphasis on commercial viability and competition among businesses. All
these are integral parts of a market system, and lead to increased demands for accounting
services. For example, when businesses compete, they become increasingly cost
conscious. Investors need accurate information about the financial performance and
position of the businesses they have invested in. When Chinese companies seek to raise
funds in overseas markets or the government attempts to attract foreign investors, it is
important to ensure that proper financial records are kept, and information is disclosed using

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Chapter 06 - Comparative Accounting

internationally acceptable standards. Further, various government regulations on the

implementation of economic reforms require the involvement of independent auditors.
3. A unique feature in the development of accounting and auditing in China is that, unlike in
many other countries, until recently (1998), these two areas developed as two rival
disciplines competing with each other, supported by two separate government agencies.
4. The pressures arise from the need to change from an accounting system designed to
provide information to government for planning purposes to a system that is capable of
providing useful information for economic decision making. China has expressed a
commitment to adopt IFRS. This is particularly important to China because of the
requirement under WTO membership and the need to attract foreign investment. The
ultimate objective of accounting regulation is to achieve a high level of compliance with the
mandated reporting standards. This requires an adequate number of professionals who are
willing and able to implement the standards. However, the accounting profession in China is
still at the early stage of development, and a lack of skilled professionals will create
problems for regulators. IFRS are based on western cultural values. Some of the concepts
that are fundamental to IFRS, such as true and fair view or fair presentation and
transparency, may not be clearly understood by Chinese accountants.
5. Features of the accounting profession in China, which are different from those of AngloAmerican countries:
a. Following the revolution in 1949, the Chinese accounting profession was under
bureaucratic control rather than market control. Consequently, accounting was focused
on reporting compliance with state economic plans.
b. Education of accountants has not been well developed in China. For example, it was
particularly disrupted during the cultural revolution in the 1960-70s.
c. Unlike in Anglo-American countries, accounting and auditing in China took different
paths in their development processes. Traditionally, auditing firms in China mainly
audited domestic companies, whereas accounting firms focused on companies using
foreign investments. Further, accountants and auditors had their own rules issued by
different government departments.
d. There are some differences in the evolution of the accounting profession in China
compared to that in Anglo-American countries. For example, in the United Kingdom,
auditors enjoyed good legislation and judicial environment during the early stages of
development, whereas such an environment is yet to be developed in China.
6. One of the distinct Japanese cultural values is collectivism or group consciousness. This has
directly affected the Japanese attitude towards external auditors and the audit function.
Prior to the American occupation of Japan after the Second World War, there was no
external auditing profession. When it was introduced in 1949, Japanese corporations often
considered it as unnecessary. Because of the cultural value orientation of not trusting
someone from outside the group, independent auditors had difficulty being accepted by
clients.
7. In the 1990s, Japanese companies were compelled to seek finance from overseas markets
due to various reasons, such as large scale losses among Japanese banks and other

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Chapter 06 - Comparative Accounting

companies, and the collapse of Japanese asset prices. However, the financial reporting
standards used by Japanese companies were criticized for their failure to produce
information in a transparent manner. In the mid-1990s the Japanese government initiated a
program of financial reform, which included a series of major changes aimed at aligning
Japanese financial reporting regulations with internationally acceptable standards. The term
Accounting Big Bang was used to describe this reform program because of the magnitude
of the changes involved.
8. In August 2007, the ASBJ and IASB jointly announced the Tokyo Agreement, highlighting the
desire to accelerate the process of convergence between Japanese GAAP and IFRS. As
part of the agreement the two boards agreed to eliminate by 2008 major differences
between the two sets of standards, identified in 2005, with the remaining differences being
removed by June 2011. The target date of 2011 does not apply to any major new IFRS that
will become effective after 2011, and both boards agreed to work closely to ensure the
acceptance of the international approach in Japan when new standards become effective.
9. The principle of prudence is firmly established in the German law mainly because of the
heavy losses suffered by creditors of German companies during the Great Depression in the
late 1920s and early 1930s. The accounting system at the time allowed companies to
revalue assets as they wished, and was blamed for the losses as it failed to protect the
creditors from becoming victims of companies, which adopted highly optimistic methods to
value their assets. The objective of establishing the principle of prudence in the 1937 Stock
Corporations Law was to ensure that the events of the 1920s and 1930s would not happen
again. This is reflected in the strict adherence to the use of historical cost for measuring
asset values.
10. In Germany, tax law has a strong influence on accounting and financial reporting. The
reason for this link between taxation and financial reporting is historical. When corporate
income taxation was introduced in Germany in 1874, the requirement for annual accounting
had already been codified in the Commercial Code in 1862. It was convenient to link
corporate income taxation to existing financial statements.
11. There are two main external factors that have influenced financial reporting in Germany in
recent years. They are, EU Directives and the forces of globalization. The 1985 Accounting
Act implemented the Fourth, Seventh, and Eighth Directives and transformed them into
German Commercial Law. The EUs decision to adopt IFRS from January 1 2005, was in
recognition of the global trends in financial reporting. Even before the EUs decision, large
German companies like Daimler-Chrysler that had their shares listed on foreign stock
exchanges were already using internally acceptable accounting standards.
12. DRSC/GASB in their annual report for the year 2009, provide a comprehensive overview of
the national and the international activities of these bodies. Accordingly, the work of the
GASB was essentially characterized by IASB projects relating to the financial crisis. Further,
the Accounting Interpretation Committee (AIC) developed or amended interpretations and
application advice on different topics in 2009. The issues for GASB/DRSC in 2009 were
mainly the amendments of the German Accounting Standards as a consequence of the
German Accounting Law Modernization Act (BilMoG).

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Chapter 06 - Comparative Accounting

13. It is correct that BilMoG is not IFRS light instead it is German GAAP complex. BilMoG
introduced many notions to German GAAP which brought German GAAP closer to IFRS.
However, the objective of BilMoG was to modernize German accounting by introducing the
necessary changes to German Commercial Code, and not necessarily to bring German
accounting in line with IFRS. This process made the German GAAP complex.
14. The NBSCs role in the area of financial reporting by Mexican companies is similar to that of
the U.S. SEC. It is a government body that regulates the operation of the Mexican stock
exchange, including financial reporting by Mexican public companies. For example, NBSCs
permission is required for listing on the stock exchange.
15. The Professional Mutual Recognition Agreement (PMRA) signed by NAFTA participants
(United States, Canada and Mexico) in September 2002 allows accountants in one
participant country to practice in another participant country. For example, the Mexican
CPCs are allowed to practice accounting in the United States subject to passing
examinations on national legislation and standards.
The implementation of NAFTA - PMRA is an example of converging national licensing
requirements into an international framework.
16. The significance of Bulletin A-8 is that it requires Mexican companies to apply international
accounting standards for issues that are not covered by Mexican GAAP.
17. There are three main external factors that have influenced financial reporting in Mexico in
recent years. First, NAFTA required Mexico, among other things, to remove barriers to trade
with partner countries (the U.S. and Canada). One of the barriers was the use of
incompatible financial reporting standards by Mexican companies. Second, the IMF/U.S.
Treasury bail-out plan in the mid-1990s after the Tequila crisis also included specific
requirements concerning information disclosure by Mexican companies. Finally, the efforts
of the IASB as global standard setter have also influenced financial reporting by Mexican
companies.
18. Recent amendment to Mexico's MFRS B-10 requires corporations to include the effects of
inflation in financial statements only if such inflation exceeds 26% (the combined inflation of
the last three years). Inflation continues to be taken into account in the determination of
taxes to be paid.
19. An important contribution that Mexican accounting has made to international accounting is in
the treatment of the effects of inflation for accounting purposes by using General Price-level
Accounting. The introduction of the integral cost of financing as an income statement item
was particularly innovative. This is the net result of three different costs: nominal interest
expense, the gain or loss due to price level changes on the net monetary position, and
foreign exchange gains and losses on monetary assets and liabilities denominated in foreign
currencies arising from variations in exchange rates.
20. Membership in the EU has had a profound effect on accounting regulation in the U.K. The
U.K. pioneered private-sector regulation of accounting where legislation provides broad
principles and the accounting profession determines specific rules for financial reporting.
However, this approach was changed with the 1981 amendments to the U.K. Companies act

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Chapter 06 - Comparative Accounting

that introduced the EU Fourth Directive. These amendments were prescriptive in that they
stated exactly how certain matters should be treated, such as the format of financial
statements. Another significant change was introduced in the 1989 Companies Act, which
for the first time referred to accounting standards. It requires that companies must state
whether the financial statements have been prepared in accordance with applicable
accounting standards.
21. The Companies Act of 2004 in the United Kingdom made the FRC the unified independent
regulator with three specific roles: set accounting and auditing standards; proactively
enforce and monitor those standards; and oversee the self-regulatory professional bodies.
The FRC has five subsidiary bodies: the Accounting Standards Board; the Financial
Reporting Review Panel; The Professional Oversight Board for Accountancy; the Auditing
Practices Board; and the Accountancy Investigation and Discipline Board. The FRC is
funded equally by government, business and the accountancy profession.
22. The most important feature of the approach taken in the United Kingdom in setting
accounting standards is the establishment of the FRC as the unified and independent
regulator. The other main features of the UK financial reporting regime include: the adoption
of principles-based approach; commitment to align the UK accounting standards with IFRS;
and enforcement of accounting standards through the FRRP, which reviews financial
statements of companies to ensure fair presentation of information.
23. The discussion paper referred to aims at responding to the growing concerns about the
increasing complexity and decreasing relevance of corporate reports. For example, many
people point to the increasing length and detail of annual reports and the regulations that
govern them; some are worried that reports no longer reflect the reality of the underlying
businesses, with key messages lost in the clutter of lengthy disclosures and regulatory
jargon. Accordingly, the discussion paper aims to stimulate discussion not only in the UK but
around the world on these issues.
24. In October 2012, the UK Department for Business, Innovation and Skills (BIS) published
draft regulations for narrative reporting. The key points of the draft regulation are: a separate
strategic report which replaces the business review and includes some extra content for
quoted companies concerning the business model, human rights and diversity; the directors
report is now excludes the content which is in the new strategic report; and shareholders
who currently receive only the summary financial statement will in future receive the
strategic report instead. Accordingly, a summarized P&L and balance sheet is replaced with
what is essentially a narrative discussion about the companys strategy and performance.
The aim of the draft regulations is to make narrative reporting simpler, clearer and more
focused.

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Chapter 06 - Comparative Accounting

Solutions to Exercises and Problems

1. The purpose of this exercise is to encourage students to consider the approach taken in
their own country towards accounting regulation, compare that with another country that has
taken a different approach, and explain why the two countries have taken different
approaches. In doing this, students should examine the legal and professional aspects of
accounting regulation. In explaining possible reasons for the differences, they should refer
to the main factors that influence accounting and financial reporting in the two countries.
2. The number of accountants per head of population is much higher in the U.K. than in Japan.
The main reason is that there is a greater demand in the U.K. for accounting information,
particularly due to the pressures exerted through the capital markets expectations with
regard to how companies should perform financially, and what financial information they
should disclose. This is because, in the U.K., the capital market is the main source of
funding for business. In Japan, the main source of funding for business is the banking
system, and the capital market plays a relatively minor role. Banks can have direct access to
company financial information. Therefore, unlike in the U.K., the demand for published
accounting information is much smaller.
3.

a. The factor that has exerted the greatest influence on the development of accounting in
each of these countries is the providers of finance for business enterprises. While the
other factors have also been important, the purpose of accounting is determined largely
on the basis of who provides finance. For example, the changes in accounting and
financial reporting that are currently taking place in China, Japan, Germany, and Mexico
are mainly due to the fact that in all these countries, the source of funding for business
are changing. In the U.K., the capital market has been the main influencing factor in the
development of accounting.
b. China: A distinguishing feature is the manner in which accounting and auditing have
developed. Unlike in many other countries, In China accounting and auditing have taken
different paths in their development as rival disciplines with the support of different
government agencies.
Japan: A distinguishing feature is the manner in which accounting has been regulated.
The accounting profession is not strong in Japan, compared to its counterpart, for
example, in the U.K., and it has played a relatively minor role in regulating accounting
and financial reporting in that country. The main sources of accounting regulation are the
Commercial Code and the Corporate Income Tax Law.
Germany: A distinguishing feature is the dominance of auditing in the financial reporting
related activities.
Mexico: A distinguishing feature is the use of General Price Level accounting to
incorporate the effects of inflation into accounting reports.
U.K.: A distinguishing feature is having six professional bodies representing the
accounting profession.

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Chapter 06 - Comparative Accounting

4. a. China: IFRS are permitted for some domestic listed companies, but not permitted for
domestic non-listed companies.
Japan: IFRS are not permitted for domestic listed companies or for domestic non-listed
companies.
Germany: IFRS are required for all domestic listed companies and permitted for nonlisted companies.
Mexico: IFRS are not permitted for domestic listed companies or non-listed companies.
U.K.: IFRS are required for all domestic listed companies. The Department of Trade and
Industry has a proposal to allow IFRS for domestic non-listed companies.
b. Germany, Japan, and the U.K. have residents who are members of the IASB.
5. a. An issue for which the practices of several countries are at variance with IASB GAAP:
Pre-operating expenses: IAS 38 requires pre-operating expenses to be charged to
expenses. The practices in China, Japan, Germany, and Mexico are at variance with this
requirement. In China, pre-operating expenses are charged to expenses, but can be
deferred until the entity begins operations. In the other three countries, pre-operating
expenses can be capitalized.
b. While the most important financial accounting practice at variance with IASB GAAP is a
matter of opinion, the following are significant differences between IFRS and each
countrys GAAP:
China: Internally generated intangible assets IAS 38 stipulates that research
expenditure is expensed when incurred, and development expenditure can be
capitalized under some circumstances. But under Chinese GAAP, all research and
development costs are expensed when incurred, capitalization is not allowed.
Japan: Inventory valuation IAS 2 requires inventories to be valued at the lower of cost
and net realizable value. Japanese companies are allowed to value inventories at cost
rather than at the lower of cost and net realizable value.
Germany:
Pre-operating expenses IAS 38 requires pre-operating expenses to be
charged to expenses when incurred. German companies are allowed to capitalize preoperating expenses, or amortize them over four years.
Mexico:
Statement of cash flows IAS 7 requires a statement of cash flows.
Mexican companies are required to publish a statement of changes in financial position
instead of a statement of cash flows.
U.K.: Proposed dividends IAS 10 does not allow recognition as a liability at the
balance sheet date. U.K. companies accrue proposed dividends as a liability.
6. Companies listed on the NYSE as at June 3, 2004:
China:
16 companies
Japan:
19 companies
Germany:
18 companies
Mexico:
23 companies
U.K.:
71 companies

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Chapter 06 - Comparative Accounting

7. The main mechanisms put in place to regulate accounting and financial reporting in U.K. are
legislation, professional pronouncements and stock exchange listing requirements. The U.K.
tradition has been for company legislation to provide only broad guidelines for accounting,
leaving specific rules to be developed by the profession. However, EU membership has
changed this tradition, and as a result, certain specific rules affecting accounting have been
included in the Companies Act. These include rules regarding the format of financial
statements and the need for registration of auditors. In the U.K., accounting standard setting
is by a private sector independent body, the ASB. Unlike in the U.K., accounting standard
setting in China started only recently, only about fifteen years ago, and it is under the control
of the government, with the Ministry of Finance as the responsible government agency. In
China, the Chinese Security Regulatory Commission performs a role similar to that of the
U.S. SEC. There is no equivalent body in the U.K.
In recent years, both the U.K. and China have experienced major changes in the area of
accounting regulation. In China the focus of the changes has been to bring Chinese
accounting practices closer to internationally acceptable standards. For example, a
conceptual framework was issued in 2001 (Accounting System for Business Enterprises).
China has not adopted IFRS, but has committed to use IFRS as the basis for developing
Chinese accounting standards. In the U.K., the focus of recent changes has been to
strengthen the position of the independent regulator, the Financial Reporting Council, mainly
in response to the recent financial disasters in the U.S. In doing this, special effort has been
made to ensure that the regulator is independent from any interested party, including the
government. This is different from the approach taken in China.
8. In 2012, there were two major reforms affecting accounting and financial reporting in the
United Kingdom. First, The FRC developed a suite of three standards, FRC 100 (published
in November 2012), FRC 101(to be published in 2013), and FRC 102 (to be published in
2015), by taking into account feedback received over many years and with
the stated aim
of simplifying accounting and reporting for unlisted entities, improving reporting of financial
instruments and providing cost savings for subsidiaries of listed
groups. Second, in
October 2012, the UK Department for Business, Innovation and
Skills (BIS) published
draft regulations for narrative reporting. Recognizing the
importance
of
narrative
reporting, the aim of the draft regulations is to make narrative reporting
by
companies
simpler, clearer and more focused.
9. Students are expected to explain that professionalization in accounting refers to the
evolution of professionalism within accounting, which includes professional power,
associational control and adhering to ideologies; relationships with other social institutions,
such as employment, markets for services and the state; and adoption of strategies.
Given the above description of professionalization of accounting, the process that has taken
in China can be described as unique, for example, refer to the suggested answer to
Question 5.
10. In recent years, both Germany and Japan have undertaken major projects to reform their
systems of accounting regulation. Both countries have recognized the need for companies
to adopt internationally acceptable accounting standards. Until recently, in both countries,
the responsibility for setting accounting standards was with government agencies. In that

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Chapter 06 - Comparative Accounting

context, the professional bodies played a relatively minor role. Since professional
accounting bodies, not governments, were members of international organizations such as
the IASB, this became a major problem for these two countries. As a result, both Germany
and Japan have established private sector standard setting bodies (Accounting Standards
Board of Japan and the German Accounting Standards Board), so that they have a
mechanism to participate effectively in the international accounting standards setting
process.
11. In Germany, the Act to Modernize Accounting Law introduced major changes to the German
Commercial Code, for example, it removed the close connection of accounting reports to tax
rules; and the controversial options relating to provisions and production cost that were
perceived to be responsible for hindering international acceptance of German accounting
practices. The Act led the way for German accounting to be shifted away from the
Continental European model and moved closer to the Anglo-American model. This reflects a
willingness to change. However, the main purpose of the Act seems to be to address
domestic concerns, and not necessarily at converging with International Financial Reporting
Standards. For example, the emphasis on creditor protection in financial reporting has been
retained.
12. First, the level of inflation in Mexico has been much higher in Mexico compared to the other
countries covered in this chapter. As a result, incorporating the effects of inflation into
financial reports is an important financial reporting issue.
Second, the other four countries do not face issues similar to those arising from Mexicos
membership in NAFTA. Mexico is under great pressure to ensure that its companies adopt
U.S. GAAP for financial reporting purposes, because the use of incompatible accounting
standards would be a barrier to free trade between Mexico and the U.S. This is a major
challenge facing the accounting profession in Mexico.
13. In comparing the financial statement prepared by companies in China, Japan, and Mexico
with those of other companies, which have used IASB GAAP, the treatments of the following
items should be considered carefully, as they can have a significant impact on the reported
financial results and positions of companies.
Measurement of property, plant and equipment. IASB GAAP allows the use of either fair
value or historical cost, but Chinese GAAP requires the use of historical cost.
Treatment of research and development costs. IASB GAAP requires that all research costs
are expensed, and development costs, if certain criteria are met, are capitalized, but
Chinese GAAP requires that all research and development costs (except patent registration
and legal costs) be expensed.
Treatment of pre-operating costs. IASB GAAP requires that pre-operating costs be
expensed when incurred, but Japanese GAAP and Mexican GAAP allow pre-operating costs
to be capitalized.
Inventory valuation. IASB GAAP requires inventories to be valued at the lower of cost and
net realizable value, but Japanese GAAP allows inventories to be valued at cost rather than
at the lower of cost and net realizable value.
Treatment of construction contracts: IASB GAAP requires the use of the stage of completion
method to recognize contract revenue, but Japanese GAAP allows the use of completed
contract method.

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Chapter 06 - Comparative Accounting

Creation of provisions. IASB GAAP specifies that provisions can only be created if an
enterprise has a present obligation as a result of past transaction, but Japanese GAAP
allows provisions to be created before an obligation arises.
Statement of cash flows. IASB GAAP requires a statement of cash flows, but Mexican
GAAP requires a statement of changes in financial position, instead of a statement of cash
flows.
It is always useful to get an opinion about the financial statements of companies domiciled in
a foreign country from a professional who is familiar with the financial reporting standards
and practices of that country.
14. a. As an outcome of the Big Bang reform in 2001, the Financial Accounting Standards

Foundation (FASF) and the new private-sector standard-setting body modelled on the FASB,
the Accounting Standards Board of Japan (ASBJ) were created. The FASF and ASBJ derive
standard-setting authority from the Business Accounting Deliberate Council (BADC). The
FASF was established partly to facilitate harmonization with international accounting
standards. The JICPA takes part in setting accounting standards by sending board members to
the FASF and the ASBJ. Additionally, many CPAs participate in various technical
committees at the ASBJ as technical staff.
b. In August 2007, the ASBJ and IASB jointly announced an agreement (known as the Tokyo
Agreement) to accelerate the process of convergence between Japanese GAAP and IFRS,
that was started in March 2005. As part of the agreement the two boards have agreed to
eliminate by 2008 major differences between the two sets of standards, identified in 2005,
with the remaining differences being removed by June 2011.
c. In February 2010, the JICPA joined the Global Accounting Alliance (GAA), the largest
global accounting network.
15. The North American Free Trade Agreement (NAFTA) among the United States, Canada and

Mexico aims to reduce most barriers to trade in goods, liberalize the cross border flow of
services and capital, and open up new areas of opportunity in each country to conduct
business in the other two countries. As a result of being party to the NAFTA agreement, there
is pressure for Mexico to harmonize its accounting standards and practices with those of the
US and Canada.

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Chapter 06 - Comparative Accounting

Case 6-1 CHINA PETROLEUM AND CHEMICAL CORPORATION

1.

The net profit figure reported under PRC GAAP is RMB 19,011 million. This is RMB 2,592
million lower than the amount under IFRS, and RMB 6,566 million lower than the amount
under U.S. GAAP.
Students are expected to comment on the main reasons for those differences on the basis
of the information given in the case.
The net profit figure of RMB 19,011 reported under PRC GAAP was increased to RMB
21,593 under IFRS. The increase of RMB 2,582 under IFRS was due to the following
reasons:
Depreciation and disposal of oil and gas properties
RMB 3,044
Acquisition of subsidiaries
443
Capitalization of general borrowing costs
389
Gain from issuance of shares by subsidiary
136
Gain from debt restructuring
82
Revaluation of land use rights
18
4,112
Unrecognized losses of subsidiaries
(182)
Pre-operating expenditures
(169)
Effect on taxation
(1,179) (1,530)
2,582
The net profit figure of RMB 21,593 reported under IFRS was increased to RMB 25,577
under U.S. GAAP. The increase of RMB 3,984 under U.S. GAAP was due to the following
reasons:
Depreciation of revalued property, plant and equipment RMB 3,998
Disposal of property, plant and equipment
1,316
Capitalized interest on investments in associates
141
Reversal of deficits on revaluation of property, plant.
86
Foreign exchange gains and losses
76
Reversal of impairment of long-lived assets
47
Exchange of assets
23
Capitalization of property, plant and equipment
12
5,699
Deferred tax effect of U.S. GAAP adjustments
(1,715)
3,984

2.

The differences for CPCC between PRC GAAP and IFRS, and between IFRS and U.S.
GAAP are given in the case. Students are expected to identify the main areas of
difference.
As mentioned in the case, treatments of the following items under PRC GAAP and IFRS
are different:
Depreciation and disposal of oil and gas properties
Capitalization of general borrowing costs
Acquisition of subsidiaries
Gains from issuance of shares by a subsidiary
Gains from debt restructuring
Revaluation of land use rights

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Chapter 06 - Comparative Accounting

Unrecognized losses of subsidiaries

Pre-operating expenditures
Impairment looses on long-lived assets
Government grants (Refer pp.5-72 - 5-75 in the textbook)

Treatments of depreciation and disposal of oil and gas properties seem to have a
significant impact on reported profit.
As mentioned in the case, treatments of the following items under IFRS and U.S. GAAP
are different:
Foreign exchange gains and losses
Capitalization and revaluation of property, plant and equipment
Exchange of assets
Impairment of long-lived assets
Capitalization of interest on investment in associates
Goodwill amortization
Companies included in consolidation
Related party transactions (Refer pp.5-77 5-82)
Treatments of depreciation of revalued property, plant and equipment, and disposal of
property, plant and equipment seem to have a significant impact on reported profit
3.

U.K. readers of the financial statements may not find them very useful, as the information
is not reconciled to the U.K. GAAP. There are differences between U.K. GAAP and IFRS,
and between U.K. GAAP and U.S. GAAP. However, with the adoption of IFRS in the EU,
this may not be a major problem any more.

4.

U.S. readers should find the information useful. However, it would be better for them if the
information was reconciled directly from PRC GAAP to U.S. GAAP.

5.

When a company is listed on a foreign stock exchange, it is always useful to explain the
differences, if any, between accounting standards used in preparing financial statements,
and those that are stipulated by the listing requirements. The need for such explanation is
reduced if the two sets of standards are comparable. However, differences can still exist
due to different interpretations of the requirements. Therefore, the approach taken by
CPCC can be recommended to other companies.

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