Gray, Salter & Radebaugh Chapter 7 GLOBAL ACCOUNTING AND GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL CONTROL: A MANAGERIAL EMPHASIS EMPHASIS Sidney J. Gray Sidney J. Gray , University of New , University of New South Wales South Wales Stephen B. Salter Stephen B. Salter , University of , University of Cincinnati Cincinnati Lee H. Radebaugh Lee H. Radebaugh , Brigham Young , Brigham Young University University Slides Prepared by: Jennifer Anne Slides Prepared by: Jennifer Anne Salter Salter
Transcript
Gray, Salter & Radebaugh Chapter 7
GLOBAL ACCOUNTING AND GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL CONTROL: A MANAGERIAL EMPHASISEMPHASIS
Sidney J. GraySidney J. Gray, University of New South , University of New South WalesWales
Stephen B. SalterStephen B. Salter, University of , University of CincinnatiCincinnati
Lee H. RadebaughLee H. Radebaugh, Brigham Young , Brigham Young UniversityUniversity
Slides Prepared by: Jennifer Anne SalterSlides Prepared by: Jennifer Anne Salter
Gray, Salter & Radebaugh Chapter 7
CHAPTER SEVENCHAPTER SEVEN
GLOBAL FINANCIAL STATEMENT GLOBAL FINANCIAL STATEMENT ANALYSISANALYSIS
Gray, Salter & Radebaugh Chapter 7
INTRODUCTIONINTRODUCTION
A management approach to global A management approach to global financial statement analysis.financial statement analysis.
Take information from accounting Take information from accounting systems to allow managers to systems to allow managers to meet strategies.meet strategies.
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ENVIRONMENTAL ENVIRONMENTAL INFLUENCES ON INFLUENCES ON FINANCIAL REPORTINGFINANCIAL REPORTING
Influences on financial reporting and Influences on financial reporting and information disclosure practices:information disclosure practices:• Enterprise ownership;Enterprise ownership;• Activities of enterprises;Activities of enterprises;• Sources of finance;Sources of finance;• Taxation;Taxation;• Level of development & independence of Level of development & independence of
the auditing and financial reporting the auditing and financial reporting profession;profession;
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ENVIRONMENTAL ENVIRONMENTAL INFLUENCES ON INFLUENCES ON FINANCIAL REPORTING - FINANCIAL REPORTING - Table 7.2Table 7.2
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ENVIRONMENTAL ENVIRONMENTAL INFLUENCES ON INFLUENCES ON FINANCIAL REPORTING FINANCIAL REPORTING Cont’dCont’d
• Stage of economic growth & Stage of economic growth & development;development;
• Legal system;Legal system;• Influence of culture;Influence of culture;• International factors.International factors.
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CLASSIFICATION OF CLASSIFICATION OF FINANCIAL REPORTING FINANCIAL REPORTING SYSTEMS (FRPs)SYSTEMS (FRPs)
There have been many attempts to There have been many attempts to classify and explain why countries classify and explain why countries differ in their financial reporting differ in their financial reporting practices.practices.
Two models with difference Two models with difference perspectives are:perspectives are:• Nobes (1983)Nobes (1983)• Gray (1988)Gray (1988)
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: The Nobes (1983) ModelThe Nobes (1983) Model
Two basic classes of financial Two basic classes of financial reporting systems:reporting systems:• MicroeconomicMicroeconomic (business (business
oriented)system where key oriented)system where key determinants are:determinants are:– basic philosophy; historical originbasic philosophy; historical origin
CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: The Nobes (1983) ModelThe Nobes (1983) Model
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: The Gray (1988) ModelThe Gray (1988) Model
A more comprehensive model A more comprehensive model based on Hofstede’s (1980) based on Hofstede’s (1980) cultural dimensions and the cultural dimensions and the institutions that arise from them.institutions that arise from them.
Gray’s model has been empirically Gray’s model has been empirically tested by Salter & Niswander tested by Salter & Niswander (1995)(1995)
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: The Gray (1988) ModelThe Gray (1988) Model
Drawing on the work of Gray (1988) Drawing on the work of Gray (1988) and Nobes (1983), two key parameters and Nobes (1983), two key parameters which define financial reporting which define financial reporting systems are:systems are:• How systems are determined and How systems are determined and
enforced:enforced:– statutory control or professional means.statutory control or professional means.
• The measurement and disclosure The measurement and disclosure characteristics of financial reporting characteristics of financial reporting systems.systems.
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: Gray (1988) Accounting Cultural Gray (1988) Accounting Cultural ValuesValues
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: Gray’s (1988) Dimensions Gray’s (1988) Dimensions
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: Gray’s (1988) Country Gray’s (1988) Country CLassificationsCLassifications
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: Gray’s (1988) Country Gray’s (1988) Country ClassificationsClassifications
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: Salter & Niswander (1995) and Salter & Niswander (1995) and Gray (1988)Gray (1988)
Integrating these two works we find:Integrating these two works we find:• Individualist societies (UK, USA) Individualist societies (UK, USA)
demand: demand: – more disclosure, more disclosure, – a stronger independent audit profession to a stronger independent audit profession to
ensure rights of individual investor.ensure rights of individual investor.
• High uncertainty avoidant societies High uncertainty avoidant societies (Japan, Germany) demand:(Japan, Germany) demand:– uniform accounting rules passing through uniform accounting rules passing through
the legal system.the legal system.
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: Salter & Niswander (1995) and Salter & Niswander (1995) and Gray (1988)Gray (1988)
Salter & Niswander add that:Salter & Niswander add that:• Development of financial markets Development of financial markets
enhances power of auditors, enhances power of auditors, encourages increased disclosure and encourages increased disclosure and a more optimistic view of income.a more optimistic view of income.
• Higher tax rates reduce income and Higher tax rates reduce income and relative power of auditors.relative power of auditors.
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CLASSIFICATION OF FRS: CLASSIFICATION OF FRS: Salter & Niswander (1995) and Salter & Niswander (1995) and Gray (1988)Gray (1988)
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MAJOR DIFFERENCES IN MAJOR DIFFERENCES IN FINANCIAL REPORTINGFINANCIAL REPORTING
Financial reporting issues that Financial reporting issues that separate countries are:separate countries are:• FormatFormat• MeasurementMeasurement• DisclosureDisclosure
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MAJOR DIFFERENCES IN MAJOR DIFFERENCES IN FINANCIAL REPORTING FINANCIAL REPORTING - - FormatFormat
Format includes statements used Format includes statements used and what they contain.and what they contain.
Most countries have statements Most countries have statements about income/expenses and about income/expenses and assets/liabilities.assets/liabilities.
Less common are: statements of Less common are: statements of cash flows, changes in financial cash flows, changes in financial position, and retained earnings.position, and retained earnings.
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MAJOR DIFFERENCES IN MAJOR DIFFERENCES IN FINANCIAL REPORTING FINANCIAL REPORTING - - MeasurementMeasurement
Major areas of diversity are:Major areas of diversity are:• depreciationdepreciation• inventory measurementinventory measurement• retirement benefitsretirement benefits• construction contractsconstruction contracts• research and developmentresearch and development• accounting for taxationaccounting for taxation• business combinationsbusiness combinations
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THE IMPACT OF THE IMPACT OF ACCOUNTING ACCOUNTING DIFFERENCESDIFFERENCES
The subtleties of different sets of The subtleties of different sets of measurement rules can be seen by measurement rules can be seen by using Gray’s (1980) index of using Gray’s (1980) index of conservatism:conservatism:• ConservatismConservatism is the extend to which, is the extend to which,
given the given the same basic accounting same basic accounting datadata, 2 companies would arrive at , 2 companies would arrive at earnings numbers that are higher or earnings numbers that are higher or lower. lower.
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THE IMPACT OF THE IMPACT OF ACCOUNTING ACCOUNTING DIFFERENCESDIFFERENCES - Index of - Index of ConservatismConservatism
Gray (1980) uses the following Gray (1980) uses the following formula to measure relative formula to measure relative conservatism:conservatism:• Index of Conservatism = 1 - (RA - RD) / Index of Conservatism = 1 - (RA - RD) /
I RA I where:I RA I where:° RA = adjusted earnings under the GAAP of RA = adjusted earnings under the GAAP of
the country being used as a standardthe country being used as a standard° RD = disclosed earnings under the national RD = disclosed earnings under the national
GAAP of the country whose conservatism is GAAP of the country whose conservatism is being assessed.being assessed.
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THE IMPACT OF THE IMPACT OF ACCOUNTING ACCOUNTING DIFFERENCESDIFFERENCES - Index of - Index of ConservatismConservatism
° I RA I = the absolute value of adjusted I RA I = the absolute value of adjusted earnings under the GAAP of the country earnings under the GAAP of the country being used as the standard.being used as the standard.
• Using the US as the base, and Using the US as the base, and comparing US versus UK accounting comparing US versus UK accounting principles, the formula can be principles, the formula can be translated as followstranslated as follows– Index of Conservatism = 1 - (US GAAP Index of Conservatism = 1 - (US GAAP
Earnings - UK GAAP Earnings) / I US GAAP Earnings - UK GAAP Earnings) / I US GAAP Earnings IEarnings I
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THE IMPACT OF THE IMPACT OF ACCOUNTING ACCOUNTING DIFFERENCESDIFFERENCES - Index of - Index of ConservatismConservatism
An Index value greater than 1 An Index value greater than 1 means that UK GAAP earnings are means that UK GAAP earnings are less “conservative” (more less “conservative” (more optimistic) than a US GAAP.optimistic) than a US GAAP.
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THE IMPACT OF THE IMPACT OF ACCOUNTING ACCOUNTING DIFFERENCESDIFFERENCES - Index of - Index of ConservatismConservatism
Having established an overall index Having established an overall index of conservatism, it is then possible of conservatism, it is then possible to establish the relative effect of the to establish the relative effect of the various individual adjustments by various individual adjustments by constructing constructing aa partial index of partial index of “conservatism”“conservatism” using the formula: using the formula:• 1 - (partial adjustment / US GAAP 1 - (partial adjustment / US GAAP
Earnings)Earnings)
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THE IMPACTTHE IMPACT OF ACCOUNTING OF ACCOUNTING DIFFERENCESDIFFERENCES - Conservatism - Conservatism and the SEC Form 20Fand the SEC Form 20F
Form 20F allows an opportunity to Form 20F allows an opportunity to compare earnings resulting from any compare earnings resulting from any country’s accounting principles with country’s accounting principles with those that would have resulted under those that would have resulted under US accounting principles.US accounting principles.• Form 20F report to the SEC contains a Form 20F report to the SEC contains a
reconciliation of foreign earnings with reconciliation of foreign earnings with the earnings that would have reported the earnings that would have reported under US GAAPunder US GAAP
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THE IMPACTTHE IMPACT OF ACCOUNTING OF ACCOUNTING DIFFERENCESDIFFERENCES - Conservatism - Conservatism and the SEC Form 20Fand the SEC Form 20F
• Radebaugh and Gray (1997) have Radebaugh and Gray (1997) have drawn up indices of conservatism for drawn up indices of conservatism for 8 countries8 countries
• Continental European countries and Continental European countries and Japan are more conservative than the Japan are more conservative than the US.US.
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Conservatism and the SEC Form Conservatism and the SEC Form 20F - 20F - Figure 7.5Figure 7.5
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GLOBAL HARMONIZATIONGLOBAL HARMONIZATION
While many organizations (UN, EU) While many organizations (UN, EU) have been concerned with have been concerned with harmonizing international harmonizing international differences in accounting and differences in accounting and reporting, the most important body reporting, the most important body is the International Accounting is the International Accounting Standards Committee (IASC).Standards Committee (IASC).
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GLOBAL HARMONIZATION GLOBAL HARMONIZATION Cont’dCont’d
The main aim of the IASC has been The main aim of the IASC has been to achieve a degree of to achieve a degree of comparability that will help comparability that will help investors make their decisions investors make their decisions while reducing the costs of MNEs in while reducing the costs of MNEs in preparing multiple sets of accounts preparing multiple sets of accounts and reports.and reports.
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