Chapter 2 Worldwide Accounting Diversity
Chapter Two Worldwide Accounting Diversity
Learning Objectives
After reading this chapter, you should be able to • Provide evidence of the diversity that exists in accounting internationally. • Explain the problems caused by accounting diversity. • Describe the major environmental factors that influence national accounting systems and lead to accounting diversity. • Describe a judgmental classification of countries by financial reporting system. • Discuss the influence that culture is thought to have on financial reporting. • Describe a simplified model of the reasons for international differences in financial reporting. • Categorize accounting differences internationally and provide examples of each type of difference.
INTRODUCTION
Considerable differences exist across countries in the accounting treatment of many items. For example, companies in the United States are not allowed to report property, plant, and equipment at amounts greater than historical cost. In contrast, companies in the European Union are allowed to report their assets on the balance sheet at market values. Research and development costs must be expensed as incurred in Japan, but development costs may be capitalized as an asset in Canada and France. Chinese companies are required to use the direct method in preparing the statement of cash flows, whereas most companies in the United States and Europe use the indirect method. Differences in accounting can result in significantly different amounts being reported on the balance sheet and income statement. In its 2009 annual report, the South Korean telecommunications firm SK Telecom Company Ltd. described 15 significant differences between South Korean and U.S. accounting rules. Under South Korean generally accepted accounting principles (GAAP), SK Telecom reported 2009 net income of 1,056 billion South Korean won (KRW). If SK Telecom had used U.S. GAAP in 2009, its net income would have been KRW 1,357 billion, approximately 28 percent
Learning Objectives
After reading this chapter, you should be able to • Provide evidence of the diversity that exists in accounting internationally. • Explain the problems caused by accounting diversity. • Describe the major environmental factors that influence national accounting systems and lead to accounting diversity. • Describe a judgmental classification of countries by financial reporting system. • Discuss the influence that culture is thought to have on financial reporting. • Describe a simplified model of the reasons for international differences in financial reporting. • Categorize accounting differences internationally and provide examples of each type of difference.
INTRODUCTION
Considerable differences exist across countries in the accounting treatment of many items. For example, companies in the United States are not allowed to report property, plant, and equipment at amounts greater than historical cost. In contrast, companies in the European Union are allowed to report their assets on the balance sheet at market values. Research and development costs must be expensed as incurred in Japan, but development costs may be capitalized as an asset in Canada and France. Chinese companies are required to use the direct method in preparing the statement of cash flows, whereas most companies in the United States and Europe use the indirect method. Differences in accounting can result in significantly different amounts being reported on the balance sheet and income statement. In its 2009 annual report, the South Korean telecommunications firm SK Telecom Company Ltd. described 15 significant differences between South Korean and U.S. accounting rules. Under South Korean generally accepted accounting principles (GAAP), SK Telecom reported 2009 net income of 1,056 billion South Korean won (KRW). If SK Telecom had used U.S. GAAP in 2009, its net income would have been KRW 1,357 billion, approximately 28 percent
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