Some Major International Differences in Financial Reporting

1. Some Major International Differences in Financial Reporting Chapter 3

2. Fairness • True and Fair • Fairness links to (a) a predominance of outside share-holders as providers of finance and (b) the lack of interference of law or taxation in financial reporting. • Substance over form • Transatlantic difference • The EU Directives: fairness is an overriding concept（公允性凌驾于其他一切之上） • The US practice: to present fairly in conformity with GAAP（遵循公认会计原则公允地表述）

3. Fairness (cont.) • Change the valuation base or extra disclosure? • Replacement cost valuation （重置成本） • Extra disclosure rather than a change in the presentation of numbers in financial statements （额外的披露）

4. Conservatism and accruals • Fairness Conservatism • Conservatism • The practice of reducing earnings (and writing down net assets) in response to "bad news," but not increasing earnings (and writing up net assets) in response to "good news."

5. Conservatism and accruals(cont.) • Financial report users • Who cares ‘conservatism’ the most? • The different strengths of conservatism in different countries (p36) • Germany • UK ‘prudence’

6. Provisions and reserves UK English: • Provision • Provision: a liability of uncertain timing or amount • Allowance: an allowance against the value of an asset • Provisions are liabilities recognized by charges against profit. • Reserves • Reserves are elements of equity set up by appropriations of profit.

7. Valuation basis • valuation basis includes.. • Historical cost • Replacement cost /Current cost • Present market value • Net realizable value • Present value

8. Valuation basis (cont.) • Germany • As little judgment as possible • Netherlands • Replacement cost • France, Spain and Italy • Tax & other government influence, inflation • England • A chaotic state of affairs • South America • GPP

9. Consolidation • US • Most practices seem to have first widespread adoption in the U.S (p41) • The wave of mergers • Innovation was encouraged by the U.S society • Parent company balance sheets were not required • Matured capital market

10. Consolidation (cont.) • UK • In the U.K, consolidation came later (p41,p43) • The wave of mergers came later and be interrupted by the second world war • The U.K society was relatively conservative, tending to oppose change • The consolidated financial statements were seen as supplements to parent balance sheets

11. Consolidation (cont.) • Other continental European countries • so far behind the U.S and the U.K • The existence of many legal requirement • The lack of a large or strong profession to innovate • The lesser importance of ‘big business’ and holding companies • The importance of bankers and creditors who might oppose consolidation • The importance of the tax authorities who prefer to do their own manipulations of the accounts of individual companies • The relative lack of importance of shareholders who may want an overall ‘economic’ view • The seventh Direction of EU • Required consolidation rules by 1990

12. Uniformity and accounting plans • Uniformity (p44) • Three main areas • Formats of financial statements • Accounting principles • Disclosure requirements • Where there are detailed rules in any or all of the above areas, there will be a high degree of uniformity. • Germany: commercial code, company law, taxation law • France: uniform accounting plans • U.S and U.K: accounting standards

13. Financial statements and their formats • Balance sheet • The way to display assets • Assets are displayed in decreasing liquidity • Assets are displayed in increasing liquidity • Different forms • Two-sided form • Report form • Financial position format • Income statement • By-function • By-nature

14. The End Are you ready for the next chapter?