International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Chapter 3: Comparative Accounting: Europe
Learning Objectives • Understand how financial reporting is regulated and enforced in five European countries: France, Germany, the Czech Republic, the Netherlands, and the U.K. • Describe the key similarities and differences between the accounting systems of these five countries. • Identify the use of International Financial Reporting Standards at the levels of the individual company and the consolidated financial statements in these five countries. • Describe the audit-oversight mechanisms in these five countries.
IFRS in the European Union • Starting in 2005, all EU-listed companies must follow IFRS in their consolidated financial statements. • Generally, IFRS consolidated statements are permitted for non-listed companies. • Requirements for individual company financial statements vary – IFRS may be required, allowed, or prohibited.
IFRS (contin) • IFRS are based on fair presentation principles • IFRS may be overridden in rare circumstances to achieve fair presentation • Accounting measurements • Business combinations – purchase accounting • Goodwill – annual impairments test • Investments in associates – equity method • Translation of financial statements of foreign operations – functional currency concept • Assets valued at historical cost or fair value • Research costs – expensed; development costs – capitalized • LIFO not allowed • Finance leases – capitalized; operating leases – expensed • Provisions – recognized when probable and estimable • Deferred taxes – recognized in full, using the liability method, for temporary differences between the carrying amount and tax base
France • Overview • “The Plan” – national uniform chart of accounts (national accounting code) • Objectives and principles of financial reporting • Definitions of elements • Recognition and valuation rules • Standardized chart of accounts • Model financial statements • Other influences on French accounting rules • Commercial legislation (Code de Commerce) • Tax laws
France (contin) • Accounting regulation and enforcement • CNC – National Accounting Board • Keeps plan current • Makes rulings and recommendations on accounting issues • CRC – Accounting Regulation Committee • Converts CNC rulings and recommendations into binding regulations • AMF – Financial Markets Authority • Supervises securities markets • OEC – Institute of Public Accountants • Represents the accounting profession • Members prepare financial statements, and provide tax, information systems, and management advisory services • CNCC – National Institute of Statutory Auditors • Members audit and give an opinion on financial statements • Must report criminal acts to the High Council of External Auditors • Substantial overlap in OEC and CNCC membership • Statutory auditors not allowed to provide accounting services to the same client • AMF oversees audits of listed companies, but relies on a committee of the CNCC to conduct audit-quality reviews
France (contin) • Unusual features of French financial reporting • Must report results of environmental activities • Reports aimed at preventing bankruptcies • Social report
Germany • Overview • Creditor protection • Conservative balance sheet valuations • Reserves as protection against unforeseen risks and insolvency • Accounting is designed to compute a prudent income amount that leaves creditors unharmed after distributions are made to owners • Influence of tax law • Determination principle: taxable income is determined by what is booked in a company’s financial records • Reliance on statutes and court decisions
Germany (contin) • Accounting regulation and enforcement • German Commercial Code (HGB) • Applies to all business entities • German Accounting Standards Board • Develops recommendations for consolidated financial statements • Financial Reporting Enforcement Panel • Enforces compliance with German financial reporting requirements and IFRS by listed companies • Chamber of Accountants • Oversees WPs (“enterprise examiners”) • Unusual features of German financial reporting • Auditor’s private report to board of directors and supervisory board on company’s future prospects
Czech Republic • Overview • Accounting changed directions several times in 20th century, reflecting the country’s political history • Until end of World War II – German influences • After World War II – Soviet influences • After 1989 – EU influences (market orientation) • Accounting regulation and enforcement • Ministry of Finance • Oversees Commercial Code (modeled on German commercial law) • Oversees Accountancy Act (based on EU directives) • Chamber of Auditors • Oversees auditors • Unusual features of Czech financial reporting • Form over substance still applies in some cases • Still implementing accounting practices consistent with EU directives and IFRS
The Netherlands • Overview • Accounting paradoxes • Permissive requirements, but high professional practice standards • Code law country whose accounting is oriented toward fair presentation • Fair presentation orientation developed without a strong stock market • Other influences on Dutch accounting • U.K. and U.S. as much as continental European countries • Accounting profession • Business economics (microeconomics) • IASB
The Netherlands (contin) • Accounting regulation and enforcement • Company law – Act on Annual Financial Statements • Dutch Accounting Standards Board • Develops guidelines on generally acceptable accounting standards • Enterprise Chamber • Enforces compliance with accounting requirements • NIvRA • Oversees auditing profession • Unusual features of Dutch financial reporting • Financial statements may be in Dutch, French, German, or English • Other than consolidated financial statements of Dutch listed companies, financial statements may be based on Dutch guidelines, IFRS, or a combination • Flexible accounting measurements • Current values are permitted for tangible assets • Opportunities for income smoothing
United Kingdom • Overview • Legacy of British accounting • First country to develop an accountancy profession • Fair presentation (true and fair view) • Exported British accounting around the world
United Kingdom (contin) • Accounting regulation and enforcement • Companies Act • Broad financial reporting framework • Financial Reporting Council oversees: • Accounting Standards Board • Issues Financial Reporting Standards (FRSs) • UITF clarifies FRSs • Auditing Practices Board • Issues auditing standards • Financial Reporting Review Panel • Enforces compliance with FRSs • Professional Oversight Board • Oversees auditing profession • Audit Inspection Unit • Monitors the audit of listed companies • Accountancy Investigation and Discipline Board • Investigates and disciplines accountants for professional misconduct • Unusual features of British accounting • True and fair override