Reasons for International Differences in Accounting
International differences in accounting practices:
The presence of international difference in the accounting practices has been the norm because of a myriad reasons and factors. There exists wide a variety and numbers of accounting systems in the world ranging from Anglo –American, Nordic, Germanic, Latin, Asian and many others. All of them come under the purview of international accounting organisation the Financial Accounting Standards Board, whose main aim is to create and implement a set of Generally Accepted Accounting Principles, which would look after the differences in the accounting systems arising in the reporting of the financial statements. Still the organisation has a long way to go, because of the presence of different norms, cultures, work ethics which are prevalent in the different parts of the world. For example, the Chinese accounting and financial practices are influenced by communism, japan is influenced by the presence of commercial and as well as Government laws, France, Italy and Germany have very secretive accounting practices and rules of financial reporting.
Moreover, the presence of different legal systems, accounting and taxation laws have contributed to the growing differences in the creation and the reporting of the financial differences. The legal systems, financial systems, taxations, inflation, as well as the accounting systems have a deep impact on the creation of the financial statements. All of them play a prominent role to play in having a significant amount of impact on the preparation and reporting of the financial statements (Tarca, Morris, and Moy. 2013). The political and the economic ties of the countries and the ruling parties also have a significant amount of influence on the financial statements of the companies and the various business organisations. In the subsequent part of the report, the various kinds of differences in the accounting practices of various countries specifically those three companies have been vividly discussed.
Differences in the accounting practices:
There are various ways in which the depiction of the differences in the accounting practices of the different companies across the globe are done and some of the prominent ones have been discussed over here, which are as follows:
- Presentation of the financial statements: Financial statements are regarded as the tool of measuring the performance of any business organisation. In this aspect too, there exists some significant amount of differences between the two discussed companies L’Oreal and GSK. In this regard some differences have been seen in the order of the presentation of the assets and structure of the balance sheet and the terminologies used. When the balance sheet of GSK and L ‘Oreal are compared horizontally, then some differences can be seen in the vertical form, where the order of the items have are presented differently. In the GSK, consolidated balance sheet, the data begins with the Non-Current assets, followed by the Current assets, current liabilities, the non-current liabilities and the equity capital at the end of it. Whereas, in case of L’Oreal the balance sheet begins with the Intangible assets, tangible assets, financial assets, followed by the Non-Current assets and Current assets. The shareholders Equity comes next, which is immediately followed by the long term liabilities such as borrowings and debt and other current liabilities. An example has been provided below:
Balance sheet of GSK:
(Source: Glaxosmithkline, 2017)
(Source: L’Oreal, 2017)
- Recognition of intangibles and treatment of other items: There are various items which come under the purview of the accounting for intangibles. Whether the costs are treated as assets or any kind of expenses. In case of the two companies of Volkswagen and GSK, some differences have been spotted, which have been reported here, although, when viewed comprehensively, they reflect the same approach to the treatment of soe of the accounting items, such as intangibles like patents, copyrights etc., by presenting them in the balance sheet of the company. In case of Volkswagen, the company shows all the investment done in the intangible assets in the form of plants and equipment, property and investment property, this exercise is missing in the annual financial reports of GSK (Gsk.com, 2018). In the case of GSK, the investment in the intangible assets of the company are not done as it is deemed unnecessary by the GSK management.
- Items of the Cash flow statement: When the cash flow statements of both the companies are such as Volkswagen and GSK are compared, there are some issues which creeps in to show some stark differences between the two. In the case of the cash flow of Volkswagen, some changes have been shown in the inventories, provisions, lease assets, which are not normally shown in the cash flow statement of the company. While on the other hand, in the case of GSK’s consolidated cash flow statement some initial adjustments have been shown in the form of cash flow from operating activities, profits after taxation and the cash generated from operations. Only after the initial adjustments, the cash from operating activities, investing and financial activities have been calculated.
- Treatment of goodwill: In the case of goodwill treatment, companies usually have a different set of rules for treatment of goodwill. When the case of GSK is taken, there are some specific rules for the treatment of goodwill. Goodwill is considered to have an indefinite life, as a result of which, it is not amortised. In the case of Volkswagen, the German accounting standards are followed, which the company is obliged to follow. The goodwill is calculated between the cost of acquisition and the value of the individual assets of the company. The company writes off its goodwill either immediately or by at least 25% annually. Sometimes, the company can even systematically amortise the goodwill over the estimated life of the asset (Zehri and Chouaibi, 2013). Additionally, an important thing to be noticed here is, most of the German companies along with Volkswagen, most commonly assume the estimated useful life of the company to be of a duration of fifteen years. In the case of
- Intangible asset impairment: Impairment of the different kinds of assets are done in order to ensure that the entity’s assets are not carried over to the next period at a price which is more than the recoverable amount. In the case of GSK, the tests are conducted for a ‘cash-generating unit’ where the concerned assets fail to generate enough and adequate cash flows. All this is done and implemented strictly in accordance with the IAS 36. In this case, Volkswagen, compares the carrying amounts of the goodwill of the sub groups and the different brands, against their recoverable amounts (Yu and Wahid, 2014). The value which is put into use is calculated using the discounted cash flow models, which is fully based on Volkswagen’s five year operating plan which is entirely prepared by the management of the organisation and is rightfully acknowledged by the company’s supervisory board.
- Inventory valuation methods: Inventory valuation is one of the most significant aspects in the preparation of the financial reporting of the company. After the conclusion of the accounting year, some stocks of inventory are still kept with the company, which could not be sold, due to some reasons or the other. These stocks are brought back to the companies warehouses and are revalued using some specific set of methods. This is no different for L’Oreal or GSK also. GSK also uses the LIFO method for valuing its stock of inventories at the end of the year. It is because of the fact that LIFO assumption provides a significant amount of cash flow advantages over the other methods (ICWA, 2018). Although, the company has been trying to close down its LIFO operations due to the fact that LIFO is not commonly permitted to be used for those companies which have a high amount of foreign operations. While on the other hand, L’Oreal uses the FIFO method of evaluating its inventories at the end or at the beginning of the year.
- Measurement of non-current assets: In this regard there are three important points to be considered which are:
- Cost(depreciated)
- Current Replacement Cost
- Fair value
There are different treatments regarding each of the items mentioned above among different companies, based on the accounting and financial laws of the particular country where the company is based. In case of each of the items mentioned above, companies like Caterpillar and GSK have separate treatments. For example, in case of fair value, the assets must be available for immediate sale in their current condition, moreover, the sale of the concerned asset must be completed within a year. For GSK, almost all the non-current assets are classified for sale. All the financial statements incorporating these non-current items of the company are prepared on historical cost basis, except for certain assets which are measured in fair value (Gsk.com, 2018). These non-current assets which have been classified for sale are presented in a separate way from the other assets, which are present in the balance sheet of the company. This helps in efficient measurement of all the non-current assets of the company.
Impact of Legal Systems, Taxation and Political Ties on Accounting Practices
In the same way, the current replacement cost is effectively used in the British company Glaxokline smith, but it is not very much prominent or effectively used in the German company Volkswagen.
Taxation issues: Taxation is another vast area, where exists a wide variety of differences across the globe. When the taxation issues of GSK are being analysed, some important factors had come to the forefront. For example, in the case of GSK, the total taxation charge consists of the entire GSK group’s current as well as the deferred tax expenses. In this robust calculation, some of it is done via means of estimation and a fair degree of judgement. Thereafter, there exists a wide range of differences in the creation and most importantly, the implementation of the tax reforms across the international arena (Expathub.us.2018). It becomes difficult to follow and implement the same set of taxation and accounting rules for the subsidiary companies of GSK, which are based and operating from the other countries. The tax policies of Caterpillar are very different in this regard, the American tax policies are very different from the other nations of the world, as they have a wide variety of norms which have to be taken care of. Some of the prominent ones from the annual report of Caterpillar Inc. The reporting of the taxes and the maintaining of the different tax provisions of IASB, IFRS and ASB have to be looked into and strictly followed.
Investment in associates and joint ventures: In the case of Glaxo Kline Smith, the investment of the company in the associates and joint ventures with various other competitors and companies, have increased over the past few years and currently it stood at $263 million in 2017. This provision of investments in the associate firms or companies are not shown in the case of German companies such as Volkswagen, as they do not use footnotes. This is evident from the diagram shown below, where the notes regarding the financial statements and positions have been provided below:
(Source: GlaxoKline Smith, 2018)
- Depreciation: Straight line method of calculating depreciation, is the most prominent method which is followed by the American companies, caterpillar is no exception to this. Straight line method of depreciation of 10%, in accordance with the provisions of the IFRS and ASB. The method is widely used, because of its simplicity and usefulness. It is more commonly used for those kinds of companies which work with assets of long term nature and are not to be resold at the earliest possible date. For the assets, which have a long term usage generally and which produce heavy goods such as steel and machinery. Whereas, in comparison to this, the British company GSK, strictly adheres to the reducing balance method in order to claim a larger amount of tax benefit as per the provisions of the taxation laws of the British economy.
Conclusion:
In this report, a vivid portrayal of the different kinds of international differences in the accounting practices of the company have been shown, with proper analysis. The existence of these differences have caused a lot of differences and chaos in the use of the financial statements. This has led to a chaotic comparison of the financial statements across various nations. If they do not become comparable, their preparation becomes futile. As a result of which, the need of harmonising the international differences in the accounting practices has now become the need of the hour. Only, when these accounting differences would be completely wiped out, will the actual usage of these financial statements would be made useful.
References:
Anon, (2018). UK&GERMANY. [online] Available at: https://www.iasplus.com/en/binary/dttpubs/uk_ger.pdf [Accessed 18 May 2018].
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.
Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.
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References:
Tarca, A., Morris, R.D. and Moy, M., 2013. An investigation of the relationship between use of international accounting standards and source of company finance in Germany. Abacus, 49(1), pp.74-98.
Web.usm.my. (2018). [online] Available at: https://web.usm.my/aamj/13.2.2008/AAMJ%2013.2.6.pdf [Accessed 18 May 2018].
Yu, G. and Wahid, A.S., 2014. Accounting standards and international portfolio holdings. The Accounting Review, 89(5), pp.1895-1930.
Zehri, F. and Chouaibi, J., 2013. Adoption determinants of the International Accounting Standards IAS/IFRS by the developing countries. Journal of Economics, Finance and Administrative Science, 18(35), pp.56-62.
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