Comparative international accounting 9th ed christopher nobes and robert parker

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ow firmly established as the leading text in the field, Comparative International Accounting
takes a comprehensive look at the international dimensions of financial accounting and
reporting. The book, which includes contributions from a diverse group of international
practitioners and academics, has been carefully shaped into a coherent whole. This ninth
edition has been extensively rewritten and fully updated to incorporate the latest
developments in the field, especially the adoption of international standards in many
countries.
Features

New to this edition

■ Broad overviews supported by detailed
information on real countries and
companies;

■ Six brand new chapters have been added,
including chapters on the regulation of
accounting and the politics of standard
setting;

■ Across-the-board comparisons of major
topics;
■ Examination of the requirements of

International Financial Reporting
Standards and of US GAAP;
■ Studies of accounting in Japan and
China.

■ Separate consideration of group
accounting by listed companies and of
individual company accounting under
domestic rules;
■ More coverage of the impact of
accounting differences on capital markets
and on analysis.

Instructors’ resources include an expanded Suggested Answers section in the back of the
book. Also, in addition to an Instructor’s Manual, unique PowerPoints for each chapter are
available online as well as links to real financial statements.
Comparative International Accounting is ideal for students at both undergraduate and
postgraduate levels taking courses in comparative and international accounting.

Christopher Nobes is PricewaterhouseCoopers Professor of Accounting at the University of
Reading, UK. From 1993 to 2001 he was a representative on the board of the International
Accounting Standards Committee.

ISBN 0-273-70357-9

Cover image © Getty images

9 780273 703570

an imprint of

Additional student support at
www.pearsoned.co.uk/nobes

www.pearson-books.com

Christopher Nobes

Both authors have received the American Accounting Association’s award of ‘outstanding
international accounting educator’.

and Robert Parker

Robert Parker is Emeritus Professor of Accounting at the University of Exeter, UK. He was
formerly editor of the journal Accounting and Business Research.

NINTH EDITION
COMPARATIVE
INTERNATIONAL ACCOUNTING

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COMPARATIVE
INTERNATIONAL ACCOUNTING

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Ninth Edition

COMPARATIVE
INTERNATIONAL
ACCOUNTING
Christopher Nobes
and
Robert Parker

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Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First edition published in Great Britain under the Philip Allan imprint 1981
Second edition published 1985
Third edition published under the Prentice Hall imprint 1991
Fourth edition published 1995
Fifth edition published under the Prentice Hall imprint 1998
Sixth edition published 2000
Seventh edition published 2002
Eighth edition published 2004
Ninth edition published 2006
© Prentice Hall Europe 1991, 1995, 1998
© Pearson Education Limited 2000, 2002, 2004, 2006
Chapter 17 © John Flower 2002, 2004, 2006
The rights of Christopher Nobes and Robert Parker to be identified as authors
of this work have been asserted by them in accordance with the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic, mechanical,

photocopying, recording or otherwise, without either the prior written permission of the
publisher or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP.
ISBN 10: 0-273-70357-9
ISBN 13: 978-0-273-70357-0
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is on file with the Library of Congress
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Contents
Contributors

xiv

Preface

xvi

Part I SETTING THE SCENE

1 Introduction
Contents
Objectives
1.1
1.2
1.3
1.4
1.5

Differences in financial reporting
The global environment of accounting
The nature and growth of MNEs
Comparative and international aspects of accounting
Structure of this book

Summary
References
Useful websites
Questions

2 Causes and examples of international differences

3
3
3
4
5
12
15
19
21
22
22
23
24

Contents
Objectives

24
24

2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9

25
25
28
29
33
34
36
37
38

Introduction
Culture
Legal systems
Providers of finance
Taxation
Other external influences
The profession
Conclusion on the causes of international differences
Some examples of differences

Summary
References
Further reading
Questions

46
47
49
49

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Contents

3 International classification of financial reporting

51

Contents
Objectives

51
52

3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10

52
53
53
55
56
60
66
67
69
69

Introduction
The nature of classification
Classifications by social scientists
Classifications in accounting
Extrinsic classifications
Intrinsic classifications: 1970s and 1980s
Developments related to the Nobes classification
Further intrinsic classification
Is there an Anglo-Saxon group?
A taxonomy of accounting classifications

Summary
References
Questions

4 International harmonization

70
71

73
74

Contents
Objectives

74
74

4.1
4.2
4.3
4.4
4.5

75
76
78
87
91

Introduction
Reasons for, obstacles to and measurement of harmonization
The International Accounting Standards Committee
Other international bodies
The International Accounting Standards Board

Summary
References
Useful websites

Questions

94
94
96
97

Part II FINANCIAL REPORTING BY LISTED GROUPS

5 The context of financial reporting by listed groups

101

Contents
Objectives

101
101

5.1
5.2
5.3
5.4
5.5
5.6

101
102
103
104

107
108

Introduction
IFRS in the EU
Adoption of, and convergence with, IFRS
Foreign listing and foreign investing
Reconciliations from national rules to US GAAP and IFRS
High-level IFRS/US differences

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Contents

5.7
5.8

Reconciliations from IFRS to US GAAP
Convergence of IFRS and US GAAP

Summary
References
Useful websites

Questions

6 The requirements of International Financial
Reporting Standards

110
111
112
113
114
114

115

Contents
Objectives

115
116

6.1
6.2
6.3
6.4
6.5
6.6

Introduction
The conceptual framework and some basic standards
Assets

Liabilities
Group accounting
Disclosures

116
116
123
126
127
129

Summary
References
Further reading
Useful websites
Questions
Appendix 6 An outline of the content of International Financial
Reporting Standards

129
130
130
130
131

7 Financial reporting in the United States

132
142

Contents
Objectives

142
143

7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9

143
144
147
150
153
158
164
166
167

Introduction
Regulatory framework
Accounting standard-setters
The conceptual framework

Contents of annual reports
Accounting principles
Consolidation
Audit
Differences from IFRS

Summary
References
Further reading
Useful websites
Questions

169
170
171
171
171
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Contents

8 Enforcement of Financial Reporting Standards

173

Contents
Objectives

173
173

8.1
8.2
8.3
8.4
8.5

173
174
178
178
185

Introduction
Modes and models of enforcement
United States
European Union
Australia

Summary
References
Useful websites
Questions

9 Political lobbying on Accounting Standards – national
and international experience

185
186
188
188

189

Contents
Objectives

189
189

9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8

190
191
193
205

208
211
213
215

Introduction
Motivations for political lobbying
Political lobbying up to 1990
US political lobbying from 1990
Political lobbying of the IASC/IASB
Preparer attempts to control the accounting standard-setter
Political lobbying of the FASB’s convergence with the IASB
Some concluding remarks

Summary
References
Useful websites
Questions

215
216
218
218

Part III HARMONIZATION AND TRANSITION IN EUROPE
AND EAST ASIA

10 Harmonization and transition in Europe

221

Contents
Objectives

221
221

10.1
10.2
10.3
10.4

222
222
228
234

Introduction
Harmonization within the European Union
Transition in Central and Eastern Europe
Poland

Summary
References

239
240

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Contents

Useful websites
Questions

11 Harmonization and transition in East Asia

242
243
244

Contents
Objectives

244
244

11.1 Introduction
11.2 Japan
11.3 China

245
245

259

Summary
References
Further reading
Useful websites
Questions

264
265
267
267
267

Part IV FINANCIAL REPORTING BY INDIVIDUAL COMPANIES

12 The context of financial reporting by
individual companies

271

Contents
Objectives

271
271

12.1 Introduction
12.2 Outline of differences between national rules and
IFRS or US GAAP

12.3 The survival of national rules
12.4 Financial reporting, tax and distribution
12.5 Special rules for small or unlisted companies

271

Summary
References
Useful websites
Questions

276
277
277
277

13 Making accounting rules for non-listed business
enterprises in Europe

272
272
275
276

278

Contents
Objectives

278

278

13.1 Introduction
13.2 Who makes accounting rules?
13.3 Which business enterprises are subject to accounting rules?

278
279
288

Summary
References
Further reading

292
293
294
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Contents

Useful websites
Questions

Appendix 13.1 Contents of the Plan comptable général
Appendix 13.2 Financial accounting chart of accounts

14 Accounting rules and practices of individual
companies in Europe

295
296
297
298

299

Contents
Objectives

299
299

14.1
14.2
14.3
14.4

299
300
304
308

Introduction

France
Germany
United Kingdom

Summary
References
Further reading
Useful websites
Questions
Appendix 14.1 Formats for French financial statements
Appendix 14.2 Formats for German financial statements
Appendix 14.3 Formats for British financial statements

310
311
312
312
312
313
318
321

Part V MAJOR ISSUES IN THE FINANCIAL REPORTING OF MNEs

15 Key financial reporting topics

327

Contents
Objectives

327
327

15.1
15.2
15.3
15.4
15.5
15.6
15.7
15.8

328
328
329
331
334
337
341
345

Introduction
Recognition of intangible assets
Asset measurement
Financial instruments
Provisions
Employee benefits
Deferred tax
Revenue recognition

Summary
References
Questions

16 Consolidation
Contents
Objectives

346
347
347
349
349
349

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Contents

16.1
16.2
16.3

16.4
16.5
16.6
16.7

Introduction
Rate of adoption
The concept of a ‘group’
Harmonization from the 1970s onwards
Definitions of group companies
Publication requirements and practices
Techniques of consolidation

Summary
References
Further reading
Questions

17 Foreign currency translation

350
350
351
352
356
357
358
362
362
363

363
364

Contents
Objectives

364
365

17.1
17.2
17.3
17.4
17.5
17.6
17.7
17.8
17.9
17.10
17.11

365
369
375
378
381
386
388
390
393

399
402

Introduction
Translation of transactions
Introduction to the translation of financial statements
The US initiative
The temporal method versus the closing rate method
FAS 52
IAS 21
Translation of the income statement
Accounting for translation gains and losses
Research findings
An alternative to exchange rates?

Summary
References
Further reading
Questions

18 Segment reporting

403
404
405
405
406

Contents
Objectives

406
406

18.1
18.2
18.3
18.4
18.5

406
408
412
417
420

What is segment reporting?
The need for segment information
Disclosure regulations
Problems of segment identification
Evidence on the benefits of segment reporting

Summary
References
Questions

426
427
429

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Contents

Part VI ANALYSIS AND MANAGEMENT ISSUES

19 International financial analysis

433

Contents
Objectives

433
433

19.1
19.2
19.3
19.4
19.5

434

434
439
446
450

Introduction
Understanding differences in accounting
Disclosure practices in international financial reporting
Interpreting financial statements
Financial analysis and the capital market

Summary
References
Questions

20 International auditing

453
454
456
457

Contents
Objectives

457
457

20.1
20.2

20.3
20.4

458
459
464
470

Introduction
Reasons for the internationalization of auditing
Promulgating international standards
The international audit process

Summary
References
Further reading
Useful websites
Questions

21 International aspects of corporate income taxes

482
483
483
484
484
485

Contents
Objectives

485
485

21.1
21.2
21.3
21.4
21.5
21.6

486
488
492
492
494
500

Introduction
Tax bases
International tax planning
Transfer pricing
Tax systems
Harmonization

Summary
References
Further reading
Useful websites
Questions

502
502
504
504
504

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Contents

22 Managerial accounting

506

Contents
Objectives

506
506

22.1
22.2

22.3
22.4
22.5
22.6
22.7

507
508
510
514
514
524
527

Introduction
The balanced scorecard as an overview tool
Currency and control
Variances and foreign exchange
Culture and management accounting
Control and performance
Looking forward

Summary
References
Questions

527
528
531

Glossary of abbreviations

532

Suggested answers to some of the end of chapter questions

537

Author index

556

Subject index

559

Supporting resources
Visit www.pearsoned.co.uk/nobes to find valuable online resources
For instructors
l Complete, downloadable Instructor’s Manual
l PowerPoint slides that can be downloaded and used as OHTs
l Examples of real financial statements
For more information please contact your local Pearson Education sales
representative or visit www.pearsoned.co.uk/nobes

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Contributors

Co-editor, author of Chapters 2, 3, 4, 5, 6, 7, 11, 12, 15 and 21, and co-author of
Chapter 16
Christopher Nobes PricewaterhouseCoopers Professor of Accounting at the
University of Reading. He has also taught in Australia, Italy, the Netherlands, New
Zealand, Scotland and the United States. He is currently a visiting professor at the
Norwegian School of Management and at Pompeu Fabra University, Barcelona. He
was the 2002 ‘Outstanding International Accounting Educator’ of the American
Accounting Association. He was a member of the Accounting Standards Committee
of the United Kingdom and Ireland from 1986 to 1990, and a UK representative on
the Board of the International Accounting Standards Committee from 1993 to 2001.
He is vice-chairman of the accounting committee of the Fédération des Experts Comptables Européens.
Co-editor, author of Chapters 1, 8, 10, 13 and 14, and co-author of Chapter 16
Robert Parker Emeritus Professor of Accounting at the University of Exeter and
former professorial fellow of the Institute of Chartered Accountants of Scotland.
He has also practised or taught in Nigeria, Australia, France and Scotland and was
editor or joint editor of Accounting and Business Research from 1975 to 1993. He was
the British Accounting Association’s ‘Distinguished Academic of the Year’ in 1997,
and the 2003 ‘Outstanding International Accounting Educator’ of the American
Accounting Association.
Authors of other chapters
Jan Buisman IFRS Senior Technical Partner for PricewaterhouseCoopers in
Sweden and partner in the firm’s Global Corporate Reporting Group. He was formerly the Netherlands representative on the International Auditing Practices
Committee, and chairman of Royal NIVRA’s Auditing Standards Board. He is now
chairman of the Accounting Practices Committee of FAR in Sweden. (Co-author of

Chapter 20)
John Flower Formerly, Director of the Centre for Research in European Accounting (Brussels), and earlier with the Commission of the European Communities and
Professor of Accounting at the University of Bristol. (Chapter 17)
Graham Gilmour Senior Manager in the Global Corporate Reporting Group of
PricewaterhouseCoopers. (Co-author of Chapter 20)
Stuart McLeay Professor of Treasury at the University of Wales, Bangor. Formerly,
he worked as a chartered accountant in Germany, France and Italy, and was a financial analyst at the European Investment Bank. Co-editor of the ICAEW European
Financial Reporting series. (Chapter 19)

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Contributors

Clare B. Roberts Professor of Accounting at the University of Aberdeen Business
School. (Chapter 18)
Stephen Salter Associate Professor and Director of the Center for Global Competitiveness at the University of Cincinnati. Formerly, he was a partner at Ernst &
Young Management Consultants. (Chapter 22)
Stephen A. Zeff Herbert S. Autrey Professor of Accounting at Rice University.
(Chapter 9)

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Preface
Purpose
Comparative International Accounting is intended to be a comprehensive and coherent text on international financial reporting. It is primarily designed for undergraduate and postgraduate courses in comparative and international aspects of
accounting. We believe that a proper understanding requires broad overviews (as in
Part I), but that these must be supported by detailed information on real countries
and companies (as in Parts II to IV) and across-the-board comparisons of major
topics (as in Parts V and VI).
This book was first published in 1981. This present edition (the ninth) constitutes
the most extensive revision that we have ever made. In particular, the former major
section on country differences, that served its purpose well for 25 years, has been
removed. This is because national accounting rules in several major countries have
been abandoned for some purposes. This is most obviously the case in Europe for
consolidated statements from 2005. The new structure is explained below. This edition contains six new chapters (5, 8, 9, 12, 13 and 14) and four re-written chapters
(1, 10, 11 and 15). The other chapters have been revised and fully up-dated.
A revised manual for teachers and lecturers is available from http://www.
pearsoned.co.uk/nobes. It contains several numerical questions and a selection of
multiple-choice questions. Suggested answers are provided for all of these and for
the questions in the text. There are also reproductions of some tables from the text
for the purpose of making overhead slides. In addition, there is now an extensive
set of PowerPoint slides.

Authors
In writing and editing this book, we have tried to gain from the experience of those
with local knowledge. This is reflected in the nature of those we thank below for
advice and in our list of contributors. For example, the original chapter on North
America was co-authored by a Briton who had been assistant research director of
the US Financial Accounting Standards Board; his knowledge of US accounting was
thus interpreted through and for non-US readers. The amended version is by one of

the editors, who has taught in several US universities. This seems the most likely
way to highlight differences and to avoid missing important points through overfamiliarity. The new chapter on political lobbying has been written by Stephen Zeff,
an American who is widely acknowledged as having the best overview of historical
and international accounting developments. Other contributors presently work in
Germany, in Sweden and (two of them) in the USA.

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Preface

Structure
Part I sets the scene for a study of comparative international financial reporting.
Many countries are considered simultaneously in the introductory chapter and
when examining the causes of the major areas of difference (Chapter 2). It is then
possible to try to put accounting systems into groups (Chapter 3) and to take the
obvious next step by discussing the purposes and progress of international harmonization of accounting (Chapter 4).
All this material in Part I can act as preparation for the other parts of the book.
Part I can, however, be fully understood only by those who become well-informed
about the contents of the rest of the book, and readers should go back later to
Part I as a summary of the whole.
Part II examines financial reporting by listed groups. In much of the world
this means, at least for consolidated statements, using the rules of either the
International Accounting Standards Board or the United States. In addition to
chapters on these two ‘systems’ of accounting (retained but revised from the eighth
edition), Part II contains three entirely new chapters: an overview, a chapter on

enforcement of accounting regulations, and one on political lobbying.
Part III contains two chapters that examine the processes of harmonization and
transition as applied in the EU and East Asia. These contain revised and up-dated
material from chapters in the eighth edition. Part IV concerns the financial reporting of individual companies, where large international differences remain. There
are three chapters, all new: context, regulatory styles, and accounting differences.
Parts V and VI retain the eight chapters from the former edition, although
Chapter 15 is revised in a major way (becoming a chapter on key issues rather
than on liabilities), and the other chapters are fully up-dated. Part V examines,
broadly and comparatively, particular major financial reporting topics: key nonconsolidation issues, consolidation, foreign currency translation and segment
reporting. Part VI contains four issues of international analysis and management:
international financial analysis, international auditing, international aspects of
corporate income taxes, and managerial accounting.
At the end of the book, there is a glossary of abbreviations relevant to international accounting, suggested answers to some chapter questions, and two indexes
(by author and by subject).

Publisher’s acknowledgements
We are grateful to the following for permission to reproduce copyright material:
Figure 3.1: Adapted from American Accounting Association (1977) Accounting Review,
Supplement to Vol. 52, p. 99. Reproduced with permission; Figure 3.2: Adapted from
Puxty A.G., Wilmott, H.C., Cooper D.J. and Lowe A.E. (1987) ‘Modes of regulation
in advanced capitalism: locating accountancy in four countries’, Accounting, Organizations and Society, Vol. 12 No. 3, p. 283. Copyright © 1987 Elsevier Ltd. Reproduced
with permission; Figure 15.2: Adapted from ‘A classification of non-state pension
schemes’ in Survey of Pensions and Other Retirement Benefits in EU and non-EU Countries.
Routledge, Taylor & Francis Group Ltd., reproduced with permission; Figure 22.3:

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Preface

Adapted from Landry, S., Chan, W., and Jalbert, T. (2002) ‘Balanced scorecard for
multinationals’, Journal of Corporate Accounting and Finance, p. 38. Copyright © 2002
John Wiley & Sons, Inc. Reprinted with permission of John Wiley & Sons; Table 2.6
(same as Table 15.2): Adapted from Volkswagen 2001 Opening Reconciliation in the
Volkswagen AG Annual Report 2001. Reproduced with permission of Volkswagen AG;
Table 5.2: Adapted from Vodafone Income Statement in the Vodafone Interim
Announcement 2004. Reproduced with permission of Vodafone Group plc; Table 5.6:
Adapted from the Bayer Annual Report 2004. Reproduced with permission of Bayer
AG; Table 5.7: Adapted from the Novartis International AG Annual Report 2004.
Reproduced with permission of Novartis International AG; Table 5.8: Adapted from
the Degussa AG Annual Report 2004. Reproduced with permission of Degussa AG;
Table 18.1: Adapted from the Gillette Corporation Annual Report 2004. Reproduced
with permission of The Procter & Gamble Company; Table 18.3: Adapted from the
Vodafone Annual Report 2004. Reproduced with permission of Vodafone Group
plc; Table 18.4: Adapted from the Novartis International AG Annual Report 2004.
Reproduced with permission of Novartis International AG; Table 19.4: Adapted
from the Volvo Group Financial Report 2004. Reproduced with permission of the
Volvo Group Headquarters; Table 22.1: Adapted from Landry, S., Chan, W., and
Jalbert, T. (2002) ‘Balanced scorecard for multinationals’, Journal of Corporate
Accounting and Finance, p. 38. Copyright © 2002 John Wiley & Sons, Inc. Reprinted
with permission of John Wiley & Sons.
In some instances we have been unable to trace the owners of copyright material,
and we would appreciate any information that would enable us to do so.

Other acknowledgements
In the various editions of this book, we have received great help and much useful

advice from many distinguished colleagues in addition to our contributors. We
would like especially to thank Sally Aisbitt of the Open University; Andrew Brown
of Ernst & Young; John Carchrae of the Ontario Securities Commission; Terry
Cooke of the University of Exeter; John Denman and Peter Martin of the Canadian
Institute of Chartered Accountants; Brigitte Eierle of Johannes Kepler University,
Linz; Michel Glautier of ESSEC; Horst Kaminski, formerly of the Institut der
Wirtschaftsprüfer; Jan Klaassen of the Free University, Amsterdam; Yannick
Lemarchand of the University of Nantes; Ken Lemke of the University of Alberta;
Klaus Macharzina of the University of Hohenheim; Malcolm Miller and Richard
Morris of the University of New South Wales; Geoff Mitchell of Barclays Bank; Jules
Muis of the European Commission; Ng Eng Juan of Nanyang Technological
University of Singapore; Graham Peirson of Monash University; Jacques Richard of
the University of Paris Dauphine; Alan Richardson of York University, Toronto;
Alan Roberts of the University of Rennes; Paul Rutteman of EFRAG; Etsuo Sawa, formerly of the Japanese Institute of Certified Public Accountants; Hein Schreuder, formerly of the State University of Limburg; Marek Schroeder of the University of
Birmingham; Patricia Sucher, formerly of Royal Holloway, University of London;
Lorena Tan, formerly of Price Waterhouse, Singapore; Ann Tarca of the University

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Preface

of Western Australia; Peter van der Zanden of Moret Ernst & Young and the
University of Tilburg; Gerald Vergeer of Moret Ernst & Young; and Ruud Vergoossen

of Royal NIVRA and the Free University of Amsterdam. We are also grateful for the
help of many secretaries over the years.
Despite the efforts of all these worthies, errors and obscurities will remain, for
which we are culpable jointly and severally.
Christopher Nobes
Robert Parker
Universities of Reading
and Exeter

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Part I
SETTING THE SCENE

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1
CONTENTS

Introduction
Robert Parker

1.1
1.2

1.3
1.4
1.5

OBJECTIVES

Differences in financial reporting
The global environment of accounting
1.2.1 Accounting and world politics
1.2.2 Economic globalization, international trade and foreign direct investment
1.2.3 Globalization of stock markets
1.2.4 Patterns of share ownership
1.2.5 International monetary system
The nature and growth of MNEs
Comparative and international aspects of accounting

Structure of this book
1.5.1 An outline
1.5.2 Setting the scene (Part I)
1.5.3 Financial reporting by listed groups (Part II)
1.5.4 Harmonization and transition in Europe and East Asia (Part III)
1.5.5 Financial reporting by individual companies (Part IV)
1.5.6 Major issues in the financial reporting of MNEs (Part V)
1.5.7 Analysis and management issues (Part VI)
Summary
References
Useful websites
Questions

After reading this chapter, you should be able to:
l

explain why international differences in financial reporting persist, in spite of the
adoption of international financial reporting standards (IFRS) by the member states
of the European Union and some other important countries;

l

illustrate the ways in which accounting has been influenced by world politics, the
growth of international trade and foreign direct investment, the globalization of
stock markets, varying patterns of share ownership, and the international monetary
system;

l

outline the nature and growth of multinational enterprises (MNEs);

l

explain the historical, comparative and harmonization reasons for studying
comparative international accounting.

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Part I

Setting the scene

1.1 Differences in financial reporting
Differences in financial reporting are the norm. If a number of accountants from
different countries, or even one country, are given a set of transactions from which
to prepare financial statements, they will not produce identical statements. There
are several reasons for this. Although all accountants will follow a set of rules,
whether implicit or explicit, no set of rules covers every eventuality or is prescriptive to the minutest detail. Thus there is always room for professional judgement, a
judgement that will depend in part on the accountants’ environment (for example,
whether or not they see the tax authorities as the main users of the statements).
Moreover, the accounting rules themselves may differ not just between countries
but also within countries. In particular the rules for company groups may differ
from the rules for individual companies. Multinational enterprises (MNEs) which
operate as company groups in more than one country may find inter-country differences particularly irksome.
Awareness of these differences has led in recent decades to impressive attempts

to reduce them, in particular, by the International Accounting Standards Board
(IASB), which issues International Financial Reporting Standards (IFRS), and by the
European Union (EU), which has issued Directives and Regulations on accounting
and financial reporting. The importance of American stock markets has meant that
US generally accepted accounting principles (GAAP), the most detailed and best
known of all national sets of rules, has greatly influenced rule-making worldwide.
The work of all these regulatory agencies has certainly led to a lessening of international differences but, as this book will show, many still remain and some will
always remain.
A good example of difference is provided by the consolidated financial statements
of BG Group plc, an oil and gas exploration company incorporated in the UK. Its
2004 Annual Report provides three sets of figures: using UK GAAP, US GAAP and
IFRS. These are shown in Table 1.1. The US GAAP information is provided because
the company is listed on the New York Stock Exchange as well as in London; the
IFRS figures because all UK listed companies moved to IFRS from 2005 onwards.
Further examples of reconciliations of earnings and of shareholders’ funds (equity)
of non-US companies that are listed on stock exchanges in the United States are
shown in Table 1.2: for Astra-Zeneca (UK), British Airways (UK), GlaxoSmithKline
(UK), and Ericsson (Sweden). It is clear that the differences can be very large and
that no easy rule-of-thumb adjustment procedure can be used. The adoption by

Table 1.1 Data from BG Group (£million)

Net income
Shareholders’ Equity at 31 December

UK GAAP

IFRS

2003

2003

2004

US GAAP
2004

2003

2004

768

904

774

886

766

731

3925

4570

3924

4567

3972

4408

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