Contemporary Issues in Accounting: Solution Manual
Contemporary Issues in Accounting: Solution Manual
to accompany
Contemporary Issues in
Accounting
Michaela Rankin, Patricia
Stanton, Susan McGowan,
Kimberly Ferlauto & Matt Tilling
PREPARED BY:
Michaela Rankin
CHAPTER 12
INTERNATIONAL ACCOUNTING
Review questions
law, which is interpreted by the courts. Civil law, on the other hand, was
developed in non-English speaking countries and originated in Europe. These
countries tend to rely more heavily on statute law, without the extent of court
interpretation found in common law. Common law countries are likely to have
non-legislative organisations developing accounting standards. The accounting
profession is likely to have less of an influence in civil law countries.
4. Countries that rely on capital markets for finance, as opposed to banks and
governments, are likely to expect greater levels of public disclosure in their
accounting systems. Evaluate this argument and provide examples.
Where entities operate in countries that rely more on capital markets and external
investors for finance, rather than banks or government, there is going to be higher
levels of information asymmetry between investors and the entity. Banks and
government are in a position to demand specific information from an entity so
there is less likely to be onerous public disclosure requirements as there is not the
same need to reduce information asymmetry between external users and the
entity.
5. Outline and discuss three cultural aspects that can differ across countries.
How do these cultural differences relate to differences in accounting
systems?
Hofstede identified a total of five cultural dimensions on which countries can
differ. These include:
a. Individualism versus collectivism – individualism relates to a
preference for a loosely knit social framework, while collectivism
refers to a preference for a tightly knit social framework. In an
individualist society there is a preference for self-regulation rather than
compliance with prescriptive legal requirements. This leads to the
development of strong professional organisations. In collectivist
societies statutory control is stronger, so professional bodies are less
prevalent and they do not have the same level of input to accounting
standard development.
b. Power distance –refers to the extent to which members of society view
power entities as distributed unequally. Where entities prefer an
unequal distribution of power they have a preference for uniformity of
accounting requirements also.
c. Uncertainty avoidance – refers to how comfortable members of society
are with uncertainty and ambiguity. In countries where there is a
preference for high uncertainty avoidance there would also bee a
preference for accounting systems that avoid any ambiguity, meaning a
rules-based approach to accounting regulation rather than a principles-
based approach.
d. Masculinity versus femininity – masculinity refers to a preference for
assertiveness, achievement and material success, while societies with
feminine traits have a preference for caring for the weak and nurturing.
11. What is transfer pricing and how does it affect the operation of MNEs?
Transfer pricing relates to the pricing of goods and services transferred between
members of a corporate family. At an international level transferring goods and
services internally may mean that the entity is not impacted by a range of taxed
such as goods and services taxes and sales taxes in countries where they may
need resources. Entities may be able to transfer goods and services to other
entities in the corporate group which operate in countries with more lenient tax
practices and rules
Application questions
12.1 Visit the website of the IASB and FASB and read the documents relating
to US GAAP and IASB convergence. Prepare a summary of the process to
date, and the timelines for future convergence. (K)
This summary has been prepared as at April 2012.
2002 – both signed the Norwalk Agreement –g aimed at removing any
differences between IFRSs and US GAAP
2006 – bodies issued a Memorandum of Understanding (MoU) which
included milestones and priorities to be completed by 2008
2007 – the SEC in the US permits foreign entities listed on US securities
exchanges to use IFRS in preparing financial reports, with no need to also
present comparative reports in accordance with US GAAP
2008 – the MoU is updated with priorities outlined to 2011
2011 – progress report issued, which confirms that the bodies are giving
priority to three main projects on their MoU – revenue recognition, leasing
and financial instruments. Priority is also being given to insurance contracts.
The following projects have been completed:
Share-based payments
Segment reporting
Non-monetary assets
Inventory
Fair value option
Accounting changes
Borrowing costs
Non-controlling interests
Business combinations
Research costs
derecognition
Work on the priority projects is to be completed over the next few years
12.2 The New York Stock Exchange (NYSE) is the largest exchange in the U.S.
Visit the website of the NYSE, www.nyse.com, and determine the number
of foreign companies listed on it. Choose ten of these companies and
analyse their latest financial reports, available from the companies’
websites. Document how the companies have addressed the difference, if
any, between their reporting requirements for United States purposes and
those for their home jurisdiction. Why would foreign companies have
gone to the effort of listing their shares on the NYSE and the expense of
preparing separate financial statements in some cases? (J, SM)
12.3 Find the financial report available on the websites of one domestic
company, and one foreign company that operates in the same industry
and complete the following: (J, K, AS, SM)
For the purposes of demonstration only, the following points relate to Qantas
Ltd and Emirates Ltd, a company listed in the United Arab Emirates.
(a) Document what accounting principles the foreign and domestic
companies used to prepare their financial report.
The financial statements of Qantas comply with Australian accounting
standards, and also with IFRSs. The financial statements of Emirates are
prepared in accordance with IFRSs.
(b) Document any differences between the formats of the report or the
accounting principles used between your two companies.
The accounting principles are the same. There are no fundamental differences
in the formats of the reports of both companies.
(c) Document any differences in the directors’ report for each company.
Emirates does not provide a directors report in its financial report. This means
there is no presentation of information concerning corporate governance,
including the roles of directors, meetings attended, how the company adheres
to a code of corporate governance principles and directors’ and executives’
remuneration. These issues are all addressed in the Qantas report.
(d) Prepare a table which outlines the similarities and differences you have
observed.
Accounting rules Both use IFRSs. Qantas reports also comply with
Australian accounting standards issued by the
AASB
12.4 Form small teams and have each team select two countries from different
cultural areas. Identify and compare each country’s environmental,
cultural and accounting values. (J, K, CT)
An example of two countries could include, but is not limited to: Australia,
and China. For the purposes of illustration these countries will be compared.
Australia is a western democratically run country, while China is an eastern
country where there is an extensive amount of control by the government. This
has impacted on accounting and business operations in a number of ways.
Until relatively recently China was not open to foreign investment, and most
entities were government controlled or owned. This is now changing, with an
increase in foreign and private ownership. This has not changed to the extent
of Australia, however, where there is an active capital market with many
entities being owned by shareholders who buy and sell shares on the stock
exchange.
Australia has a common law system while the legal system is China is a code
law system.
If you refer to page 346-47 of the text Hofstede’s cultural dimensions are
discussed. China tends towards collectivism while Australia tends towards
individualism. China has a large power distance, while Australia’s is smaller.
In Australia, society is happy to tolerate uncertainty, while in China it tends
towards strong uncertainty avoidance.
In terms of Gray’s accounting dimensions, Australia tends towards
professionalism, while China favours statutory control. The countries also
differ on uniformity versus flexibility, with China favouring more uniformity.
Finally, in China there is a high degree of secrecy while in Australia
transparency is favoured.
12.5 Visit the website of the Australian Stock Exchange, www.asx.com.au.
Select a large company that is listed on the securities exchange that also
has operations in different countries – a MNE. You may need to refer to
the company website or annual report for this information. Access the
latest annual report and evaluate the impact of operating across countries
on the company’s financial reporting requirements (J, K, SM)
The fact that the Indian government is considering convergence rather than
adoption of IFRS means that an investor will need to look closely at the
financial reports to recognize the differences in financial reporting practices
when comparing potential investments in other countries. Investors would
perceive greater risk of investing in Indian firms as the financial reports will
not align fully with those of alternative investment opportunities in other
nations.