Accounting
A Global Perspective
Agenda
Part I: Global Accounting Standards
–	A Matter of History: The Source of Diversity
–	Accounting Implications of History
–	Specific Accounting Differences
–	The Humanity of it all: The Psychology of Accounting
Part II: The Global Accounting Professional
–	What do they do? How do they get there?
–	Taxation and Transfer Pricing
–	International Financial Management and Analysis
–	NPV, International Transactions, Currency Translation

1. Sources of Variation
Accounting varies across borders for a number of reasons

The Source of Diversity
ROME
Perhaps history’s most inflvential empire
Resvlt of dvration, vastness, bvreavcracy
fovndation of western civilization
Politically ~ Legally ~ Lingvistically
ROME

The Middle Ages
A Brief History of Early England

The Magna Carta

Habeas Corpus
The Rule of Law
Renaissance Italy
The inhabitants of a city… must always ultimately derive their subsistence… from the country. But those of a city, situated near either the sea coast or the banks of a navigable river, are not necessarily confined to derive them from the country in their neighbourhood. They have a much wider range, and may draw them from the most remote corners of the world… 

A city might in this manner grow up to great wealth and splendour, while not only the country in its neighbourhood, but all those to which it traded, were in poverty and wretchedness…

The cities of Italy seem to have been the first in Europe which were raised by commerce to any considerable degree of opulence. Italy lay in the centre of what was at that time the improved and civilised part of the world.

The Crusades too… were extremely favourable to that of some Italian cities. The great armies which marched from all parts to the conquest of the Holy Land gave extraordinary encouragement to the shipping of Venice… They were the commissaries… of those armies; and the most destructive frenzy that ever befell the European nations was a source of opulence to those republics.
Renaissance Italy
Renaissance Italy
•	Italian merchants became successful and powerful
•	The enhanced financial knowledge enabled them to make better decisions than competitors
•	The prosperity of these Italian merchant states like Venice, fueled the rise of the Renaissance, which laid the foundations of modern civilization.
•	Thus, Accounting played a central role in the development of the world you know today.

Modern England
Canada
The United States of America

•	If at first it seems like these three systems are very similar,
•	You’re right; they are
•	Why?
•	Simple…

•	A lot of what you know about these three nations seem the same to you
•	Their legal, political, and economic systems are very similar
•	They were all British dominions at one time
•	That is – former colonies ruled by Britain, and  populated by immigrants from Britain
•	As a result, they lie in the same cultural  cluster with each other
But, wait!
•	Not all of Europe was sacked by the Germanic tribes from the north
•	Just England – Remember?
France

What’s the Implication?
The ancient and colonial history of the world has had a major impact on the cultural, legal, economic and political landscape

Western powers took their culture, language, religion, and systems of governance with them as they expanded

This has had a tremendous impact how business is conducted across borders.
Agenda
Part I: Global Accounting Standards
–	A Matter of History: The Source of Diversity
–	Accounting Implications
–	Specific Accounting Differences
–	The Humanity of it all: The Psychology of Numbers
Part II: The Global Accounting Professional
–	What do they do?
–	International Financial Management and Analysis
–	NPV, International Transactions, Currency Translation

2. Accounting Implications
•	History, laws, culture etc. have an impact on everything
•	You’ve seen how events in history have had a lasting effect on language
•	The same is true for the accounting profession
•	How?
2. Accounting Implications
•	Let’s begin by examining how legal systems vary around the world
•	Laws themselves (privacy in UK vs. public accountability in North America)
•	Common law vs. Code law countries
•	The rule of law
•	Role of lawyers – (judge vs. lawyer)
•	Burden of proof – (beyond a reasonable doubt/balance of probabilities)
•	Right to judicial review
A Case in Point
A Case in Point
2. Accounting Implications
•	The difference between common law and code law countries affects accounting as follows:
•	Common Law:
•	Accountants work together with professional bodies (CICA, FASB, ASB) to develop GAAPs
•	Within these boundaries professionals usually have leeway to use their experience and judgment on how best to report a “true and fair” depiction of company performance (hence the ACHTUNGs!)
•	Code Law:
•	Nations codify their national accounting procedures. 
•	They don’t rely on the professional judgment of accounting professionals

2. Accounting Implications

A Global Example:
•	France has a code law system (a descendent of the Napoleonic Code and Roman Law) 
•	It also has high government involvement in its economy
•	Understandably then, the government imposes a standardized Chart of Accounts on businesses known as the Plan Comptable Général, dating to 1673.
•	Similarly, German accounting practices are laid down by statute and followed rigidly.
•	What are the pros and cons of this?

2. Accounting Implications
Enforcement
•	The way in which a country enforces appropriate practice also varies 

Global Example:
•	French and German accounting practices are stipulated by statutes
•	Violations are illegal and are dealt with by the government
•	In common law countries (like Canada, US, and UK), there are no statutes stipulating how to perform the duties of accounting
•	Instead, those who mislead others are likely to be sued
•	In these countries, fear of private litigation is what keeps the profession in line
•	What are the pros and cons of this?
2. Accounting Implications
It’s worthy to note the following:

•	Even common law nations like Canada, the US, Britain, and Australia have differences in application

•	Once each former colony left the British Empire, their body of common law evolved independently

•	Example: British vs. American Product liability standards
2. Accounting Implications
•	Culture & History:
•	French companies must publish a “social balance sheet” reporting on worker treatment
•	German procedures include strong anti-inflation measures
•	Countries normally adopt practices of their former colonial rulers
•	Canada, if you recall, was a French possession, then a British one
»	And yes: code law prevails in Quebec, while common law is followed in the rest of Canada!
•	Economic Systems:
•	In Market economies, managers require profit and cost information
•	In Command economies, information centres on whether production levels are being met for central planning purposes
2. Accounting Implications
•	Political Systems:
•	In authoritarian states, the law is what bureaucrats say it is, regardless of what’s written down
Global Example:
•	After AOL and others had invested $100 million (US) in Chinese “dot-com” upstarts, they discovered that foreign investments in Chinese internet companies were illegal. How? The Chinese Minister of IT made the surprise announcement at a press conference one fall.
•	Theocracies are nations whose laws are based on religion. Iran is an example. The Koran denounces charging interest as exploitation of the poor. As a result interest is illegal in several Muslim countries.
Agenda
Part I: Global Accounting Standards
–	A Matter of History: The Source of Diversity
–	Accounting Implications of History
–	Specific Accounting Differences
–	The Humanity of it all: The Psychology of Numbers
Part II: The Global Accounting Professional
–	What do they do? How do they get there?
–	Taxation and Transfer Pricing
–	International Financial Management and Analysis
–	NPV, International Transactions, Currency Translation

3. Specific Differences
•	Historical, cultural, legal, and political differences result in differences in accounting practice
•	Businesses that fail to realize this will make expensive if not catastrophic errors
•	The greatest danger is in the following areas of accounting practice

3. Specific Differences
Areas of Global Variance:

•	Valuation of assets
•	Capitalization requirements
•	Accounting ‘reserves’
•	Taxation
3. Specific Differences
•	Valuation of Assets
–	Most countries work with historical cost
–	Inflation raises the market value of assets
–	Different nations deal with this problem differently
–	Dutch firms are permitted to raise the value
–	British accountants can use historical cost, current cost, or a mixture of both
–	In Canada, the US and Japan, such revisions are illegal

3. Specific Differences
•	Valuation of Assets
–	The danger is over reliance on the strength of company’s Balance Sheets. 
–	Observe the following company…

3. Specific Differences
•	Valuation of Assets (Inventory)
–	You’ve learned about different ending inventory valuation methods (LIFO, FIFO, and Average Cost)
–	Not every country uses these three methods
–	Some can’t use LIFO, some only use FIFO, and some use all three

3. Specific Differences
•	Capitalization
–	This means “making an asset” of something
–	Typical examples: 
•	Capital Leases
•	Research and Development Costs
•	Goodwill
–	The effect of capitalization is to increase the size of assets and liabilities
Capital Leases
•	What is a lease?
•	Operating vs. Capital leases
–	Capital leases are when:
»	Lease transfers ownership
»	Lease term is 75% of useful life
»	PV of all payments is 90% of FMV of asset

R & D Costs
•	Research and development Costs often are
–	Large
–	Result in no tangible results
•	Nevertheless, most countries allow these costs to be capitalized
•	Not the US or Germany. 
•	In Canada you capitalize only if costs can be associated with an identifiable, feasible product. Otherwise, they’re expensed.
Goodwill
•	What is a goodwill?
•	Goodwill is one of the most misleading accounts on a firm’s balance sheet.
•	It’s literally empty air to begin with
•	But as well, firms “expense” this value lowering net income
•	The degree of goodwill allowed, and its amortization varies across borders
3. Specific Differences
•	Capitalization
–	Not all countries require capitalization
–	Those that do have different procedures, sometimes allowed, sometimes required

3. Specific Differences
•	Capitalization

“Off Balance Sheet” Financing
–	Many nations require the capitalization of major leases but this makes debt levels look higher
–	Companies can hide debt by arranging leases that don’t qualify as capital leases (recall the 3 criteria?)
–	Investors and bankers can be easily manipulated and mislead this way, and it’s all perfectly legal
3. Specific Differences
•	Accounting Reserves
–	What are they?
»	Allowance for doubtful accounts
»	Allowances for warrantee obligations
»	Other contingent liabilities 
–	They lower profit so the IRS monitors them closely
–	Not the case in Germany. In fact, Deutsche Bank reported $14 Billion US in hidden reserves
–	If fact, Germans use reserves as a stabilizer – dipping into them in bad years
–	Makes German results look more stable from year to year.
3. Specific Differences
•	Taxation
–	In Canada and the US computing net income for tax purposes differs from reporting purposes
–	This causes a discrepancy in the books: deferred income tax.
–	In France and Germany, methods of reporting to the government and to shareholders must be the same
–	Thus, they are forced to choose between lower taxes, or higher profit. 
–	Most companies chose lower taxes, thus their profits are biased downwards
3. Specific Differences
Impact of These Specific Differences
–	Effects on Capital Markets
•	Investment decisions hampered
•	Comparability issues
•	Lack of disclosure, reserves of nations like Germany make lending difficult
–	Consolidation and Reporting for Multinationals
•	How to multinationals manage world wide operations?
–	Mergers and acquisitions
Agenda
Part I: Global Accounting Standards
–	A Matter of History: The Source of Diversity
–	Accounting Implications
–	Specific Accounting Differences
–	The Humanity of it all: The Psychology of Numbers
Part II: The Global Accounting Professional
–	What do they do?
–	International Financial Management and Analysis
–	NPV, International Transactions, Currency Translation

Societal Role of Accounting
The Enlightenment
•	Remember Pacioli from 1494?
•	Well, here’s where it landed them
•	An era where blind faith in the church gave way to blind faith in science and rational thought
•	And where the wealth created by the first stages of the industrial revolution reaffirmed the wisdom of all things scientific
Wedgwood Potters
•	1772 recession in Europe 
•	Wedgwood believed if he could calculate the costs for his products, it would help his firm survive
•	Embezzlement and extravagance were the order of the day.
•	He set up a new system of weekly cash reporting and bank reconciliations and he soon “put things to right in the counting house.”
•	But it help him to do more: he learned about economies of scale, analyzed price cuts, determined appropriate production runs, how to set wages, prices, hiring policies, and even caught dishonest employees 
•	As the depression eased, Wedgwood continued to use his accounting system as a day to day management tool.
•	By his death in 1795 he employed over 200 men, women, (and children), made specialty pottery for the Queen, and was worth over £500,000.
Put Life Cycle Here
Financial Control Chart

Have you ever noticed that prisons resemble factories, schools, barracks, and hospitals, which all resemble prisons? (Michel Foucault)
The Birth of the Modern Era
•	About 1700 there was a sudden interest in disciplining all aspects of life.
•	Over the next 200 years this drive for efficiency and order continued. Today life looks nothing like it once did
•	These systems are fully ingrained, legitimated by their status as ‘neutral’, ‘objective’, ‘scientific’, and ‘rational’.
•	Accounting control systems are an example of one of these ‘systems’
•	What am I talking about? Consider this…

The Birth of the Modern Era
•	Controlling Space
–	Enclosure (by purpose or function)
–	Partitioning (subdivided spaces)
•	Controlling Time
–	Segmentation (defined periods)
–	Maneuvers (precision, motion studies)
–	Dressage (bells, whistles, commands)
•	Controlling Resources
–	Standardization
–	Mass Production
•	Controlling Minds
–	Hierarchical Monitoring
–	Normalized Sanctions
–	Examination
Sources
Ball, Donald A. et al. International Business: The Challenge of Global Competition, 8th Edition. Montreal: McGraw Hill Irwin, 2002

Griffin, Ricky W. and Michael W. Pustay. International Business: A Managerial Perspective, 3rd Edition. New Jersey: Prentice Hall, 2002.

Department of Accounting, Mayes Business School, Texas A&M University. Online at: http://acct.tamu.edu/giroux/history.html

Kieso, Donald E. et al. Intermediate Accounting: Fourth Canadian Edition. John Wiley & Sons, Toronto, Ontario 1994

MacIntosh, Norman B. Management Accounting and Control Systems: An Organizational and Behavioral Approach. John Wiley & Sons, Chichester, England, 1994

Shelly, Percy Bysshe. Ozymandias. 1817

Weygandt, Jerry J. et al. Accounting Principles: Second Canadian Edition. John Wiley and Sons Canada Ltd, Etobicoke, Ontario 2002

Smith, Adam. The Wealth of Nations: Of the Rise and Progress of Cities and Towns after the Fall of the Roman Empire. Revised 5th Edition, 1776.   

Bach, Johan Sebastian, Brandenburg Concerto No. 3 in G Major. c.1712

Beethoven, Ludwig von, Wellington’s Victory, opus 91, 1813

Arne, Thomas, Rule Britannia, Traditional, 1740

Zimmer, Hans, Progeny, Soundtrack to the movie Gladiator. Decca Recordings, 2000

Goldsmith, Jerry, The Bomb, Soundtrack to the movie The Sum of All Fears, Elektra Recordings, 2002

Gregorian Chant, Pueri Hebraeorum, Delta Recordings, 1994
Extras - Ozymandias
Ozymandias is the Greek name for the Egyptian king Rameses II (1304-1237 BC) whom, according to the Bible, Moses compelled to release the Hebrew slaves from bondage in Egypt. 
The Historian Diodorus Siculus (ca. 30 BC), records the inscription on the pedestal of his statue (at the Ramesseum, on the other side of the Nile river from Luxor) as "King of Kings am I, Osymandias. If anyone would know how great I am and where I lie, let him surpass one of my works."
Extras – Wellington’s Victory
Blah blah blah
Extras – Rule Britannia
Raw raw raw