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International Accounting, 6/eFrederick D.S. Choi

Gary K. Meek

Chapter 3: Comparative Accounting: Europe

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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.

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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.

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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

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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

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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

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France (contin) Unusual features of French financial reporting

Must report results of environmental activities Reports aimed at preventing bankruptcies Social report

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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

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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

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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

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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

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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

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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

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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

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Other Chapter Exhibits

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Other Chapter Exhibits (contin)

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Other Chapter Exhibits (contin)