11
INTERNATIONAL VARIATIONS IN IFRS ADOPTION AND PRACTICE
2. INTERNATIONAL DIFFERENCES BEFORE IFRS
2.3 WHY OTHER FACTORS ARE LESS USEFUL
There are various explanations as to why other important
factors are less useful in explaining the main A/B split
between the classes of accounting.
International dierences in tax are of limited relevance in
causing the A/B split of Table 2.3 because Class A is
supposed to be unaected by tax issues. There are some
exceptions, such as the use of LIFO in the US for reporting
purposes, in order to be allowed to use LIFO for tax.
System IV nancing causes Class A accounting, which is
not designed to serve tax purposes. So, tax itself does not
explain why a country is in Class A or Class B. Of course,
within a set of countries that use Class B accounting,
dierences in tax are likely to be a major cause of
dierences in accounting.
International dierences in legal systems are also of only
limited relevance in causing the A/B split. Class A seems
to be associated with common law countries, and Class B
with Roman (codied) law countries, but there is not a
perfect correlation. In addition, IFRS was adopted in some
Roman law countries in the 1990s for the consolidated
statements of listed companies. The EU (a very Roman law
organisation) has adopted IFRS for this purpose.
Nonetheless, the national legal system still aects
monitoring and enforcement of accounting.
2.4 COLONIAL INFLUENCE
Colonial inheritance is probably the major explanatory
factor for the general system of nancial reporting in many
countries outside Europe. For example, it is easy to predict
how accounting will work in Gambia (a former British
colony) compared with neighbouring Senegal (a former
French colony). The same general point applies to
predicting how accounting will work in Singapore or New
Zealand, both of which must be expected to have British-
inuenced accounting. Colonial inheritance extends to
legal systems and to other background and cultural factors,
and not just to direct imports of accounting. Substantial
capital investment from another country may also lead to
accountants and accounting migrating with the capital.
Another related inuence on accounting is invasions, which
may have major eects, as is the case with Japanese,
4
French,
5
and German
6
accounting. When the invader
departs, however, any foreign accounting measures can be
gradually removed if they do not suit the country: Japan
closed down its Securities and Exchange Commission
4. Japan’s SEC, its structure of Securities Laws and its stock market owed
much to US inuence during the occupation following the Second World War.
5. The distinguishing feature of French accounting, the plan comptable,
was rst adopted when France was under German occupation.
6. The German accounting plan, though copied in France, was abolished
by the occupying Western powers after the Second World War. A version
survived in communist East Germany until reunication.
when the Americans left, whereas France retained its
German-inspired accounting plan in order to aid
reconstruction after the Second World War.
2.5 EMPIRICAL EVIDENCE
The two-class model outlined in section 2.2 has been
supported in the literature when researchers have
examined accounting practices.
7
It can also be seen in
measures of the dierences between various national
GAAPs and IFRS.
8
For example, in 2001, there were far
fewer dierences between UK GAAP and IFRS than there
were between French or German GAAP and IFRS.
Other empirical studies look at the eects of moving from
national GAAP to IFRS. Some of these look at ‘value
relevance’, ie whether IFRS accounting numbers are more
closely related than national GAAP to share price
movements. The evidence
9
suggests that there is not much
dierence between US GAAP and IFRS for this purpose, but
that IFRS is more value relevant than, for example, German
GAAP. This is consistent with the model proposed here.
2.6 THE MODEL DEVELOPED
Section 2.2’s simple model of the development of
accounting based on corporate nancing can now be
elaborated. This fuller model consists of a number of
linked ideas which will be expressed as propositions. Part
of the model can be shown in simplied form as in Figure
2.1, which amends a diagram suggested by Doupnik and
Salter (1995). The variables have been introduced in the
text above, but now need to be marshalled.
The rst variable is a country’s type of legal and
institutional culture, and the second is the strength of its
equity-outsider nancing. It can be assumed that some
cultures develop strong equity-outsider markets and
others do not. This is an issue for economic historians and
is not examined in detail in this report. As discussed
earlier, some countries have strong indigenous systems,
whereas others have imported systems that are still
dominated, or at least heavily inuenced, from outside.
This dichotomy will be expressed by using the labels SSC
(for self-sucient nancial and legal culture) and DC (for
dominated culture). For example, a DC country whose
colonial inheritance came from a country with one type of
nancial culture would tend to have that same nancial
culture. This variable could be measured in various ways,
for example by the number of decades since one country
gained political independence from another. Many
developed countries are SSC and many developing
countries are DC, but there are exceptions.
7. Doupnik and Salter (1993).
8. Ding et al. (2007).
9. The evidence is summarised by S.J. McLeay in Section 20.5 of C.W.
Nobes and R.H. Parker, Comparative International Accounting, Prentice Hall,
2010.