Solution Manual for Comparative International Accounting, 13th Edition

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’s ManualComparative InternationalAccountingThirteenth editionChristopher NobesRobert ParkerSOLUTION MANUAL

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3ContentsPagesIntroduction to the Manual4Section IOutline answers to the end-of-chapter questions in the text5Part ISetting the scene61.Introduction72.Causes and examples of international differences113.International classification of financial reporting154.International harmonization18Part IIFinancial reporting by listed groups using IFRS or US GAAP225.The context of financial reporting by listed groups236.The requirements of International Financial Reporting Standards277.Different versions of IFRS practice308.Financial reporting in the United States329.Key financial reporting topics3510.Political lobbying on accounting standards – US, UK and internationalexperience39Part IIIChina and Japan4111.Financial reporting in China and Japan42Part IVFinancial reporting by individual companies4512.The context of financial reporting by individual companies4613.Harmonization and transition in Europe4814.Making accounting rules for unlisted business enterprises in Europe5115.Accounting rules and practices of individual companies in Europe54Part VGroup accounting issues in reporting by MNEs5616.Group accounting5717.Foreign currency translation6018.Segment reporting62Part VIMonitoring and enforcement6519.International auditing6620.Enforcement of financial reporting standards68Section IIExtra questions70Section IIIOutline answers to the questions in Section II76Section IVExamples of multiple-choice questions89Section VSuggested answers to multiple-choice questions103

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4Introduction to the ManualThis instructor’s manual is designed to be used for courses for whichComparative InternationalAccounting(thirteenth edition, 2016) is a text.Section I contains some suggestions for outline answers to the end-of-chapter questions that arenot answered in the text. Fuller answers would contain more details and references to books andarticles. The questions and outline answers relating to a chapter are not provided by the authorsof the chapters but by the editors, assisted by Lisa Evans of the University of Stirling.Section II provides some extra questions that require access to annual reports, available on theinternet. Section III provides some outline answers to these questions.Sections IV and V contain some suggestions for multiple-choice questions (and answers tothem) on various aspects of the material covered in the text. Again, Lisa Evans has contributedsome of these. Teachers with large classes may find these questions a helpful supplement to theessay and numerical questions. Teachers are asked to take the normal precaution of collectingthe multiple-choice question sheets after use by students so that questions do not gain widecurrency.Tables from the text are also available in the form of PowerPoint slides on the website.Christopher NobesRobert Parker

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5SECTION IOutline answers to theend-of-chapter questionsin the text

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6PART ISetting the scene

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7C H A P T E R1IntroductionOutline Answers to Questions1.1What effects have the major political events in the world since the end of the SecondWorld War had on accounting and financial reporting?[See Appendix in textbook.]1.2Why have the major accounting firms become ‘international’? From what countrieshave they mainly originated? Why?[See Appendix in textbook.]1.3What major contributions to accounting and its terminology have been madehistorically by the following countries: Italy, the United Kingdom, the United Statesand Japan?Italy’s main contribution has been double-entry bookkeeping. Practised in Italy from thethirteenth century onwards, double entry spread to other countries of Western Europe from thefifteenth century and later to the rest of the world (e.g. to Japan in the late nineteenth century).English and other languages have borrowed Italian bookkeeping and commercial terms. Theexamples given in the text are bank, capital, cash, debit, credit, folio and journal.The United Kingdom’s main contribution has been professional accountancy, which firstdeveloped in its modern form in Scotland, and in England and Wales in the nineteenth century.The supremacy of the British Empire and the export activities of British capital during thisperiod ensured that English became the business language of the world, a position confirmedand consolidated by the later growth of US influence.The United States’ main contributions have been made since the First World War. Consolidatedaccounting and standard costing, for example, are US ‘inventions’.Professional accountancy worldwide has become dominated by firms in which the largestoffices are American even when they have UK or other European origins. Many accountingterms in other languages have been borrowed or adapted from English usage, for example,‘audit’ and ‘cash flow’ in French and ‘accountant’ in Dutch. The terms ‘chartered accountant’(the United Kingdom) and ‘certified public accountant’ (the United States) have been adoptedby other English-speaking countries.Japan’s contribution is much more recent and results from the export of its management(including management accounting) practices. Accounting terms borrowed and translated fromJapanese into English (and other languages, sometimes through English) include ‘just-in-time’and ‘target costing’.

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Nobes and Parker,Comparative International Accounting, 13e,’s Manual81.4Which are the top three countries in respect of each of:(a) share of the world’s top 100 companies;(b) number of qualified accountants;(c) market capitalization of stock exchange?Why is the answer not the same for all three questions?(a) United States, United Kingdom, Germany(b) United States, United Kingdom, Brazil(c) United States, China, JapanThese answers are based on Tables 1.5, 1.10 and 1.11 in the text, the first and last of which canbe updated easily from the sources cited. The United States is the only country appearing in allthree options. Note the small size of the Japanese accountancy profession and the large numberof accountants in Brazil and China (a function of their large populations and their fast-growingeconomies, but perhaps also of the difficulty of defining a ‘qualified accountant’). The UnitedKingdom is second even after excluding the CIMA, which has nothing to do with audit. On theother hand, many ACCA members work outside of the United Kingdom.1.5What factors have made possible the ‘internationalization’ of the world’s stockmarkets?The main factors that have made possible the ‘internationalization’ of the world’s stock marketsare the deregulation of the leading national markets, the speed of financial innovation, advancesin communications technology and growing links between domestic and world markets.1.6What factors have led to the establishment of multinational enterprises (MNEs)?Dunning’s ‘eclectic paradigm’ stresses:(1)possession, or privileged access to, assets that provide a competitive advantageover local firms;(2)the extent to which it is appropriate, given the relative transaction costs, tointernalize the markets for these assets;(3)the extent to which there are advantages in locating production overseas rather thanmeeting the demand by exports.Note that these are economic explanations of a phenomenon that can be looked at more widely.

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Nobes and Parker,Comparative International Accounting, 13e,’s Manual91.7Which countries historically have been the home countries of MNEs? Are they thesame countries from which international accounting firms have originated?In addition to the sort of information in Table 1.10, one could use data on the countries of originof foreign investment. On that basis, according to Table 1.8 in the text, the top four homecountries were (in order of importance) as follows:1914United Kingdom, United States, Germany, France1938United Kingdom, United States, Netherlands, France1980United States, United Kingdom, Germany, Netherlands1990United States, United Kingdom, Japan, Germany2000United States, United Kingdom, Germany, France2009United States, United Kingdom, France, GermanyThe United Kingdom has remained an important home country despite dropping behind theUnited States; Germany has recovered a position lost in two world wars; the Netherlands is anexample of a small country whose companies can only grow by expanding overseas; JapaneseMNEs emerged strongly, but suffered setbacks in the late 1990s.These are not exactly the same countries from which international accounting firms haveoriginated. What is also needed is a strong domestic accountancy profession – whose growthmay depend on other factors as well, for example, the nature of the corporate financing system.(See, also, the answer to Question 1.2.)1.8Why are there more accountants per head of population in New Zealand than inFrance?Using the figures in the text (page 19), New Zealand had one professional accountant per 125persons and France had one per 3,158 persons! However, not all accountants are members of aprofessional body and the tasks carried out by an ‘accountant’ in one country (e.g. NewZealand) may be carried out in another country (e.g. France) by an ‘engineer’ or a ‘lawyer’.In general, Anglo-Saxon countries have more ‘accountants’ per head than other countries, butthe influence of international capital markets has increased the number of accountants in Francein recent decades.1.9Why are some EU companies listed on non-European (especially North American)stock exchanges?Companies seek listings on stock exchanges in order to raise capital and/or make their sharesmore widely available. They may also have a policy of being listed in the major countries inwhich they operate. For all of these reasons, EU companies have sought to be listed on a USexchange. Partly because of the cost of complying with US regulations (notably the SarbanesOxley Act), US listing has become less popular on the New York Stock Exchange. Companieshave to weigh up the costs and benefits of a US listing. De-listings exceeded new listings formuch of the first decade of the new millennium.

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Nobes and Parker,Comparative International Accounting, 13e,’s Manual101.10Why is English the leading language of international corporate financial reporting?English is the leading language of corporate financial reporting for two main reasons:(a) For historical reasons, English has been the world’s dominant language for the last hundredyears or so and(b) corporate financial reporting to shareholders and the terminology of accounting standardsthat forms a part of it originated in English-speaking countries, especially the United Statesand the United Kingdom.Note that US and UK terminology differ in many respects, as illustrated in Chapter 8.Continental European and Japanese financial statements are usually translated into US Englishrather than UK English. International accounting standards use a mixture of US and UKEnglish.

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11C H A P T E R2Causes and examples of international differencesOutline Answers to Questions2.1‘The basic cause of international differences in financial reporting practices is thedifferent degree of interference by governments in accounting.’ Discuss.[See Appendix in textbook.]2.2Assess the view that accidents of history are primarily responsible for internationaldifferences in corporate financial reporting.[See Appendix in textbook.]2.3If you were trying to predict which financial reporting regulations and practiceswould be found in various African countries, which non-accounting variables wouldyou measure?Most African countries were under the control of colonial powers for much of the twentiethcentury. Therefore, it is likely that the best predictor of accounting regulations or practices isthat such countries will have an old version of those of the colonial power. Furthermore, theAfrican country is likely to have inherited its style of legal system and accounting profession,which will reinforce the style of accounting.For example, one would expect a French influence on an African country to extend to the use ofan accounting plan, whereas British influence would lead to the use of ‘standards’, perhapsbased on British or IASB rules. See the paper by Elad (2015), referred to in the chapter.The size of equity market might not be a good predictor for these countries. Some formerBritish colonies may have had no substantial equity market but might have accounting rulessuitedto one.2.4Explain how international differences in the ownership and financing of companiescould lead to differences in financial reporting.The basic thesis is as follows:1.In all countries, the government will be interested in the calculation of profit inorder to calculate taxable income and prudently distributable profit.2.Financial reporting rules in a country tend to be driven by large companies becausethey exercise the greatest influence over the rule makers.3.In countries with large numbers of listed companies that have large numbers ofnon-director shareholders, there will be a demand for large quantities of published,audited financial information used for making financial decisions.

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Nobes and Parker,Comparative International Accounting, 13e,’s Manual124.In these countries, the government’s accounting/tax rules will be unsuitable forfinancial reporting, so accounting calculations will have to be done twice.5.In other countries, a few large ‘international’ companies may volunteer to use non-tax rules for group accounts.If, for example, the United Kingdom and the United States are countries as described in point 3,whereas Germany and Italy are not, the financial reporting will differ.2.5Do international differences in the rules for the calculation of taxable income causeaccounting differences, or is the influence the other way round?Using the answer to Question 2.4 (above), the conclusion would be that a basic split of countriesinto two groups is not caused by tax differences. The fact that some countries have financialreporting closely linked to tax is not caused by differences in the calculation of taxable income.However, at the next classification level down, we might be looking at a series of countries inall of which the tax rules and the financial reporting rules are closely linked. In that case,differences in tax rules would be likely to cause differences in financial reporting. For example,if tax rules allow the use of last-in first-out (LIFO) (as in Germany, Japan or Italy), financialreporting in those countries may be affected by companies choosing that practice.2.6Why is it difficult to establish a causal relationship between specific external factorsand international differences in accounting? Discuss the methodological problems inidentifying possible causes.Although a probable relationship between possible causal factors and their effects can beestablished, it is not possible to be certain that these factors have caused specific differences, orto what extent they may have done so. This is due to the fact that some variables, for exampleculture, are not easily measurable. Attempts, such as the one by Hofstede, to quantify such anintangible factor and to measure its impact, could only provide partial explanations (this isaccepted by Hofstede). Further, other researchers’ different definitions of culture and researchdesigns have come up with somewhat different results. Additionally, cultural data are usuallycollected for anthropological or sociological research, rather than specifically for researchrelated to accounting; and problems can arise if data are used for purposes other than those forwhich it was originally collected.Perhaps the greatest problem in linking causal factors to effects lies in the fact that mostvariables are not independent of each other. For example, it is difficult to separate the effects ofculture and language or of company financing and the influence and size of the profession.Also, many factors can represent both cause and effect. For example, taxation regulations arethe cause of some of the differences in accounting measurement regulations, while at the sametime the extent of the link between financial reporting and taxation represents one of the majordifferences between countries. Finally, the influences of the causal factors on accounting are notstatic, but their relative importance changes with time. Historical, economic or political eventscan introduce new factors or change their effect.

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Nobes and Parker,Comparative International Accounting, 13e,’s Manual132.7How do the causal factors discussed in the chapter affect corporate governancestructures in different countries?There is clearly a link between corporate governance structures and the ownership structures ofcompanies (see also the answer to Question 2.4). According to Zysman’s classification,companies in some countries (such as the United Kingdom or the United States) rely onfinancing through capital markets and individual shareholders, while in other countries theydepend on finance from governments (e.g. France and Japan) or from financial institutions (e.g.Germany).Therespectivecorporategovernancesystemsareinplacetohelpwiththegovernance of the companies on behalf of their stakeholders.In many continental European countries, companies have a two-tier board structure consistingof an executive board of directors and a supervisory board. The (non-executive) directors on thissupervisory board represent various groups of stakeholders, most notably the providers offinance (e.g. banks and major shareholders) and employees. This means that there is a reducedrequirement for the publication and auditing of objective/fair information, since interestedparties will have access to this information in their position as ‘insiders’. At the same time, it isin the interest of these stakeholders to emphasize the protection of creditors and the long-termsurvivalofthecompany(asopposedtoshort-termprofits),inotherwords,tofavourconservative accounting rules. In countries (such as the United Kingdom) where companieshave only a single (executive) board of directors and where stakeholders are much moredispersedandexternaltothecompany,thereisagreaterrequirementforaudited,fairinformation and disclosure.Another link exists between legal systems and the degree of government control as opposed toprivate sector regulation. For example, the two-tier board structure and the functions of eachboard are specified in detail in German legislation, while the United Kingdom prefers privatesector regulation.Note, however, that the differences described here are becoming less distinct. In the UnitedKingdom, for example, changes to corporate governance structures led to the appointment ofnon-executive directors and audit committees for large listed companies, while, in Germany, thedesire of large multinational companies to raise finance on international capital markets has ledto a move away from credit/insider financing and towards ‘fairer’ reporting rules.2.8Are the international differences in the formats of financial statements a majorobstacle to comparing the statements?In principle, international differences in the shape of balance sheets should not be a majorobstacle for international comparisons. Users of balance sheets can easily rearrange them to apreferred format. The most obvious difference is that, in some countries (e.g. the United States),balance sheets start with cash, whereas in other countries (e.g. in Europe), they start withintangible assets and move down in the order of increasing liquidity. Some balance sheets donot contain a current/non-current distinction, although equivalent information can usually befound in the notes. A more subtle difference is that some balance sheets combine all debitstogether (on the left or at the top), whereas others show the financial position by calculating netcurrent assets and then net assets. This difference might mislead users by focusing attention ondifferent totals.A more serious problem is that there are two basic styles of profit and loss account: by natureand by function. The ‘by nature’ format shows total wages, total depreciation and so on. For a

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Nobes and Parker,Comparative International Accounting, 13e,’s Manual14manufacturing industry, this means that cost of sales and gross profit are not shown. This formatis production oriented and is used in France, Germany, Italy and Spain (although many largeGerman companies use the other style). The ‘by function’ format combines expenses togetherby stage of production: manufacturing expenses, administration expenses, distribution expensesand so on. It therefore shows the calculation of gross profit. This is generally used in the UnitedStates and the United Kingdom.There may be enough information in the notes to a ‘by function’ format to enable the calculationof the ‘by nature’ figures, but the reverse is seldom the case. This is a problem for analysts inAnglo-Saxon equity markets who are trying to interpret continental European statements.

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15C H A P T E R3International classification of financial reportingOutline Answers to Questions3.1In what ways might classification be useful in any field of study? Use internationaldifferences in financial reporting as an illustration of your answer.[See Appendix in textbook.]3.2‘The essential problems of attempts to classify financial reporting practices acrossthe world are related to the suitability of the data upon which such classificationshave been based.’ Comment.[See Appendix in textbook.]3.3To what extent is differing national culture relevant to an understanding of thecauses of accounting differences and therefore to the process of classification ofcountries?‘Culture’ is a large word. In a sense, culture could be said to be the cause of internationalaccounting differences, if the word includes legal systems or capital markets. Taking a narrowermeaning, it might then be that such features as ‘conservatism’, ‘individuality’ or ‘respect forauthority’ are relevant as partial explanations of accounting differences. Of course, thesefeatures and the legal/capital/other institutional features and the accounting systems interact.Consequently, to some extent, each one causes the others.Gray (1988) proposes a relationship between the cultural factors and accounting, and he usesHofstede’s(1980)statisticalanalysisasabasisforamodel.Graysuggeststhatmeasurement/disclosure issues might usefully be separated from enforcement issues. However,the subsequent research to connect the cultural values to the real accounting systems has notbeen very successful. In principle, cultural differences would seem to be important in thepreparationofahypothesisforaclassification,ortheycouldbeusedtocheckthereasonableness of existing classifications.3.4How would you judge the relative success of attempts to provide classifications incomparative international accounting?One measure of ‘success’ might be whether the classification is reasonable, that is, does theclassification survive in the light of cultural and evolutionary considerations? For example, theDa Costaet al.(1978) classification that shows the United States and the United Kingdom asthe least alike countries in the world seems not to survive this test of reasonableness.Another indication of ‘success’ might be the clarity of the classification. Is it clear what is beingclassifiedandwhattherelationshipsbetweenthemembersofthepopulationare?Aclassification might be unsuccessful if it left out important members of the population or couldnot convincingly place a particular member in a unique location in the classification.

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Nobes and Parker,Comparative International Accounting, 13e,’s Manual16Of course, another indication of success would be if students, researchers or practitioners usedthe classification for various purposes. In academic terms, it might be successful if it wasreferred to frequently by other researchers.3.5Which of the main models of international classification of accounting do youprefer? Explain your reasoning.Students have a range of classifications to consider in the chapter and its reading list. Thereasoning for the choice might include the following issues:(a) coverage of countries;(b) plausibility in the light of culture, evolution, common sense;(c) clarity of what is being classified;(d) usefulness for learning or other purposes;(e) existence of hierarchy, rather than unconnected groups and(f)countries placed in unambiguous groups.3.6When producing classifications in the field of comparative international accounting,what should one be classifying?It would be possible to try to classify rule makers, rule enforcers, listed companies by disclosurepractices, all companies by measurement practices and so on. Exactly what it is that oneclassifies should depend on the purpose of the classification and the availability of suitable data.Another aspect of the question is whether one should classifyon the basis of culture,institutional factors and environmental backgrounds. In this case, one would not be classifying‘accounting’ but potential influences on accounting. Instead, one should presumably classify bymeasuring the characteristics of whatever it is that one is trying to classify. For example, aninternational classification of the accounting measurement practices of listed companies shouldpresumably be based on differences in those practices. The other background factors can beused to propose a hypothesis for classification or to check the reasonableness of a classification.3.7Do the accounting classifications suggest that there is or was such a thing as Anglo-Saxon accounting?The evidence from old classifications is ambiguous. Mueller (1967) puts the United Kingdomand the United States together; however, classifications based on Price Waterhouse data do not(see da Costaet al., 1978; Frank, 1979; Nair and Frank, 1980). Nobes (1981) suggests that thismay be caused by data problems. Nobes (1983) puts the United States and the United Kingdomtogether and Doupnik and Salter (1993) agree.More recently, Alexander and Archer (2000) and D’Arcy (2001) cast more doubt on an Anglo-Saxon grouping but Nobes (2003 and 2004) tries to disprove their arguments.The IASB can be seen as a proponent of capital-market-based accounting (or decision-usefulness accounting). Since this is set to dominate the world, at least for listed companies,perhaps the ‘Anglo-Saxon’ category has now become an inaccurate description.

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