Accounting Standards

Internationalization of Accounting Standards for Consolidation

The purpose of this paper will be to examine problems with internationalization

of accounting standards for consolidations on methods from an international

perspective - specifically, in the US and Japan. This is an especially timely

topic as standardization of financial markets is a prerequisite to international

free trade. Given the trends toward greater globalization, the motivations of

companies for seeking a uniform accounting system are strong. If companies have

to prepare their accounts according to several different sets of rules, in order

to communicate with investors in the various capital markets in which they

operate or for other national purposes, they incur a considerable cost penalty

and feel that money is wasted. This significantly limits global opportunities

for multinational businesses. Thus, it is important to understand what the

differences are between accounting standards, why they exist, and what problems

they pose.

It is worth noting that no one nation has a set of accounting rules which

appears to have such clear merits that they deserve adoption by the whole world.

No one country can claim to have a uniquely correct set of rules. The United

States has the longest history of standard setting. It has the largest standard

setting organization which is characterized by high standards of professionalism.

But, even the rules of the United States exhibit compromises between different

interests of a kind which could have reasonably been decided otherwise.

Furthermore, no unanimity exists among U.S. accountants about the merits of the

precise details of the compromises that have been struck. For example, the

recent discussion memorandum on consolidation outlines three different methods

which are GAAP in the US. No one nation has a clear right, on

the basis of existing achievements, to be regarded as predominant in accounting.

A great deal more work is needed by accountants from different countries before

we can reach the point of having a well founded basis for uniformity.

People who study differences among systems of accounting rules are inclined to

group countries into two categories. On the one hand, there are countries where

business finance is provided more by loans than by equity capital, where

accounting rules are dominated by taxation considerations and where legal

systems customarily incorporate codes with detailed rules for matters such as

accounting. The effect of taxation systems can be particularly pervasive. Often,

the taxation system effectively offers tax breaks for businesses by allowing

generous measurement of expenses and modest measurement of revenues on condition

that these measurements are used for general reporting purposes. Companies have

strong incentives to take advantage of these taxation concessions as real cash

is involved. But the penalty is a jack of full transparency for investors. Major

countries in this category include France, Germany and Japan.

The other group of countries is one in which equity sources of finance are more

important, accounting measurements are not dominated by taxation considerations

as tax breaks can be enjoyed independent of the way result are reported to

shareholders, and common law systems prevail. These countries generally have

some private sector system for setting accounting standards, often with a

general statutory framework. The role of equity finance is important because

capital market pressures are then brought to bear most strongly to improve the

quality of information available. The absence of detailed codes leaves

flexibility to respond to pressures. The United States, the United Kingdom,

Australia and the Netherlands are examples of countries in this category.

US consolidation policy begins with a definition of control. It is based on the

simple legal concept that the majority shareholder controls a company and that

even without a majority, a stockholder can exert significant influence. Thus,

consolidated financial statements reflect the financial position and results of

the firm as well as all subsidiaries upon which the firm may exert this

influence. Furthermore, the entity about which the consolidated financial

statements are prepared is not an entity in legal form. It is an abstraction

created solely for the purpose of these statements and does not have an ongoing

set of books as a normal corporation would. The details of

consolidation in the US are based on one of two theories as outlined in the

Discussion