International Accounting, 7/e
Frederick D.S. Choi
Gary K. Meek
Chapter 4:
Comparative Accounting: The
Americas and Asia
Choi/Meek, 7/e
1
Learning Objectives




Understand how financial reporting is regulated and
enforced in five countries of the Americas and Asia: the
U.S., Mexico, Japan, China, and India.
Describe the key similarities and differences among the
accounting systems of these five countries.
Describe the auditor-oversight mechanisms in these
five countries.
Explain the difference between principles-based and
rules-based accounting standards.
Choi/Meek, 7/e
2
Choi/Meek, 7/e
3
United States

Overview

Financial Accounting Standards Board (FASB)



Public Company Accounting Oversight Board (PCAOB)




Private-sector organization that determines accounting standards
The Securities and Exchange Commission (SEC) – a governmental
agency – underpins FASB’s authority
Private organization overseen by the SEC
Regulates audits and auditors of public companies
In 2002, took over the responsibility for setting auditing standards
from the American Institute of Certified Public Accountants (AICPA)
Financial statements “present fairly”

Choi/Meek, 7/e
Compliance with GAAP is the test for fair presentation
4
United States (contin)

Accounting regulation and enforcement

Securities and Exchange Commission




Financial Accounting Standards Board





Has jurisdiction over listed companies
Relies on private sector (FASB) to set accounting standards
Pressures FASB on the direction of accounting standards
Conceptual Framework is a significant feature of accounting standard setting
Standard setting in the U.S. is both political and technical
Generally accepted accounting principles (GAAP) are voluminous and detailed
Committed to converging U.S. GAAP with IFRS
Sarbanes-Oxley Act (2002)


Expanded requirements on corporate governance, disclosure and reporting, and the
regulation of the audit profession
Established PCAOB






Choi/Meek, 7/e
Sets standards for auditors
Oversees and inspects audit firms
Sanctions auditors for defective work
CEO and CFO must certify financial statements
Management must assess internal controls
Auditors express an opinion on internal controls
5
United States (contin)

Unusual features of U.S. financial reporting
 No federal law for preparing financial statements or having them
audited, except for listed companies
 LIFO
 Rules-based GAAP versus principles-based GAAP

Rules-based





Principles-based




Choi/Meek, 7/e
More specific requirements
More detailed implementation guidance
May result in more comparability
May foster “check-the-box” mentality
Sets forth broad objectives and fundamentals
Requires professional judgment for implementation
More flexible
May result in more divergence in practice
6
Choi/Meek, 7/e
7
Choi/Meek, 7/e
8
Mexico

Overview





Accounting is oriented toward fair presentation despite code law legal system
General price-level accounting (inflation-adjusted financial statements) was a
fundamental feature until 2008
Listed companies will use IFRS starting in 2012
Accounting profession is well-developed and influential in setting accounting and
auditing standards
Accounting regulation and enforcement

Council for Research and Development of Financial Information Standards
(CINIF)




Mexican Institute of Public Accounting


Independent public/private-sector partnership patterned after FASB and IASB
Determines Mexican GAAP
Aim – align Mexican GAAP with IFRS
Issues auditing standards through its Auditing Standards and Procedures
Commission
Unusual features of Mexican financial reporting

Financial statements are adjusted for inflation when three-year cumulative
inflation rate equals or exceeds 26 percent
Choi/Meek, 7/e
9
Japan

Overview


Strong bureaucratic control over business,
including accounting
Structural reforms under way



Keiretsu business model being transformed
Accounting “big bang” to improve transparency
Listed companies may voluntarily adopt IFRS starting in
2010 and required adoption expected around 2015
Choi/Meek, 7/e
10
Japan

Accounting regulation and enforcement

Triangular legal system




Accounting Standards Board of Japan






Provides guidance on conduct of audit
Business Accounting Council


Private-sector organization
Responsible for developing accounting standards
Modeled after FASB and IASB
Convergence with IFRS a major goal
Took over from the Business Accounting Council (a government agency) in 2001
Japanese Institute of Certified Public Accountants


Company Law

Administered by Ministry of Justice

Creditor and shareholder protection the fundamental principle
Securities and Exchange Law

Administered by Financial Services Agency

For publicly owned companies

Providing information for investment decision-making the main objective
Corporate Income Tax Law

Expenses must be booked to be claimed for tax purposes
Responsible for auditing standards
Certified Public Accountant and Auditing Oversight Board


Choi/Meek, 7/e
Government agency
Monitors and oversees the auditing profession
11
Japan (contin)

Unusual features of Japanese financial
reporting

Forecasts of cash flows, capital investments, and
production in statutory filings
Choi/Meek, 7/e
12
China

Overview


Embracing IFRS as part of structural market reforms
Ministry of Finance responsible for all aspects of
accounting and auditing
Choi/Meek, 7/e
13
China (contin)

Accounting regulation and enforcement

Chinese Accounting Standards Committee



Chinese Institute of Certified Public Accountants




Under Ministry of Finance
Regulates China’s two stock exchanges
Accounting Standards for Business Enterprises (ASBE)





Under the Ministry of Finance
Responsible for developing auditing standards and code of professional ethics
China Securities Regulatory Commission


Under the Ministry of Finance
Responsible for developing accounting standards
Comprehensive framework for accounting and financial reporting
Includes detailed implementation guidance on accounting issues
Largely in line with IFRS
First introduced in 1992 by Ministry of Finance and revised several times since
Unusual features of Chinese financial reporting

Startling changes since original ASBE in 1992
Choi/Meek, 7/e
14
India

Overview

British influence on accounting and auditing
For example:


Choi/Meek, 7/e
True and fair view
Independent accounting profession
15
India (contin)

Accounting regulation and enforcement

Companies Act


Broad framework for accounting and auditing
Institute of Chartered Accountants of India



Supervised by Ministry of Company Affairs, a government agency
Regulates profession of chartered accountancy
Responsible for developing both accounting and auditing standards



Securities and Exchange Board of India



Accounting Standards Board

Issues Indian Accounting Standards
Auditing and Assurance Standards Board

Issues Auditing and Assurance Standards
Agency of the Ministry of Finance
Oversees stock markets
Unusual features of Indian financial reporting

Some practices are “behind” developed world, but will roll out adoption of
IFRS starting in 2011
Choi/Meek, 7/e
16
Choi/Meek, 7/e
17
Other Chapter Exhibits
Choi/Meek, 7/e
18
Other Chapter Exhibits (contin)
Choi/Meek, 7/e
19