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Harmonisation of accounting standards: disclosure policies and practices of european commercial banks

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par Michael Forzeh Fossung
Gothenburg University - Master of Science (MSc) Accounting 2002

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2.2.3 Practical Differences In Accounting Development and Annual Accounts -An EC Perspective

Different EC countries have diverse influential factors in their accounting development process. While in some countries, legal and tax considerations, or traditions may be significant contributors; in others the stock and capital markets are of significant influence. The reasons for this may be diverse, but in some cases are meaningful. For example, in countries where the users of accounting information are significantly large corporations exposed to disclosure pressures from international capital markets, the capital market is of utmost importance to them, thus their disclosure need must be fully satisfied and bearing information for the financial statements. We have chosen banks from different accounting areas with different accounting backgrounds so as to show how such differences in accounting backgrounds may influence information presented in the financial statements. The Banks chosen are: Barclays and HSBC, having the Anglo Saxon accounting background SEB bank and Foreningsparbanken with the Nordic accounting background; and Deustche Bank and Dresdner Bank with the Germanic accounting background; In the United Kingdom, for example, the Company Act of 1985, which consolidated all previous existent Company Acts, includes accounting requirements for all limited liability companies.

In the United Kingdom, the stock exchange market and the accounting profession are also influential in the accounting regulatory process. UK annual reports and accounts consist of consolidated profit and loss accounts, a balance sheet and a cash flow statement. To assess a review of operations on a yearly basis, a director's report is necessarily always included. In consolidation practices, the purchase method is usually followed though in some cases, and merger accounting or pooling method may be required. With regards to their measurement practices, the UK applies a conservative approach than most Anglo Saxon countries where there is constant revaluations of assets like land and buildings to market values. Inventory cost is also determined using the first-in-first-out method (FIFO) permitted for tax purposes, while the last-in-first-out (LIFO) method is not allowed.

In Sweden, for instance, the development of accounting has been strongly influenced by legal and taxation requirements. There is also a tradition of involving the accounting profession in the standard setting process. (Radebaugh and Gray, 1997). Sample Swedish annual reports and accounts always consists of a consolidated balance sheet, an income statement and a board a directors annual report. The parent company financial statement is also always provided. Valuations are sometimes on the basis of historical cost, although revaluations are sometimes permitted, especially in circumstances where valuations are materially in excess of book values.

Depreciation is mostly on a straight-line basis. Inventory cost is determined using the FIFO method. Research and development expenses are frequently capitalized and amortized over a period of five years, although in practice most companies charge research and development as an expense. The purchase method used in consolidation practices is consistent with the EU 7th Directives. Goodwill is written off immediately against reserves or amortized over its useful life. Foreign currency translation follows the closing rate method with the temporal method used in highly inflationary economies.

In the Germanic group of countries, accounting is greatly influenced by company law and taxation. The accounting profession and the stock market are relatively small and play a less influential role in these countries. The situation has changed in recent years where many German companies have gone to foreign stock markets for listings. The Germans have an attitude of presenting transparent and reliable financial information, while interpreting the EU Directives concept of true and fair view as carrying just that meaning. Tax rules dominate legal decisions on accounting issues and the development of accounting principles. German financial statements consist of a consolidated balance sheet and an income statement together with those of the parent. Regularly included are annual reports from the board of directors. The Information therein is frequently very detailed. The Germans are quite conservative in their measurement practices with historic cost accounting applied and revaluations not permitted. Inventory cost is measured with the average method, although LIFO and FIFO are frequently used especially when they correspond to physical usage. Research and development expenses are written off against reserves. The purchase method is used in business combinations and the pooling method is rarely used. No legal requirements exist for foreign currency translation (Radebaugh and Gray, 1997).

Although Radebaugh and Gray's classification may be a reliable basis for identifying differences in development process and the reasons for such differences, other authors have attempted to make what may be looked upon as a more reliable classification. In attempting to identify differences in annual accounts among EC nations, Nobes (1992) made his classification with respect to accounting harmonization in the European community and significant developmental processes by first examining areas where significant differences exist that have a major influence on accounting development. He identified the following areas: publication and audit; formats of accounts; conservatism in providing accounting information; fairness of published information; valuation bases; consolidation practices and others as being realized from different accounting backgrounds; hence, influencing the accounting development in those countries.

According to Nobes (1992), The history of consolidation practices is different among EC countries. In the United Kingdom, for example, consolidation accounting developed shortly after the First World War when holding companies became prevalent. In the Netherlands, for instance, consolidation was practiced, as early as the 1930s but, in most of continental Europe, consolidation is a recent development dating from when most countries adopted the seventh directive in 1985.

In France, for example, there was no law on consolidation until 1985, while in West Germany, consolidation dates back to 1965 when it was made obligatory for public companies. It has been noted that in countries where there has been no tradition of professional accounting measurement standards, and in cases where there were no law or tax requirements, practice has been varied. Valuation bases are another area with significant differences in accounting development. The use of replacement costs and other current values at the expense of historic cost varies greatly among EC countries. In the Netherlands, some Dutch companies have used replacement cost as far back as the 1950s. In the United Kingdom, for instance, there have been frequent revaluations to market values. These fundamental differences in methods of asset valuation made international comparisons difficult for net assets, shareholders funds and many ratios (Nobes, 1992). Looking at the way accounting information is published, there have also been significant differences. In the Anglo-Saxon and many other English speaking countries, accounts have always been published after they have been liquidated. Looking at the UK back in the 19th century, publication and audit have always been required for all companies except dormant ones. The published annual accounts have been available to the public.

Conservatism has also influenced accounting values in different ways. In Germany, for example, bankers have a long history of trying to satisfy that long-term loans were safe by disclosing only information that protects such values; while in the United Kingdom, reference is usually made to the concept of prudence. As far as the issue of fairness in financial information is concerned, corporate laws in UK, Ireland, and The Netherlands were the only ones in EC countries requiring fairness in audited financial statements. This was incorporated in the 4th Directives as a «true and fair view». In German financial statements, there is still little preference for fairness. Financial reporting is still an exercise of accurate bookkeeping, which has to satisfy detailed rules and the scrutiny of the tax inspector (Nobes, 1992). Unlike Radebaugh and Gray, Nobes identifies principal differences among EC countries in what he calls a two-group classification. He identified specific features in their background, general accounting features, specific accounting features and examples of EC countries that follow this system. See table figure 3 below.



English law Roman law

Large, old and strong profession Small young and weak profession.

Large stock exchange Small stock exchange


Fair Legal

Shareholder orientation Creditor orientation

Disclosure Secrecy

Tax rules separate Tax dominated

Substance over form Form over substance

Professional standards Government rules


Percentage of completion method Completed contract method

Depreciation over useful lives Depreciation by tax rules

No legal reserves Legal reserves

Finance leases capitalized No lease capitalization

Funds or cash statements No funds flow statements.

Earnings per share disclosed No earnings per share disclosed

No secret reserves Secret reserves.

No tax induced provision Tax induced provisions

Preliminary expenses expensed Preliminary expenses capitalized












Source: Adapted from Nobes, (1992) «Accounting harmonization in Europe: process, progress and prospects and survey data.»

It is important to mention the fact that in choosing of our case study, we have used Radebaugh and Grays's analysis, by sub-classifying countries, cultural groups. They based their differentiation on several values that influenced accounting development and differences. Values looked upon in detail included a country's culture, capital markets and the stock exchange development, the influences of taxation, the accounting profession and others.

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