The Importance of International Accounting Differences in the Theory and Practice

Abstract

In this paper we will focus on why accounting and financial reporting systems developed differently in different countries. At the end we will pay attention to research approaches which try to explain, with the help of this national characteristics, the differences in the degree of accounting quality observed between various countries, even after these countries switched to mandatory compliance with IFRS for listed groups The limits mentioned are set by standard setters in different countries or international standard setters such as the IASB, which promulgate the methods of recognition and measurement, consolidation presentation and disclosure that the company must comply with. Some standard setters allow many options with regard to those issues. Other standard setters are strict and prescribe, for example one specific measurement method for a specific asset. Companies located in countries where standard setters allow many choices with regard to recognition and measurement issues have much more accounting flexibility in the presentation and valuation of this assets, liabilities, earnings and financial position. As a result, users of financial statements of companies located in countries with accounting flexibility will face more problems comparing the performance of different companies with one another than users of annual accounts of companies located in countries with very little accounting flexibility. Harmonization increases the comparability of financial information and creates more transparency for the users of financial information. As a result, the information asymmetry between stakeholders and the companies decreases. This will lead to a lower cost of capital for companies [see for example Leuz and Verrecchia, 2000, Botosan and Plumblee, 2002] and the increase in the market liquidity [Lambert et al. 2007, Daske et al. 2008]. Today the comparability of financial information published by listed groups might have improved, but the situation for the large majority of non listed companies [often SMEs] has not improved yet.