International Accounting, 7/e

Frederick D.S. Choi

Gary K. Meek

Chapter 3:
Comparative Accounting:
Europe
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Learning Objectives

Understand how financial reporting is regulated and

enforced in five European countries: France, Germany,
the Czech Republic, the Netherlands, and the U.K.
Describe the key similarities and differences between
the accounting systems of these five countries.
Identify the use of International Financial Reporting
Standards at the levels of the individual company and
the consolidated financial statements in these five
countries.
Describe the audit-oversight mechanisms in these five
countries.

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IFRS in the European Union

Starting

in 2005, all EU-listed companies

must follow IFRS in their consolidated
financial statements.
Generally, IFRS consolidated statements are
permitted for non-listed companies.
Requirements for individual company
financial statements vary IFRS may be
required, allowed, or prohibited.
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IFRS (contin)

IFRS are based on fair presentation principles

IFRS may be overridden in rare circumstances to achieve fair
presentation
Accounting measurements

Business combinations purchase accounting

Goodwill annual impairments test
Investments in associates equity method
Translation of financial statements of foreign operations functional
currency concept
Assets valued at historical cost or fair value
Research costs expensed; development costs capitalized
LIFO not allowed
Finance leases capitalized; operating leases expensed
Provisions recognized when probable and estimable
Deferred taxes recognized in full, using the liability method, for temporary
differences between the carrying amount and tax base

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France

Overview

The Plan national uniform chart of accounts

(national accounting code)

Objectives and principles of financial reporting

Definitions of elements
Recognition and valuation rules
Standardized chart of accounts
Model financial statements

Other influences on French accounting rules

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Commercial legislation (Code de Commerce)

Tax laws

France (contin)

Accounting regulation and enforcement

CNC National Accounting Board

Keeps plan current

Makes rulings and recommendations on accounting issues

CRC Accounting Regulation Committee

Converts CNC rulings and recommendations into binding regulations

ANC National Accounting Authority

Will replace CNC and CRC as the national standard setter

AMF Financial Markets Authority

Supervises securities markets

OEC Institute of Public Accountants

Represents the accounting profession

Members prepare financial statements, and provide tax, information systems, and management
advisory services
CNCC National Institute of Statutory Auditors

Members audit and give an opinion on financial statements

Must report criminal acts to the High Council of External Auditors

Substantial overlap in OEC and CNCC membership

Statutory auditors not allowed to provide accounting services to the same client

AMF oversees audits of listed companies, but relies on a committee of the CNCC to conduct auditquality reviews

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France (contin)

Unusual features of French financial reporting

Must report results of environmental activities

Reports aimed at preventing bankruptcies
Social report

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Germany

Overview

Creditor protection

Influence of tax law

Conservative balance sheet valuations

Reserves as protection against unforeseen risks and
insolvency
Accounting is designed to compute a prudent income amount
that leaves creditors unharmed after distributions are made to
owners
Determination principle: taxable income is determined by
what is booked in a companys financial records

Reliance on statutes and court decisions

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Germany (contin)

Accounting regulation and enforcement

German Commercial Code (HGB)

German Accounting Standards Board

Enforces compliance with German financial reporting requirements

and IFRS by listed companies

Chamber of Accountants

Develops recommendations for consolidated financial statements

Financial Reporting Enforcement Panel

Applies to all business entities

Oversees WPs (enterprise examiners)

Unusual features of German financial reporting

Auditors private report to board of directors and supervisory

board on companys future prospects

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Czech Republic

Overview

Accounting changed directions several times in 20th century, reflecting the

countrys political history

Accounting regulation and enforcement

Ministry of Finance

Oversees Commercial Code (modeled on German commercial law)

Oversees Accountancy Act (based on EU directives)

Chamber of Auditors

Until end of World War II German influences

After World War II Soviet influences
After 1989 EU influences (market orientation)

Oversees auditors

Unusual features of Czech financial reporting

Form over substance still applies in some cases

Still implementing accounting practices consistent with EU directives and
IFRS

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The Netherlands

Overview

Accounting paradoxes

Permissive requirements, but high professional practice

standards
Code law country whose accounting is oriented toward fair
presentation
Fair presentation orientation developed without a strong stock
market

Other influences on Dutch accounting

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U.K. and U.S. as much as continental European countries

Accounting profession
Business economics (microeconomics approach)
IASB
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The Netherlands (contin)

Accounting regulation and enforcement

Company law Act on Annual Financial Statements
Dutch Accounting Standards Board

Netherlands Authority for the Financial Markets

Enforces compliance with accounting requirements

NIvRA

Supervises operations of securities markets

Oversees financial reporting and auditing of listed companies

Enterprise Chamber

Develops guidelines on generally acceptable accounting standards

Oversees auditing profession

Unusual features of Dutch financial reporting

Financial statements may be in Dutch, French, German, or English
Other than consolidated financial statements of Dutch listed companies, financial
statements may be based on Dutch guidelines, IFRS, or a combination
Flexible accounting measurements

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Current values are permitted for tangible assets

Opportunities for income smoothing
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United Kingdom
Overview

Legacy of British accounting

First country to develop an accountancy profession
Fair presentation (true and fair view)
Exported British accounting around the world

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United Kingdom (contin)

Accounting regulation and enforcement

Companies Act

Broad financial reporting framework

Financial Reporting Council oversees:

Accounting Standards Board

Auditing Practices Board

Enforces compliance with FRSs

Professional Oversight Board

Issues auditing standards

Financial Reporting Review Panel

Issues Financial Reporting Standards (FRSs)

UITF clarifies FRSs

Oversees auditing profession

Audit Inspection Unit

Monitors the audit of listed companies

Accountancy Investigation and Discipline Board

Investigates and disciplines accountants for professional misconduct

Unusual features of British accounting

True and fair override

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Other Chapter Exhibits

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Other Chapter Exhibits (contin)

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Other Chapter Exhibits (contin)

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