markets in these countries. Post-Enron, the preeminence of the U.S. standard-setting
model has been challenged and the pendulum is swinging more toward a greater de-
sire for principles rather than rules. In this regard, IFRS is considered principles
based whereas U.S. GAAP are more rules orientated through being more prescrip-
tive, detailed, and comprehensive.
Other countries have somewhat less extensive bodies of promulgated standards.
One explanation for this may be found in those countries where companies are re-
quired to conform their accounting books and statements to the books and records
utilized for income tax-reporting purposes. Examples of countries in which there ex-
ists a high degree of book and tax conformity are France, Germany, and Japan. The
standards in these countries require companies to take book deductions for items
such as reserves, write-offs, and accelerated depreciation that are deducted on their
tax returns. As a result, given the natural bias to minimize taxes, their reported earn-
ings are generally less than if the book and tax conformity requirement did not exist.
Over the past five years, globalization of the capital markets has continued to exert
its influence forcefully on financial reporting. In relation to the United States, this de-
bate is focused on the SEC’s financial reporting requirements and, in particular, the
requirement that non-U.S. registrants either prepare their financial statements in ac-
cordance with U.S. GAAP or reconcile them thereto. Some argue that these regula-
tions are acting as a barrier to the formation of capital as evidenced by the fact that
there are apparently more than 2,000 companies that have not yet entered the U.S.
public markets, even though they would meet the listing criteria of the New York
Stock Exchange (NYSE). Shares in many of these companies, which include Bayer
of Germany and Nestle of Switzerland, are actively traded in an over-the-counter
“pink” sheet market in the United States for which there is no volume reporting and
no real time quotes. Thus, there is an enormous number of high-quality companies
that may find the U.S. public markets attractive.
With so much cross-border activity, strong pressures have emerged for there to be
one financial language around the world. This goal has been embraced by the Inter-
national Accounting Standards Committee (IASC), the predecessor to the Interna-
tional Accounting Standards Board (IASB), which has clearly emerged with the lead-
ership role in the international standard-setting process. The IASB and the
International Organization of Securities Commissions (IOSCO) have announced that
their mutual goal is for financial statements prepared in accordance with IAS to be
accepted worldwide (including the United States) in cross-border offerings and list-
ings as an alternative to the use of national accounting standards. This promises to be
a very significant development having important worldwide ramifications from a fi-
nancial reporting standpoint.
12.6 FINANCIAL STATEMENT EFFECTS OF DIFFERENCES IN ACCOUNTING
PRINCIPLES. In this section, we will discuss, evaluate, and assess 12 specific areas
of accounting where diversity exists, and we will discuss the differences in account-
ing principles practiced in a representative group of countries. As can be seen in Ex-
hibit 12.2, there is a good deal of diversity among countries’ standards even in light
of the recent efforts toward the achievement of financial reporting harmonization. In
addition, we will examine the theoretical bases for the different methods adopted, and
we will explore why countries use certain rules. The accounting principles that will
be discussed are:
12 • 10 SUMMARY OF ACCOUNTING PRINCIPLE DIFFERENCES