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#1 HOW DOES WORLDWIDE ACCOUNTING DIVERSITY CHALLENGEMULTINATIONAL CORPORATIONS?
International Financial Management ⇒ Activity of management which is concerned with the
planning, procuring and controlling of the firm’s financial resources globally
Multinational corporations (MNCs) ⇒ Corporate organization that owns or controls the
production of goods or services in one or more countries other than its home country (Pitelis et
al., 2000).
● E.g. Unilever and Shell → their base is in the NL, but they have subsidiaries, run their
business, and make deliveries to different parts of the world, and hence they are
multinational corporations. Today, there are more than 60,000 MNCs doing business
around the world.
MNCs are the major participants in the International financial management:
● Top 10 MNCs’ revenues and size account for the sum of more than 180 countries’ GDP,
including developed countries such as Ireland and South Korea
● More importantly, the MNCs are not just bigger in terms of size, they are also the engine
to push the innovation of the world.
● Top 100 MNCs account for over ⅓ of R&D investments worldwide (UNCTAD, 2019).
MNCs are therefore not just about making money, but in some way they also push the
innovation and R&D of countries and the world.
MNCs’ ACCOUNTING AND CONTROL ISSUES:
Subsidiaries spread across the globe → When an MNC has a different subsidiary in another
country, the information of that subsidiary has to be prepared following the accounting
requirement of that country.
● Therefore, the accounting standard of the subsidiary in that country is not the same as
the parent firm’s accounting standards, meaning there could be an issue as the
information provided by the subsidiary will have to be different, thus the MNC will have to
get exposure to different accounting systems which will take time and money for the
accountants of the MNC to integrate the multiple sources of accounting information.
● This depicts the complexity of accounting and control systems and the problems
of accounting diversity that MNCs face.
I. Evidence of Accounting Diversity
Presentation differences (Format of statements) → How items will be organized and
structured in the income statement or the balance sheet statement
, 1. In British accounting (left) → Accounts are sorted in the reverse order of liquidity
(i.e. non-current assets to current assets; non-current liabilities to current liabilities)
○ In the U.S. (right) → The order is to the contrary, where most liquid assets are
ordered from current to non-current assets
2. In British accounting → You have the number of Footnotes, because by referencing
the footnote you can understand how the values are calculated and what is the definition
of each asset.
○ In the US accounting → You have the definitions as well, without the footnotes
but mentioned in the index.
3. In the British accounting → They present Property, plant and equipment long-term
assets in net value and don’t include the gross value or the accumulated depreciation
value.
○ In US accounting → They include the property, plant, and equipment in gross
value (1st line), as well as the depreciation (2nd line) and net value (3rd line →
gross line-depreciation = net value).
Terminology differences (names of accounts) → The names of the accounts could be
different across countries and companies.
E.g. UK/US comparative accounting terms
UK terms US terms
Trade Debtors Accounts receivable
Stocks Inventories
, Creditors Liabilities
Shareholders funds Stockholders equity
Ordinary shares Common stock
Share premium account Additional paid-in capital
Profit and loss account Retained earnings
Turnover Sales or Revenue
Differences in recognition and measurement rules (definitions of accounts) → Key part
about the accounting diversity.
● Recognition → How do we determine the nature of a transaction? Is the transaction
listing a revenue or expense to the company or nothing?
● Measurement → Is about the money and the number. If we can determine whether we
are dealing with a transaction, how much of the revenue or how much of the expenses
would be recognized?
How costs of inventories are recognized? → Timing of salling may not be the same as time
of material purchase
● LIFO (Last in First Out) → Most recently acquired inventory is sold first (may be due to
inflation). When sales exceed purchases resulting in liquidation of inventory from
previous period that was not sold
○ Higher expenses and therefore less income than FIFO. This comes with
benefits such as lower tax. However, not allowed in all countries
● FIFO (First in First out) → When you recognize expenses, recognize the inventories
that were purchased earlier
US GAAP vs IFRS
Items US GAAP IFRS
Inventory costing LIFO is allowed LIFO is not allowed
Inventory Reversals are prohibited Reversals (limited to the amount of
write-downs the original write-down) can be
recovered
Research and Both research costs and Research costs are expensed;
Development development costs are Development costs are capitalized
Costs expensed as incurred (based on some condition)
- LIFO is used best when high inflation periods because it shows lower net income
, Sources of Accounting Diversity
I. INSTITUTIONAL CHARACTERISTICS:
1. Legal systems
CODE LAW (Civil Law) → Accounting in code law countries is legislated, so accounting
professions may have less influence over the accounting rules
● Accounting rules tend to be general, since congressmen and legal persons are not very
specialized in accounting & Information disclosures tend to be low
COMMON LAW (Anglo-Saxon Law) → Accounting rules in common law countries are generally
determined by the non-government accounting professions (accounting rules are more specific)
● Accounting rules in common law countries are characterized with fair presentation, high
transparency and full disclosure.
2. Taxation
● In some countries, accounting serves for taxation (e.g. Germany, Poland) → it is not just
concerned by the companies, but also concerned by the countries/governments.
● If accounting rules or principles align with tax rules, then
○ Net income may lose its ability to reflect the economic reality
○ Think about a case of car depreciation
3. Providers of financing
Debt holders (creditors) and shareholders have different interests in the company.
● Debt holders will only care about whether the interest payment and principle can be
claimed back in a timely manner and in a safe way. They care about the downside risk of
the company (focus on the balance sheet statement more than the income statement)-
whether the company will go bankrupt or not because if the company goes bankrupt,
they cannot claim back its principles or interest.
● Equity investors and shareholders care about whether the dividends will be paid and
whether the share price will be higher or lower, which is determined by the growth and
performance of the firm. Shareholders will care about the growth of the company,
therefore they care about the balance sheet statement and income statement)
Debt versus Equity:
Debt Financing Equity Financing
Financing from family members, banks, state Financing from investors (potential
(creditors) shareholders)
Creditors are in company’s board and/or have All shareholders cannot be in company’s board
direct access to private information about the and they do not have direct access to
company information
Firms experience less accountability pressures Firms provide extensive accounting disclosure
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