Transnational Accounting

The following pages present two reference matrices. While the first (see p. 9–37) encompasses the recognition and valuation rules, the second (see p. 39–67) deals with principles of consolidation applicable within the 14 countries included in the TRANSACC volumes (Australia, Austria, Belgium, Canada, Denmark, France, Germany, Japan, Netherlands, Spain, Sweden, Switzerland, United Kingdom, United States of America) as well as the IASC.

Financial accounting and reporting in Australia are subject to government legislation and professional self-regulation and in both cases, the process is complicated by institutional arrangements.

The timing of the release of the first set of consolidated accounts in Australia is not clear. Gibson (1971) suggests the date was 1935 whereas Whittred (1988) gives the date as 1931. Irrespective of who is correct, it would seem that the use of group accounts in Australia lagged some ten years behind the release in the United Kingdom of the consolidated accounts of Nobel Industries reported by Nobes and Parker (1979).

The main influence on Austrian financial accounting and reporting has been federal law. The first regulations can be traced back to the eighteenth century. (For a short but informative survey see Nowotny and Gruber, 1993, p. 295.) In substance they followed the French ordonnance de commerce of 1673. The main objective was to protect creditors from being defrauded by the owners of the firms. Accordingly, these regulations were incorporated into penal codes. From 1768 on, all merchants were required to maintain records. The first distinct accounting regulations are to be found in the General Commercial Code (Allgemeines Handelsgesetzbuch, ADHGB), enacted in 1863, which included some rules on inventory-taking, bookkeeping and the preparation of balance sheets. Rules on distributable profit were adopted in 1899. The General Commercial Code was followed in 1938 by the German Commercial Code (Handelsgesetzbuch, HGB) of 1897 after the annexation of Austria by Germany. With some revisions the code is still in force. The General Commercial Code included ten sections which dealt with bookkeeping, inventory-taking and valuation in a very general way; detailed rules had to be deduced from the principles of proper bookkeeping and accounting (Grundsätze ordnungsmäßiger Buchführung, GoB). All enterprises (except the smallest businesses) had to follow these rules.

Until the passage of the Financial Reporting Act (Rechnungslegungsgesetz, RLG) in 1990 Austrian law made no provision for the regulation of group accounts. The need for changes in the legislation first became evident in the late 1970s and early 1980s with a succession of company failures. In every case the management had maintained an appearance of financial health and stability for several years by selling goods within the group, issuing shares to other companies in the group, and similar devices (Seicht, 1982, p. 5). Subsequent calls for a legal requirement to prepare consolidated accounts became increasingly strident. After promulgating amendments of the bankruptcy code in 1980 and of company law in 1982, the legislators started looking seriously at group accounts.

By nature business enterprises in Belgium were for long a mixture of a few large and many small or medium-sized companies. The shares of the large companies were concentrated in the hands of a few wealthy families. This meant that only a few shares in a small number of companies were (and are) available for trading on the stock exchange. Shareholders with substantial holdings obtained financial information about a company by means other than published reports. They would usually be represented on the board of directors. Moreover, most small or medium-sized companies were family-owned. Family shareholder groups could easily obtain all the financial information they wanted from the management of the company (Timmerman, 1980, p. 53).

Belgian companies have never taken a pioneering role in the field of consolidated or group accounting practices. Neither has Belgian legislation taken a pro-active stand on consolidation matters.

Canadian accounting developed from the roots of private enterprise accounting as it developed in major Western creditor countries, first the United Kingdom and then the United States. The viewpoint underlying accounting and financial reporting is almost entirely that of the owners of the enterprise — the proprietorship approach.

The nature of Canadian business operations has been significantly influenced by the geographic and legal characteristics of the country. Canada covers the largest land mass of any country in the world (now that the Soviet Union has ceased to exist as a unified country). Although the geography is vast, the population of about 27 million is smaller than that of many European countries. Roughly 90 per cent of the population lives within 100 kilometres of the United States border. Therefore, in economic terms, Canada is a country that measures 5,000 kilometres by 100 kilometres.

Denmark adopted its first Limited Companies Act in 1917. Among its provisions was the requirement that audited annual accounts be open for public inspection, to be ensured by submission of the accounts to a registrar, except for small companies. This Act was followed by several others, though Danish legislative power cannot be said to have intervened in financial accounting to any extensive degree. All acts relating to financial accounting have in one way or another been based on a general clause, which to a great extent has acted as a higher regulatory instrument dispensing with detailed legislation.

In Denmark the need for accounts to be prepared on a group basis had already been stressed before the Second World War. Generally, public discussion of accounting matters at that time was rare in Denmark. Most discussions took place within the accounting profession. The topics relating to group accounting were no exception, and the articles published in the professional journal Revision & Regnskabsvæsen (Auditing & Accounting) took the form of presentations by individuals which tended to express the opinions of the Institute rather than those of more interested parties. Thus, relatively little information is publicly available concerning the debate over group accounts.

The harmonization of accounting standards is not specifically provided for in the EC Treaty. It is part of the company law harmonization programme based on the EC Treaty Art. 54, para. 3(g).

During the negotiations which led to the adoption of the Fourth Directive on the annual accounts of limited liability companies, it was already pointed out that when a company belonged to a group, the annual accounts of that company alone would not be sufficient to give a true and fair view of its position. The Preamble to the Fourth Directive (Recital 12) therefore refers to the adoption of another Directive which would deal with group accounts in order to give ‘a true and fair view of the activities of the group as a whole’. Several provisions of the Fourth Directive were merely temporary ‘until the entry into force of a Council Directive on consolidated accounts’ or Tending subsequent coordination’ (Fourth Directive Arts 56 to 59 and 61, redrafted and made permanent by Seventh Directive Arts 42 to 46).

The first accounting rules appeared under Colbert, Minister of Louis XIV (seventeenth century). Jacques Savary (a merchant who became rich and went into finance) contributed to the building of the new ‘Code Marchand’. This latter, best known under the name of ‘Ordonnance de Colbert’ (1673), made use of the ‘livres de commerce’ compulsory for the merchants and enabled the ‘Journal’ book to be used as evidence.

In many books of international accounting, France is portrayed as having a highly regulated and uniform accounting system dominated by a mandatory accounting plan which forms an essential tool in government economic planning. Following recent publications this traditional picture has been questioned. In one of the most comprehensive and detailed books on French accounting the two authors emphasize that in France ‘the web of regulations is very complex indeed, with one set of regulations dealing with individual accounts and another dealing with group accounts’ (Scheid and Walton, 1992, p. 6).

Under the German legal system, financial accounting and reporting are subject to detailed regulation. The framework of law may be divided into the general principles that affect all forms of business organization and those relating specifically to legal form, size, industry sector and stock exchange listing. The general rules that touch upon every type of business are to be found in the First Section of the Third Book of the Commercial Code (Handelsgesetzbuch, HGB), §§ 238–63. Further regulation is embodied in subsequent sections of the code (HGB §§ 264–89 for limited companies, §§ 336–9 for registered co-operatives and §§ 340–340o for banks) and in specific Acts.

The 1920s and 1930s were a particularly fruitful period for German accounting, including group accounting. In several journal articles and in the books of Hoffmann (1930) and Bores (1935) methods for the preparation of consolidated accounts were developed, building particularly on work done in America in the twenties. As in other areas of accounting, e.g. in the development of methods of capital maintenance and of inflation accounting, the technical discussion was inspired by the needs of business. Already at that time, according to statistical surveys made in 1927, 60 per cent of the subscribed capital of joint stock corporations was bound up in groups. An appreciation of the extent of groups of companies in the German economy at this time is given in the survey ‘Groups, syndicates and similar combinations’ (see Statistisches Reichsamt, 1927; also Hirschstein, 1927). Many of these groups already prepared group accounts (see the examples mentioned in Bores, 1935).

The first significant attempt to harmonize international accounting practices was the establishment in 1967 of the Accountants’ International Study Group by representatives of certain professional accountancy bodies in Canada, the United Kingdom and the United States of America. The Group published a number of comparative studies of accounting and auditing requirements and practices in the three countries. The Group was wound up following the establishment of the International Accounting Standards Committee (IASC).

International Accounting Standard (IAS) 3, Consolidated Financial Statements, was issued in 1976. It dealt with the presentation of consolidated financial statements and established a standard for the use of the equity method for investments in associates. IAS 3 had considerable influence in many parts of the world. In particular it was used in the development of the Seventh Directive on Consolidated Accounts. IAS 3 was also used by a number of EU Member States in their implementation of the Seventh Directive.

The establishment of a modern banking industry, supported by the power of active government leadership, played a pivotal role in the modernization of the Japanese economy during the Meiji Era. This establishment, privately managed, but overseen by the government, was achieved following the then most advanced methods. The bookkeeping system of the First National Bank (the first Japanese company, founded in 1873) was modelled on the National Bank Act of the United States and bank accounting practices of England. The establishment of the bank accounting system, done mainly to support economic development, resulted in the development of modern Japanese accounting. To prepare the framework for future development and preceding the founding of the first company, the National Bank Act had been promulgated in November 1872, and included three requirements that formed the basis of the accounting system of the First National Bank: Preparation of books of account and periodical reports.Periodic settlements.Examination of the bank by the Ministry of Finance.

In Japan, the systematization of group accounts occurred much later than in Europe and America. The main reason for this was the policy of the General Headquarters of the United Nations of democratization, under which the zaibatsu (see IV. 1) were dissolved and private monopolies were outlawed. Since the establishment of simple holding companies was prohibited, there was little need for group accounts.

The development of financial accounting and reporting in the Netherlands is only partly explained by developing legislation concerning financial reporting. The first legal requirements concerning financial reporting were set out in the Commercial Code of 1929. That code, however, contained only one article concerning annual financial statements. Among its provisions was a general clause concerning valuation. The law required the application of sound business practices. Some very broad rules concerning the system of headings within the balance sheet were also included.

Dutch legislation regarding financial accounts and the Guidelines of the Council on Annual Reporting (Raad voor de Jaarverslaggeving, RJ) initially relate to the individual accounts of a parent company. Consolidated financial statements generally have to be prepared for the group of entities. The consolidated financial statements are regarded by interested parties as more important than the individual accounts of the parent company. However, in legal terms, the consolidated financial statements are regarded as part of the notes on the financial statements of the parent company.

Spanish accounting regulation is eminently public, since financial statements are drawn up and presented essentially in line with statutory accounting standards which are set forth in legislative instruments of varying status — Law (Ley), Royal Decree (Real Decreto, RD), Ministerial Order (Orden Ministerial), Resolution (Resolución) or Circular (Circular). The standards are drawn up by various government bodies. They are published in the Official Gazette (Boletín Oficial del Estado, BOE) and in the Official Gazette of the Accounting and Audit Institute (Boletín Oficial del Instituto de Contabilidad y Auditoria de Cuentas, BOICAC) in the case of resolutions issued by the institute. The following bodies are currently empowered to issue accounting regulations: The Parliament and Council of Ministers (in the form of laws and Royal Decrees).The Ministry of Economic and Financial Affairs.The Accounting and Audit Institute (Instituto de Contabilidad y Auditoria de Cuentas, ICAC). Additionally, in association with the ICAC, the Bank of Spain (Banco de España), the National Securities and Exchange Commission (Comisión Nacional del Mercado de Valores, CNMV) and the Directorate General of Insurance (Dirección General de Seguros) may regulate the accounting systems of the entities and groups under their surveillance.

Until the publication of Royal Decree (Real Decreto, RD) 1815/1991 approving the ‘Standards for the Preparation of Consolidated Annual Accounts’ (Normas para la formulación de las cuentas anuales consolidadas), hereafter referred to as ‘Consolidation Standards’ (Normas de Consolidación, NC) the preparation of consolidated annual accounts was more the exception than the rule for groups of companies. This was due mainly to the absence-of a legal obligation to consolidate. Royal Decree 1815/1991 enacts the provisions of the Commercial Code (Código de Comercio, CCom) which, for the purpose of adapting commercial law to EU regulations, requires the presentation of consolidated annual accounts.

In terms of accounting tradition Nobes (1993, p. 30) divides countries into two basic categories. Sweden falls into the Continental, as opposed to the so-called Anglo-Saxon, group. Continental accounting regimes are characterized as having the following general features:Legalism.Credit orientation.Secrecy.Tax domination.Form over substance.Government rules. A superficial look at Swedish accounting regulation may give the impression that Sweden is, indeed, a country strongly influenced by the continental European tradition. Actual practice, at least among the major listed companies, reveals a picture that is much more mixed. This is manifest in the fact that several Swedish companies have received prizes for their annual reports from financial analysts and others. The intention of major companies to provide their shareholders with relevant information within the constraints of a Continental legalistic system makes the development of Swedish accounting an interesting study.

The idea of group accounting was introduced in Sweden at the beginning of the 1930s both in practice, although to a limited extent, and as a subject for discussion in circles interested in the development of financial accounting. A major event which sparked off these ideas occurred in 1932. Ivar Kreuger was the leading industrialist in Sweden at the time who also had a remarkable reputation among financial institutions abroad. He had, for instance, restructured much of the match industry of the world as well as shaping the Swedish Match Company and its subsidiaries. Another of his core companies, Kreuger & Toll, was a construction company. His empire came under heavy financial stress around 1930 and Kreuger took his life. Afterwards, it became apparent that he had used transfers between his companies to conceal the true financial position of the group. Shareholders and creditors alike lost money. Politicians, journalists and ordinary people reacted emotionally and legal action was taken, in particular against a leading bank manager close to Kreuger. The manager was convicted; although whether this was the right verdict has since been disputed (af Trolle, 1992).

As in most of the continental European countries, Swiss accounting regulation derives from the Napoleonic Code. This codified system of law imposes on all corporations certain requirements geared mainly to the protection of creditors. They include, but are not confined to, the following:Assets may normally be valued only at acquisition cost (the historical cost convention).Legal reserves have to be created before dividends can be paid, favouring internal financing through retained earnings.

In Switzerland, group accounts play a much more important role for public companies than individual accounts do. Although some 155,000 Swiss stock corporations are required to prepare individual accounts and follow company law provisions, these individual accounts are mostly tax driven. They disclose little and tend to follow conservative accounting policies aimed at avoiding or reducing income tax.

This contribution looks at the state of corporate financial reporting in the UK and the deliberate efforts that have been made and are being made to improve the level of reporting. Corporate financial reporting is an abstract concept which means a variety of things for a variety of users. In a competitive market, such as the business environment of the UK, customers, suppliers, employees, managers, investors, lenders and government (including tax authorities) need constant streams of information to assist them in their respective roles. In a regulated market, the regulator that serves as a surrogate for competition requires similar flows of information so as to regulate the market and stimulate customers, suppliers, employees, managers, investors and lenders to respond in that market in a way that is not dissimilar from a competitive market. Financial reporting is one constant stream of information available to these different constituencies.

The use of investment holding companies had existed in the UK since the mid nineteenth century. However, Edwards and Webb (1984, p. 37) found the earliest use of consolidation delayed until 1910, and as late as 1933 a full set of consolidated financial statements by the Dunlop Rubber Co. was still newsworthy. Bircher’s survey results on the rate of adoption of consolidation in the largest listed UK companies from the late 1930s to the late 1940s are shown in Table I.1. He found the primary driving force was the imminence of the first relevant UK legal pronouncement, the Companies Act 1947, with lenders’ information demands and the relaxation of wartime taxation restrictions also having a probable impact (see Bircher, 1988, p. 12).

The earliest financial statements in the United States were similar in many respects to modern ones, with such features as a depreciation allowance that offset the cost of buildings and equipment (and livestock and slaves). Industrialization increased the complexity of commercial operations, and accounting procedures became more complicated. Alternative procedures developed because no common framework existed for establishing accounting principles. Various historical events have influenced the development of accounting principles (see Table I.1). For example, the introduction of the income tax in the United States in 1913 required detailed and defensible accounting records. Various tax laws have allowed different accounting practices, and many of the alternatives are reflected in current accounting standards. The problems caused by accounting alternatives were recognized as early as the First World War, when the federal government attempted to audit cost-plus fixed-fee military contracts. As a result, a plea for uniformity was issued in the Federal Reserve Bulletin in 1917. By the beginning of World War II, standardized auditing procedures had been adopted in place of standardized accounting procedures, and non-uniformity increased as increasingly difficult and complicated transactions developed. Accounting procedures have evolved and adapted to a changing business climate over a period of many years (Chatfield, 1974; Zeff, 1976).

Group accounting in the United States evolved in a manner which differed from the way it evolved in European and other countries. In the first place, there is no such term as ‘group’ accounting in the United States. The comparable term to group accounting in the US is ‘consolidation’ accounting. Related topics to consolidation accounting include: Accounting for business combinations.Accounting for intangible assets.Equity method of accounting for investment in common stock.Foreign currency translation. Therefore, when we refer to consolidation accounting and related topics, it should be understood that we are referring to group accounting. Secondly, there are relatively few official accounting pronouncements dealing with consolidation accounting and related topics in US Generally Accepted Accounting Principles (GAAP) (see Table I.1 for a list of official accounting pronouncements dealing with consolidation accounting and related topics under GAAP). Thirdly, consolidation accounting and related topics has been a fairly settled matter in the US for some time. Accounting Research Bulletin (ARB) No. 51, which is the primary official pronouncement dealing with consolidation accounting, was issued in 1959. Furthermore, an examination of the topics of research articles appearing in The Accounting Review, which is the most important accounting research journal in North America, reveals that since 1990 there have been only two articles out of over two hundred which dealt with consolidation accounting and related topics.

The TRANSACC glossary aims to provide the reader with a well structured and comprehensive tool for ease of use in daily practical work. The choice of terms included in the glossary derives from a close study of other glossaries included in contemporary accounting literature, as well as the particular concerns of TRANSACC and the experience gathered in the co-ordination of the TRANSACC project. There is no guarantee of completeness, due in part to the fact that some terms like ‘the true and fair view’ have not been included, since their translation into other languages is rather cumbersome and many countries either make use of the original English term or use descriptions the equivalence of which to the original is more than debatable (see below).