Question

What impact will the cultural differences between Eastern and Western countries have on financial accounting and reporting? Please give two specific examples

Answer 1

I would like to answer this question by taking into consideration the national cultures of China(Eastern) and United States(Western).

INTRODUCTION

The differences between accounting systems around the world arises partly due to the national culture.It sets the norms for the companies,since it's a part of society.Comprehensive laws are established by culture-driven authorities. Studies suggest that accounting practices evolve within a country in order to meet the needs of their particular society. Therefore, as demands and needs vary from country to country, so will the way in which accounting is practiced.

China(Eastern Country)

A Unique thing in China is the strong socialistic holds and Government influences over the companies. The Chinese government has a remarkable control over the accounting of all firms operating in their country. The financial statements are compiled according to the needs of the government .Less Consideration is given to the interest of its investors while taking major financial decisions.Since most of the companies are owned by the government, the need to make their financial statements correspondingly is quite obvious.

The foreign companies that open branches in China will recruit local managers to ensure they run the company according to the company’s cultural(chinese) standards. As the market continues to fluctuate, financial statements will have to be geared more towards investors and accountants will have to be better equipped with the accounting knowledge.Various religions also influence the national culture, which consists of Buddhism, Taoism and Confucianism.Since Harmony and moderation is their religious motto,adapting to any changes even in accounting takes place at a very slow pace.

United States (Westerners)-Briefly

As with the western countries, the purpose of accounting information is to serve the stakeholders - it includes all the parties related internally or externally with the business when the business runs in the market economy, thus debtors, creditors, shareholders, potential investors, government agencies, management, employees are all one part of the information users. The common financial statements are to meet all these parties’ needs.The influence of the Government is much lesser in Western Countries(U.S.A) compared to China.Mainly,the financial decisions are made by considering the needs of the investors .

The Difference of IAS and CAS

Let’s see examples of this in the light of the accounting treatments and methods in Chinese Accounting Standards (CAS) and International Accounting Standards (IAS)

Accounting treatment for CAS when converging with IAS

Usually in western countries, there is no different treatment of merge under same or difference control. However in China, from the beginning of 1990, with the restructure of big state-owned or national owned companies, the accounting recognition for the new merged enterprises is very important in accountancy practice, as a result, CAS 20 set up rules for this Chinese-featured mergers;In CAS Equity Method is accepted and restatement of the adjusted figures is needed while in IAS there is no specified rules for the mergers under same control. Purchase Method and Pooling off interests Method are both acceptable.

One more interesting case concerning Chinese accounting is the related party transaction disclosure. According to CAS 24, the related party transactions do not include transactions between two national owned organisations if there is no other related interest. Whereas in IAS 24, the government controlled or related companies can only be partly exempt from disclosure.

Another Implied Difference

One thing that differentiates China from western countries’ practice is the accounting recognition and measurement.In U.S different methods of the accounting treatment concerning cost and value issues can be chosen from, while in China, the CAS directly nominates the accounting method for the above certain issues. A good example would be the revaluation of fixed assets. The IAS would accept the cost method as well as the revaluation method, so after test of asset impairment loss, if the impaired asset has a recoverable value at the current date, then it is recognized and a recoverable amount is recorded. While in CAS, only the cost method is acceptable. After the asset impairment loss is recognized, there is no way to re-recognize the recovery. This recognition difference arises from the social ideology of these two countries.