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Essay: The high demand for convergence

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  • Published: 21 June 2012*
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The high demand for convergence

Despite the high demand for convergence, differences in accounting practices widely exist among different sets of accounting standards, causes of which include but are not limited to different industry practices, interpretation of accounting principles and selection of accounting choices.

Format difference is a main area of differences which first come to our eyes. The three primary financial statements have different titles and are presented differently across different countries. In France/Germany and UK, income statement appears first in the annual report, followed by balance sheet, indicating that companies in those countries are more concerned with operating results. In terms of their balance sheet presentation, current items follow non-current ones, whereas the opposite is true in Japan, U.S. and China. Furthermore, a separate statement—SORIE is found immediately after income statement in annual reports of French/German and UK companies, while SOCI is prepared by U.S. and Chinese companies.

The most significant difference is found in treatment of specific accounts, where U.S. and Japan like to be different from IFRS. Goodwill is a main area of Japan’s deviation. It is tested at least annually for impairment in all the countries except in Japan, where goodwill is amortised using e.g. straight-line method, indicating that Japanese prefer smoothing of accounts to volatility. In valuing long-term contract, completed-contract method is most widely used in Japan, but is not allowed under IFRS. Moreover, LIFO is acceptable under U.S. GAAP but not under IFRS. There are also some areas where U.S. and Japan have converged, but are still not in line with IFRS. For example, both U.S. and Japan GAAP prohibit upward revaluation of fixed assets, except a one-time optional revaluation of land in Japan. Besides, Japan previously allowed cost method for inventory valuation but revised its accounting standards later in 2006 to allow only the LOCOM method to converge with US.

Despite the existence of differences, convergence is also happening across world. The most welcoming convergence is seen between IFRS and U.S. GAAP, e.g. huge efforts have been made by IASB to converge with U.S. GAAP by revising IAS 23 to require capitalising borrowing cost to qualifying asset from 2009. Besides, most differences previously found in recognition, calculation and classification of deferred assets are expected to be eliminated with the introduction of Exposure Draft for Income Taxes in 2009. Japan is also moving towards convergence while still maintains discretion over accounting polices, e.g. it made a big step forward to converge with the world in 2007 by requiring that all finance leases be capitalised.

In conclusion, accounting practices in France/Germany and UK are largely the same, indicating IFRS influences across Europe. However, worldwide harmonisation is not seen because of disagreements between FASB and IASB despite recent convergence in some aspects, thus casting doubt on comparability of annual reports. Other factors such as language, political pressure and cultural differences may also lead to different national versions of IFRS. Japan is different in many aspects, e.g. their preference for smoothing, which may be due to their conservative national personality.

KPMG, Implementing IFRS, Extract from: IFRS Compared with Japanese GAAP. 2004

Germany

Japan

UK

US

China

STRABAG AG

Obayashi Corporation

Kier Group plc

McDermott International

Renesola

Country of registration

Austria

Japan

United Kingdom

Republic of Panama

British Virgin Islands

Country ofoperation

Germany & Austria

Japan

United Kingdom

United States

China

Stock markets on which shares are listed

Vienna Stock Exchange

l Tokyo Stock Exchange

l Osaka

l Nagoya

l Fukuoka

London Stock Exchange

New York Stock Exchange

l AIM

l New York Stock Exchange

Accounting systems used

IFRS

Japan GAAP

IFRS (Group)

UK GAAP (Parent)

US GAAP

US GAAP

Proportions of sales outside the home country

41%

12%

N/A

55%

42%

Country/Region of highest sales outside the home country

Central and Eastern Europe

North America

N/A

Qatar

East Asia

Level of gearing

30.5%

23.3%

32.6%

0.46%

8.6%

Business segments

l Building construction & Civil engineering

l Transportation infrastructures

l Special divisions & Concessions

l Construction

l Real Estate

l Other

l Construction

l Support Services

l Partnership Homes

l Developments

l Offshore Oil and Gas Construction

l Government Operations

l Power Generation Systems

Single reportable business segment-sale of solar wafers and related products

Breakdown of shareholding

l Haselsteiner Group

l Raiffeisen/UNIQA Group

l Rasperia

l Institutional investors

l Retail

l Japan Trustee Services Bank

l Master Trust Bank of Japan

l Takeo Obayashi

l Nippon Life Insurance Co.

l Standard Life Investments Limited

l Legal & General Group Plc and its subsidiaries

l Barclays global investors

l Norges Bank

l ClearBridge Advisors, LLC

l PRIMECAP Management Company

l Ruixin Holdings Limited

l Yuncai Holdings Limited

l Zhengmin Lian

l Xiangjun Dong

l Invesco Ltd.

Annual Report Information

Germany

Japan

UK

US

China

STRABAG AG

Obayashi Corporation

Kier Group plc

McDermott International

Renesola

Financial

Segment information

ü

ü

ü

ü

Key figures

l Earnings figures

l Balance Sheet figures

l Output volume

l Sales

Consolidated financial results

l Sales

l Net cash balance

l Profit

l EPS/DPS

Condensed financial statements

Consolidated financial results

CEO’s review

ü

ü

ü

ü

ü

Chairman statement

ü

Non-financial

Shareholder information

ü

Employee numbers

ü

History of the company

ü

Board directors and officers

ü

ü

Website information

Shares & Bonds

ü

ü

ü

ü

Reports

l Financial

l Corporate Governance

l Financial

l Financial

l Social Responsibility

l Corporate Governance

l SEC filings

l Annual report & Proxy

l AIM Rule 26

l SEC filings

l Financial

l Corporate Governance

Presentations to analysts

ü

ü

ü

ü

ü

Announcements

ü

ü

ü

ü

ü

Others

AGM summary

Medium term business plan

l Earnings estimate

l Stock purchase plan

AGM summary

Germany

Japan

UK

US

China

STRABAG AG

Obayashi Corporation

Kier Group plc

McDermott International

Renesola

Format of primary financial statements

– Income statement;

– SORIE;

– Balance sheet;

– Cash flow statement;

– Statement of changes in fixed assets

– Balance sheet;

– Statements of income;

– Statements of changes in net assets;

– Statements of cash flows

– Income statement;

– SORIE;

– Balance sheet;

– Cash flow statement

– Balance sheet;

– Statements of income;

– Statements of comprehensive  income and stockholders’ equity;

– Statements of cash flows

– Balance sheet;

– Statements of operations;

– Statements of shareholders’ equity and comprehensive income;

– Statements of cash flows

Terminology used

Share capital;

Capital/treasury stock;

Capital surplus

Share capital;

Share premium

Common/treasury stock;

Capital in excess of par value

Common shares;

Additional paid-in capital

Level of detail in notes

Fair

Fair

High

High

High

Treatment of Goodwill

Annual impairment test

Amortised (straight-line)

Annual impairment test

Periodic impairment test

N/A

R&D expenditure

Expensed as incurred

Expensed as incurred

N/A

Expensed as incurred

Expensed as incurred

Other intangible assets

Without defined useful life

-impairment

With defined useful life

-amortise

Amortised (straight-line)

Cost less amortisation and impairment loss;

Amortised by straight-line method

Definite life-amortise using straight line method

Indefinite life-unamortised

Prepaid land use right

-amortise using straight line method

Valuation of tangible (fixed) assets

Depreciated & impairment

– Fair value upon acquisition;

– Revaluation reserve for land

Cost less depreciation

– Depreciated & impairment;

– No revaluation

Depreciated & impairment

Depreciation

Straight-line method

– Declining balance method

– Straight-line method

Straight-line method

Straight-line method

Straight-line method

Inventory

Lower of Cost and Net Realisable Value

FIFO &

Specific identification method

Lower of Cost and Net Realisable Value

Lower of Cost or Market &

FIFO (LIFO possible)

Lower of Cost or Market & FIFO

Capitalisation of interest

N/A

N/A

Capitalised to qualifying asset

– Capitalise Required by SFAS

Capitalised to PP&E

Long term contracts

Percentage-of-completion

– Completed-contract or

– Percentage-of-completion

Percentage-of-completion

Percentage-of-completion

N/A

Accounting for leases

Finance lease-capitalised

Operating lease-expensed

Finance lease-capitalised

Operating lease-expensed

Capitalised or expensed on a straight-line basis

Operating lease-expensed

N/A

Deferred taxation

Balance sheet liability method;

Non-current asset/liability

Balance sheet liability method

Balance sheet liability method;

Non-current asset/liability

Balance sheet liability method;

Asset/liability

Balance sheet liability method;

Asset/liability


Germany

Japan

UK

US

China

STRABAG AG

Obayashi Corporation

Kier Group plc

McDermott International

Renesola

CSR On annual report?

ü

ü

ü

ü

What content?

l social and societal

l ecological

l health and safety

l only one page with pictures

l communities and society

l environment and climate change

l health and safety

l employees and training

l customers and suppliers

l community engagement

l considerate construction scheme

l government regulations

l environmental matters

N/A

Additional information on website (other reports)

Sustainability report?

ü

ü

What content?

l first sustainability report 2008

l management systems

l economic sustainability

l environmental commitment

l personal development

l social accountability

l Environmental

l Social

l Economic

N/A

CSR report?

ü

ü

What content?

l first CSR report 2008

l environmental report

l customers

l shareholders

l employees

l partner companies

l locality, society, environment

Almost same content as in the annual report

N/A

Germany

Japan

UK

US

China

STRABAG AG

Obayashi Corporation

Kier Group plc

McDermott International

Renesola

Code to comply

Austrian Code of Corporate Governance

Combined Code on Corporate Governance

Code of Business Conduct

Code of Business Conduct

Information included in Corporate Governance

– commitment to the Code

– corporate governance          structure

– working methods

– report on the external evaluation of compliance

– principles of corporate governance

– basic philosophy

– measures to promote corporate ethics

– board of directors

– corporate governance statement

– remuneration report

– statement of directors’ responsibilities

Proxy Statement

– executive compensation

– directors and executive officers

– security ownership

– directors and senior management

– compensation

– board practices

– share ownership

Management philosophy

ü

ü

Management structure

– dual-board

– presidium

– nomination committee

– audit committee

– unitary board

– audit committee

– remuneration committee

– recommendation committee

– unitary board

– audit committee

– remuneration committee

– nomination committee

– unitary board

– audit committee

– compensation committee

– finance committee

– governance committee

– unitary board

– audit committee

– compensation committee

– corporate governance and nominating committee

Senior management (directors) information

Background

ü

ü

ü

ü

Terms of employment

ü

ü

ü

ü

ü

Share ownership

ü

ü

ü

Remuneration

– fixed base salary

– profit-related bonus

– basic salary

– benefits in kind

– annual bonus arrangements

– retirement benefits

– long-term incentives

– fees earned and cash paid

– stock and option awards

– bonus

– perquisites

– retirement plans

– share incentive plan

– share option

Shares information

Share ownership

– institutional investors

– geographical distribution

– extensively held by financial institutions

– extensively held by financial institutions

– certain beneficial owners

– major shareholders are board of directors

Stock market performance

ü

ü

ü

ü

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