Measuring the Degree of International Harmony in Selected Accounting Measurement Practices

The I-index developed by Van der Tas and chi square tests suggested by Tay and Parker are used to quantify and assess the degree of harmony in selected accounting measurement practices of large companies from France, Germany, Japan, the UK, and the US. The results indicate significant differences in accounting for inventory, fixed assets, and investments among the countries. The 3 subtopics that exhibited a high degree of harmony were the treatment of gains or losses on the disposal of fixed assets, short-term investments and long-term investments, a reflection of the preference of regulators and companies in the different countries for taking disposal gains and losses to income as they occur. Depreciation and inventory costing methods had the lowest I-index scores respectively, suggesting that the level of international harmony in these 2 basic accounting measurement practices is fairly low. It was found that the disclosure of information on accounting policies, even on fundamental accounting measurement methods such as inventory costing methods, tends to be quite low. This research assesses empirically the extent to which selected accounting measurement practices of companies from France, Germany, Japan, the UK and the US are harmonised in the context of major international efforts to enhance the comparability of company financial statements. The findings suggest that significant differences continue in accounting measurement practices between companies originating in each of these countries. The results of the study have important implications for international standard-setters, investors, creditors and those interested in international accounting. Support for international harmonisation of accounting standards has grown steadily in recent years with a number of initiatives at the regional and international levels. The European Uniony, with its broad objective of a unified economic market, has emerged as the leading model for regional harmonisation, while the International Accounting Standards Committee (IASC), with the support and encouragement of the International Organization of Securities Commissions (IOSCO), is the preeminent global organisation. Much has been written about the problems and current prospects of international harmonisation (Rivera 1989, Chandler 1992). Some observers have suggested that it may be unnecessary, pointing to the growth of the international capital markets despite the lack of internationally accepted accounting standards (Goeltz 1992). Others have even suggested that it may be harmful (Hoarau 1995). Despite these arguments, the international harmonisation movement has moved forward. Considering the substantial resources that the EC and IASC have committed to the pursuit of harmonisation, it is surprising that researchers have only now begun to develop approaches to quantitative measurement of the degree of harmony in accounting regulations and practices. These measures will facilitate the identification of potential targets for harmonisation initiatives. Additionally, before-and-after measurement of the degree of harmony in a targeted regulation or practice would indicate the success of a specific harmonisation initiative (Van der Tas 1988). This study uses new approaches suggested in the literature to quantify the degree of accounting harmony between countries. A related objective is to compare certain accounting measurement practices of large companies in France, Germany, Japan, the UK and the US in the light of international harmonisation efforts. DEFINITIONS AND RELEVANT LITERATURE REVIEW Harmonisation (a process) seeks to increase the compatibility between two or more subjects by narrowing their differences. Harmony (a state) reflects the degree of compatibility that exists between two or more subjects at one particular time (Tay and Parker 1990).1 In the accounting context, the subjects can be companies' financial reporting practices or financial reporting standards (Van der Tas 1988). Material harmonisation refers to the harmony of financial reports of companies. Formal harmonisation concerns financial reporting standards, regulations or guidelines. Material or formal harmonisation can focus either on measurement issues (recognition, valuation and estimation) or on disclosure issues (the extent of information provided by different entities). This study focuses on the material measurement practices of companies as reflected in annual reports. Research on harmonisation issues prior to 1988 (Nair and Frank 1981, Evans and Taylor 1982, Doupnik and Taylor 1985) has been criticised by Tay and Parker (1990) for lack of conceptual clarity and shortcomings in the data sources. Our review uses more recent studies that seek to develop and apply new quantitative measures of harmonisation. Van der Tas (1988) suggested two main approaches (C-index and I-index) to quantify the concepts of harmony and harmonisation. These measurement approaches were derived and adapted from the Hirschman-Herfindahl index (H-index), a measure of industrial concentration. Van der Tas developed the C-index to measure harmony in a national context; the I-index was developed to measure the degree of harmony in an international setting. Tay and Parker (1990) isolated key challenges in the measurement of international harmonisation: operationalisation of concepts, data sources and statistical methods. They found Van der Tas's (1988) approach of using concentration indexes to measure harmony to have potential but concluded that the lack of statistical testing was a shortcoming. They suggested an alternative method incorporating statistical testing. Emenyonu and Gray (1992), using the Van der Tas approach but incorporating the suggestions of Tay and Parker, assessed the extent to which accounting measurement practices in France, Germany and the UK are harmonised in the context of the EU initiatives. Using a sample of annual reports of large companies from the three countries, they used the Van der Tas I-index complemented by chi-square tests to quantify the level of accounting harmony across the three countries. Their results indicated significant differences, with a wide and relatively low range of harmony. Van der Tas (1992), building on his earlier work and also responding to some of the criticisms of Tay and Parker, examined the deferred taxation policies of European companies for a 10-year period (19781988). He used a sample of 154 European listed companies from nine EU countries to assess the degree of harmony, the extent of harmonisation and the effect of the EU harmonisation efforts. The study examined individual and consolidated financial statements and took into account not only the accounting policy used but also the information provided in the notes that may enable the reader to reconcile one method with another. The results of the study indicated that there were differences in the degree of harmony depending on whether separate or consolidated accounts were examined and that the reconciliation data also affected the measurement of harmony Archer et al (1995) separated the C-index introduced by Van der Tas (1988) into two components to measure "within-country" and "between-country" effects of harmonisation. They used the resulting index to measure the degree of harmony in the treatment of goodwill and deferred taxation for a sample of European companies. Their results indicated that in these areas, little progress in harmonisation occurred between 1986/87 and 1990/91. Herrmann and Thomas (1995), building on the work of Emenyonu and Gray (1992), used a sample of 217 companies from eight EU countries to assess the degree of harmony in nine specific accounting measurement practices. Their results were mixed, indicating a high degree of harmony for accounting for foreign currency translation of assets and liabilities, treatment of translation differences and inventory valuation, while reporting a lower degree of harmony for accounting for fixed-asset valuation, depreciation, goodwill, research and development costs, inventory costing and foreigncurrency translation of revenues and expenses. Despite the contribution of the above studies, research into international harmonisation measurement is still exploratory. The studies reviewed have examined the issue in the context of the EU harmonisation efforts. Archer et al (1995) include some non-EU countries (Sweden and Switzerland) in their sample, but both countries were members of the European Free Trade Association and recent changes in their accounting systems have been patterned on the EU accounting directives.2 There is some concern that EU harmonisation initiatives may conflict with the international harmonisation movement (Thorelli and Whittington 1994). PURPOSE AND SCOPE OF STUDY This study uses the I-index developed by Van der Tas (1988) and chi square tests suggested by Tay and Parker (1990) to quantify and assess the degree of harmony in selected accounting measurement practices of large companies from France, Germany, Japan, the UK and the US. These countries were selected because France, Germany, and the UK are the leading economic powers in the EU and Japan and the US are non-EU countries that have the strongest economies in the world. The five countries selected for this study France, Germany, Japan, the UK and the US have demonstrated a strong commitment to the goal of international harmonisation of accounting standards. All five countries were founding members of the IASC and are members of the IASC board. The sample is therefore more international than those in earlier studies.3 ;;tt Further, the five countries boast strong although disparate accounting traditions, making them interesting subjects for a study of harmony. The measurement practices investigated in this study accounting for inventories, accounting for fixed assets and accounting for investments were chosen because they generally have an important effect on profit measurement and asset valuation. Further, they are germane to most companies, thus reducing the potential for non-disclosure in our survey.