Comparative International Financial Accounting in Developing Countries

Beside in developed country, there are some examples of selected developing countries using the
cultural classification identified earlier. It is important to gain a background understanding of
each countries. These exhibit illustrates that developing countries tend to have lower GDP per
capita than developed countries are less stable, as illustrated by the varying inflation rates and
unemployment rates.

Economic Data for Developing Countries

GDP GDP Per Populati Unem Inflati Area per Imports Exports (in
PPP Capita on (in ploym on sq km (in billions)
(in millions) ent (in billions)
billions) thousand
s)
India $3,033.0 $2,900 1,065.1 9.5% 3.8% 3,287.6 $74.2 $57.2
Malaysia $207.8 $9,000 23.5 3.6% 1.1% 329.8 $74.4 $98.4
Brazil $1,375.0 $7,600 184.1 12.3% 14.7% 8,512.0 $48.3 $73.4
Argentina $435.5 $11,200 39.1 17.3% 13.4% 2,767.0 $13.3 $29.6
Mexico $941.2 $9,000 105.0 3.3% 4.5% 1,972.6 $168.9 $164.8
China $6,449.0 $5,000 1,298.8 10.1% 1.2% 9,597.0 $397.4 $436.1
Indonesia $758.8 $3,200 238.5 8.7% 6.6% 1,919.4 $40.22 $63.89
Thailand $477.5 $7,400 64.9 2.2% 1.8% 514.0 $65.3 $76.0
Poland $427.1 $11,100 38.6 20% 0.7% 312.7 $63.7 $57.6
Russia $1,282.0 $8,900 143.8 8.5% 13.7% 17.075.2 $74.8 $134.4
Czech $161.1 $15,700 10.2 9.9% 0.1% 78.9 $50.4 46.8%
Republic
Source: Compiled from The World Bank

Number of Companies in Developing Countries Listed on Foreign Exchanges

NYSE NASDAQ London Stock

Exchange
India 8 3 17
 Malaysia 0 0 3

Brazil 37 1 0

Argentina 10 3 1

Mexico 22 3 0

China 17 0 5

Indonesia 2 0 2

Thailand 0 0 0

Poland 0 0 8

Russia 6 0 4

Czech Republic 0 0 3
Source: Compiled from New York Stock Exchange

IFRS Acceptance

Not Permitted Required Required for

Permitted for for Some All Domestic
for Domestic Domestic Listed
Domestic Listed Companies Companies
Listed Companies
Companies
India ? ? ? ?
Malaysia X

Brazil X

Argentina X

Mexico X

China X

Indonesia X

Thailand X

Poland X
Russia X

Czech Republic X
Source: Deloitte IAS Plus

Anglo-American Accounting
Anglo American accounting can be found in countries where the United Kingdom has had a
major colonial influence, such as Australia, Canada, Hong Kong, India, Ireland, Kenya,
Malaysia, New Zaeland, Nigeria, Singapore, and South Africa. These countries tend to favor the
needs of investors and to be relatively less conservative and more transparent than the Germanic
and Latin countries.

India

In the 1950s, more than 50 percent of India was in real poverty. However, India has significantly
improved its economy over the past decade. Not only has the poverty level fallen, but economic
growth has risen and various social indicators have improved, such a life expectancy and
literacy.

Because of Indias English legal origin, its accounting standards focus on the information needs
of investors. In 1949, the Institute of Chartered Accountants in India (ICAI) was created as the
national organization of registered accountants in India. Subsequently, the Accounting Standards
Board was established to formulate accounting standards in order to assist the Council of the
ICAI in creating and modifying accounting standards in India. ICAI and ASB give consideration
to International Accounting Standards (IAS) and IFRS issued by the International Accounting
Standards Board and tries to implement them into their standards to the extent possible,
considering the circumstances in India.

Malaysia
Although Malaysia has struggled historically, the country has sustained rapid growth over the
last 30 years. Furthermore, prospects over the next few years are promising, with anticipated
growth in GDP, private consumption, and private investment.

Malaysias legal system originated from the United Kingdom that the accounting system also
aims to meet the information needs of investors. On 1997 Malaysia restructured its accounting
system with the Financial Reporting act which created Financial Reporting Foundation (FRF)
and the Malaysian Accounting Standard Board (MASB). The FRF oversees the work of the
MASB but is not involved in the standard-setting process. The MASB is an independent body
created to develop and issue accounting standard in Malaysia. MASB it self is a strong supporter
of international harmonization and has thus adopted 26 of their 32 standards from their
corresponding IFRS prior to revisions made by the IASB in 2003 dan 2004.

Latin Accounting
The unique flavor of Latin accounting can be found in a number of developing countries. Latin
accounting tends to be relatively more conservative and secretive compared to the Anglo-
American countries.

Brazil
The accounting tradition in Brazil gives preference to the information needs of creditors and the
tax authorities. As in other Latin countries, the influence of government, company law, and
taxation regulations on accounting are fundamental importance. The corporation law of 1976
contains the basic requirements governing the preparation of financial statements and disclosures
for public companies. In addition, the Commissao de Valores Mobiliarios (CVM), the SEC,
prescribes accounting standards for listed companies.

IBRACON and the Federal Accounting Council issue accounting standards. If the CVM
approves such standards, they become obligatory for listed companies, and in general it appears
that the CVM tends to rely on the accounting profession to develop accounting standards.

Argentina
Historically, Argentinas accounting has focused on meeting the needs of creditors and tax
authorities. The Argentine commercial code requires all companies to provide annual reports,
and public companies also have to issue quarterly statement. Accounting standards set by the
Argentine Federation of Expert Councils in Economies (FACPCE) and the councils may ratify or
amend each Technical Resolution (TR).

Argentina has shown confusion over who can issue laws regarding accounting standards consider
the high inflation rate in the past, the concept of general price level (GPL) has been of central
consideration in formulating accounting standards. Specifically, GPL accounting allows
Argentines to adjust balance amounts on their financial statements to reflect purchasing power.
However, the national government issued a decree to the Argentine regulatory institutions, such
as the CNV and the Central Bank, that they should no longer accept GPL adjusted financials.
Although FACPCE felt that the decree was contrary to law, it modified GPL accounting so that
the use is optional if inflation is lower than 8 percent.

The FACPCE is working toward harmonization with IFRS. Argentina believes differences
should still exist because they address issues not covered under IFRS.

Mexico
Mexico also gives preferences to the information needs of creditors and tax authorities. Since the
creation of the North American Free Trade Agreement (NAFTA), Mexicos economic
development has been improving. However, it is still important for Mexico to access funding.

Historically, Mexican accounting has been influenced by the United States generally accepted
accounting principles (GAAP) and auditing standards (GAAS). This strong influence can be
attributed to Mexicos need for foreign investment from the United State. However, Mexico
frequently looks toward IFRS when U.S standards do not meet Mexicos needs.

The Mexican Constitution establishes professional associations to regulate their respective fields
of activity. Societies of accountants throughout the country delegate their regulatory capacity to
the IMCP, Mexicos self regulated institution overseeing the accounting profession. The IMCP
issues accounting and auditing standards as well as a code of ethic for accountants. More
recently in 2001, the IMCP formed the Mexican Council for Research and development of
Financial Reporting Standards (CINIF). This institution is responsible for creating accounting
standard with IFRS. As of the beginning of 2005, Mexican GAAP was approximately 70 percent
in line with international standards.

Asian Accounting
Many of the developing Asian countries have a colonial history. In 1997, many of the developing
countries in Asia experienced declining confidence in their financial crisis. One of the cures for
this Asian Flu was to increase accounting quality and transparency by adopting higher quality
accounting standars.
China
A major shift of emphasis is under way in China from a primary focus on the information needs
of government, that is, needs involving national planning and taxation, to a broader view of user
needs that includes those of investors, creditors, and enterprise management. A more micro-
oriented decision-making approach is thus being encouraged that retains a measure of
macroeconomic control.

Government through laws passed by the National Peoples Congress is the major influence on
accounting and auditing. With economic reform and moves to a more market oriented economy
have come a series of accounting reforms. The Accounting Law of the peoples Republic of
China adopted in 1985 and revised in 1993 and again in 1999, established general principles
concerning the nature and role of accounting and empowered the Ministry of Finance (MOF) to
issue accounting standards.

Following the revision of accounting law, the PRC State Council issued Financial Accounting
Rules (FARR) for Enterprises. It represent a new era in Chinese accounting, one based on a
Western market-oriented approach rather than the old Soviet Union style. The notably
accounting organization such as Accounting Society of China and Deloitte Touche Tohmasu also
played important advisory role in accounting development in China.

Indonesia
Historically, Indonesias accounting system was based on the Netherlands accounting system as
a result of the Dutch influence on the country. However, when the ties between the two countries
were broken in the mid-1900s, Indonesia turned to U.S accounting practices. The Indonesian
Institute of Accountants (IAI) was created to guide accountants throughout Indonesia. In the
1970s the IAI created a code of conduct and adopted accounting principles and standards based
on U.S. code of conduct and adopted accounting principles and standards based on U.S. GAAP
at the time. As such, Indonesias accounting system focuses on the information needs of
investors over the needs of government. The Financial Accounting Standards Committee was
reconstituted as the more independent Financial Accounting Standards Board (DSAK) of the
Indonesian Institute of Accountants. Currently, the DSAK is working to harmonite Indonesian
accounting standards with IFRS.
Thailand
Thailand is the only country in Southeast Asia that avoided colonial rule. However, its
accounting system values transparency and the information needs of investors, much as in the
Anglo-American countries. After the financial crisis, Thailand implemented reforms to increase
corporate governance and boost incentives for competition. The Thai economy recovered quickly
and has since sustained growth.

Accounting standards are issued by the Institute of Certified Accountants and Auditors of
Thailand. However, Thai accounting standards must be approved by the Ministry of Commerce
and placed into law before the companies are required to adopt them.

The Thai Securities Exchange Commission requires all companies listed on the Stock Exchange
of Thailand (SET) to be reviewed by independent, external auditors. It is done in order to
supervise all listed companies

Eastern European Accounting

Eastern European accounting has historically based on the socialist concept of a planned
economy. As such, their accounting is geared toward the needs of tax authorities and focuses
little on reflecting the profit of the company. However, in recent years, countries in Eastern
Europe have been attempting to transition from centrally planned socialist to the Western-style
market economy.

Poland
Poland began its transition to a market economy in 1990 using what is now called the shock
therapy model, meaning that all reforms were made concurrently. Polands goal was to set up the
basis for a market economy in just one year by creating the legal, institutional, and economic
institutions necessary to help privatize the economy. Accounting decree 1991 was issued by
Ministry of Finance to provide some intermediate rules to facilitate the economys transition to a
market economy. On 2004 Polands entrance into the EU marks a huge step for the country
because of the rigorous set of admission requirements. In order to become a member of the EU,
countries must harmonize their financial requirements with EU and IFRS. Thus, in 2005 Poland
adopted IFRS.
Russia
Although the economics situation in Russia has improved, it differs from other transitioning
economies in the following ways. First, the share of new enterprises is low compared to other
economics. Second, many Soviet-style production units still exist that are opening at loses. The
countrys ability to sustain growth is constrained by its independence on natural resources.
Furthermore, they continue to be dominated by unreformed monopolies.

Generally, the Russian Ministry creates accounting standard and regulation that reflect little of
value and profits. However, the Central Bank of the Russian Federation is responsible for
creating accounting and auditing standards for banks and credit institutions.

Many Russians still outdated using Russian Accounting Standards (RAS) that are based on a
planned economy and focus on taxation needs of the country. In 2002 Russian prime minister
announced that Russian companies and bank would be required to prepare financial statements in
accordance with IFRS in order to increase transparency and encourage investment

Czech Republic
The Czech Republic gained independence in 1993 and tried the shock therapy method but ran
into problems with inflation. The shift from heavy tax orientation to a market driven economy
created by the Ministry of Finance. They are currently working to conform with IFRS that they adopt
IFRS by 2005 as a member of the EU.

The current tax system still depends on accounting rules. As such, changes in current accounting
regulations after income before tax purposes for tax calculations. Should the government fail to
amend the tax act before IFRS becomes the countrys required standards, it will lose its power to
amend rules to adjust the tax base.