Financial Reporting Systems of Germany and the Netherlands

Financial Reporting Systems of Germany and the Netherlands Nobes (1998) classifies the German financial reporting system as a Type B (weak equity) and The Netherlands as Type A (strong equity). Compare the financial reporting systems of Germany and The Netherlands. National differences have all become stereotypical. Indeed the differences between countries may be vast. Influences such as family origin, or attitudes towards business culture are inherently reflected in the way businesses are run, managed and owned. There are also many reasons as to why there are differences in financial reporting. These depend on the character of the national legal system, the type of industry financing, the interrelationship between tax and finance reporting systems, the extent of accounting theory progression and even language.(Elliott, 2006)[1] In terms of the legal system between Germany and the Netherlands, it is clear tat they both follow a civil law system which is different to the common la procedure of the United Kingdom contained within the Companies Act 1981.[2] However, for the purposes of this essay, I will focus on the comparisons between the financial supporting systems of German and the Netherlands with regards to the Nobes’ (1998) classification of Germany being a weak equity (Type B) while the Netherlands in a strong Equity (Type A). I will consider Nobes’ theory by considering equity figures for both Germany and the Netherlands in respect of their types of equity and will briefly compare the financial reporting systems of the two countries. Although equity is represented in many different forms, it is generally defined as â€Å"the value of a company which is the property of its ordinary shareholders (the company’s assets less its liabilities, not including the ordinary share capital)[3] In terms of financial accounting reporting, considerations of which is the relevant way of financing a business, i.e. the information required by equity investors are different to those of load creditors. Strong equity can be defined as a high ratio between equity market capitalisation and Gross Domestic Product (GDP) whilst weak equity is a low ratio between market capitalisation and Gross Domestic Product (GDP).[4] I, Germany had the lowest equity of 5 countries which were studied. (49%). This shows that unlike America, France or presumably the Netherlands, Germany does not rely heavily on individual investors. Specifically, Nobes (1998) develops a frameork that seek to explain the differences in international accounting. Nobes catagorises accounting systems into two types: Class A (accounting for outside shareholders) and Class B (accounting for tax and creditors). Two variables determine whether a country will have a Class A or a Class B accounting system: (1) the type of culture and (2) the strength of the equity-outsider financing system. According to the model, countries with Type A cultures have developed strong outsider-equity financing systems that have led to the development of a Class A financial reporting system. Therefore, like America and the UK, the Netherlands has relied on a Type A accounting system that is relaint on a high ratio of equity investment as oposed to loan creditors. Conversely, countries with Type B cultures have weak outsider-equity financing (i.e. weak equity) systems that have led to the development of a Type B financial reporting system . This model is comonly known to be widespread practice within continenatl Europe including Germany. Nobes (1998) stsudies the link between the financing system and accounting, but also believes that a Type A system in terms of equity financing is not entirely dependant on Type A accounting, but instead external or outsider equity financing is imperative. By drawing on examples, Nobes (1998) examines Japan. Japan is a country with many listed companies as well as large equity market, but instead of the market being supported externally, most of the shares are owend by Janpanese banks or other companies, investors etc). According to the model, financial reporting in Japan should exhibit the characteristics of a Type B accounting system. Nonethelss, Nobes (1998) in explaining why Germany is substantialy different to the Netherlands claims that differences in culture, i.e. countries that have altered their culture through war will usually adopt the culture and accounting system imported from the dominating country. This explains, for example, why some post colonial African countries possess a type A system despite having very weak accounting systems. As noted earlier, Nobes focuses his discussion on the link between financing systems and accounting. He assumes that some cultures lead to strong equity-outsider financing systems and others do not, but he leaves the examination of this assumed relationship for others. Nobes appears to assign a very broad view of culture to this variable in his model. In a simplified model presented earlier in his paper he refers to this variable as culture, including institutional structures[5] A brief examination of the differences betweent the culture of institutional structures is examined below. While a Type A classification separates accounting and tax rules, Type B does not.[6] Type A in comparison to Type B also has an extensive auditing system. This is true for the Netherlands in comparison to Germany. In US, UK and Netherlands, link between taxable income and accounting income is much weaker, with separate tax accounts and financial accounts. The information is prepared with external investor information in mind thereby focusing on a large equity market (Type A). In comparison a Type B taxation system such as that of Germany tax accounts which are published financial accounts are not usually prepared for investors, but instead internal forces such as company investors, shareholders etc. In sum, the Type A system such as that in practice in the Netherlands and as proposed by Nobes is one of dynamic accounting formulated with the external investor in mind thereby creating increased demand for external investment. On the other hand, Germany experiences the converse of this, with taxation and accounting system which is interlinked and an intention of financial reporting for internal investors rather than external investors in mind. Bibliography Classification based on Corporate Finance, http://www.people.ex.ac.uk/wl203/BEAM011/Materials/Lecture 10/IA1 Lecture 10.pdf Elliott et al, Financial Accounting and Reporting, (2006 10th ed) Dictionary of Accounting, Collin Publishing (2001) Nobes (1998) Footnotes [1] Elliott et al, Financial Accounting and Reporting, (2006 10th ed) p 136 [2] Ibid, p137. [3] Dictionary of Accounting, Collin Publishing (2001) p.99 [4] Elliott et al, Financial Accounting and Reporting, (2006 10th ed) p 137 [5] Nobes (1998) p. 177 [6] Classification based on Corporate Finance, http://www.people.ex.ac.uk/wl203/BEAM011/Materials/Lecture 10/IA1 Lecture 10.pdf