Free Accounting Essays - Financial Accounting and Reporting in France
Outline
Introduction
‘Duality’ of French Accounting System
Comparison of French Accounting System with US and UK Accounting Systems
Benefits of Harmonization
Effect of EEC Wide Uniform Accounting Practices on France
Conclusions
Summary
French Accounting Standardization Commission introduced a formal dualism, where cost accounting codes were separated from financial accounting codes. This resulted in a formal book keeping system where codes could be simply filled in a pre-set format for the balance sheet and profit and loss account
France has followed a strict accounting system and for historical reasons its accounting system has remained significantly different from other EEC countries. Uniform accounting standards introduced by the EEC will gradually harmonize accounting practices throughout the EEC. The historical differences and national pride will probably allow continuation of a few differences.
French and American systems continue to be substantially different. The effort to introduce an International Accounting System will be helpful for the new global economy, and it is likely that in the years to come most of the developed countries will adopt a broadly common accounting system.
Introduction
The accounting system variation in different countries is largely imbedded in history. The system of government and the way business was viewed in those countries influenced their financial accounting procedures.
Regulation in business accounting in France was introduced in 1673 when accounts record keeping in a particular format was introduced. The commercial law of 1808 and limited company regulations of 1867 strengthened the French business accounting system.
The introduction of Income Tax Regulations in 1920 changed the focus of financial accounting towards the tax-based accounting. European accounting specialists started focusing on a chart-based system, to standardize and simplify the financial reporting procedures [Roberts, 2005]. The resulting system mimicked the operating procedures of a business enterprise. The input and output from the enterprise and the activities within the enterprise were included in the accounting system. The development of this accounting format during the war years led to financial accounting and reporting format in the Plan Comptable Général (PCG), the General Accounting Plan. The Accounts Standardization Committee prepared the first national PCG in 1947. The 1947 PCG was designed for public sector enterprises.
Duality of French Accounting System
The new PCG has continued in the old historical chart format but it made a formal dualism as its basis. [Parker, 2003] described this ‘formal dualism’ as separation of cost and financial accounting. The codes for cost and financial accounting were totally separated and the profit and loss accounting system was based on expenditure by nature, e.g. expenditure on materials, depreciation, labor costs etc.
THE 1947 system for public sector enterprises and its expansion to include private enterprises in 1952, 1957 and 1962 made the new PCG based system applicable to all enterprises. A tax regulation was also introduce to bring the tax return format in line with PCG format to bring the total accounting system in conformity with PCG chart based system.
The system was deliberately kept simple for easy use and transparency of accounting. These PCGs relied on a system of account codes. The enterprise accountant only has to classify all transactions according to the nature of expense into its account code. Inserting this information into the prescribed forms could then generate the financial statement.
The reason for wide scale acceptance of PCG format are its simplicity, training and schooling of accountants in the system from the very beginning and a broad familiarity of all accounting and tax professionals in the format.
Comparison of French Accounting with UK and USA
The accounting systems in countries have remained substantially different. The accounting professional of one country are expected to undergo substantial training and pass conversion examinations before being allowed to practice in their profession in another country. Requirement for qualified auditors are more stringent in France and UK then in USA.
In France, the government sets the standard, while in UK and US accounting bodies determine the formats and procedures. The inflation accounting is also different in all three countries. In France the managers could face prosecution if the company they manage goes bankrupt while US and UK managers have to be found fraudulent to face the same fate. French system does not practice deferred tax while the other two have this provision.
Benefits of Harmonization
France is a part of EEC and it is important for members of a single economic community to have uniform accounting procedures. An International Financial Reporting Standard (IFRS) is now being used for promoting harmony in international accounting. EEC has been at the forefront of IFRS and all member states were expected to conform to this standard by 2005 [Ernst & Young, 2005].
An international harmonization in accounting would be beneficial in the global economy. Multinational corporations will benefit from uniformity of financial accounting and reporting. The international investor will also benefit from the common terminology and accounting practices.
Developed countries have evolved an advance system of accounting best suited to their needs. They can rightfully be proud of these systems. The problem is that a sense of pride in their accounting system is likely to be a major hurdle in any attempt to harmonize the procedures.
Harmonization of French Accounting with EEC Policies
In line with the responsibility of EEC member state and France’s own desire to promote international harmonization in financial accounting, the country has started modifying its accounting system to bring it in line with EEC directives and also of International Accounting Standard Committee (IASC).
The EEC regulation known as 4th directive on Company Law Harmonization brought the 1982 PCG. This was followed by 7th EEC Directive compelling the EEC companies to prepare their consolidated accounts under the set of rules laid in the 7th Directive. The French government introduced a new chapter to the 1982 PCG to accommodate the new rule in the French accounting rules.
The new PCG assembles chart into 9 groups. The first digit in the code identifies the group. The second digit is for the ledger framework while three more digits complete the code for other heads within the main category. The accounting heads are [Roberts, 2003]:
Equity, provisions and non-current liabilities
Non-current assets
Inventories
Personal accounts
Financial accounts
Expenses
Revenues
Special accounts (optional)
Management accounts (optional)
The new PCG complies with the EEC directives. The French financial accounting and reporting system has been able to move with the requirements of times and it is certain that parts of this convenient chart accounting system, which are also common with the US Generally Acceptable Accounting Procedures (GAAP) will be incorporated in the International Accounting Standard.
Although both UK and France are now following the new EEC directives there are still significant differences in the French and British financial accounting and reporting system. [Jones & Samar-Fauchon, 2001] have carried out a detailed analysis of the main differences between the UK and French accounting practices. They point out that the differences in accounts consolidation, associated and joint ventures accounting, accounting for business combination, tangible and intangibles assets accounting, income tax, employee benefit accounting and capital and shares accounting were still substantially apart. The IASC and EEC have to do substantial work to have a system, which can be broadly similar to achieve their aim of harmonization of accounting practices.
Conclusions
International accounting systems differ a lot from each other. French financial accounting and reporting system has evolved over the last three hundred years. The origin of the present chart based form can be traced to 1927. The system has evolved over the years resulting in French system becoming one of the most powerful and useful accounting systems in the world.
The global economy is favoring a uniform financial accounting and reporting system. France being a member of EEC is leading the drive to harmonize accounting standards initially within EEC and as future target help in evolving an international accounting system.
Bibliography
Doost, R. K., and Ligon, K.M., Management Accounting, October 1986; retrieved from Internet on Oct 27, 2005, http://college.hmco.com/accounting/resources/students/readings/38-doost.html
Jones, C. and Samar-Fauchon. M., EUROPEAN COMPARISON-The main differences between UK and French accounting practice, Deloitte & Touche, 2001.
Lian, F.A. IFRS: A Strategic Opportunity for Listed Companies Around the World, Retrieved from Internet on Oct 27, 2005, http://www.ey.com/GLOBAL/content.nsf/International/Assurance_-_IAS_Overview
Nobes, C., and Parker, R., Comparative International Accounting, 2003
Roberts, A., Working Paper in Accounting No. 4, Business History & Europe Conf., University of Canterbury, New Zealand, 2003.
