Effects of Accounting Practice Divergence: Canada and the United States
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* Priorto WorldWar I, the Londoncapital marketsatisfied the bulkof Canada'sfinan- INTRODUCTION cial needs for the expansion of wheat production,lumbering,minerals, and railway construction.Inthe 1920s, the inflowof capitalfromthe UnitedStates began to gather momentum,surged afterWorldWar II,and supplantedthe importanceof othernational sources of investment.By the early 1970s, eighty-fourpercent of all foreigninvestment in Canada was derivedfromthe UnitedStates.1 In manufacturing,mining,and petroleum, more than half of the total capital invested came from this source.2 No other majordeveloped economy exhibitssuch a degree of dependence and integrationwitha neighboringeconomy. In spite of their interrelationships,the Canadian accounting profession has chosen to implementaccounting practices which differfrom those in the UnitedStates.3 These differences between Canadianand UnitedStates accounting practices can be classified intothree subsets: (A)Type I, areas of conflict;(B) Type II,areas where accounting practices otherthan those acceptable in the othernationare permissible;and (C)Type III,areas where additionaldisclosures are requiredin the othernation.Admittedly,allof these differences have been examined extensively elsewhere,4 but a summary is importantto grasp the extent of the situation. Thereare manyType I,or, areas of conflict,of whichthe followingare representative:5
Canadian Versus United States Financial Reporting
1-1. In Canada, the sinking fund method of depreciation is permitted, whereas it is permitted only in rare instances in the United States. 1-2. The last-in, first-out inventory method is not permitted in Canada although it may be used under special regulations in the United States. 1-3. Accounting for taxes is another conflict area. In the United States, three methods are permitted which include separate computations (A) for each item, (B) for each group, and (C) for all similar type computations. The Canadian recommendations require specific component allocations. 1-4. With pension costs, the Canadian recommendation requires that adjustments brought about by an actuarial revaluation should be included in pension costs of the current period or allocated over several periods to the next revaluation. In the United States past service costs are sometimes treated as a gain or loss, spread over future years, or credited against past service costs depending upon the circumstances. 1-5. Leases have been dealt with extensively in United States practice where capitalization of some types of leases is required, but in Canada, expensing is the general rule. * The authoris an assistant professor of accounting, McGillUniversity,Montreal,Canada. The paper is partof his dissertationforthe Ph.D. in Accountingand InformationSystems at Northwestern University.The workwas fundedjointlyby NorthwesternUniversityand the CanadaCouncil.
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