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University of Arkansas, Fayetteville ScholarWorks@UARK Accounting Undergraduate Honors Theses Accounting 5-2014 Lost in translation: Impediments to the homogenous interpretation of IFRS translations Addison N. Scott University of Arkansas, Fayetteville Follow this and additional works at: http://scholarworks.uark.edu/acctuht Part of the Accounting Commons Recommended Citation Scott, Addison N., "Lost in translation: Impediments to the homogenous interpretation of IFRS translations" (2014). Accounting Undergraduate Honors Theses. 10. http://scholarworks.uark.edu/acctuht/10 This Thesis is brought to you for free and open access by the Accounting at ScholarWorks@UARK. It has been accepted for inclusion in Accounting Undergraduate Honors Theses by an authorized administrator of ScholarWorks@UARK. For more information, please contact scholar@uark.edu, ccmiddle@uark.edu. Lost in Translation: Impediments to the homogenous interpretation of IFRS translations   By: Addison Nicole Deavers Scott Advisor: Dr. James Myers An Honors Thesis in partial fulfillment of the requirements for the degree of Bachelor of Science in Business Administration in Accounting and Finance and for the degree of Bachelor of Science in International Business in Economics Sam M. Walton College of Business University of Arkansas Fayetteville, Arkansas May 10, 2014 Table of Contents   Introduction Literature Review Linguistic Analysis Cultural Analysis Conclusion and Recommendations Bibliography 2 5 7 14 22 27     1   Introduction The past century has been characterized by efforts to make the world more interconnected. As economies become more integrated, financial information must become more comparable across borders (Davidson & Chrisman, 1993). In order to satisfy this growing need, regulators and accounting professionals have pursued the harmonization of national accounting standards. The effort to develop a transnational set of accounting standards began with the establishment of the International Accounting Standards Committee (IASC) in 1973 (FASB, 2013). Now reorganized as the International Accounting Standards Board (IASB), this transnational organization is responsible for the development of International Financial Reporting Standards (IFRS). These standards have been adopted in more than 100 countries and are currently available in 47 languages.   The benefits of IFRS seem intuitive. Before the availability of common international accounting standards, companies prepared financial statements in accordance with their own domestic national accounting standards. The differences among these national accounting standards rendered the comparability of financial information across borders nearly impossible. IFRS provides a common business language through which users of accounting information can compare the financial performance of a business in one country with that of a similar business in another country. The financial statements for two businesses prepared using the same accounting standards should be comparable (Doupnik & Richter, 2006). There are reasons to believe that this is not always the case, even when both businesses use IFRS. One important reason is the inherent need to translate international accounting standards. While different translations of IFRS may simply be assumed equivalent, there is strong evidence that translations of 2   accounting standards do not retain their original intent and meaning (Davidson & Chrisman, 1993). There are many examples of barriers to perfect translation of IFRS. One common problem is the lack of equivalent accounting concepts in different countries. For example, the English term “depreciation” is used to describe the systematic and rational allocation of the cost of tangible assets over the periods benefitted, but a different English term, “amortization,” is used to describe a similar process used to record allocations of the cost of intangible assets like goodwill. In Finnish, the term “poisto” is used for both concepts. Thus, the Finnish language cannot be used to differentiate between the allocation of costs associated with tangible and intangible assets (Kettunen, 2011). This simple example illustrates how difficult it can be to translate technical accounting terminology. Potential problems with translations can also be observed by comparing existing translations of IFRS texts. For example, while the English term “remote” is used in both IAS 31 and IAS 37 to define thresholds for the disclosure of certain contingent liabilities, the German version uses “unwahrscheinlich” (in English, “improbable”) in IAS 31 and “äuβerst gering” (in English, “extremely remote”) in IAS 37 (Tsakumis, Campbell & Doupnik, 2009). Although English and German accountants use the same accounting standards to guide the disclosure of contingent liabilities, the translation of the standards appears to encourage different interpretations for English versus German users. That is, the difference in terminology used in the German versions of IAS 31 and IAS 37 seems to encourage the use of different probability thresholds for determining the non-disclosure of the contingent liabilities referred to in each respective standard while the English version’s consistent use of the term “remote” seems to imply that approximately the same threshold should be used in applying both standards. This difference may indicate that English and German accounting practitioners do not use the same basis for their decisions related to the disclosure of 3   contingent liabilities. Similarly, there may be differences in how English and German financial statement users interpret contingent liability disclosures. This example clearly illustrates that inconsistencies in the translations of IFRS may result in significant differences in their application and interpretation. Inconsistent application of international accounting standards presents a significant threat to the comparability of international financial information. When financial information is prepared in accordance with IFRS, users of that information may assume that the application of the accounting rules is consistent across countries. In actuality, many differences in interpretation and application can occur because of the difficulties inherent in translating the standards from one language to another. This should be a concern for the international business community. The problems associated with inconsistent application of translations of IFRS are difficult to isolate and study. Language is naturally intertwined with elements of culture and history. Thus, issues with translating technical materials such as accounting standards are complex (Baskerville & Evans, 2011). This paper seeks to identify some of the factors that may impede the homogenous interpretation and application of IFRS. Because of the complexity of the issue, I take a qualitative approach that draws on the disciplines of linguistics and cultural studies to analyze why translations of international accounting standards may be misinterpreted. The structure of this paper is as follows. First, I summarize and review relevant literature. Next, I analyze specific factors related to misinterpretation using relevant research from the fields of linguistics and cultural studies. This provides a better understanding of how translation issues arise and affect the interpretation of IFRS. I then conclude with a summary of the potential sources of translation problems and provide six recommendations 4   for how to proceed with the development, translation, adoption, and use of IFRS. Literature Review As the acceptance of IFRS continues to grow around the world, accounting researchers have identified translation challenges as a potential roadblock and have called for greater research on this subject. For example, Nobes (2006, p. 237) explains that “there is a risk that the process of translation will change or lose meaning from the original version” and suggests several topics for further research such as the Portuguese translation of the IAS 7 definition of cash and cash equivalents. Zeff (2007) also identifies language as a significant impediment to the homogenous interpretation of accounting standards and warns that this problem could inhibit the comparability of accounting information. Tsakumis, Campbell, and Doupnik (2009, p. 34) identifies translation and culture as “two factors… that could undermine the rigorous interpretation and application of IFRS” and goes on to further outline potential problems that arise with translations through specific examples. Several studies seek to analyze the effects that language has on the interpretation of uncertainty expressions (Davidson & Chrisman, 1993; Doupnik & Richter, 2003). These studies measure the interpretation of uncertainty expressions (e.g., probable, certain, reasonably expected, etc.) by asking subjects from different language groups to assign a probability to each expression. Results of these experiments indicate that significant differences in the interpretation of uncertainty expressions exist across different language groups. This suggests that “perfect translation may not be achievable” (Davidson & Chrisman, 1992, p. 7). There is also an emerging body of literature relating to the challenges of translating accounting standards. Some studies employ a case study approach to analyze problems associated with the translation of accounting terminology. For example, Evans (2004) 5   surveys the historical development of national accounting subcultures and theories of linguistics. This serves as the basis for her analysis of three case studies that illustrate fundamental differences in the way that accounting terms are interpreted by speakers of different languages. She concludes that “translation is not impossible, but… it is likely to be incomplete” (Evans, 2004, p. 239. Dalghren and Nilsson (2009) examines Swedish translations of specific International Accounting Standards, illustrating that existing translations of standards are often incomplete and not equivalent to the original English versions. Other studies employ interview and survey techniques to gather information about specific problems that IFRS translators face. Through interviews with the translators involved in the Finnish translation of IFRS, Kettunen (2011) identifies and analyzes key issues with the translation process, some of which include inherent differences in terminology across different languages, difficulty in interpreting the original English text, and translators’ lack of accounting knowledge. Baskerville and Evans (2011) considers a much broader scope, surveying authors and translators of IFRS accounting textbooks from all European Union member states and candidate countries. They identify specific challenges that translators face as well as solutions that translators have used to overcome those challenges. They also provide relevant policy recommendations that would alleviate some of the difficulties of translation and limit misinterpretations of IFRS translations. Some of these policy recommendations include increasing regulators’ awareness of the limitations of translation, fostering a greater understanding of existing accounting subcultures on the part of translators, and standardizing IFRS terminology. Overall, the general consensus among accounting researchers related to the translation of international accounting standards appears to be that translation is inherently difficult and can lead to different interpretations and applications of accounting standards. However, 6   there is evidence that effective translation is achievable (Baskerville & Evans, 2011). Specifically, translators who responded to the survey in Baskerville and Evans (2011) imply that translation challenges are not entirely insurmountable. They suggest that “[w]here problems arise, a number of strategies and solutions are adopted to reduce their impact” (Baskerville & Evans, 2011, p. 57). Our understanding of translation difficulties and how to overcome them is likely to grow as the adoption of IFRS spreads. This paper seeks to establish a framework for considering translation challenges in the development, adoption, and use of international accounting standards. Understanding the complexity of translation and how to approach it in the context of international accounting standards is relevant to researchers, policy makers, accounting professionals, and general users of accounting information.   Linguistic Analysis The  relevance  of  linguistics  in  the  field  of  accounting       Even before transnational accounting was as tangible as it is today, linguistics was incorporated into accounting research. Researchers reasoned that accounting is, at its core, a means of communication. “The language of business” is a common metaphor used to broadly explain both the purpose and importance of accounting in basic accounting principles courses and textbooks (Belkaoui, 1978). An interesting question stems from this characterization – is there a consistent language of accounting among accounting professionals in different parts of the world or is the “language of accounting” fragmented by region, with non-transferrable terminology and practices? This question has interesting implications for the feasibility of a transnational set of accounting standards like IFRS. Archer and McLeay (1991) attempts to answer this question and concludes that there are some shared meanings among accounting systems around the world. Basic underlying 7   principles like double entry accounting and accrual accounting seem to be understood and applied consistently, although more specific terminology and practices, such as the wording of an audit opinion, can differ dramatically from country to country. This indicates that the common “language of accounting” has many different accents and dialects, much like many of the world’s widely spoken languages. This seems to imply that international accounting standards are attainable, but their development and use will require a great deal of collaboration with regards to the details of the standards and practices. Belkaoui (1978) uses the idea of accounting as a language in a somewhat different manner. He directly applies linguistic theory to the field of accounting in order to understand how the actual “language of accounting” influences the behavior of its users (i.e., accounting professors, practitioners, and students). He proposes that accountants’ training and understanding of accounting concepts enables them to describe particular financial phenomena that a layperson cannot easily understand and to perform certain tasks more efficiently than non-accountants. He also hypothesizes that those with an accounting background are “pre-disposed to certain managerial styles” (Belkaoui, 1978, p. 103). These assertions stem from the application of what is known in linguistics as the Sapir-Whorf Hypothesis. The  Sapir-­‐Whorf  Hypothesis:  A  problem  of  perception   The Sapir-Whorf Hypothesis, originally developed by Whorf in 1956, and later extended by his student Sapir in 1965, essentially proposes that “language is an active determinant of thought” (Belkaoui, 1978, p. 98). In other words, the language that a person speaks shapes his or her perception and behavior. A classic example used to illustrate the Sapir-Whorf hypothesis is that of time. Many cultures perceive time differently. European-based languages use a standardized, discrete 8