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This paper examines the history of Denmark, its form of government, political background, legal system, taxation, culture, accounting practices and auditing practices, factors contributing to the adoption of an International Accounting Framework, its major industries, natural resources, trading partners, financial and investment information, relationship among other countries, and a SWOT analysis of the country. In addition to this, recommendations and strategies are proposed both for Denmark and investors in order to enhance the comparability of financial statements and reduce investment risks.
Smallest of the Scandinavian countries, Denmark (officially called the Kingdom of Denmark) is located in northern Europe, bordering the Baltic Sea and the North Sea, on a peninsula north of Germany. It lies between 54° and 58° of latitude north and 8° and 15° of longitude east with an area of 43098 sq km (16640 sq miles). The country consists of several islands in the Baltic Sea; the two largest being Sjaelland, and Fyn. According to the World Fact Book, (2010), as of July, 2010, Denmark has a population of approximately six (6) million people. The capital of Denmark is Copenhagen (Kobenhavn). The main airport is called Kastrup. The principal language spoken is that of Danish. However, they also speak English, Greenlandic and German. In terms of life expectancy, women tend to live four (4) years longer (79 years) than men (75 years). In accomplishing their auditing and accounting procedures, Denmark follows a calendar year.
Denmark is a member state of the European Union which is a single market. The European Union laws are adopted, written into national laws and enforced in every member state. They however ensure that there is constant monitoring and reporting so as to ensure that laws are correctly enforced and applied.
History of Denmark
The beginning of Denmark dates back to the Vikings era (9th -11th centuries) at this point in time it became part of European history. The Danes were the most notorious Vikings who plundered churches and monasteries. Additionally, in the 13th and 17th century, Denmark had superpower influence. It forced relinquishments of land and won many battles as a result the present configuration of Denmark is a representation 400 years of warfare.
King Christian IV was the constructor of Denmark. He reigned as king from 1588 until his death in 1648. He reigned for more than 59 years; the longest- reigning monarch of Denmark. He was remembered as one of the most remarkable Danish kings having initiated many reforms and projects for the country.
During World War I and World War II, the country remained neutral but changed its constitution to make it more democratic in the 1950's. During World War II, the Danes had great struggles with Germany for their country, but eventually overpowered them. In the 1960's the country flourished, but became more economical in the 1970's.
The Danish Kings and Queens
The Danish Royal Family and Monarchy is a very respected and is highly supported by the Danes. At the head of the monarch is Queen Margaret II, and Prince Henrik; the eldest son next in line as heir. Directly under the Danish Queen and Prince Henrik, are the children of the monarch namely: Prince Fredrik and Princess Mary, Prince Christian and Princess Isabella and Prince Joachin and Princess Marie.
Form of Government and Political Background
Denmark is a constitutional Monarchy whose constitution was established on June 5th, 1953 and signed by King Frederick and is still enforced today. The head of state is guided by the constitution. Currently, Queen Margrethe II is the head of state and has been so since January 14th, 1972. Directly after her is the eldest son of the monarch Prince Frederik who will be next heir to take up this role. The queen rights, duties, and responsibilities are spelled out in written law or by custom. The country's executive branch is made up of the chief of state and the head of government. However, the prime minister; Lars Loekke Rasmussen is currently the head of government and has been so since April 5th, 2009. As it relates to the formation of government for election, the monarchy is hereditary. Subsequent to legislative elections, the leader of the majority party or the leader of the majority coalition usually appointed a prime minister by the monarch. Elections in Denmark are held every four (4) years and their political parties include: Danish people's party, Conservative party, Social Liberal party, Socialist People's party and Christians People's party.
Financial and Investment Information
This section contains all the necessary and important information pertaining to starting a business in Denmark.
The currency of Denmark is the Danish Krone or Denmark Kroner which was first established in 1873, (GoCurrency, 2010). Krone means crown in English, which is representative of the monarch in Denmark. The Denmark krone is pegged to the Euro today much like the EC Dollar is tied to the US Dollar. Before the establishment of the EURO the Krone was pinned to the German Mark. Currently, one Danish Krone is equivalent to US $0.19c.
Is Denmark a "good" country to invest in?
How does it rank on an international scale for transparency? According to Transparency International, (2009) on the Corruption Perception Index for 2009, Denmark came in second for transparency in the world with a rating of 9.3 out of 10. A score of zero means the country is very corrupt and a score of 10 means no corruption. This shows that investors are very likely to enter into Denmark due to less corruption. Along with this great transparency score, Denmark is a very self sufficient and energy rich country. It has an abundance of resources including but not limited to: Petroleum, natural gas, fish, salt, limestone, chalk, stone, gravel, and sand. These are just some of the reasons why Denmark has flourished so well over the years with a high standard of living.
Some other reasons why Denmark is currently the top country to conduct business for the next two years since 2005 include:
Advanced telecommunication and infrastructure - this helped boost Denmark ratings as the top country to conduct business for the next two years. This was due to its very modern transport system, good infrastructure, and its position as a leader in the technology development field.
Tax rate of 25% - as compared to the U.S. maximum tax rate of 39% for corporations, Denmark can boast about this.
Well educated graduates - Denmark can also pride itself on having high literacy rates and a very highly skilled labor force.
Excellent language skills - many of the Danes are bilingual. They speak many different languages.
Refer to appendix
Denmark's labor force is mainly stationed in the service industry (72.7%), then the production industry has (23.8%) and finally the agricultural industry (2.9%). It can boast of a very low inflation rate of only 3.5% and an unemployment rate of 2%. Up to June 2010, Denmark had exports of 46.4 billion krone in products such as; machinery, food products, chemicals, and furniture. This can be compared to their imports of 40.8 billion krone in May 2010 of goods such as; equipment, foodstuff, and consumer goods. This shows their trade was almost balanced.
Denmark trades with mainly Western Europe. The EU countries account for 70% of Danish exports and Germany is their primary trading partner, along with Sweden, United Kingdom, United States and Norway. Denmark imports mainly from the same Western European countries.
Factors influencing Denmark's national accounting development
In the year 1903, the Danish income tax was introduced. This tax is divided into two taxes: state tax and local tax. The state tax represents a progressive tax while the local tax signifies a flat tax. All income originating in terms of employment or self-employment is levied. In Denmark businesses tax account is separate from its financial account due to the fact that there are differences in allowable income and expenses under either methods. Additionally, both reporting standards are enforced so neither takes precedence over the next.
Within Denmark's legal system are the provincial laws which are the oldest written sources of law from the 12th century. From then onwards, numerous provincials from the law was then incorporated into Danish Law which have been influenced by foreign law. The Nordic co-operation has played an important part in the development of Danish law. Furthermore, a particular feature of Danish law is the fact that the civil law rules are only found in specific legislation or are established by practice. Denmark's constitution supports an investment climate therefore its legal system helps protect investors and creditors rights by the constant revision of its laws (common law).
Branches of Law
Denmark's legal system operates on the basis of a division into public law and civil law. Public law is divided into constitutional law, which concerns the provisions governing the supreme state organs, international law which regulates relations between states, administrative law, i.e. the legal rules applying to or used by local authority and state administration, criminal law, which contains the rules for what actions are punishable by law, and the law of procedure, the rules concerning the handling of cases by the courts. Conversely, Civil law regulates reciprocal relations between citizens and between natural persons and legal persons, e.g. companies and institutions. The rules must weigh and protect the interests of the individual parties. Important areas in civil law are the law of contracts and torts, the law of property and the law of capacity, family law and the law of wills and succession. (Refer to Appendix)
Sources of finance
There is a diverse range of sources of finance in Denmark, from public incentives to private investors. Some others include: banks, debt factoring, leasing, venture capitalist and the stock markets. Denmark fully maintains free trade agreements of the EU and it does not discriminate against foreign investors. Mortgage financing of real estate can be deemed very flattering, the rate are very low.
What makes the Danish people special?
Danes are very modest and humble. They do not like attention. They value punctuality. Being on time and sticking to time is very central to them. Danes are a private people; they don't like to show emotions publically because they see it as a sign of weakness. They are very conservative though they like to be relaxed and casual. According Hofstede Cultural Dimension such a society is considered to be collective and achievement oriented. Therefore, it is based on principles of uniformity which help guard against unforeseen events. Consequently, it laws are flexible or can be adjusted base on current event. Given this their accounting standards incorporates or are adjusted for changes in current economic activities.
Welfare state with social responsibility - the heads of the country provide for the people.
Lack of openness to the world - since they are a reserved people, this can actually keep investors out of the country.
Merge small and medium size businesses - since the country mainly consists of these types of businesses, merging can give Denmark a more competitive edge in the global market.
Higher taxation - if the tax rate increases, then businesses will have to pay more in taxes and potential incoming business can pull out of the country because of this.
Lack of tolerance
High growth in the pharmaceutical industry - Denmark can venture into this arena.
Current economic recession - slower economic growth and smaller investment from foreign investors.
Hide their emotions
Strategic geographic position - Denmark acts a bridge between Scandinavian and other European markets, this is a greater chance for increased exports.
Accounting in Denmark
Prior to Denmark's inception into European Union its accounting rules traditionally were influenced by the Anglo Saxon traditions where the detail implementations of rules were required. Currently, the main factor that has influenced Denmark's national accounting development is the fact that it is a member of the European Union (EU). Denmark as a member state of the EU has to adhere to the rules, laws and standards adopted by the union which observance are monitored and reported. In accordance to the European Union, within Denmark all entities are required to follow either the IFRS or the Denmark's GAAP. Financial and non financial corporations are required to use International Financial Reporting Standard. All other entities have the choice of following the Generally Accepted Accounting Principles or the IFRS (eStandard Forum, 2010).
Currently, IFRS standards that are enforced by the EU are endorsed through a nine step process. The endorsement process begins with issuance of a new standard by the IAASB. This standard is reviewed by the European Financial Reporting Advisory Group (EFRAG) who advices the European Commission whether the standards are "true and fair view principle conducive to the European public good, and understandable, relevance, reliable and comparable", (EC. Europa. EU, n.d.). Following the review, the Standards Advice Review Group critics the impartiality and stability of the EFRAG's advice. If the critic is affirmative, the standard moves on to the sixth stage of the process.
This stage comprises of a committee, namely the Accounting Regulatory Committee who votes on the commission proposal. In light of a favorable vote the standard then passes on to the seventh and eight stages which occur simultaneously. At these stages the Council of the European Union has three months to contest the endorsement of the draft regulation by the commission. If the standard is thereby approved or the three months period passes without constructive opposition from the European Parliament or Council, the commission by this mean espouse the standard. Subsequent to the adoption the standard is published in the official journal and enforced as of the day of approval (EC. Europa. EU, n.d.). It should be noted that the majority of the ISAs disseminated by the IAASB have been adopted by the Union with the exclusion of "ISA 320, ISA 501, and ISA 600". Such stringent rules are applied by the European Union so as to ensure the comparability of reports on an international level. (Refer to appendix)
The GAAP enacted in Denmark comprised of "the Financial Statements Act, the Danish Accounting Standards (DKASs), and Ministerial Orders issued by the Ministry of Business and Industry in Denmark", (eStandard Forum, 2010). The financial statement accounting act of Denmark is similar to the international Accounting Board Framework the differences arises as a result of the incorporation of the European Commission requirements.
The principal auditing and reporting acts in Denmark are the Danish Public Accounting Act, Act on Private companies, the Act on Public Accountant and Registered Accountant. These acts speak to how accounting should be carried out and the required format. Additionally, it states the language, currency, capital structure, management structure and employee compensation the different business entities should follow. Denmark being multi lingual, liberal, educated, and an economically advance country allows companies to report in any language and currency they see fit. However, the acts also specify that a report should also be available in Denmark Krone or Euro and Dutch.
Audit profession in Denmark consists of two groups: the State Authorized Public Accountant (SAPA) and the Registered Accountant (RA). The SAPA audits larger firms while the RA audit smaller ones. These two organisations are regulated by the Danish Commerce and Companies Agency. This agency ensures that officers are not employees, and that their accounts are a true and fair representation of the company's financial standing.
Other Factors Contributing To Denmark Adopting an International Accounting Framework
There are other international factors which had contributed to the development of accounting standard within Denmark. They are: Growth & Spread of Multinational Operations, Internalization of capital markets, Global Competition and Financial Innovation.
Growth & Spread of Multinational Operations
Multinational companies played an important role in the development of companies' core competencies in Denmark. According to a survey carried out Denmark Statistic community more than 3500 foreign companies are based in Denmark and 375 of these are from America, (Reitz & Ronoe, 2007 and Ministry of Foreign Affairs of Denmark, 2010). These 3500 foreign companies are responsible for 20% of Denmark's private sector employment ( Ministry of Foreign Affairs of Denmark, 2010). Given such an important role of multinational and total percentage private sector ownership it bears to reason that this will greatly influence the need of international accounting framework within Denmark in order to assist multinationals in their consolidation processes.
Internalization of capital markets
There are two main capital markets operating in Denmark. They are the Copenhagen Stock Exchange (CSE) which focuses mainly on growth companies and the Dansk AMP which focuses mainly on small and medium size companies, (Getting The Deal Through, 2010). The CSE is a subsidiary of the Nasdaq OMX which is the world's largest stock exchange company which has operations in the six continents. Twenty of Denmark's blue chip companies are listed on the OMX (Nasdaq OMX, 2010).
In Denmark the primary law governing the securities offering is the Securities Trading Act. It states administrative orders and requirements of listing companies. For example, it states that "companies shall publish periodical financial information, namely, the annual report and an interim report regarding its activities and results for the first three, six and nine months of each financial year" (Getting The Deal Through, 2010). The administrative, regulatory and supervisory body of the act is the "Danish Financial Supervisory Authority (DFSA)" (Getting The Deal Through, 2010). Additionally, the DFSA duty is to re-examine and endorse prospectus on public offering. The DFSA also requires that listed companies report in accordance to IFRS (Getting The Deal Through, 2010). This ensures that the companies listed OMX reports are on an international comparative standard.
Denmark companies are global competitors in the field of life science, creative and entertainment and clean-tech, for example Denmark is the world's largest maker of wind turbines ( Copenhagen Capacity, 2010). Additionally, the majority of its global competitive companies are blue chips listed on the CSE. Such mega companies often bench mark themselves against competitors on a global level. For this reason following an international accounting frame work is utmost important.
Financial innovations are financial instruments that aid companies in protecting themselves against risk and to gain money from the appreciation of asset. Examples of such instruments are future, option, stocks and bonds. To gain the true effectiveness of the hedging capabilities of instruments, investors have to utilize instruments from global sources. To do this efficiently and simply companies should report in accordance to an international standard, (Getting The Deal Through, 2010).
Denmark has close ties to countries within the European Union such as Germany who is its biggest trading partner and United Kingdom whose monarchy it is closely tied to. Outside the union it has international ties with the United States of America.
The United States is currently Denmark's number one investor whose investments contribute approximately 28% to the regions GDP as of 2003, (US Commercial Service, 2010). Denmark is said to be a very open country where investment can happen without restriction, except in the case of large mergers which have to be approved by the EU. As of 2001 the Danish government signed a "Treaty to investor" protocol that enhances the U.S. - Danish bilateral Friendship, Commerce and Navigation Treaty. This protocol provides easy access to non immigrant visas to the US managerial staff. Also it ensures that there is a special US- Denmark tax rate of 28% for subsidiaries whose parents companies owned more than twenty percent of the subsidiaries. Additionally, dividends paid by US subsidiary are tax exempted, (US Commercial Service, 2010).
It is recommended that investors, both companies and individual, who are not required by the European Commission to follow IFRS should transfer their accounts to domestics GAAP. This will better enable them to make comparison and to adhere to local legislative requirements, for example local tax requirements.
Additionally, companies should use the language of the domestic country and the international language, English so as to aid international investors understanding of the accounts and adherence to local laws.
Also companies should align return with risk. If investing in a company in Denmark is very risky the investor should ensure it receive a likewise or greater return.
Also investors should work closely with a lawyer and auditors before making vast financial decisions.
Denmark should develop its relationship with Iraq despite their stance on terrorism; due to the fact the region contribute significantly to Denmark's GDP. By doing this they can aid in the stabilization and reconstruction of the conflict areas.
This paper explained the accounting standard followed in Denmark and it outlined the main factors that have contributed to its development on a national and international level. Additionally, it highlighted the history, politics, and culture of Demark and how they may assist in hindering or enhancing its investment climate. Comments and recommendations were presented towards the improvement of the accounting process applied by international companies operating in Denmark.
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