International Accounting : Development and Classification
Why Study Development and Classification?
- Helps understand a nation’s accounting.
- Explains the differences and similarities in accounting around the world.
- Helps understand why and how national accounting systems differ.
- Helps analyze whether these systems are converging or diverging.
- Are a way of viewing the world.
1. Sources of finance – who, how many, how close?
◦ Equity markets
- Profits measure how well managers have run the company.
- Accounting is used to assess cash flows, risks, and to value the firm.
- Extensive disclosures.
- Conservative earnings for creditor protection.
- Less extensive disclosures.
2. Legal system
◦ Code law
- Laws are all-embracing.
- Accounting tends to be prescriptive and procedural.
- Accounting focuses on legal form.
- Accounting standards and procedures are incorporated into national laws.
◦ Common law
- Laws develop on a case-by-case basis.
- Accounting develops from experience and judgment.
- Accounting tends to be flexible, adaptive, and innovative.
- Accounting focuses on economic substance.
- Accounting rules are established by private sector professional organizations.
◦ Must companies record revenues and expenses in their accounts to claim them for tax purposes?
- Are financial accounting and taxation the same?
- Or are they different?
4. Political and economic ties
◦ Accounting ideas and technologies are transferred through conquest, commerce, and other forces.
◦ Inflation distorts historical cost measurements.
◦ Countries with high inflation often require that companies incorporate price changes into the accounts.
6. Level of economic development
◦ Affects the types of transactions and which ones are most prevalent in the economy which, in turn,
◦ Affects the accounting issues that are faced.
7. Educational level
◦ Affects the capability for professional accounting training.
◦ Where education levels are low, countries import accounting training or send citizens elsewhere to get it.
◦ Several variables are closely associated.
- Common law legal system, strong equity markets, and separation of financial and tax accounting.
- Code law legal system, credit-based financing, and accounting rules that conform to tax law.
◦ Result is two basic orientations of accounting.
- Fair presentation
- Legal compliance
9. Culture and accounting values
◦ Culture (Hofstede)
- Individualism vs. collectivism
- Power distance – high vs. low
- Uncertainty avoidance – high vs. low
- Masculinity vs. femininity
◦ Accounting values (Gray)
- Professionalism vs. statutory control
- Uniformity vs. flexibility
- Conservatism vs. optimism
- Secrecy vs. transparency
1. Four approaches to accounting development (Mueller 1967)
◦ Macroeconomic approach
- Accounting derived from and designed to enhance national macroeconomic goals.
- Example: Sweden
◦ Microeconomic approach
- Accounting derived from microeconomics.
- Maintaining physical capital
- Separation of capital and income
- Replacement costs
- Example: the Netherlands
◦ Independent discipline approach
- Accounting derived from business practices, judgment, and trial-and-error.
- Examples: U.K. and U.S.
◦ Uniform approach
- Accounting is standardized by central government and used as a tool for administrative control.
- Example: France
2. Legal systems: common law vs. code law accounting
◦ Common law accounting
- Oriented toward fair presentation, transparency, and full disclosure
- Separation between tax and financial accounting
- Accounting standard setting in private sector
- Parallels stockholder model of corporate governance
◦ Code law accounting
- Legalistic orientation, opaque with low disclosure
- Alignment between tax and financial accounting
- Accounting standard setting in public sector
- Parallels stakeholder model of corporate governance
3. Practice systems: fair presentation versus legal compliance accounting
◦ Why national accounting distinctions are becoming blurred
- Importance of stock markets as a source of finance is growing.
- Dual financial reporting is becoming more common, particularly where duality is sanctioned.
- Some code law countries are shifting responsibility for accounting standard setting to the private sector.
◦ Fair presentation accounting
- Substance over form.
- Oriented toward decision needs of external investors.
- Helps judge managerial performance and predict future cash flows and profitability
- Extensive disclosures
- IFRS are aimed at fair presentation.
- Found in U.K., U.S., Netherlands and countries influenced by them.
- The trend for consolidated financial statements.
◦ Legal compliance accounting
- Designed to satisfy government-imposed requirements, such as:
- Calculating taxable income
- Complying with macroeconomic plan
- Conservative measurements
- Income smoothing
- Will persist in code law countries for individual-company financial statements.
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