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International Accounting : Development and Classification

International Accounting : Development and Classification

Why Study Development and Classification?

Development

  • Helps understand a nation’s accounting.
  • Explains the differences and similarities in accounting around the world.

Classification

  • 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.

Development

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.

◦       Banks

  • –   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.

3.  Taxation

◦       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.

5.  Inflation

◦       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.

8.  SUMMARY

◦       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

Classification

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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