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International Accounting, 6/e. Frederick D.S. Choi Gary K. Meek. Chapter 2: Development and Classification. Learning Objectives. Identify and understand the importance of the eight factors that have a significant influence on accounting development.

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international accounting 6 e

International Accounting, 6/e

Frederick D.S. Choi

Gary K. Meek

Chapter 2: Development and Classification

learning objectives
Learning Objectives
  • Identify and understand the importance of the eight factors that have a significant influence on accounting development.
  • Understand the four approaches to accounting development found in market-oriented Westerneconomies and identify countries in which each approach is prevalent.
  • Have a basic working knowledge of accounting classifications and how they compare with one another.
  • Explain the difference between the “fair presentation” and “legal compliance” orientations of accounting and identify nations in which each is prevalent.
  • Explain why distinctions of accounting at the national level are becoming blurred.
why study 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.
      • Reveals what group members have in common, and
      • What distinguishes groups from each other
  • 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.
development contin
Development (contin)
  • 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.
development contin6
Development (contin)
  • 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?
  • Political and economic ties
    • Accounting ideas and technologies are transferred through conquest, commerce, and other forces.
  • Inflation
    • Inflation distorts historical cost measurements.
    • Countries with high inflation often require that companies incorporate price changes into the accounts.
development contin7
Development (contin)
  • 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.
  • 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
development contin8
Development (contin)
  • 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
development contin9
Development (contin)
  • Linking the two:
  • 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
classification contin
Classification (contin)
  • 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
classification contin12
Classification (contin)
  • 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.
classification contin13
Classification (contin)
  • 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