Development and Classification
Sources of finance. Where capital markets/shareholders are the principal source of finance, accounting focuses on profitability, stewardship, and a fair presentation of results and financial position. There are high levels of disclosure in published financial statements. When banks are the principal source of finance, accounting tends to be conservative and disclosures are usually relatively low (banks have direct access to information). When governments are the principal source of finance, accounting is aimed at the information needs of government agencies such as tax collection, assembling macroeconomic statistics, or compliance with macroeconomic goals. b)
Legal system. Accounting in code law countries tends to be highly prescriptive, detailed, and procedural, designed to cover every possible circumstance. Accounting standards are a part of national laws. Accounting in common law countries is more adaptive and innovative and tends to allow more judgment to suit the circumstance. Accounting standards are set in the private sector. c)
Taxation. This tends to parallel the legal system. In common law countries (where accounting standards are set by the accounting profession), accounting and taxation are separate. In code law countries (where accounting standards are national laws), accounting and taxation are essentially the same. d)
Political and economic ties. Accounting technology and expertise is imported and exported based on the contacts that nations have with each other through commerce, conquest, etc. e)
Inflation. Historical cost accounting is the basis for initially recording transactions around the world. Inflation puts stress on the historical cost principle. Where inflation is high, accounting adjusts recorded amounts to reflect price level changes. f)
Level of economic development. This factor defines the difficulty and types of the accounting issues that are faced in a nation. Accounting is complex where business transactions are complex (in highly developed economies); it is simpler where transactions are simpler (in less developed countries). g)
Education levels. This factor defines the limits of accounting sophistication in a nation. Accounting cannot get very sophisticated where education levels are relatively low (unless the country imports accounting training or its citizens are sent elsewhere for it).
The text lists seven environmental circumstances asserted to have direct effects on accounting development. We judgmentally rank the list as follows: a.
Sources of finance
Political and economic ties
Level of economic development
Students may wish to alter this ranking and justify their own. It should also be pointed out that the rankings for certain countries may be quite different.
Capital markets as a source of finance are driving accounting development today. This phenomenon is the reason why the European Union decided to abandon its own effort at developing European accounting principles and require IFRS for EU listed companies. It is behind the convergence movement described in Chapter 8. The chapter argues that the fair presentation versus legal compliance classification describes accounting today better than the one based on legal system. This argument is consistent with sources of finance as the driver of accounting development today.
Level of economic development exerts only a moderate effect. This is because developing economies tend to import accounting technologies (and training) from developed countries. For example, many countries in emerging market economies are adapting sophisticated Western accounting systems in order to enhance their development efforts.
Culture underlies institutional and other arrangements in a nation that directly affect accounting development....
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