International accounting Frederick D. S. Choi Gary K. Meek Chapter 2: Development and Classification

Learning objective: 1. Identify and understand the importance of the eight factors that have a significant influence on accounting development. 2. Understand the four approaches to accounting development found in market oriented Western economies and identify countries in which each one in prevalent. 3. Have a basic working knowledge of accounting classifications and how they compare with one another. 4. Explain the difference between the “fair presentation” and “legal compliance” orientations of accounting and identify nations in which each is prevalent. 5. Explain why distinctions of accounting at the national level are becoming blurred.

Why should we want to know how and why accounting develops?

DEVELOPMENT factors have a significant influence on accounting development. 1. Sources of Finance. 2. Legal System. 3. Taxation. 4. Political and Economic Ties 5. Inflation 6. Level of Economic Development 7. Educational Level 8. Culture (1) individualism, (2) uncertainty avoidance, (3) power distance, and (4) masculinity.

framework linking culture and accounting. Professionalism vs. statutory control Uniformity vs. flexibility Conservatism vs. optimism Secrecy vs. transparency

Four Approaches to Accounting Development (1) Under the macroeconomic approach, (2) Under the microeconomic approach, (3) Under the independent discipline approach, (4) Under the uniform approach,

Legal Systems: Common Law vs. Code Law Accounting common law countries is characterized as oriented toward “fair presentation,” transparency and full disclosure, and a separation between financial and tax accounting. Stock markets dominate as a source of finance, and financial reporting is aimed at the information needs of outside investors. Setting accounting standards tends to be a private sector activity, and the accounting profession plays an important role. Common law accounting is often called “Anglo-Saxon,” “British-American,” or “micro based.”

.. Legal Systems: Common Law vs. Code Law Accounting code law countries is characterized as legalistic in orientation, opaque with low disclosure, and an alignment between financial and tax accounting. Banks or governments (“insiders”) dominate as a source of finance, and financial reporting is aimed at creditor protection. Setting accounting standards tends to be a public sector activity, with relatively less influence by the accounting profession.