Choi/Meek, 7/e*International Accounting, 7/eFrederick D.S. ChoiGary K. MeekChapter 2: Development and Classification

Choi/Meek, 7/e*Learning ObjectivesIdentify 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 Western economies 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.

Choi/Meek, 7/e*Why Study Development and Classification?DevelopmentHelps understand a nations accounting.Explains the differences and similarities in accounting around the world.ClassificationHelps 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, andWhat distinguishes groups from each other

Choi/Meek, 7/e*DevelopmentSources of finance who, how many, how close?Equity marketsProfits measure how well managers have run the company.Accounting is used to assess cash flows, risks, and to value the firm. Extensive disclosures.BanksConservative earnings for creditor protection.Less extensive disclosures.

Choi/Meek, 7/e*Development (contin)Legal systemCode lawLaws 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 lawLaws 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.

Choi/Meek, 7/e*Development (contin)TaxationMust 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 tiesAccounting ideas and technologies are transferred through conquest, commerce, and other forces.InflationInflation distorts historical cost measurements.Countries with high inflation often require that companies incorporate price changes into the accounts.

Choi/Meek, 7/e*Development (contin)Level of economic developmentAffects the types of transactions and which ones are most prevalent in the economy which, in turn,Affects the accounting issues that are faced.Educational levelAffects the capability for professional accounting training.Where education levels are low, countries import accounting training or send citizens elsewhere to get it.SUMMARYSeveral 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 presentationLegal compliance

Choi/Meek, 7/e*Development (contin)Culture and accounting valuesCulture (Hofstede)Individualism vs. collectivismPower distance high vs. lowUncertainty avoidance high vs. lowMasculinity vs. femininityAccounting values (Gray)Professionalism vs. statutory controlUniformity vs. flexibilityConservatism vs. optimismSecrecy vs. transparency

Choi/Meek, 7/e*Development (contin)Linking the two:

Choi/Meek, 7/e*Classification Four approaches to accounting development (Mueller 1967)Macroeconomic approachAccounting derived from and designed to enhance national macroeconomic goals.Example: SwedenMicroeconomic approachAccounting derived from microeconomics.Maintaining physical capital Separation of capital and incomeReplacement costsExample: the NetherlandsIndependent discipline approachAccounting derived from business practices, judgment, and trial-and-error.Examples: U.K. and U.S.Uniform approachAccounting is standardized by central government and used as a tool for administrative control.Example: France

Choi/Meek, 7/e*Classification (contin)Legal systems: common law vs. code law accountingCommon law accountingOriented toward fair presentation, transparency, and full disclosureSeparation between tax and financial accountingAccounting standard setting in private sectorParallels stockholder model of corporate governanceCode law accountingLegalistic orientation, opaque with low disclosureAlignment between tax and financial accountingAccounting standard setting in public sectorParallels stakeholder model of corporate governance

Choi/Meek, 7/e*Classification (contin)Practice systems: fair presentation versus legal compliance accountingWhy national accounting distinctions are becoming blurredImportance 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 accountingSubstance over form.Oriented toward decision needs of external investors.Helps judge managerial performance and predict future cash flows and profitabilityExtensive disclosuresIFRS are aimed at fair presentation. Found in U.K., U.S., Netherlands and countries influenced by them.The trend for consolidated financial statements.

Choi/Meek, 7/e*Classification (contin)Legal compliance accountingDesigned to satisfy government-imposed requirements, such as:Calculating taxable incomeComplying with macroeconomic planConservative measurementsIncome smoothingWill persist in code law countries for individual-company financial statements

Choi/Meek, 7/e*Other Chapter Exhibit

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