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									                 International Accounting, 6/e
                           Frederick D.S. Choi
                                Gary K. Meek

Chapter 2: Development and

Choi/Meek, 6/e                                   1
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 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, 6/e                                                        2
Why Study Development and
    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
          Are a way of viewing the world.
            Reveals what group members have in common, and
            What distinguishes groups from each other

Choi/Meek, 6/e                                                       3
    Sources of finance – who, how many, how
          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.

Choi/Meek, 6/e                                                                  4
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
          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

Choi/Meek, 6/e                                                                        5
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.

Choi/Meek, 6/e                                                          6
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

Choi/Meek, 6/e                                                                                 7
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

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Development (contin)
          Linking the two:

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    Four approaches to accounting development (Mueller 1967)
          Macroeconomic approach
                Accounting derived from and designed to enhance national macroeconomic
                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

Choi/Meek, 6/e                                                                                10
Classification (contin)
    Legal systems: common law vs. code law
          Common law accounting
            Oriented toward fair presentation, transparency, and full
            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

Choi/Meek, 6/e                                                           11
Classification (contin)
    Practice systems: fair presentation versus legal compliance
          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
                    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.

Choi/Meek, 6/e                                                                              12
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

Choi/Meek, 6/e                                                        13
Other Chapter Exhibit

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