Chaptet two Interntional accounting

1. CHAPTER 2:
international accounting
CHAPTER 2:
• Development and
Classification

2. introduction
• Accounting must respond to society’s ever-changing
informational needs and reflect the cultural, economic, legal,
social, and political conditions within which it operates.
• The history of accounting and accountants reveals continuing
change. At first, accounting was little more than a recording
system for certain banking services and tax-collection
schemes. Double-entry bookkeeping systems were later
developed to meet the needs of trading ventures.
• Industrialization and division of labor made cost-behavior
analysis and managerial accounting possible. The rise of the
modern corporation stimulated periodic financial reporting
and auditing.

3. Cont..
• Accounting provides decision information for huge
domestic and international public securities markets.
• Why should we want to know how and why accounting
develops? The answer is the same as for developmental
studies in other fields. We can better understand a nation’s
accounting by knowing the underlying factors that have
influenced its development.
• Accounting differs around the world, and knowledge of the
developmental factors helps us see why. In other words,
they can explain the observable differences as well as the
similarities. Because accounting responds to its
environment, different cultural, economic, legal, and
political environments produce different accounting
systems, and similar environments produce similar systems.

4. Conti..
• This leads us to classification. Why should we classify
(compare) national or regional financial accounting
systems? Classification is fundamental to understanding
and analyzing why and how national accounting systems
differ. We can also analyze whether these systems are
converging or diverging. The goal of classification is to
group financial accounting systems according to their
distinctive characteristics.
• Classifications reveal fundamental structures that group
members have in common and that distinguish the various
groups from each other. By identifying similarities and
differences, our understanding of accounting systems is
improved. Classifications are away of viewing the world.

5. DEVELOPMENT of accounting
• Every nation’s accounting standards and
practices result from a complex interaction of
economic, historical, institutional, and cultural
factors. Diversity among nations is to be
expected. The factors that influence national
accounting development also help explain the
accounting diversity among nations.
• The following eight factors have a significant
influence on accounting development

6. eight factors have influence on
accounting development
• 1.Sources of Finance.
• 2. Legal System
• 3.Political and Economic ties with other Countries
• 4.Level of Inflation
• 5. Taxation
• 6.Level of Economic Development
• 7.Educational Level
• 8. Culture

7. 1.Sources of Finance.
• The source of finance to organizations differ in
various countries and this influence their accounting
profession.
• In situation where a company grows from private
ownership to public ownership due to the need for
capital increase, the first observation is that the
shareholder group becomes large and diverse.
• The second observation is that ownership is separated
from management.
• Owners of the business (shareholders) become
essentially uninvolved in the day-to-day management
of the companies they owned.

8. 1.Sources (conti..)
• In such situation, in order to know how well a company is
doing, financial accounting information becomes an
important source of information. This was how the
industrial revolution in the United States and Britain aided
the development of accounting.
• Another point in external financing is the credit
system. Where banks are primarily the source of capital,
financial accounting is oriented toward creditor protection.
There are close ties between companies and banks.
• The information needs of the resource providers are
satisfied in a relatively straightforward way through
personal contacts and direct visits.

9. 1.Sources (conti..)
• Another consideration in external financing is to what
extent the government gets involved in company
investment. Like in France and Sweden where the
National Governments play a strong role in managing
their resources and business enterprises are expected to
accomplish the governments’ policies and macro-economic
plans.
• Governments also actively ensure that businesses have
adequate capital and will lend or even invest in
companies if necessary.
• Financial accounting is oriented toward decision making
by government planners. Firms follow uniform accounting
procedures and reporting practices, which facilitate better
government decisions.

10. 2. Legal System
• The country's legal system is the most effective reason for the
diversity of accounting principles from one country to another.
Worldwide, two major types of legal systems used:
• The Common Law: Used by English Speaking countries
• The Codified Roman Law (Code Law): Used by Non-English-Speaking
countries
• The legal system determines how individuals and institutions
interact. The Western world has two basic orientations: code (or
civil) law and common (or case) law.
• A major factor that influences the development of accounting
is the legal system that operates in that country.

11. 3.Political and Economic ties with
other Countries
• One factor that has shaped accounting
development is the political and economic ties that
exist among nations.
• The United States has influenced accounting in
Canada due to geographic proximity and friendly
economic ties and because a number of Canadian
companies routinely sell shares of common stock or
borrow money in the United States.
• The United States is Mexico’s principal trading
partner: and also because of proximity, accounting
in Mexico is very much like that in the United States.

12. Conti..
• Another significant force in international accounting
has been the United Kingdom.
• Almost every former British colony has an accounting
profession and financial accounting practices patterned
after the UK model. These countries include
Australia, New Zealand, Malaysia, Pakistan, India,
South Africa and Nigeria. The British did not only
export their brand of accounting but also exported
many accountants. Most early US accountants also
came from Britain, seeking the job opportunities
associated with the economic expansion that was
occurring in the United States around the turn of the
20thcentury.

13. Conti..
• Consequently, this has led to the rise of the
International Accounting Standards
Committee (IASC) which has become the
driving force globally to develop
international financial accounting standards
and sought for their widest possible
acceptance and use.
• Similarly, the International Federation of
Accountants Committee (IFAC),

14. 4.Level of Inflation
• Another factor that influences the development of
accounting development is the level of inflation.
Accounting in many countries is based on the historical
cost principle.
• The principle is based on an assumption that the currency
unit used to report financial results is reasonably stable.
The historical cost principle holds that the recording of
transactions at prices when they occur should be done and
there should not be changes in the prices at later date.
• Generally, historical cost principle affects accounting most
significantly in the area of assets values that the company
keeps for a long time such as land and buildings.

15. Conti..
• Germany and Japan hold strictly to historical
cost principle because they have historically
experienced very little inflation. However,
some South American countries, ravaged by
inflation problem for years, long age
abandoned any attachment to strict historical
cost.
• Companies in these countries routinely write up
the values of their assets based on changes in
general price levels.

16. 5. Taxation
• In many countries, tax legislation effectively
determines accounting standards because
companies must record revenues and
expenses in their accounts to claim them for
tax purposes. In other words, financial and tax
accounting are the same. This is the case, for
example, in Germany and Sweden.

17. 6. Level of Economic Development
• This factor affects the types of business transactions
conducted in an economy and determines which ones
are most prevalent. The type of transactions, in turn,
determines the accounting issues that are faced.
• Today, many industrial economies are becoming
service economies. Accounting issues relevant in
manufacturing, such as valuing fixed assets and
recording depreciation, are becoming less important.
New accounting challenges, such as valuing intangibles
and human resources, are emerging.

18. 7. Educational Level
• Highly sophisticated accounting standards and
practices are useless if they are misunderstood and
misused.
• For example, a complex technical report on cost
behavior variances is meaningless unless the reader
understands cost accounting. Disclosures about the
risks of derivative securities are not informative unless
they can be read competently. Professional accounting
education is difficult to achieve where general
educational levels are low. In other situations, a
country must import accounting training or send its
citizens elsewhere to get it, something that China is
now doing.

19. 8. Culture
• Culture encompasses the values and attitudes
shared by a society. Cultural variables underlie
nations’ legal systems and other institutional
arrangements.
• Hofstede identified four national cultural
dimensions (or societal values):
• (1) individualism, (2) uncertainty avoidance, (3)
power distance, and (4) masculinity.
• His analysis is based on data from employees of
a large U.S. multinational corporation operating
in 40 different countries.

20. Table shows how factors differ in
accounting development