International Accounting, 7/e

Frederick D.S. Choi

Gary K. Meek

Chapter 2: Development and

Classification
Choi/Meek, 7/e

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, 7/e

Why Study Development and

Classification?

Development

Helps understand a nations 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
diverging.
Are a way of viewing the world.
Reveals what group members have in common, and
What distinguishes groups from each other

Choi/Meek, 7/e

Development

Sources of finance who, how many, how

close?

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

Choi/Meek, 7/e

Conservative earnings for creditor protection.

Less extensive disclosures.

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
laws.

Common law

Choi/Meek, 7/e

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
organizations.
5

Development (contin)

Taxation

Political and economic ties

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?
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, 7/e

Development (contin)

Level of economic development

Educational level

Affects the types of transactions and which ones are most prevalent in the
economy which, in turn,
Affects the accounting issues that are faced.
Affects the capability for professional accounting training.
Where education levels are low, countries import accounting training or send
citizens elsewhere to get it.

SUMMARY

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.

Choi/Meek, 7/e

Fair presentation
Legal compliance
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

Choi/Meek, 7/e

Development (contin)
Linking

Choi/Meek, 7/e

the two:

Classification

Four approaches to accounting development (Mueller 1967)

Macroeconomic approach

Accounting derived from and designed to enhance national macroeconomic

goals.
Example: Sweden

Microeconomic approach

Accounting derived from microeconomics.

Example: the Netherlands

Independent discipline approach

Maintaining physical capital

Separation of capital and income
Replacement costs

Accounting derived from business practices, judgment, and trial-and-error.

Examples: U.K. and U.S.

Uniform approach

Choi/Meek, 7/e

Accounting is standardized by central government and used as a tool for

administrative control.
Example: France
10

Classification (contin)

Legal systems: common law vs. code law

accounting

Common law accounting

Oriented toward fair presentation, transparency, and full
disclosure
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, 7/e

11

Classification (contin)

Practice systems: fair presentation versus legal compliance

accounting

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.

Choi/Meek, 7/e

Helps judge managerial performance and predict future cash flows and
profitability
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.
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 individualcompany financial statements

Choi/Meek, 7/e

13

Other Chapter Exhibit

Choi/Meek, 7/e

14