1、 1 Chapter 2 Development and Classification Discussion Questions 1. a) Sources of finance. Where capital markets/shareholders are the principal source of finance, accounting focuses on profitability, stewardship, and a fair presentation of results and financial position. There are high levels of dis
2、closure in published financial statements. When banks are the principal source of finance, accounting tends to be conservative and disclosures are usually relatively low (banks have direct access to information). When governments are the principal source of finance, accounting is aimed at the inform
3、ation needs of government agencies such as tax collection, assembling macroeconomic statistics, or compliance with macroeconomic goals. b) Legal system. Accounting in code law countries tends to be highly prescriptive, detailed, and procedural, designed to cover every possible circumstance. Accounti
4、ng standards are a part of national laws. Accounting in common law countries is more adaptive and innovative and tends to allow more judgment to suit the circumstance. Accounting standards are set in the private sector. c) Taxation. This tends to parallel the legal system. In common law countries (w
5、here accounting standards are set by the accounting profession), accounting and taxation are separate. In code law countries (where accounting standards are national laws), accounting and taxation are essentially the same. d) Political and economic ties. Accounting technology and expertise is import
6、ed and exported based on the contacts that nations have with each other through commerce, conquest, etc. e) Inflation. Historical cost accounting is the basis for initially recording transactions around the world. Inflation puts stress on the historical cost principle. Where inflation is high, accou
7、nting adjusts recorded amounts to reflect price level changes. f) Level of economic development. This factor defines the difficulty and types of the accounting issues that are faced in a nation. Accounting is complex where business transactions are complex (in highly developed economies); it is simp
8、ler where transactions are simpler (in less developed countries). g) Education levels. This factor defines the limits of accounting sophistication in a nation. Accounting cannot get very sophisticated where education levels are relatively low (unless the country imports accounting training or its ci
9、tizens are sent elsewhere for it). 2. The text lists seven environmental circumstances asserted to have direct effects on accounting development. We judgmentally rank the list as follows: a. Sources of finance b. Legal system c. Taxation d. Political and economic ties e. Education levels f. Inflatio
10、n g. Level of economic development 2 Students may wish to alter this ranking and justify their own. It should also be pointed out that the rankings for certain countries may be quite different. Capital markets as a source of finance are driving accounting development today. This phenomenon is the re
11、ason why the European Union decided to abandon its own effort at developing European accounting principles and require IFRS for EU listed companies. It is behind the convergence movement described in Chapter 8. The chapter argues that the fair presentation versus legal compliance classification desc
12、ribes accounting today better than the one based on legal system. This argument is consistent with sources of finance as the driver of accounting development today. Level of economic development exerts only a moderate effect. This is because developing economies tend to import accounting technologie
13、s (and training) from developed countries. For example, many countries in emerging market economies are adapting sophisticated Western accounting systems in order to enhance their development efforts. 3. Culture underlies institutional and other arrangements in a nation that directly affect accounti
14、ng development. Individualism, power distance, and uncertainty avoidance are likely to be the most important influences. Individualism, small power distance, and weak uncertainty avoidance tend to be correlated with and found in common law countries with fair presentation accounting. There is a stro
15、ng accounting profession, accountants rely on professional judgment, and capital markets are the principal source of finance. Collectivism, large power distance, and strong uncertainty avoidance tend to be correlated with and found in code law countries with legal compliance accounting. The professi
16、on is relatively weak - accounting is influenced by law, instead. Accounting is more conservative and prescriptive, and banks and governments are the principal sources of finance. 4. This question is controversial and there is no consensus of opinion at present. However, as noted in the answer to qu
17、estion 3, culture exerts a second-order effect on accounting. It underlies institutional and other arrangements in a nation that directly affect accounting development. We feel that economic and legal factors are more clearly linked to specific features of accounting, whereas cultural variables are
18、linked to broader generalizations about accounting. Thus, we argue that economic and legal factors explain national differences in accounting practice better than culture. 5. Generally speaking, these patterns of accounting development are still valid today, but less so than in 1967. The description
19、s of accounting in the chapter for the respective exemplar countries are broadly true. However, note that the Netherlands is really the only country that can be described by the microeconomic pattern. There are also only a few countries that follow the macroeconomic pattern. The independent discipli
20、ne approach is not as ad hoc as it was in 1967. Most of these countries (in particular, the United Kingdom and United States) now have conceptual frameworks to guide accounting policy formulation. The uniform accounting approach is less relevant as more and more countries privatize their economies.
21、We expect these patterns to break down in the future as financial reporting converges around International Financial Reporting Standards. As discussed in this chapter, the trend is for fair presentation accounting at the consolidated financial statement level. The macroeconomic and the uniform appro
22、aches will persist in certain code law countries at the individual company financial statement level (for example, for tax collection purposes). The microeconomic and 3 independent discipline approaches have always been fair presentation oriented. So, they will likely disappear due to convergence, a
23、s discussed above. 6. Conservative measurements and secretive disclosures tend to be correlated. At the same time, less emphasis on conservative measurements and transparent disclosures also tend to be correlated. This is largely to due to the principal source of finance in a country. Banks and gove
24、rnments are concerned about the safety net that conservatism affords; and because they tend to have direct access to information, public disclosure is less important. Capital markets demand a fair presentation of financial position and results of operations along with high levels of disclosure 7. Cl
25、assifications are a way of viewing the world. They abstract from complexity and reveal fundamental characteristics that members of the group have in common and that distinguish the various groups from each other. Classifications provide the basic structure for understanding what is alike and what is
26、 different in accounting around the world. By identifying similarities and differences, our understanding of accounting systems is improved. 8. Judgmental classifications rely on knowledge, intuition and experience. Empirically derived classifications apply statistical methods to databases of accoun
27、ting principles and practices around the world. This chapter discusses Muellers four approaches in accounting development (1967), which is essentially a judgmental classification of accounting. The fair presentation versus legal compliance classification and classifications based on legal systems ar
28、e also judgmental, though largely supported by empirical data. 9. The chapter discusses three major accounting classifications. The first is the one by Mueller (1967): Macroeconomic approach, where accounting practice is designed to enhance macroeconomic goals; Microeconomic approach, where accounti
29、ng develops from the principles of microeconomics; Independent discipline approach, where accounting develops from business practices based on judgment and trial-and-error; and Uniform approach, where accounting is standardized so it can be used as a tool of administrative control by central governm
30、ent. The second classification is the one based on legal systems, which closely parallels the third classification based on practice systems. Generally speaking, the features of common law accounting (legal system) are those described for fair presentation accounting (practice system). The features
31、of code law accounting (legal system) are those described for legal compliance accounting (practice system). Fair presentation (common law) emphasizes substance over form and is oriented toward the decision needs of external investors. Thus, it is capital markets oriented. Financial statements help
32、investors judge managerial performance and predict future cash flows and profitability. Extensive disclosures provide additional relevant information for these purposes Legal compliance (code law) accounting is designed to satisfy government-imposed requirements such as calculating taxable income or
33、 complying with the national governments macroeconomic plan. The income amount may also be the basis for dividends paid to shareholders and bonuses 4 paid to employees. Conservative measurements ensure that prudent amounts are distributed and smooth income brings stable tax, dividend and bonus payou
34、ts. As noted above, fair presentation accounting is associated with common law countries, while legal compliance accounting is associated with code law countries. However, many companies from code law countries now follow International Financial Reporting Standards in their consolidated financial st
35、atements. IFRS are based on the principles of fair presentation. 10. The chapter contends that many accounting distinctions at the national level are becoming blurred because of global capital market pressures. An increasing number of companies are listing on multiple stock exchanges. This has press
36、ured accounting policy makers around the world to harmonize (converge) reporting requirements. This has also pressured companies to devise financial reporting practices that satisfy multiple requirements and user groups. At the same time, some code law countries where accounting is aimed at legal co
37、mpliance have dual reporting. Consolidated financial statements are aimed at fair presentation (IFRS), while individual company financial statements continue to be aimed at legal compliance. 11. Our preference for classifying based on fair presentation versus legal compliance over legal system follo
38、ws from the answer to question 10. Many companies from code law countries now prepare two sets of financial statements. Consolidated financial statements follow fair presentation principles, while individual company accounts follow legal compliance principles. Listed companies from the European Unio
39、n now follow International Financial Reporting Standards in their consolidated financial statements. IFRS are based on fair presentation principles. 12. In your authors opinion, the prospects for the harmonization of national systems of accounting is low. As the chapter demonstrates, accounting sati
40、sfies the information needs of its users and develops in response environmental circumstances. Unless these forces converge, there is little reason to expect accounting to converge. Also, taxation is a fundamental influence on accounting in many countries - it is the reason accounting exists in the
41、first place. Unless governments are willing to relinquish their sovereignty over such matters, national accounting systems cannot be harmonized. At the national level, accounting systems are too entrenched. However, the story is different at the transnational (or international) level for consolidate
42、d financial statements. Convergence is occurring here, driven by the globalization of capital markets. Companies now seek capital from around the world and must appeal to the information needs of a worldwide investor group. The type of information these investors seek is similar, regardless of where
43、 they reside. This same force drove the European Union requirement for listed companies to comply with International Financial Reporting Standards starting in 2005. This means dual reporting for many companies, especially those from European countries where accounting is legalistic and tax-driven. L
44、ocal financial statements will be prepared in compliance with local laws and accounting standards, but secondary financial statements will be prepared for the worldwide investor group. Consolidated financial reporting is converging onto fair presentation based on IFRS. Exercises 1. a. The dominant f
45、actor influencing accounting development in Taiwan is political and economic ties, namely those with the United States since the 1950s. In 1949, defeated by the Communists, Chiang Kai-shek fled to Taiwan and set up a provisional government there. Taiwan soon began receiving substantial U.S. economic
46、 aid to prevent the further 5 spread of Communism. Taiwan is a dynamic capitalist economy and the United States is the countrys largest trading partner. Taiwan is an economic power that is a leading producer of high-technology goods. Services make up more than two-thirds of GDP. Nevertheless, small,
47、 family owned businesses are the basis for the economy. Taiwan has a credit-based, rather than capital markets-based financial system. Its (Germanic) code law legal system dates from the years (1895 1945) when Taiwan was a Japanese colony. Given the influence of the United States, it can be expected
48、 that taxation will not directly impact financial reporting (despite the code law legal system). Additional development factors are a low level of inflation and high education level (literacy rate approaching 100 percent). b. Overall, one would expect accounting to resemble U.S. accounting, emphasiz
49、ing a fair presentation and full disclosure as opposed to compliance with legal requirements. Accountants can be expected to exercise judgment and not merely follow the rules or the tax laws. c. The above prediction is accurate according to the fifth edition of this textbook (Prentice Hall, 2005) and Ronald Ma, ed., Financial Reporting in the Pacific Asia Region, Singapore: World Scientific Publishing (1997). Accounting in Taiwan is largely based on U.S. accounti
