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1、chapter execise keyChapter 2 Development and Classification 1. The chapter identifies seven economic, sociohistorical, and institutional factors believed to influence accounting development. Explain how each one affects accounting practice. a) Sources of finance. Where capital markets/shareholders a
2、re the principal source of finance, accounting focuses on profitability, stewardship, and a fair presentation of results and financial position. There are high levels of disclosure in published financial statements. When banks are the principal source of finance, accounting tends to be conservative
3、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 information needs of government agencies such as tax collection, assembling macroeconomic statistics, or compliance with macroeconomi
4、c goals. b) Legal system. Accounting in code law countries tends to be highly prescriptive, detailed, and procedural, designed to cover every possible circumstance. Accounting standards are a part of national laws. Accounting in common law countries is more adaptive and innovative and tends to allow
5、 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 (where accounting standards are set by the accounting profession), accounting and taxation are separate. In code law countries (w
6、here accounting standards are national laws), accounting and taxation are essentially the same. d) Political and economic ties. Accounting technology and expertise is imported and exported based on the contacts that nations have with each other through commerce, conquest, etc. e) Inflation. Historic
7、al cost accounting is the basis for initially recording transactions around the world. Inflation puts stress on the historical cost principle. Where inflation is high, accounting adjusts recorded amounts to reflect price level changes. f) Level of economic development. This factor defines the diffic
8、ulty 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 simpler where transactions are simpler (in less developed countries). g) Education levels. This factor defines the limits of accoun
9、ting sophistication in a nation. Accounting cannot get very sophisticated where education levels are relatively low (unless the 1 country imports accounting training or its citizens are sent elsewhere for it). 2.Countries that have relatively conservatism measurement practices also tend to be secret
10、ive in disclosure, while countries that have less conservative measurement practices tend to be transparent in disclosure. Why is this so? Conservative measurements and secretive disclosures tend to be correlated. At the same time, less emphasis on conservative measurements and transparent disclosur
11、es also tend to be correlated. This is largely to due to the principal source of finance in a country. Banks and governments 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
12、demand a fair presentation of financial position and results of operations along with high levels of disclosure 3. What are the major accounting classifications in the world? What are the distinguishing features of each model? The chapter discusses three major accounting classifications. The first i
13、s the one by Mueller Macroeconomic approach, where accounting practice is designed to enhance macroeconomic goals; Microeconomic approach, where accounting develops from the principles of microeconomics; Independent discipline approach, where accounting develops from business practices based on judg
14、ment and trial-and-error; and Uniform approach, where accounting is standardized so it can be used as a tool of administrative control by central government. The second classification is the one based on legal systems, which closely parallels the third classification based on practice systems. Gener
15、ally speaking, the features of common law accounting (legal system) are those described for fair presentation accounting (practice system). The features of code law accounting (legal system) are those described for legal compliance accounting (practice system). Fair presentation (common law) emphasi
16、zes substance over form and is oriented toward the decision needs of external investors. Thus, it is capital markets oriented. Financial statements help investors judge managerial performance and predict future cash flows and profitability. Extensive disclosures provide additional relevant informati
17、on for these purposes Legal compliance (code law) accounting is designed to satisfy government-imposed requirements such as calculating taxable income or complying with the national governments macroeconomic plan. The income amount may also be the basis for dividends paid to shareholders and bonuses
18、 2 paid to employees. Conservative measurements ensure that prudent amounts are distributed and smooth income brings stable tax, dividend and bonus payouts. As noted above, fair presentation accounting is associated with common law countries, while legal compliance accounting is associated with code
19、 law countries. However, many companies from code law countries now follow International Financial Reporting Standards in their consolidated financial statements. IFRS are based on the principles of fair presentation. 4. Why does this chapter contend that many accounting distinctions at the national
20、 level are becoming blurred? Do you agree? Why or why not? 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 pressured accou
21、nting 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 compliance h
22、ave dual reporting. Consolidated financial statements are aimed at fair presentation (IFRS), while individual company financial statements continue to be aimed at legal compliance. Consolidated financial statements follow fair presentation principles, while individual company accounts follow legal c
23、ompliance principles. Listed companies from the European Union now follow International Financial Reporting Standards in their consolidated financial statements. IFRS are based on fair presentation principles. 5. Consider the development factors in the following five countries: France, India, Japan,
24、 U.S.A. and U.K. Development France India Japan United United Factors Kingdom States Main source Banks; Government; Banks Stock Stock market Of finance Government Stock market market Legal system Code law Common Code law Common Common law law law Taxation Linked Separate Linked Separate Separate (li
25、nk to accounting Political and Europe U.K., U.S., U.S., U.S., Canada, economic China China China, Mexico,China ties Europe 3 Level of High Low High High High economic development Educational High Low High High High level Required: Based on the information provided in this chapter, prepare a profile
26、of accounting in each of the countries. France: With banks and government as the main sources of finance, we can expect conservative and uniform measurements. With code law legal system, the focus is on complying with the law. The link to taxation means that measurements are also tax-oriented. Polit
27、ical and economic ties with the rest of Europe suggest that French accounting may influence and be influenced by other European countries. Low inflation indicates a low likelihood of inflation adjustments. The levels of economic development and education suggest sophisticated accounting. India: With
28、 the government and stock market as the main sources of finance, we can expect a mixed (and inconsistent) orientation uniformity but also fair presentation. The common law legal system and separation between tax and financial accounting indicate fair presentation accounting. The political and econom
29、ic ties to the U.K. and U.S.A. also suggest fair presentation accounting. (Economic ties to China are probably unimportant in describing Indian accounting.) Low inflation suggests a low likelihood of inflation adjustments. The levels of economic development and education suggest less complex account
30、ing standards and practices. Japan: With banks as the main source of finance, we can expect conservative accounting measurements. With the code law legal system, focus is on complying with the law. The link to taxation means that measurements are also tax-oriented. Political and economic ties to the
31、 U.S.A. indicate some U.S. influence on Japanese accounting. (Economic ties to China are probably unimportant in describing Japanese accounting.) Low inflation suggests a low likelihood of inflation adjustments. The levels of economic development and education suggest sophisticated accounting. Unite
32、d Kingdom: With the stock market as the main source of finance, we can expect fair presentation accounting. Fair presentation accounting can also be expected because the U.K. has common law, and taxation and accounting are separate (i.e., not linked). Political and economic ties to the U.S.A. and Eu
33、rope suggest accounting influence is felt to and from both areas. Low inflation indicates a low likelihood of inflation adjustments. The levels of economic development and education suggest sophisticated accounting. 4 United States: With the stock market as the main source of finance, we can expect
34、fair presentation accounting. Fair presentation accounting can also be expected because the U.S.A. has common law, and taxation and accounting are separate (i.e., not linked). Political and economic ties to the Canada and Mexico most likely mean that these two countries are influenced by the U.S.A., rather than the other way around. Low inflation indicates a low likelihood of inflation adjustments. The levels of economic development and education suggest sophisticated accounting. 5
