International Accounting, 7/e
Frederick D.S. Choi
Gary K. Meek
Chapter 2: Development and
Classification
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Learning Objectives
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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.
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Why Study Development and
Classification?
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Development
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Helps understand a nation’s accounting.
Explains the differences and similarities in accounting
around the world.
Classification
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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
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Development
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Sources of finance – who, how many, how
close?
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Equity markets
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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
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Conservative earnings for creditor protection.
Less extensive disclosures.
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Development (contin)
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Legal system
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Code law
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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
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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.
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Development (contin)
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Taxation
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Political and economic ties
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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
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Inflation distorts historical cost measurements.
Countries with high inflation often require that companies
incorporate price changes into the accounts.
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Development (contin)
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Level of economic development
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Educational level
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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
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Several variables are closely associated.
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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.
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Fair presentation
Legal compliance
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Development (contin)
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Culture and accounting values
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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)
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Linking the two:
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Classification
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Four approaches to accounting development (Mueller 1967)
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Macroeconomic approach
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Accounting derived from and designed to enhance national macroeconomic
goals.
Example: Sweden
Microeconomic approach
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Accounting derived from microeconomics.
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Example: the Netherlands
Independent discipline approach
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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
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Accounting is standardized by central government and used as a tool for
administrative control.
Example: France
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Classification (contin)
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Legal systems: common law vs. code law
accounting
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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
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Classification (contin)
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Practice systems: fair presentation versus legal compliance
accounting
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Why national accounting distinctions are becoming blurred
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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
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Substance over form.
Oriented toward decision needs of external investors.
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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.
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Classification (contin)
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Legal compliance accounting
 Designed to satisfy government-imposed
requirements, such as:
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Calculating taxable income
Complying with macroeconomic plan
Conservative measurements
Income smoothing
Will persist in code law countries for individualcompany financial statements
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Other Chapter Exhibit
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