Accounting theory 7


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  • Accounting theory 7

    1. 1. Financial Accounting Theory Craig Deegan Chapter 4 International Accounting (Part-2) Dewan Mahboob Hossain; Department of Accounting & Information Systems University of Dhaka Dhaka Bangladesh
    2. 2. Can accounting standards ensure international standardization? <ul><li>Problems: </li></ul><ul><li>Different countries </li></ul><ul><li>Different enforcement mechanisms </li></ul><ul><li>Different forms of capital markets </li></ul><ul><li>Different cultures </li></ul><ul><li>So forth………………….. </li></ul><ul><li>Despite the widespread adoption of IFRS there will continue to be many differences in the accounting methods adopted across different countries. </li></ul>
    3. 3. Main issues for difference <ul><li>Differences in taxation system </li></ul><ul><li>Differences in economic and political influences on financial reporting </li></ul><ul><li>Modifications made to IFRS at national level </li></ul><ul><li>Differences in implementation, monitoring and enforcement </li></ul>
    4. 4. Differences in taxation systems: evidence <ul><li>Nobes (2006) uses a comparison of differences in taxation systems between Germany and the UK to identify why financial accounting practices in the two countries might be systematically different despite both countries adopting IFRS. </li></ul><ul><li>In Germany, companies are required to continue to prepare unconsolidated statements under conventional rules for calculation of taxable income and distributable income. </li></ul><ul><li>In the UK, IFRS is allowed for individual company financial statements and therefore as a starting point for calculation of taxable income. </li></ul>
    5. 5. Economic and political influences <ul><li>Powerful local economic and political forces determine how managers, auditors, courts, regulators and other parties influence the implementation of rules. </li></ul><ul><li>Those forces have exerted a substantial influence on financial reporting practice historically, and are unlikely to suddenly cease doing so, IFRS or no IFRS. </li></ul>
    6. 6. Modifications made to IFRS at a national level <ul><li>IASB has no ability to enforce the application of its accounting standards in countries that have made the decision to adopt IFRS. </li></ul><ul><li>If modifications to IFRS are made at a national level, the result will be international inconsistencies in accounting practices. </li></ul><ul><li>Regulatory bodies in particular countries may make a decision to modify a particular IFRS before it is released. </li></ul>
    7. 7. Implementation, monitoring and enforcement <ul><li>Inconsistencies internationally in how the adoption of accounting standards is implemented, monitored and enforced will lead to inconsistencies in how standards are applied, which will in turn diminish the international comparability of financial reports. </li></ul><ul><li>In some cases, the massive underdevelopment of the accounting profession, implementation may be different. </li></ul><ul><li>In China, there are hardly 70000 practicing accountants and most of them are poorly trained. So, implementation may be hampered. </li></ul><ul><li>The list of IFRS adopting countries ranges from countries with developed accounting and auditing professions and developed capital markets to countries without a similarly developed institutional background. </li></ul><ul><li>The free rider problem associated with IFRS: If a symbol of legitimacy – such as IFRS- can be acquired at a low cost, some countries with low accounting proficiency will make the choice to adopt IFRS because of the reputation benefits such a choice may generate. </li></ul><ul><li>However, such a choice will have costly implications for countries with a higher level of accounting proficiency and who put in place appropriate implementation, monitoring and enforcement. </li></ul>
    8. 8. Explanations of differences in accounting <ul><li>Nature of business ownership and financing system </li></ul><ul><li>Colonial inheritance </li></ul><ul><li>Invasions </li></ul><ul><li>Taxation </li></ul><ul><li>Inflation </li></ul><ul><li>Level of education </li></ul><ul><li>Age and size of the accounting profession </li></ul><ul><li>Stage of economic development </li></ul><ul><li>Legal systems </li></ul><ul><li>Culture </li></ul><ul><li>History </li></ul><ul><li>Geography </li></ul><ul><li>Language </li></ul><ul><li>Influence of theory </li></ul><ul><li>Political systems, local climate </li></ul><ul><li>Religion. </li></ul>
    9. 9. Culture <ul><li>The collective programming of the mind which distinguishes the members of one human group from another. </li></ul><ul><li>Accounting is a socio-technical activity that involves interaction between both human and non-human resources. </li></ul><ul><li>Accounting cannot be culture-free. </li></ul><ul><li>Culture is typically reserved for societies as a whole, or nations, whereas ‘subcultures’ is used for the level of an organization, profession or a family. </li></ul><ul><li>It is quite possible that had accounting systems evolved independently in developing countries they would have rather different from any now we witness in present day Europe. </li></ul>
    10. 10. Hofstede (1984) <ul><li>Individualism vs. Collectivism: </li></ul><ul><li>A preference for loosely knit social framework </li></ul><ul><li>A tightly knit social framework </li></ul><ul><li>Large Vs. Small power distance </li></ul><ul><li>To which the members of a society accept that power in institutions and organizations is distributed unequally . </li></ul><ul><li>Large power distance society: Hierarchical. </li></ul><ul><li>Small power distance society: strive for power equalities and demand for justifications for power inequalities. </li></ul><ul><li>Strong Vs. weak uncertainty avoidance </li></ul><ul><li>The degree to which the members of the society feel uncomfortable with ambiguity or uncertainty. </li></ul><ul><li>Strong uncertainty avoidance: Rigid codes of beliefs and behavior. </li></ul><ul><li>Weak uncertainty avoidance: maintain more relaxed atmosphere. </li></ul><ul><li>Masculinity vs. femininity </li></ul><ul><li>Masculinity: Achievement, heroism, assertiveness, and material success. </li></ul><ul><li>Femininity: relationships, modesty, caring for weak and the quality of life. </li></ul>
    11. 11. Gray (1988): directly linked to Hofstede <ul><li>Professional vs. statutory control: </li></ul><ul><li>Self-regulation or prescription requirements and statutory control. </li></ul><ul><li>Uniformity vs. flexibility: </li></ul><ul><li>Uniform accounting practices between companies and the consistency over time or flexibility in accordance with perceived circumstances of individual companies. </li></ul><ul><li>Conservatism vs. optimism: </li></ul><ul><li>Cautious approach to measurement so as to cope with the uncertainty of future events or optimistic, laissez-faire, risk taking approach. </li></ul><ul><li>Secrecy Vs. transparency: </li></ul><ul><li>Confidentiality: restriction of disclosure of information or transparent, open and publicly accountable approach. </li></ul>
    12. 12. Hypothesized relationships between Gray’s accounting values and Hofstede’s cultural values _ _ ? ? Masculinity _ _ _ + Individualism + + + _ Uncertainty avoidance + ? + _ Power Distance Secrecy Conservatism Uniformity Professionalism Accounting values (Gray) + : positive relationship - : negative ?: unclear relationship Cultural values (Hofstede)
    13. 13. Religion <ul><li>Islamic culture typically fails to embrace western accounting practices. </li></ul><ul><li>The Islamic tradition does have notions of stewardship – but to God rather than to suppliers of equity and debt capital. </li></ul><ul><li>Muslims believe that they hold assets not for themselves but in trust for God. </li></ul><ul><li>Islam prevents debt financing and prohibits the payment of interest. This prohibition has significant implications for processes aimed at the international harmonization of accounting standards. </li></ul><ul><li>Many past and present western standards entail discounting procedures involving a time value of money concept which is not admitted by Islam. </li></ul>
    14. 14. Legal Systems <ul><li>Two kinds of legal systems: common law and Roman law systems. </li></ul><ul><li>Common law: </li></ul><ul><li>few prescriptive statutory laws. </li></ul><ul><li>Judges apply both limited amount of statutory law and the outcomes of previous judicial decisions to the facts of a specific case. </li></ul><ul><li>Each judgment becomes a legal precedent for future cases. </li></ul><ul><li>Originated in England and spread to its former colonies: the US, Canada, Australia and NZ. </li></ul>
    15. 15. Legal Systems (contd..) <ul><li>Roman Law Systems: </li></ul><ul><li>Statutory law tends to be very detailed and covers most aspects of daily life. </li></ul><ul><li>Accounting implications: </li></ul><ul><li>Common law countries: few detailed accounting laws guiding practices. Accounting practices: judgments of accountants. </li></ul><ul><li>Roman law countries: a body of codified accounting laws prescribing in details how each type of transaction or event should be treated in the accounts. </li></ul><ul><li>In the EU, we would expect England, Wales, Ireland and Scotland historically to have had relatively few codified accounting laws. </li></ul><ul><li>In the reminder of the EU we could expect accounting practice to have historically been developed through detailed codified accounting laws. </li></ul><ul><li>The adoption of IFRSs (principles based) would have represented a significant change in practice for countries with Roman law systems relative to countries with common law systems. </li></ul>