Reasons For Accounting Diversity | International Accounting Course

Summary

Professor Farhad discusses the reasons for accounting diversity across countries, focusing on legal systems, taxation, financing providers, inflation, political and economic ties, and cultural factors. He highlights how countries like the US and the UK use different accounting frameworks, with the US following common law and the UK adopting a more general code law. The impact of tax laws, political relationships, and the role of shareholders and family-owned businesses in financing companies are explored. The session offers insights into the complexities of international accounting standards and the factors that shape them.

Takeaways

• 😀 Common law vs code law: Common law countries (e.g., the US, UK, Australia) rely on court interpretations, while code law countries (e.g., Germany, France, Japan) use detailed written statutes.
• 😀 Accounting diversity arises due to factors like legal systems, taxation, political and economic ties, and cultural influences, all of which affect how accounting rules are implemented.
• 😀 In the US, two sets of financial records are maintained—one for financial reporting (GAAP) and another for tax purposes (IRS), leading to differences that require adjustments, such as third income taxes.
• 😀 Cultural influences play a major role in accounting practices, and countries' historical ties and political influences contribute to adopting specific accounting standards.
• 😀 Providers of financing in different countries shape accounting practices: In the US, shareholders are key capital providers, while in Europe and Japan, families, banks, and the state play a larger role.
• 😀 Inflation affects accounting practices in countries like Venezuela, requiring adjustments to assets and inventory values, unlike the US where inflation is not a significant concern.
• 😀 The legal system in a country, whether common or code law, significantly influences accounting regulations, such as the amount of detailed guidance provided.
• 😀 Tax conformity: In code law countries like Germany and Japan, tax and financial accounting records must align, while in common law countries, there is more flexibility in the approach.
• 😀 Political and economic ties influence accounting standards: Countries with colonial histories, like those influenced by England and France, often adopt similar accounting frameworks.
• 😀 The number of listed companies and the reliance on equity financing differ across common and code law countries, influencing the degree of transparency and disclosure required in financial reporting.

Q & A

What is the main topic of the session in the transcript?

The session focuses on the reasons for international accounting diversity, explaining the different accounting practices and principles followed across the globe.

What is one major distinction between how the US and the UK present their balance sheets?

In the US, balance sheets are presented in order of liquidity, with cash listed first, while in the UK, the order is reversed, with cash listed last.

What are some terminology differences between US and UK accounting terms?

For example, in the US, the term 'common stock' is used to refer to money contributed by investors, while in the UK, it is referred to as 'called up share capital'.

What is the difference between recognition and measurement in accounting?

Recognition refers to when a transaction is recorded, while measurement refers to how a transaction is quantified or valued, such as determining the monetary amount of an asset.

How do common law and code law legal systems differ in terms of accounting rules?

In common law systems, like those in the US, UK, and Australia, accounting rules are based on court decisions and precedents, with less legislative detail. In code law systems, like in Germany, accounting rules are legislated and provide more detailed guidance.

Why do different countries have different tax laws, and how does that affect accounting rules?

Different countries have varying tax laws, which influence accounting practices. For instance, the US requires companies to maintain separate sets of books for tax and financial reporting, while in Germany, tax and financial accounting records are typically the same.

What is the impact of inflation on accounting in different countries?

In countries with high inflation, such as some in Latin America, inflation adjustments must be made to accounting records, such as revaluing non-monetary assets and inventories. In contrast, countries with stable inflation, like the US, generally do not need such adjustments.

How do political and economic ties influence accounting practices?

Political and economic ties often lead to the adoption of similar accounting systems across countries. For example, former colonial powers like England and France have influenced accounting practices in their former colonies.

What is the relationship between capital providers and accounting practices in the US versus other countries?

In the US, accounting practices are more profit-oriented, as capital is mostly provided by public shareholders. In contrast, in other countries like Japan and parts of Europe, where families, banks, and the state provide capital, accounting practices are often more focused on solvency and liquidity.

What is tax conformity in accounting, and how does it differ between common law and code law countries?

Tax conformity means that the accounting records for tax purposes must align with financial accounting. In code law countries, like Germany and Japan, tax and financial records must be the same. In contrast, common law countries like the US have more flexibility in maintaining separate records for tax and financial purposes.