Question

Case 2-1 The Impact of Culture on Conservatism PARTI The framework created by Professor Sidney Gray in 1988 to explain the development country's accounting system is presented in the chapter in Exhibit 2.6. Gray theorized the culture has an impact on a country's accounting system through its influence on accoun ing values. Focusing on that part of a country's accounting system comprised of financial reporting rules and practices, the model can be visualized as follows: Financial reporting rules and practices Cultural dimensions Accounting values In short, cultural values shared by members of a society influence the accounting values shared by members of the accounting subculture. The shared values of the accounting subculture in turn affect the financial reporting rules and practices found within a country With respect to the accounting value of conservatism, Gray hypothesized that the higher a country ranks on the cultural dimensions of uncertainty avoidance and long-term orientation and the lower it ranks in terms of individualism and masculinity, then the more likely it is to rank highly in terms of conservatism. Conservatism is a preference for a cautious approach to measurement. Conservatism is manifested in a country's accounting system through a tendency to defer recognition of assets and items that increase net income and a tendency to accelerate the recognition of liabilities and items that decrease net income. One example of conservatism in practice would be a rule that requires an unrealized contingent liability to be! recognized when it is probable that an outflow of future resources will arise but that does not allow the recognition of an unrealized contingent asset under any circumstances. Required: Discuss the implications for the global convergence of financial reporting standards raised by Gray's model.

Answer 1

Answer to the Part 1 is :-

The implications for the global convergence of financial reporting standards are that there are several factors that can cause one country to be so different from another culturally. The first area that presents an obstacle for implementation is language. It is an accepted concept that language carries with it values and meaning. Each language imparts those values and meaning into laws and rules, such as accounting standards. Language also presents a problem because its meaning can be destroyed or construed through translation. This pertains to IFRS, because in order for it to be used internationally it must be translated into many languages. The IASB, therefore, must go to great lengths to ensure that standards retain the meaning with which they were originally written.

Religion is also another factor that has a strong influence over the behavior of individuals and societies as a whole. It is plausible that religion influences every one of Hofstede’s dimension. As a result religion has the potential to be a strong driving force in the method through which economic transactions are handled and how they are accounted for. One such religion is Islam.

Another factor that represents differences in societal values is education. The value placed on the level and type of education in a society would most likely be reflected through a change in the dimension of masculinity, with increases in educations geared toward monetary gains and success increasing the masculinity score. The level and direction of education also can affect a nation’s ability to develop and implement accounting standards. In many instances a country’s educational system does not place a high value on the study of accountancy. This results in a lack of qualified and educated accountants to develop and implement high quality standards. A prime example of this kind of situation is Africa.