Question

Why do we attempt to classify accounting practices by country or region? Discuss how classification might help financial statement users. How might one go about classifying accounting practices? Select two different regions that were identified (i.e., Asian Accounting, East European Accounting, Anglo American, Lation) and compare and contrast the accounting practices of the two regions.

Answer 1

Factors influencing the accounting practices:

Legal factors: Lega framework of country like its labour laws, taxation system, property related laws influence accounting practices a lot. For ex. Laws in Germany are silent upon  leases, foreigncurrency translation and cash flow statements thus their accounting practices are tend to be much simpler

Financing system: There are primarily two types of financing: equity and debt. Countries where raising equity is in practice involves more fine calculations and disclosures of income earned, EPS and demands more accountabilty which creates need for more robust accounting system whereas in debt driven economies accounting is driven by convinience of financers.

Taxation Rules: In countries like Japan and Germany, tax rules are considered as accounting rules and they run on a system called Massgeblichkeitsprinzip. Accounting and taxation are dependent in this type of accounting system.

Whereas countries like US and UK have dependent bodies who look after accounting and taxation. Financial statements are adjusted to give effect to the taxation rules.

Cultural differences: Cultural differences also influencing factor on reporting and disclosure performance withregard to financial statement.

Classification helps users as different users has different needs and reporting requirements. These needs are driven by trending practices in their country and thus following an accounting system of the country's requirement helps users to understand financial reports much better and extract required informations.

How might one go about classifying accounting practices?

One may tend to classify based upon Extrinsic and Intrinsic factors.

Extrinsic:

• Cultural
• Economic
• Colonial
• Regulatory

Intrinsic:

• Accounting practices
• Reporting practices
• IFRS practies
• Degree of Standardization

Asian accounting is focused on the banks perspective whereas american one is much more based upon investors point of view. There is no much requirement over the discosures and accountability in the asian accounting system whereas in american much focused is given on these owing to some big scandals over the decades.