Chapter 1, Global Accounting Diversity Flashcards
3 Types of Worldwide accounting diversity
- Presentation Differences
- Terminology Differences
- Differences in recognition and measurement rules
2 Main accounting systems
International Financial Reporting Standards (IFRS)
U.S. Generally Accepted Accounting Principles (U.S. GAAP)
What is a consequence of different recognition and measurement rules
Financial results such as net income can differ significantly
5 Main reasons of accounting diversity
- Legal System
- Taxation
- Providers of financing
- Inflation
- Political and economic ties
2 main legal systems
- Common law (accounting standards developed by non-legislative organisations, fair presentation, high transparency, full disclosure and clear separation between financial accounting and tax accounting. More reliance on equity financing than debt financing)
- Code law (accounting standards developed by legislative organisations, more general and broad accounting laws, low disclosure and alignment between financial and tax accounting. More reliance on debt financing than equity financing)
What is the consequence when there is no clear separation between financial and tax accounting? (as in code law countries)
The net income fails to reflect the economic reality and there is no need for account deferred taxes
2 providers of financing
- Debt financing (banks, family state) (code law)
- Equity financing (shareholders) (common law)
4 problems caused by accounting diversity
- Preparation of consolidated statements (challenging for MNCs when subsidiaries have different accounting rules and currencies)
- Access to foreign capital markets or financing abroad ( costly when financial statements need to be adjusted)
- Comparability of financial statements
- Lack of high quality disclosure standards in some parts of the world.
Gray’s accounting values (4)
- Professionalism vs statutory control
- Uniformity vs Flexibility
- Conservatism vs optimism
- Secrecy and transparency