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Why jurisdictions have different rules (Contingent model of accounting…
Why jurisdictions have different rules
Background
Hines (1988)
When we draw up accounting rules, we determine what view of reality we present
If we decide that internally generate intangibles should not be measured, we also determine that a whole class of assets owned by a company is not part of the picture given by the balance sheet
The 'reality' that the balance sheet is supposed to reflect is shaped by our decision on the accounting rules
Those who make the accounting rules determine which aspects of the company are highlighted, and which are neglected, in financial reporting
Objectives of financial reporting
International Accounting Standards Board (IASB)
Has a conceptual framework that aims to set out publicly which qualities should be in the forefront of the standard-setters’ minds when making accounting rule
They believe that the key objective of primary financial statements (reporting) is to provide summarized information about recognized...
Assets
Liabilities
Equity
Income
Expenses
Cashflows
The setting of standards is important to an investor’s understanding of the information provided in financial reports
Not all regulators have an overt set of objectives like this
There are usually factors that come into play
Oversimplication
Contingent model of accounting change
The totality of the accounting rules in any one country at any one time
Represents an accumulation of rules that have been brought in over many years
Rules are therefore sometimes inconsistent
They have been put together by different people
They are likely of been put together at different times and in the face of different circumstances and priorities
It is optimistic to expect close comparability between national sets of rules
Standards of the IASB
Put together over a period of 30 years
Evident that there are different approaches
Full-time professional standard-setting committee, started work in 2001
Their first act was to decide to revise most of the standards inherited from the IASC (their original)
Financial Accounting Standards Board (FASB)
When issuing the draft of its standard on Fair Value Measurement
in 2004
Recognised that there were 31 standards issued since 1971 by the FASB that mentioned fair value but had inconsistent approaches to how it was defined and how it should be calculated
Factors that influence the accounting rules
The way in which they change
Burchell et al. (1985)
Analysed a particular case of accounting change in the UK
Analyses how, in a particular economic context, various interests concerned with financial reporting arrived at a consensus that an additional financial statement, a statement of value added, should be part of the company reporting package
Walton (1995)
Evidence of the model in operation about how accounting change
often takes place
Contingent model
Suggests that there is a cycle in accounting regulation
State of equilibrium
(financial reporting believed to be effective)
Financial scandal/significant economic change
(financial reporting proved to be faulty)
Search for consensus as to how to remedy the problem
(consultation amongst interested parties)
New regulation
(patch put on rules)
State of equilibrium
Unintended consequences
(regulators often fail to see side effects)
Means of regulation
Cultural issues can be seen to have a considerable impact on the methods used in each country to regulate its accounting, and indeed on whether regulation is perceived to be necessary
The underlying legal system
Common Law model
A great deal of latitude is left to the courts in determining how the law is applied
The law says what its objectives are, people try to meet these and the courts decide whether they have been successful
EG - 19th century, in the UK - company law required a full and fair balance sheet and left it to accounting practitioners to work out what that was, and the courts to assess whether this had been done
English speaking countries typically follow this tradition
The standard setting for most of the 20th century was carried out by professional accounting bodies, against a framework provided by company law
Roman Law model
Napoleon was a great enthusiast and proselytiser
The law sets out the procedures that have to be followed to
meet the legislator’s objectives
The practitioner has little input and exercises little judgement in following the procedures
French example
The accountant has only to follow the rules of the plan comptable
général (General Accounting Plan),
Specify which ledger accounts are to be used for different transactions and how the account balances are to appear in the financial statements, to provide an acceptable set of annual accounts
Standard setting is typically in the governments hands