Why jurisdictions have different rules

Objectives of financial reporting

overview

based upon the rules maker's perception of what should and should not be included to reflect the health of a company

International Accounting Standards Board (IASB)

provides framework of factors which should be in the forefront of standard-setter's mind

primary purpose of financial statement

provided summarised info on assets, liabilities, equity, income, expenses, equity changes, cash flow

classification and aggregation should be useful to its users i.e. helps to make decisions in providing resources

important to investors understanding

standard setters

objectives

make decisions which provide a balance between difference objectives (complex choices)

use rules to enhance the economy rather than damage it

ensure information used is of high quality

application of rules to not be too onerous

information which is consistent and comparable

how are these objectives interrupted across different jurisdictions & which ones take priority

Contingent model of accounting change

rules in a country represent an accumulation of rules brought together over many years

resulting in inconsistencies

pulled together by different people, at different times, with different circumstances and priorities

revised inherited rules (from IASC) because they were inconsistent

One influential factor is how standards change

Contingent model

suggests the existence of a cycle in accounting regulations

  1. event which disturbs perception that the following are operating effectively - financial reporting; associated auditing infrastructure; professional regulation e.g. scandal/ WIM

needs to intrusive and on a large scale to convince action

  1. Search for consensus to change rules - via a formal process (if established)
  1. new applied to previous rule
  1. New equilibrium established
  1. Unintended consequence of rule change

stems from

people not reviewing and feedback on change

impact of new rule on group of people not consulted, because no one realised these people who be

consequences were unidentifiable at the time

consequence identified but classified as unimportant

is experienced by all countries but is becomes active by different events in each country

i.e. two countries can start with the same basic rules, but different country specific rules will evolve the foundations creating different rules between the two countries

Means of regulation

factors

cultural variables

cultural variances can have significant impact on methods used by countries to regulate accounting

Contingent model

underlying legal system fundamental factor

two models

Common Law Model

Roman Law Model

how law applied is largely decided by courts

law states objectives

people attempt to meet these

court decides if they were successful

e.g. practitioners determine technical details (not the state)

law determines procedures to follow in order to meet legislators objectives

practitioner has little to no input, and exercises little judgement in following procedures

characteristics

company law infrequently changes

professional rules constantly changing

changes decided by expert committee of auditors, preparers, users of financial statements

detailed rules can be changed quickly

practitioners familiar with constant changes which need to be updated and applied to their knowledge base

characteristics

commercial code

tax statuses

jurisprudence - philosophy of law

statuses change infrequently

professional guidance not mandatory or extensive

changes to law drafted by civil servants in consultation with persons with an interest in accounting

events

e.g. wars

Events

Wars (invasion) can bring different cultural laws to invaded countries

becomes a military decision

can be far reaching with unintended consequences

political decisions

e.g. joining EU trading bloc

political decisions