Question

List and discuss the five commonly accepted factors influencing a country’s financial reporting practices.

Answer 1

Five commonly accepted factors influencing a country's financial reporting practices are :

(1) Legal System

(2) Taxation

(3) Providers of financing

(4) Inflation

(5) Political and economic Ties

Lets discuss one by one

(1) Legal System

There are two major types of legal system commonly used around the world : common law and codified Roman law. Common law began in England and is primarily found in English speaking country. Common law counties rely on a limited amount of statute law, which is then interpreted by courts. Court decision then establish precedent, there by developing case law that supplements the statute. A system of code law mostly followed in non English speaking countries. Code law countries mostly tend to more statutes or codified law governing a wider range of human activity.

what does country's legal system have to do with the accounting? Code law countries generally have corporation law (sometimes called commercial law or companies act), which establishes the basic legal parameters governing business enterprises. The corporation law often stipulates which financial statement must be published in accordance with a prescribed format. Additional accounting measurement and disclosure rules are included in an accounting law debated and passed by the the national legislature. In countries where accounting rules are legislated, the accounting profession tends to have little influence on the development of accounting standards.

In countries with a tradition of common law, a;though corporation law lying the basic framework for accounting might exist,specific accounting rules are established by profession or by independent non governmental body representing variety of constituencies. Thus, the type of legal system in a country tends to determine whether the primary source of accounting rules is the government or a nongovernmental organization

In code law countries, the accounting tends to be rather general and odes not provide much detail regarding specific accounting practices and may provide no guidance at all in certain areas. Germany is good example of this type of country.

In common law countries, where there is likely to be non - legislative organization developing accounting standards, much more detailed rules are developed. In Nigeria they used to have the Nigerian Accounting Standard Board, which has been replaced by the Financial Accounting Standard Board.

(2) Taxation

In some countries, published financial statements from the basis for taxation, whereas in other countries, financial statements are adjusted for tax purposes and submitted to the government separately from the reports sent to stockholders. If we talk about the Germany, the so called congruency principle in that country stipulates that the published financial statements serve as the basis for taxable income. In most cases, for an expense to be deducted for tax purpose it must also be used in the calculation of financial statement income.

In the united states, in contrast, conformity between the tax statement and financial statement is required only with regard to the use of last - in, first -out, inventory cost flow assumption.

The difference between tax and accounting incomes gives rise to the necessity to account for deferred income taxes, a major issue in the United states as well as in Nigeria. Deferred income taxes are much less of an issue in Germany; for many German companies they do not exist at all. This is also true in other code law countries such as France and Japan.

(3) Providers of Financing

The major providers of financing for business enterprises are family members, banks, governments and shareholders. In those countries in which company financing is dominated by families, banks, or the state, there will be less pressure, for public accountability and information disclosure. Banks and the state will often be represented on the board of directors and will therefore be able to obtain information necessary for decision making from inside the company.As companies become more dependent on financing from the general populace through the the public offering of share of stock, the demand for more information made available outside the company becomes greater. It simply is not feasible for the company to allow the thousands of shareholder to access the internal accounting records. The information needs of those financial statement users can be satisfied only through extensive disclosure in accounting records. There can also be a difference in financial statement orientation, with stakeholders more interested in profit and banks are more interested in solvency and liquidity.

(4) Inflation

Countries experiencing chronic high rates of inflation found it necessary to adopt accounting rules that required the inflation adjustment of historical cost amounts. This was especially true in Latin america, which as a region has had more inflation than any other part of world.For example throughout out the 1980s and 1990s, the average annual rate of inflation rate in Mexico was approximately 50 percent, with a high of 159 percent in 1987. Double and tripe digit inflation rates render inflation cost meaningless. Adjusting accounting records for inflation results in a write up of assets and therefore related expenses. Adjusting income for inflation is especially important in those countries in which accounting statements serve as the basis for taxation; otherwise companies will be paying taxes on fictitious profits.

(5) Political and Economical Ties

Accounting is technology that can be relatively easily borrowed from an imposed from an another country. Through political and economical links, accounting rules have been conveyed from one country to another. For example, through previous colonialism, both England and France have transferred their accounting framework to a variety of countries around the world.  British style accounting system can be found in countries as far - flung as Australia and Zimbabwe. French accounting is prevalent in the former French colonies of western Africa. More recently, it is thought that economic ties with the United States have had impact on accounting in Canada, Mexico, and Israel.