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Finacial accounting theory describe the key historical events that have shaped the development of ac

Printable page generated Saturday, 29 Sep 2018, 00: In times past, imperialism and war have both been responsible for expanding financial rules across Europe and the world. More recently the Sarbanes-Oxley Act of 2002 in the United States has had the same, if unintentional, effect.

This OpenLearn course provides a sample of postgraduate study in Business Learning outcomes After studying this course, you should be able to: Essentially, we are dealing with how reports on a company's financial situation are compiled for external purposes and how that compilation is constrained and shaped. Reporting rules are not exactly the same in any two countries, and this is a fundamental issue around which much of the study of international accounting revolves.

We are focusing on a particular area within international accounting, that of the supply of information to the international capital markets. To understand why there is a need for international rules, we need to know something about the diversity of accounting that exists in the world.

After all, if a litre of petrol is the same in Wales, Spain and Australia, why are company profits not measured with the same uniformity? We probably take it for granted that financial reporting is regulated in various ways, but it is not necessarily obvious that it should be regulated, and, if it is regulated, it is not self-evident who should do the regulation. Economists such as Bromwich 1992 point out that those who want to use accounting information in negotiating with others, for example to raise finance, or to sell products, have an interest in providing good quality financial information.

Consequently, the provider of the information has an incentive to provide good information and to reassure users of its quality, through devices such as using a comprehensive basis of accounting, which is perceived to be high quality. The counter-argument is that this leaves inefficiencies in the market, because it takes a little while for the poor quality information to be clearly identified, and there will always be those who believe they can deceive the market e.

Enron, Worldcom, Parmalat, etc.

Introduction

Ever since possessors of wealth appointed other people to manage their money, the agents have been reporting back on what they did with it in the form of the stewardship report. If you are familiar with the Bible, you may know a parable about a wealthy man who advances the same amount of money to three employees, and then asks them a year later to say what they did with it — verbal financial reports.

The stewardship function is still a very potent force in financial reporting. In the markets, the multinational is presenting its account of past management action as an incitement to investors to continue to invest.

200 Years of Accounting History Dates and Events

The stewardship report establishes a track record. Consequently they went into liquidation, often, as is the case with small business networks, taking other businesses down with them. The 1673 Savary Ordonnance in France, which is regarded as the first national accounting rule created in the world and was subsequently taken up into the French Commercial Code more belowwas introduced to prevent bankruptcies. The French government required all businesses but at the time, pre-Industrial Revolution, large businesses were in single digits to make an annual inventory, in effect, a balance sheet using current market values, to assess the health of their business.

The difference in net worth from one year-end to the next showed whether the business was profitable or not. This first example illustrates one of the principal forces for regulation: Increasingly, politicians have thought it necessary to step into the markets and introduce controls on corporate behaviour.

If you look at any pronouncement by the US Securities and Exchange Commission SECwhich regulates the US financial markets, you will see that they frequently refer to protecting the smooth operation of the markets and preserving investor confidence, as a reason for almost any measure.

The 1673 regulation in France occurred because the government observed that there had been a spate of bankruptcies, leading to a loss of confidence in business and a downturn in economic activity.

It wanted to re-build confidence by weeding out the weaker businesses before they took others down. We will look at this pattern again in Section 2. The special impact of the Industrial Revolution on accounting sprang from the change in the size of the average business and the capital necessary. Before the revolution, businesses were small scale, involving one owner or a partnership, liability was unlimited and the distinction between the owner's wealth and the business's was not observable.

  1. Of course, they do not create something that does not exist although some companies do try to use the rules that way! Simpkin, Marshall, Hamilton, Kent.
  2. This new business unit ushered in the rise of the professional manager, hired for expertise in a particular activity, and relegated the owner-manager to the small business. This 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.
  3. See the following wikipedia page for the history of the minimum wage. In Roman law countries, standard setting is usually in government hands.

Banks were mostly concerned with financing trade exchanges, not with lending to provide base capital for business. The Industrial Revolution called for large investments in high risk projects, initially such as building canals and railways and then, later, factories.

The economy needed to evolve to accommodate the new pattern of business, and it did so with the expansion of the joint stock limited liability company, where many investors could be brought together to share the risks, and their liability was limited to their investment. This new business unit ushered in the rise of the professional manager, hired for expertise in a particular activity, and relegated the owner-manager to the small business. This in turn produced a new sophistication in the stewardship function — there was a separation between manager and investor, and financial reporting had to evolve to meet the needs of communicating information between the two.

We can call this the capital market function of financial reporting: Although it was recommended that the shareholders nominate one of their number to audit the books, this was not a legal finacial accounting theory describe the key historical events that have shaped the development of ac until the twentieth century in the UK. However, many companies did have an audit reassurance to the market reduces prices and the new profession of accountants was gradually hired more and more by shareholders to carry out the audit on their behalf.

There is a strong tradition within continental Europe of looking at what the neighbours are doing and adapting their solutions for one's own use. Forrester 1996 discusses how professional accountants from the nineteenth century onwards encouraged exchanges of accounting rules.

The Savary Ordonnance see Section 1. The German state of Prussia used the Savary Ordonnance in the eighteenth century. At the beginning of the nineteenth century, it was adapted into Napoleon's first Commercial Code 1807which was forcibly exported to Portugal, Spain, Italy and the Netherlands. Apart from the last, these countries have kept the code in place ever since. When the new country of Germany was founded in 1870, it too built on the Prussian base and developed that into a similar code.

This is because the UK and the US have always exerted a strong influence on each other. For example, the technique of producing consolidated accounts was pioneered in the US in the early twentieth century and started to be used in the UK from about 1930, but only became widespread in the rest of Europe following the Seventh Directive, passed in 1983.

The European colonisers, notably the UK and France, transferred their accounting rules to their colonies, so that Singapore, for example, had the same rules as Cyprus and Nigeria Walton, 1986while Cameroon shared rules with Lebanon, Vietnam and Guadeloupe, amongst others.

These links have led to countries adopting rules that have not evolved in their own economy and are not therefore necessarily well adapted to that economy. The link between taxation and financial reporting is stronger in some countries than others, and is typically much more pronounced in the accounting of owner-managed business than multinational groups. However, the tax issue can be a very significant shaper of accounting measurement.

The relationship between tax and accounting is, like so many things, partly the result of an accident of history. In commercial code countries, government regulation of accounting was installed in the early nineteenth century, if not before, whereas tax on income was introduced towards the end of the nineteenth century or in the early part of the twentieth century. The sequence of events was that, first, there was a government-mandated set of accounting rules and, later, a government need for agreed measurement rules for tax assessment — so naturally the two became entwined.

In some cultures, annual financial statements are perceived to be mostly about taxation, not reporting economic performance. Activity 1 Think of three different countries that are separated widely geographically. From what you know about their history and economics, identify which factors may have been important in the development of their accounting regulations. Discussion Your answer to this activity will obviously depend on your choice of countries. Hopefully, you have attempted to apply some of the principles discussed in this session to arrive at your answer.

Keep your answer to this activity beside you as you work through the next section, and see whether you can add further details in the light of what you read in that section. The consequence of this is that accounting regulation has evolved differently in various countries. The reasons for the diversity in accounting regulations will be considered in more detail in Section 2. Those who make the accounting rules determine which aspects of the company are highlighted, and which are neglected, in financial reporting.

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Of course, they do not create something that does not exist although some companies do try to use the rules that way! Not all regulators have an overt set of objectives like this, and even when they do, there are usually other factors that come into play. This is one of the reasons that accounting rules differ from one jurisdiction to another: We need to be wary of over simplification here.

Standard-setters face complex choices, and though they may express them one way, very often decisions are made in a way that tries to strike a balance between different objectives. All standard-setters wish the economy to be enhanced not damaged by their rules, all want those entitled to information about the company to have good quality information, all want the application of the rules not to be too onerous, all want the information to be comparable and consistent, none can ignore that accounting rules will influence tax rules in any jurisdiction, and so on.

So the issue when you look at a particular jurisdiction is how they interpret these objectives and which seem to get the most emphasis. If we take Switzerland as an example, the financial reporting regime is changing.

That is another rule of financial reporting: One of the reasons that some European countries find it difficult to accept IFRS is that they are used to an environment where the rule changes occur once every 20 years, not one like the US, where several rules are changed each year. Traditionally, the Swiss rules have been almost exclusively concerned about taxation and a stable economy. The Swiss regulator believes and it is explicit in the commercial code that undervaluing the finacial accounting theory describe the key historical events that have shaped the development of ac by creating hidden reserves, gives a positive economic benefit because it means companies have reserves that can be used during a downturn in the economic cycle.

The tax rules go along with this, so, in the Canton of Geneva, one third of year-end stock can be written off, as of right, irrespective of its condition. This reduces the value of stock shown in the balance sheet and reduces profit by a corresponding amount. The legislator believes that this is good for the health of the economy, and that users of financial statements are getting good information, precisely because it does not reflect the economic state of the company — they are protected by undervaluation.

Influences on accounting regulation

The Swiss Commercial Code code des obligations in the 1990s addressed its rules to the financial statements of individual companies. There was only one line on groups of companies, saying that they should prepare consolidated accounts. Listed companies now have to follow standards for consolidated accounts that are loosely based on International Financial Reporting Standards IFRSbut the regulation remains extremely light. In practice, listed companies do not necessarily like this because, as we discussed at the start, the markets want reliable information and this comes from following the rules of a high quality comprehensive basis of accounting.

The absence of detail in the code suggests that, for the Swiss legislator, the preparation of financial statements as an essential input to capital markets is just not an important factor in framing rules for financial reporting. The rules are under the ultimate authority of the Securities and Exchange Commission SECand the announced objective of the standard-setter the Financial Accounting Standards Board FASB is to create rules that provide information for investors on which to make investment decisions.

The standard-setters believe that the economy is protected by transparent information, so that the investor can make economic judgments.

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  • The professional association Ascend launches advancing the finance and accounting professions in the Asian and pacific Islander communities;
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  • The rules are under the ultimate authority of the Securities and Exchange Commission SEC , and the announced objective of the standard-setter the Financial Accounting Standards Board FASB is to create rules that provide information for investors on which to make investment decisions;
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There are no mandatory rules for private companies. This issue of different countries perceiving financial reporting as having different objectives is one of the important cultural variables that affect financial reporting.

The way in which you represent reality in the financial statements will depend upon what aspects of the company you believe to be most important to convey to the outside world. In remembering that, it becomes clear why the rules are sometimes inconsistent: It also makes clear why it would be optimistic to expect close comparability between national sets of rules. When looking at the standards of the International Accounting Standards Committee IASC and its successor the IASB, put together over a continuous period of no more than 30 years, it is evident that these different approaches, different priorities, etc.

When the IASB, virtually a full-time professional standard-setting committee, started work in 2001, almost their first act was to decide to revise most of the standards inherited from the IASC, because they were internally inconsistent.

The IASB press release added that the project had removed a number of options contained in IASs, whose existence had caused uncertainty and reduced comparability. One of the factors that influences the accounting rules is the way in which they change. Burchell, Clubb and Hopwood 1985 analysed a particular case of accounting change in the UK. This 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.

From this detailed analysis we can draw a more general model about how accounting change often takes place. If you consult a history of financial reporting in Europe, such as Walton 1995you can find plenty of evidence of this model in operation.