Topic 2: Classification of Accounting Systems Flashcards
(27 cards)
What is the purpose of classification in accounting systems?
Classifications in accounting bring order to complex data, sharpen description and analysis, help predict behavior, and identify missing elements or patterns.
What are the AAA (1977) criteria for a ‘good’ classification?
The American Accounting Association identified four criteria: 1) differentiating attributes should be consistent throughout, 2) subsets should be mutually exclusive, 3) hierarchy should be maintained, and 4) classification should include all objects.
What does Roberts (1995) argue about classifications in accounting?
Roberts argues that few accounting classifications achieve the AAA’s ideal criteria because accounting systems are constantly evolving, influenced by multiple factors, and contain hybrid elements.
What does Nobes (2018) suggest are the key criteria for evaluating classifications?
Nobes suggests two main criteria: 1) Faithful representation - accuracy of the classification in reflecting reality, and 2) Relevance - usefulness for decision-making purposes.
What was Mueller’s (1967) classification approach?
Mueller provided the first accounting classification, identifying four patterns based on business environments: 1) Macroeconomic pattern (Sweden), 2) Microeconomic pattern (Netherlands), 3) Independent discipline approach (UK/US), and 4) Uniform accounting approach (France).
What are the strengths and limitations of Mueller’s classification?
Strengths: First to attempt classification, linked accounting to broader economic environment. Limitations: No empirical testing, illustrated with only a few countries, no hierarchy showing relationships between patterns.
What was Seidler’s (1967) classification approach?
Seidler classified accounting systems based on ‘spheres of influence’: British, American, and Continental European.
What was Nobes’ (1983) hierarchical classification?
Nobes developed a hierarchical classification distinguishing micro-based, commercially-driven systems from macro-uniform, government-driven systems.
What was innovative about Nobes’ (1983) approach?
Nobes created a hierarchy showing relationships between accounting systems, explicitly defined what was being classified, and linked classification to causal factors.
What data was used in the Price Waterhouse (PW) based classifications?
PW surveyed practices in 38 countries on 233 accounting topics, scoring whether practices were required, allowed or banned. The survey was originally designed to highlight UK/US differences and later extended to other countries. This data formed the basis for several classifications.
What were the key problems with the PW data?
The PW data was created as a list of UK/US differences, with detailed topics swamping important points. If something wasn’t a difference between US and UK, there was no page for it. Many countries were later asked to fit themselves into this framework, creating distortions.
What was unusual about da Costa et al.’s (1978) findings using PW data?
Da Costa showed the accounting system least like the UK’s was US GAAP, with correlation of only .05, suggesting major differences between them. This contradicts most other evidence and suggests problems with the underlying data or methodology.
What did Frank (1979) and Nair & Frank (1980) find using PW data?
They identified four groups of countries using statistical analysis: 1) British Commonwealth, 2) Latin American, 3) Continental European, and 4) United States. Strangely, this placed UK and US in different groups despite their fundamental similarities.
What was d’Arcy’s (2001) classification approach?
D’Arcy used KPMG data on accounting rules (not practices) to classify countries. Her statistical analysis placed UK and US in different groups and Australia in a group by itself, contradicting substantial evidence of Anglo-Saxon similarities.
Why is d’Arcy’s classification considered problematic?
It relied on KPMG data containing errors (e.g., Australian provisions were mismeasured) and focused on rules rather than practices. The counterintuitive results (Australia alone, UK/US separate) suggest poor faithful representation despite sophisticated methodology.
What is the difference between classifying accounting rules and accounting practices?
Rules are formal requirements (laws, standards) while practices are what companies actually do. Classifications based on rules may not accurately represent actual reporting practices, especially when enforcement varies or when standards contain options.
What is the difference between extrinsic and intrinsic classifications?
Extrinsic classifications (Mueller, Seidler, Gray) group countries based on external factors influencing accounting. Intrinsic classifications (Frank, Nair & Frank, Nobes, d’Arcy) group countries based on accounting characteristics themselves - either rules or practices.
How did Nobes (1998) modify his classification approach in light of IFRS adoption?
Nobes proposed classifying accounting systems rather than countries, recognizing that a country might use different systems for different purposes (e.g., IFRS for listed consolidated statements but national rules for individual companies).
What factors make classifications less useful now than when published?
Four key factors: 1) Widespread IFRS adoption creating formal harmonization for listed companies, 2) Evolution of national systems making old classifications outdated, 3) Changing institutional contexts (financing systems, legal traditions), 4) Technological changes affecting reporting.
How can classifications remain useful despite IFRS adoption?
Classifications remain useful for: 1) Understanding national rules still used by most entities, 2) Predicting variations in IFRS implementation that follow historical patterns, 3) Explaining different approaches to IFRS adoption, and 4) Understanding enforcement differences.
What did Nobes (2011) find regarding IFRS implementation?
Nobes found that country-based variations in IFRS practices fit with his previous classification groups. Companies from different traditions make different choices when implementing IFRS options, creating ‘national versions’ of IFRS that follow historical patterns.
How does classification help predict responses to harmonization?
Countries with similar classifications tend to respond similarly to harmonization efforts. Class A countries (UK, Netherlands, Australia) embraced IFRS more readily, while Class B countries (Germany, France, Japan) maintained dual systems and traditional approaches for non-listed entities.
What is the difference between ‘de jure’ and ‘de facto’ harmonization?
De jure harmonization refers to making laws and standards more similar across countries. De facto harmonization refers to making actual accounting practices more similar. Classification research shows de jure harmonization doesn’t automatically lead to de facto harmonization.
How has translation influenced accounting classification?
Translating accounting concepts creates challenges - terms like ‘impairment’ are translated differently across languages (German ‘Wertminderung,’ French ‘dépréciation’). These differences reflect conceptual variations and can reinforce classification differences despite formal harmonization.
