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To start with, accounting refers to representation of vital information about the financial actions of business to different individuals and groups for their usage. International accounting is no different as it provides information of the firm's financial actions to the investor or entities that are located in other country. Usually this kind of accounting is followed by a multi-national company (MNC) which operates on cross-bordered transactions. It is done to make it possible for the MNCs to take further decisions or steps. To portray accounting dimensions globally the term international accounting is used, also comprising the harmonization of accounting methods or standards around the world. (4) (1)
History of international accounting
International accounting standards began in 1959 by Mr. Jacob kraayenhof who was a founding partner in firm of independent accountants. Later in 1966 professional institutes in Canada, United States and United Kingdom came together for forming accountants international study group. In 1973 international accounting standard committee was created. Standard committee included accounting bodies of nine developing countries namely: United Sates, West Germany, United Kingdom, Canada, Netherland, Mexico, Japan, Australia and France. This was followed by foundation of international federation of accountants in 1977.
In 1981 the input were expanded for international standard setting by IASC (international accounting standard committee) by forming a consultative group for non-members. This further influenced the companies listed in London stock exchange by making them obey international accounting standards in 1984. To promote the use of common accounting standards the international organization of securities commissions (IOSCO) in 1987 conducted its annual conference. By 1995 the IOSCO and IASC came together for implementing IAS across the globe. In 1996 United States Securities and Exchange Commission started supporting the IOSCO and IASC to develop accounting standards.
In 2001 international accounting standard board came into existence. International accounting standard board is a successor body of international accounting standard committee. The IASB pressurised mainly on international financial reporting standards such as promoting the company to provide and use accurate information, working with IASB and bring a change in accounting and to develop financial statements and reports of high quality, which could be easily understandable, are comparable and follows the global accounting standards. Accounting standards are very transparent in nature, due to such nature it makes it easy for others to use information and make decisions.
Current accounting methods used in a country is not outcome of that particular country. It is rather than a result of the improvement or innovation of accounting methods in many places across world over a period of time. (2)
Factors affecting international accounting
Cultural importance can now be seen in accounting, as culture is one of the essential elements. As culture explains the behaviour comprised by a society how people behave within a system. Culture influences the norms and values of the people.
Hofstede in 1970 researched on the dimensions of culture, its elements which powerfully influence the actions in an organisation or institution. Hofstede recognized the cultural value elements such as individualism, power distance, uncertainty avoidance and masculinity. (3).
Briefing the dimensions given by Hofstede, Individualism versus collectivism; individualism shows an outline of society where individuals take care of themselves and their family only. Whereas in collectivism the individuals also keep in mind the society which they belong to, where the society behaves as one family.
Large versus small power distance; if in a society the power is equally distributed among the people then it is known as small power distance and if power is unequally distributed then is known as large power distance.
Strong versus weak uncertainty avoidance; weak uncertainty avoidance is stress-free organisation where the lost in the path of work is tolerated. Whereas in strong uncertainty avoidance the lost in the path of work is not tolerated, working under strict codes of belief and behaviour is pressurised.
Masculinity versus femininity; it is where society gives preference to either masculinity and values the qualities possessed by a man in general like achievement, assertiveness etc or prefers Femininity and qualities possessed by a female like sympathy, relationship etc. A society might give equal importance to both the genders.
All the above dimensions given by Hofstede come under the cultural value; here a relationship can be established between the accounting values and cultural values. Establishment of such a relation will lead to measure the influence of culture. Gray in 1988 used these dimension proposed by Hofstede in an effective manner. Gray applied the dimension to explain the behaviour of accountant internationally, which lead to the difference in the accounting practices done by these accountants. Gray put forward the four accounting values firstly the professionalism versus statutory control as accountant all over the world possess a self-regulating attitude throughout the globe.
Professionalism in Grays accounting value is the centre element because the accountants are well trained in their job. They posses great skill and deep knowledge about accountancy, this knowledge help them in taking decisions. In an organisation judgements concerning to financial valuation and other key areas of accounting.
Statutory control is the involvement of structure of rules and regulations that are to be followed by accountants while working. Accountant in statutory control don't use their personal skill completely. This in western countries is a topic for argument that accounting profession should be completely under statutory control. For example giving a true and fair view of financial position of company is compulsory in United Kingdom, which completely depends upon the accountant individual's skills and judgement that how he or she presents the company. A contrasting case of France and Germany states that accountant's responsibilities are restricted to apply the recommend legal requirements in depth.
Second is the uniformity versus flexibility, uniformity means following rules and regulations, same set of procedures, rigid code of behaviour and maintaining a consistency in work. Whereas flexibility refers to less rigid set of rules under which procedures can be changed easily depending upon the circumstances.
Third is conservatism versus optimism, conservatism is most ancient accounting principle. In conservatism approach the accountants carefully measures and predicts the uncertainty in future. Accountants take very safe approach by following the rules and regulation and not over stepping them. The most conservatism approach is followed by the accountants in Japan, whereas a risk taking attitude is founded in accountants of United States. This risk taking attitude comes under the optimism.
Fourth secrecy versus transparency, secrecy is when top management of a company pressurize the accountant over the disclosure of information to stake holders. Only the essential information is provided to stake holders. Whereas in transparency company don't keep any information hidden from stake holders. This now takes us to the next influence that is legal influence.
Accounting was never inside the circle of laws, instead accountants created the rules for practicing accountants. These rules by accountants were framed as recommendations or standards of accounting. Legal influences in accounting are most spoken throughout the world. Countries across the globe have different legal system which relies upon the laws passed by the parliament. This was started in England buy the name of 'common law' where the judge acts on behalf of king. This method was later adopted by many countries including India. Another law was 'roman law' which was very rigid and firm. To meet any objective there were certain method to achieve, which were applied by the law. For example in roman law countries government sets the standards .In France the accountant must record the transactions by following General Accounting Plan which is utilized to specify which ledger is to be used to record that transaction.(5)
Until the emergence of Companies Act 1981 accounting didn't came in the picture of laws too much. The Companies Act 1985 had a greater impact over the companies accounting method.
As the taxation does not have a massive influence on financial reporting of a company, but the regulation of tax decides the methods to be utilized during preparing accounts. This is the most debated influence, as it has caused differences between accounting methods and tax. This influence is better understood with an example, in United States and United Kingdom the issues over the differences between the book value and the tax value of the asset which is known as deferred tax. Another example in United Kingdom the deprecation charged on the tangible assets in accounting statements is determined by the accounting standard FRS 15. The FRS 15 states that the method used to determine the depreciation, should replicate a fairly as possible. Twenty five percent is the depreciation charged on machinery in United Kingdom. The method used is reducing balance. For fixed assets whose lives are more than 25 years depreciation rate of 6%. In United Kingdom there is a separate plan for reduction in the corporate tax to pay. Depreciation in United States ranges from asset to asset. The method used is declining balance method, using twice the straight line rate. The 'modified accelerator cost recovery system' is used to write off fixed assets.