According to the book authors, classification of accounting based on legal compliance versus fair presentation has a better description of accounting in the modern world compared to its description based on code law as well as common law legal systems (Choi & Meek, 2011). I agree with these sentiments. There are many reasons why I feel that the authors hold valid sentiments. Many companies operating in those nations led by code law have a completely different way of preparing financial statements. These companies are now making two sets of financial statements. The consolidated financial statements are in line with fair presentation principles. On the other hand, the listed companies are based on legal compliance principles (Choi & Meek, 2011). The classification of accounting based on legal compliance versus fair presentation has pervasive effects on different accounting issues such as leases, depreciation, etc. The deferred tax also does not exist in situations where tax profit, as well as book profit, is similar.
In a general perspective, both patterns of accounting development are still valid today. However, these patterns are less valid compared to 1967. The accounting descriptions in the chapter or the respective archetype nations are broadly accurate. However, the Netherlands has a different system because the country operates a microeconomic pattern (“Accounting and accounting rules in the Netherlands - Business Environment - Nordea Trade Portal,” 2019). Secretive disclosures, as well as conservative measurements, tend to be correlated. Less focus on transparent disclosures as well as conservative measures are also correlated. The main reason why this is the case is countries’ finance source. Both governments and banks are concerned about the safety net afforded by conservatism. Since both institutions have direct access to information and data, public disclosure is not a must. The second classification of accounting is based on legal systems. The classification closely resembles the third classification, which is based on the practice systems. In a general perspective, the features of the legal system are the ones described in the practice system. Common law lays much focus on the substance compared to the form and is oriented towards the external investors’ decision needs meaning that it is capital markets oriented. One of the functions of financial statements is helping predict future profitability, cash flow, as well as judge the managerial performance.
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The classification of accounting based on code law is tailored to meet the government-imposed requirements such as complying with a macroeconomic plan of the government or calculating the taxable income (Choi & Meek, 2011). The amount of income may also be the basis for bonuses paid to employees as well as the dividends paid to the shareholders. Conservative measures play a critical role in ensuring the distribution of prudent amounts as well as bonus, dividends, and stable tax payouts. As I have above, code law nations are associated with compliance accounting. The common law countries, on the other hand, are associated with fair presentation accounting. However, it is interesting that many code law countries are currently consolidating their financial statements following the international financial reporting standards. The authors also contend that many national-level accounting distinctions are becoming blurred with the reason being pressures from the global capital market. In the authors’ opinion, there are low prospects of harmonization of national accounting systems. The chapter demonstrates that accounting satisfies users’ information needs. Accounting also develops depending on the response to circumstances in the environment. It is also prudent to note that strong uncertainty avoidance, large power distance as well as collectivism are correlated with code law countries practicing legal compliance accounting.
References
Accounting and accounting rules in the Netherlands - Business Environment - Nordea Trade Portal. (2019). Retrieved 8 September 2019, from https://www.nordeatrade.com/en/explore-new-market/netherlands/accounting
Choi, F., & Meek, G. (2011). International accounting . Upper Saddle River, N.J.: Prentice Hall/Pearson.
