Reasons For Accounting Diversity
05

Oct 2020

There are business opportunities all over the world but every jurisdiction has their own accounting standards and financial reporting standards. This makes it very important for a business management to keep a track of all the different accounting systems.

Why do financial reporting practices vary across countries? The Accounting experts have hypothesized various influences on a country’s accounting system, including factors as diverse as the type of the political system, the phase of economic development, and the type of accounting education and research.

What is Accounting Diversity?

Accounting Diversity refers to the differences in recording and making use of financial information. While many corporates deal with the variabilities without cutting on business operations, the problems affect major business dealings, including assessing a company’s net worth and the way managers make business decisions under the Generally Accepted Accounting Principles and Standards.

While accounting and bookkeeping services in Dubai train using several textbooks and educational philosophies, two organizations set the accounting standards used by the accountants and bookkeepers in Dubai under the Generally Accepted Accounting Principles.

The Generally Accepted Accounting principles have a general Diversity hierarchy for bookkeeping and accounting services in Dubai. The accounting companies in Dubai have the potential to legally and professionally elucidate the accounting standards in such a way as to generate diversity in recording finances.

As per the studies of the National Bureau of Economic Research, accounting diversity impacts security pricing and compiles international portfolios.

Reasons For Accounting Diversity

As per the survey of pertinent literature, following are the factors influencing the financial reporting practices of a country

  1. Legal System

There are two significant types of legal systems used, viz., common law and codified Roman law. Now the question arises what does the legal system of a country has to do with accounting?

Code law countries mainly have corporation law, which sets up the basic legal parameters controlling business enterprises. The corporation law often specifies which financial statements must be issued in accordance with a prescribed format. The national legislature of the country passes the accounting law that includes additional accounting measurement and disclosure rules.

The accounting companies tend to have little effect on the development of accounting standards in the countries where the accounting rules are legislated. In countries with common law, fixed accounting rules are established by the statements or by an independent non-governmental body representing a number of constituencies.

Therefore, the type of legal system in a country decides whether the primary origin of accounting rules is the government or a non-governmental organization.

  1. Taxation

In some countries, issued financial statements form the rationale for taxation. But in other countries, financial statements are altered for tax purposes and presented to the government separately from the reports sent to stockholders

In most cases, for a tariff to be removable for tax purposes, it should also be used in the computation of financial statement income. Well-managed accounting companies attempt to reduce income for tax purposes.

  1. Inflation

The Countries experiencing persistently high rates of inflation found it necessary to take on accounting rules that needed the inflation adjustment of historical cost amounts. This was mainly true in Latin America, which has experienced inflation more than any other part of the world.

Modifying accounting records for inflation leads to a write-up of assets and hence the related expenses. Adjusting income for inflation is mainly vital in those countries in which accounting and financial statements serve as the reason for taxation, or else the accounting companies will be paying taxes on fabricated profits.

  1. Providers of Accounting and Financing

The utmost providers of financing for business enterprises are family members, governments, banks, and shareholders. In those countries in which financing of accounting companies is controlled by families, banks, or the state, there will be little pressure for information disclosure and public accountability.

Banks and the state will often be able to get the information needed for decision making from inside the company. As the accounting companies become more reliant on financing from the general residents through the public offering of shares of stock, there is greater demand for more information that is made available outside the accounting companies.

  1. Political and Economic Ties

Accounting is a technology that can be comparatively easily borrowed from or inflicted in another country. Accounting rules have been carried from one country to another through political and economic links.

For example, Both France and England have conveyed their accounting and financial services frameworks to various countries around the world. British-style Accounting systems are found in countries as distant as Australia and Zimbabwe.

French Accounting is widespread in the former French colonies of western Africa. More recently, the United States' economic ties have had an influence on accounting in Mexico, Canada, and Israel.

  1. Correlation of Factors

There is a high amount of correlation between the legal system, source of financing, and tax conformity. Common law countries are inclined to have greater numbers of domestic listed companies, depending more heavily on equity as a source of capital. Code law countries are tempted to link taxation to accounting statements and depend less on shareholders' financing.

Why JAXA?

JAXA Chartered Accountants is a certified firm of adept Chartered Accountants teams, which provides a wide range of services, including Accounting and Management, Auditing, and Software Consultancy services customized to client’s needs. Devising of management reports, maintaining accounting records and database, Business settlements, etc. is some of the JAXA accounting services.

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