International Differences in Accounting:  A Comparative Analysis of Portugal and the UK

                                  

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                                                         Abstract

The core aim of the paper is to offer an inductive theory of the Portuguese accounting system in comparative international perspective with the United Kingdom. It will seek to establish the core differences between their accounting standards, explaining the core issues and eventually the causes of these differences. The comparison will try to use the discovered issues to ensure that these issues are resolved to ensure adhere to the international laid down accounting standards. The main aspects of both countries accounting systems present vital differences especially in budgeting and their influence in accounting. Basically the international accounting standard seeks to ascertain whether its application achieves higher accounting quality and capital efficiency. The standards of accounting remain of paramount and should not be disregarded especially in accounting businesses over the world. The comparative analysis of the standards used by United Kingdom and Portugal will bring into play variables like tangible assets, stocks, disclosure of accounting policies, consolidated financial statements, lease accounting, and even information regarding financial reporting. This will help in the analysis of the core issues creating the differences in accounting systems and their level of diversity with aim of aligning them for uniformity. A discussion of the probable reasons for these differences is then presented, centered on political constitution, historical evidence and budgetary practices embraced in these countries.

 

                                       

 

 

 

                                     Table of content

Introduction……………………………………………………….………………….………4

1.0 International differences in accounting………………………………………………….5

1.1 International Differences in Accounting: Core Issues......................................................5

1.2 Causes of the International Accounting Diversity Level..................................................5

1.2.1 Culture...........................................................................................................................5

1.2.2 The Legal System..........................................................................................................6

1.2.3 The Nature of the Firm and the Model System Funding...............................................6

1.2.4 The Power of Accounting Profession............................................................................7

1.2.5 Tax System....................................................................................................................7

1.3 Classification of Accounting Systems..............................................................................7

1.3.1 Definition of Accounting System..................................................................................8

1.3.2 System Anglo-Saxon and Continental European System.............................................8

1.4 Conclusion.......................................................................................................................9

References............................................................................................................................10

 

 

 

 

 

 

 

 

 

                                                  Introduction

               The accounting practices of the two countries having been changing with time. The European and Anglo-American viewpoints had dominated the accounting writings but this changed as recent comparative studies so convergence (Luder and Jones, 2003). The term international accounting standards therefore refer to accounting guidelines that elaborate on financial accounting and reporting with core objectives of uniformity and transparency.             International accounting standards through the theories of accounting present a course and guidance that clearly outlines the procedures companies can employ to achieve proper record keeping, consistency, comparability and transparency.

                These are key features that enhance the self-assurance of the public in the financial reports (Van Tendeloo and Vanstraelen, 2005). The need for uniform standards rose due to lack of accountability and credibility of accounting standards caused by companies presenting financial reports concerning their profits and position on their individual basis (Glautier and Underdown, 2001). Standards determine information presentation with aim of achieving transparency and accountability. This is a factor that promotes productivity and economic performance of the country. Therefore reporting standards are crucial in market mechanism for the gain of organizations and users of those reports.

The knowledge of international study will be useful in this study as we try to establish the likely causes of the differences. The study will try ascertaining if these factors pose reasonable weight to establish a relationship and viable assumptions. Researchers in the past have attempted to establish if the identified differences in accounting practices have an association with the causative factors (Doupnik and Salter, 1995).

 

1.0 International differences in accounting

               The international differences in accounting arise since accounting is based on estimations and valuation that presents major differences in the accounting systems of the two countries. A summary of the comparative analysis of the accounting systems of Portugal and British reveals the following disparities, broadly classified in various categories.
1.1 International Differences in Accounting: Core Issues

             The institutional frame work between the two countries poses the major differences between the accounting systems. This constitutes a range of accounting practices that qualifies the differences. Budgetary accounting basis, long-term borrowing and consolidated financial reports are some of the key areas in this category that present a difference. Secondly, the disparities in budgeting rules and principles have a fair share in the differences. The Portugal systems are integrated as the British ones are totally separated. The differences in accounting identification and criteria of accounting measurement has also merited in the list of this differences. This takes a close look on the differences in equity structures, cost of services, matching concept and many more. Another viable difference is the form and content of financial reporting. Some of the areas of conflict in this category are individual vs. consolidated statement, cash flow statements etc. Finally, the objectives of financial reporting information in these countries have submitted its core differences. The study will focus to establish if the differences are logic to the study (Jorge, 2003) and (Luder and Jones, 2003).

1.2 Causes of the International Accounting Diversity Level

       Several factors have been closely attributed to cause the diversity in international accounting are outlined as below.

1.2.1 Culture

              This outlines that accounting practices have been strongly been affected by the prevailing culture of the country.  The cultural patterns that determine the differences are summarized as follows; individualism versus collectivism which is concerned with the degree of interdependence between individuals, large versus small power distance is interested with the relative acceptance of the unequal distribution of power, strong verse weak uncertainty avoidance seeks to comprehend the level to which people feel uncomfortable with uncertainty and masculinity versus femininity tries to focus on the differences on preferences caused by two (Hofstede, 1984). These cultural differences application were used to clarify the international accounting systems diversities (Gray, 1988).

1.2.2 The Legal System

            The differences in legal systems of different countries have a strong effect on how the accounting practices and systems function. Some countries such as British have embraced the common law that depends on limited statute laws. Codified roman laws has rules interrelated to ideas of justice and morality. Portugal falls in this group of legal system. These legal systems ascertain the commercial codes and laws.

1.2.3 The Nature of the Firm and the Model System Funding

          The nature and types of business organizations and ownership in place also differ from country to another. The model of funding system therefore differs and explains the difference in accounting system disparities between British and Portugal. An example shows that the British source of funding is dependent on private shareholders unlike German and Italy depend on capital provided by banks. Some researchers claim that the common laws protection on legal investors is more promising than those governed by roman statutes. All these differences have played a big role in the determination of organizations’ characteristics and systems of finance governing the companies.

1.2.4 The Power of Accounting Profession

           This has been a factor that has been closely thought to cause international differences.  This factor is a dependent variable that borrows much from potency, size and competence of the country’s accounting system profession. This could be used to determine the number of auditors. Countries with substantial significant body of private shareholders and public companies have a higher demand of auditors. Britain falls to this category where as Portugal falls on the other category that does not require much services offered by auditors due to professional differences.

1.2.5 Tax System

              The level to which accounting measurements are affected by taxation laws has a reasonable influence in determination of the underlying differences between the accounting system of Britain and Portugal. The study of tax deferral provides the best example of the differences existing due to diverse tax systems. The differences in the degree of importance deferred tax may be differing from one country to another as outlined by Haller in his book. Taxation regulations have a tangible influence on accounting practices (Haller, 1992).

1.3 Classification of Accounting Systems

          The accounting system may be classified either by intrinsic or extrinsic ways. The extrinsic classifications are majorly determined by the prevailing political and economic environment (Cho and Meek, 2005). Intrinsic classification has its basis on data collected or generated by them (Alexander and Archer, 2001).

1.3.1 Definition of Accounting Systems

         These are systems outlined in the statutes of a given country that determine the process of identifying, measuring and communication of economic information in a manner that will permit informed judgment by the users of such information.

1.3.2 System Anglo-Saxon and Continental European System

            The concept was introduced in 1991 by Michel Albert. Albert explains the differences between the two concepts and how they affect the systems of accounting prevailing in a country of choice. He says the Continental European model has been assimilated in Germany and other western European countries. The model is described as a strongly regulated market economy with an elaborate system of labour laws and social security, in which the government, the employers, and trade unions discuss and determine the social-economic policies. This concept is underlined by the principle that the people are aware of their collective responsibilities for their societies. It also an assumption that the capital and labour are organized to join forces by swallowing their conflicts.

        The Anglo-Saxon model is a concept majorly used by the United States of America and the United Kingdom. This concept has features of competition, individual responsibility, and dominance of the market forces. Its fundamental assumptions are that people pursue their own interests and receive what they deserve depending on their individual competitive power. Albert finalized by stating the eight differences that clearly distinguish the two concepts (Tella and Churnin, 2011).

 

 

1.4 Conclusion

           In conclusion, there is a higher credibility and possibility that the differences that exist within the comparative analysis of Portugal and Britain have some tangible influence on the difference in the accounting systems established in those countries. This is evident by the sharp contrast observed in their legal systems and the prevailing accounting practices. The classification of accounting and the concept by Albert comes in to simplify the accounting systems by explaining the how economic and political environment determine the kind of political systems in play.

 

 

 

 

 

 

 

 

 

 

 

                                                                          References

Haller, A. (1992) ‘The relationship of financial and tax accounting in Germany: a major reason for accounting disharmony in Europe’, International Journal of Accounting,

Hofstede, G. (1984) ‘Cultural dimensions in management and planning’, Asia Pacific Journal

of Management, January.

Choi, F.D.S. and Meek, G.K. (2005) International Accounting, Prentice-Hall, Upper Saddle

River, NJ.

Gray, S.J. (1988) ‘Towards a theory of cultural influence on the development of accounting systems internationally’, Abacus, Vol. 24, No. 1.

Jones, R. H. (2003), Reforming governmental accounting and budgeting in Europe, Frankfurt: Fachverlag Moderne Wirtschaft.

Carvalho, J. C.; Jorge, S. (2003) ‘Governmental accounting in Portugal and the information disclosed on cash and accruals bases: the case of Porto municipality; working-paper presented at 26th Annual Congress of the European Accounting Association, Seville, April.

Glaulier M. & Underdown B. (2001): Accounting Theory and Practice; London, FT-prentice Hall 7th edition. ELBS

Van tendeloo, B & A. Vanstraelen(2005): Earnings Management under German GAAP versus European Accounting Review.

Alexander, D. and Archer, S. (2001) European Accounting Guide, Aspen, New York.

Doupnik, T. and Salter, S. (1995) ‘External environment, culture, and accounting practice: a

preliminary test of a general model of international accounting development’, International Journal of Accounting, Vol. 30, No. 3.

Tella, M., & Churnin, S. (2011). Case law in Roman, Anglosaxon and continental law. Leiden: Martinus Nijhoff Pub

 

 

 

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