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1.1 Â The importance of classification
To classify is human.
(Bowker and Star, 2000, p. 1)
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Classification is a fundamental part of many disciplines. The classifications of diseases and books are vital in the daily tasks of medics and librarians, respectively. The Linnaean and Mendeleev classifications are central to learning and research in biology and chemistry. Classifications have also been made in many other fields; for example, languages (Ruhlen, 1991), economies (Neuberger and Duffy, 1976), political systems (Shils, 1966) and legal systems (David and Brierley, 1985). Some of these classifications will be examined in Chapter 2.
The everyday work of accountants involves recording transactions in the classification system that is double-entry bookkeeping. The financial statements which result are also classifications: for example, assets are classed as non-current or current; the former are then subclassed as tangible, intangible or financial. The classifications are debatable: in the income statement, should expenses be classified by nature or by function? Some classifications are metaphysical: the split of equity financial assets into trading or available-for-sale rests1 not on any observable characteristic, or even on the real intentions of managers, but on the declared intentions of managers.
Classification has also been applied in the field of international accounting differences. Just as in other fields, classification has been used to assist understanding of how the many different objects (in this case, accounting systems) are related. I use the term âaccounting systemâ to refer to a set of accounting practices in financial statements. For example, each individual listed company in the USA has its own accounting practices. However, the accounting of all the companies has many shared characteristics, imposed and enforced by the Securities and Exchange Commission. The individual examples of US accounting share so much in common that they could be said to comprise a âsystemâ: US GAAP (generally accepted accounting principles). Another precise, but quite different, system is French GAAP as used for unconsolidated financial statements in France. A country can exhibit more than one system. For example, although French GAAP is still used for unconsolidated financial statements in France, the consolidated statements of French listed companies are now prepared using International Financial Reporting Standards (IFRS).
The US and French âsystemsâ contain few overt2 options. However, partly as a result of international political negotiations (Camfferman and Zeff, 2007, ch. 5), many options were included in IFRS; although these are gradually being removed. When considering these options, a firm is subject to national pressures (including such matters as tax and legal systems) which make it choose differently depending on its domicile. Ball (2006, p. 15) explains how, even if all entities are complying with IFRS, the incentives of preparers and enforcers remain âprimarily localâ. As a result, one can discern national patterns of IFRS practice (Kvaal and Nobes, 2010). These could be seen as different âsystemsâ of generic IFRS. I classify such systems in the empirical chapters of this book.
A proper understanding of accounting classifications is important for several reasons. Hundreds3 of academic papers refer to the classifications as part of motivating research (Gray, 1988; Ball et al., 2000; OâDonnell and Prather-Kinsey, 2010) or to justify an independent variable (type of accounting system) which is expected to influence issues such as value relevance (e.g. Ali and Hwang, 2000). If the classifications are inappropriate, the research setting or the variables will be questionable. For financial analysts, students and policy makers, the classifications are a convenient way of simplifying and summarising. So, again, inappropriate classifications are likely to be misleading. For instance, much of the argumentation on the development of new standards is political (Harrison and McKinnon, 1986), and is now often expressed in terms of resisting âAnglo-Americanâ accounting. As an example, German writers have seen the international standard-setters as a Trojan horse which conceals Anglo-American accounting (Kleekämper, 2000) or as âthe unknown enemy from Londonâ4 (Hennes and Metzger, 2010). Botzem and Quack (2009) believe that the history of the International Accounting Standards Committee has been wrongly reported as âan Anglo-American success storyâ (p. 991). However, as will be shown, some classifiers deny the existence of Anglo-American accounting.
1.2 Â Outline of this book
Chapter 2 examines classifications across a wide range of disciplines and across many centuries. Lessons are collated for later use in the field of international accounting.
Chapter 3 looks at the objects of international accounting classifications: countries or âsystemsâ of accounting. The chapter investigates why and how accounting is different between countries, noting that (since the last edition of this book) it has become common for more than one accounting system to be used within a single country. There is also considerable variety in the practice of IFRS, along national lines, such that there are several âsystemsâ of IFRS, which can be classified.
Chapter 4 surveys the large number of international accounting classifications that have been drawn up over more than a century. These classifications can themselves be classified, particularly into those based on influences on accounting (extrinsic or deductive classifications) and those based on the rules or practices of financial reporting (intrinsic or inductive classifications). There is also great variation in the number of countries covered and the type of data used. Chapters 5 and 6 look in more detail at the extrinsic and intrinsic classifications, respectively, up to the end of the 1990s when international standards became important.
Chapter 7 examines the new world of IFRS. Far from rendering international accounting classifications obsolete, there are now more things to classify, especially (i) how jurisdictions have reacted to IFRS, and (ii) the several national âsystemsâ of IFRS practices.
Chapter 8 draws on the lessons learnt from other fields, as in Chapter 2, to ask whether the accounting classifications can be relied upon. Are they too dependent on the classifiers and the data chosen? The chapter uses data on IFRS practice to investigate the sensitivity of classification to variations in the countries and sectors included and variations in the characteristics used to measure the accounting systems.
Four appendices contain more detail on aspects of various chapters. The References list provides the details of the publications referred to in the text.
Notes
1 As under IAS 39, para. 9.
2 As explained later, I use this term to describe policy options that have been deliberately and explicitly inserted into accounting rules.
3 As examples, Nair and Frank (1980) Table 1 has 228 citations and Nobes (1983b) has 390 (according to Google Scholar, accessed on 15 April 2013).
4 âDer unbekannte Feind aus Londonâ.
âWhatâs the use of their having namesâ, the Gnat said [referring to insects], âif they wonât answer to them?â
(L. Carroll, Through the Looking Glass, ch. 3)
This chapter first discusses the purposes of classification in various disciplines, then looks at the rules which may be applied when classifying, then examines classifications in subjects other than accounting. It is hoped that such study will enable a better analysis of accounting classifications in the following chapters.
2.1 The purposes of classification
As mentioned in Chapter 1, classification is the central activity of librarianship. However, there are many ways in which books could be classified. In a book whose title could be translated1 as âTo Think, to Classifyâ, Perec (1985) discusses how books can be classified by, inter alia, alphabetical order of author or title, country of author or publication, colour, date of publication or acquisition, language, priority for reading, and so on (p. 39). Not all of these approaches would be useful in a library. Nevertheless, several quite different methods can be found around the world, particularly the Dewey Decimal system and the Library of Congress system. Both of these quite different methods are useful because the main purpose is to store books in a way in which they can be easily found by readers and librarians.
In other fields, classification serves purposes for which some approaches are clearly more useful than others. Classification was one of the earliest activities in the development of organised and scientific study in many disciplines. In the physica...