What is Western Accounting?

Sherri Anderson

Western accounting refers to the accounting methods and practices used in the western-most countries of the world as opposed to those located farther to the east. Generally, western accounting is rules-based. This is demonstrated by the two dominant sets of western accounting standards, U.S. Generally Acceptable Accounting Principals (GAAP) and International Fair Reporting Standards (IFRS). The codes have many similarities, but also many differences. There has been a worldwide push toward uniting these codes into one standardized set of accounting rules which can be used by all, including the businesses in eastern countries. This will make for financial statements that can be understood by financial advisers worldwide.

Man climbing a rope
Man climbing a rope

Accounting rules and regulations vary from country to country but are closely related to the types of governments from which they evolve. The United States and many western European countries, such as England, have many things in common with each other in the area of government. Many of the governments of these western countries have some involvement in how businesses are operated via accounting rules, but do not have absolute control. The United States has the Fair Accounting Standards Board (FASB) which creates FASB Statements, and these comprise U.S. GAAP. Europe's rules come from the International Accounting Standards Board (IASB) in the form of IFRS codes. Together, U.S. GAAP and IFRS are the most definitive codes within western accounting.

In the interest of standardizing the two accounting codes, the FASB and IASB announced in 2002 that they would work toward converging them. The accounting codes already had much in common. For instance, if GAAP had a statement for a certain accounting practice, it was likely that IFRS would also have had a standard on it. Though the accounting issues may be the same, the actual rules within them could be very different. As an example, take the topic of long-term construction contracts. Under U.S. GAAP, these projects could be accounted for using either a percentage of completion method or by only reporting them once they were 100% complete. Under IFRS, the percentage of completion method is required, forcing companies to estimate losses or gains incurred and then report estimates. The difference between these two methods can be enough to create potentially huge differences in the financial reports of a construction company carrying out long-term contracts.

Variances such as these caused many to feel that U.S. GAAP and IFRS were dissimilar enough to create confusion on the part of those attempting to understand foreign financial statements. Being able to understand the financial statements of a company is crucial to those analyzing it for its value as a potential investment. Though countries historically have been reluctant to give up their specific methods of accounting, even businesses within the eastern countries of China, Japan, and Russia backed up the move toward convergence.

It was the advent of commerce on an international level and growing multi-national corporations that drastically changed how globally accepted western accounting principles were. While perhaps only very large companies would have had international dealings in the 1970s and 80s, the turn of the millennium has seen even small businesses getting involved in international trading. Every day more trade boundaries fall and allow for easier means of global trading. Businesses large and small alike have discovered they can save money by utilizing resources from outside the borders of their countries. A globally accepted set of accounting rules can now be found within IFRS and this understanding opens international trade to even more participants.

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