Another function of accounting is to provide the basis on which tax is measured. The link between taxation and financial reporting is stronger in some countries than others, and is typically much more pronounced in the accounting of owner-managed business than multinational groups. However, the tax issue can be a very significant shaper of accounting measurement. The relationship between tax and accounting is, like so many things, partly the result of an accident of history. In commercial code countries, government regulation of accounting was installed in the early nineteenth century, if not before, whereas tax on income was introduced towards the end of the nineteenth century or in the early part of the twentieth century. The sequence of events was that, first, there was a government-mandated set of accounting rules and, later, a government need for agreed measurement rules for tax assessment – so naturally the two became entwined. In some cultures, annual financial statements are perceived to be mostly about taxation, not reporting economic performance.
Think of three different countries that are separated widely geographically. From what you know about their history and economics, identify which factors may have been important in the development of their accounting regulations.
Your answer to this activity will obviously depend on your choice of countries. Hopefully, you have attempted to apply some of the principles discussed in this session to arrive at your answer. Keep your answer to this activity beside you as you work through the next section, and see whether you can add further details in the light of what you read in that section.