The Impact of Culture on Conservatism

The Impact of Culture on Conservatism


The framework created by Professor Sidney Gray in 1988 to explain the development of a country’s accounting system is presented in the chapter in Exhibit 2.8. Gray theorized that culture has an impact on a country’s accounting system through its influence on accounting values. Focusing on that part of a country’s


accounting system comprised of financial reporting rules and practices, the model can be visualized as follows:


In short, cultural values shared by members of a society influence the accounting values shared by members of the accounting subculture. The shared values of the accounting subculture in turn affect the financial reporting rules and practices found within a country.

With respect to the accounting value of conservatism, Gray hypothesized that the higher a country ranks on the cultural dimensions of uncertainty avoidance and long-term orientation, and the lower it ranks in terms of individualism and masculinity, then the more likely it is to rank highly in terms of conservatism. Conservatism is a preference for a cautious approach to measurement. Conservatism is manifested in a country’s accounting system through a tendency to defer recognition of assets and items that increase net income and a tendency to accelerate the recognition of liabilities and items that decrease net income. One example of conservatism in practice would be a rule that requires an unrealized contingent liability to be recognized when it is probable that an outflow of future resources will arise but does not allow the recognition of an unrealized contingent asset under any circumstances.


Discuss the implications for the global convergence of financial reporting standards raised by Gray’s model.


Although Gray’s model relates cultural values to the accounting value of conservatism as it is embodied in a country’s financial reporting rules, it can be argued that the model is equally applicable to the manner in which a country’s accountants apply those rules:



Discuss the implications this argument has for the comparability of financial statements across countries, even in an environment of substantial international accounting convergence. Identify areas in which differences in cultural dimensions across countries could lead to differences in the application of financial reporting rules.

Place Your Order Here!

Leave a Comment

Your email address will not be published. Required fields are marked *