Suppose you have just been selected as the Secretary of the Treasury for Freedonia! Freedonia is a small island nation not far from Florida which has been under modified socialistic system for the last 50 years and now wants to adopt a capitalist culture. As Secretary of the Treasury your first responsibility is to adopt an accounting model for your country.

Freedonia has had an accounting model which was based on a code law and had the government prescribe the accounting policies. Under the modified socialist system, Freedonia had some private business but they were controlled (prices, output, salaries etc.) by the government. So Freedonia has a normal balance sheet with a full-fledged equity section.

Your first visitor is “Knuckles” McPunch who is the head of the largest labor union in Freedonia. “Knuckles” would like you to consider using US GAAP and English for the Freedonian accounting standards. “The Honorable” Mr. McPunch informs you that US GAAP would report the largest income of the alternatives and thus would ‘allow’ companies to grant higher wages to the well deserving employees. Mr. McPunch also reminds you that the United States is the largest trading partner of Freedonia and that English is the second most common language among Freedonians behind Spanish.

Your second visitor is Francine Fishface of the Freedonian Historical Foundation. She would like you to consider keeping Freedonian accounting as it is, and continuing to use Spanish as the official business language of the country. She does not want Freedonia to become a ‘puppet’ of the United States and fears this would happen if Freedonia adopted US GAAP. Furthermore, most Feedonian businesses are small mom and pop stores who would have an enormous cost of adopting a new accounting policy. Most of Freedonian financing is through the banks which Ms. Fishface insists is not much different than the old days of government intervention so the old tried and true accounting is adequate. Lastly, Ms. Fishface reminds you that companies are required to prepare the taxes using Freedonian accounting so forcing companies to adopt an alternative would unnecessarily increase the cost to Freedonian businesses.

Your third and last visitor for the day is Mr. Billy Bob Banker known as B-Cubed. Mr. Banker represents the banks of Freedonia. He insists that Freedonia adopt International Standards (IFRS) and keep Spanish as the language of business. IFRS is being used by more and more companies and thus Freedonia would be ‘on the train instead of continually chasing the train, adopting one of the other methods would only cause us to switch later to IFRS so let’s save a step and go there NOW!’ B-Cubed informs you that IFRS would report the lowest income of the 3 alternatives; this would keep retained earnings low and thus prevent dividend payments. Bankers would prefer small to no dividends so the resources remain in the company for their protection. Furthermore, B-Cubed suggests that foreigners are going to start investing in Freedonia. When Freedonian companies start paying dividends those funds would leave Freedonia thus hurting the local economy.

Required:

1. Which accounting method and language to you require for the national of Freedonai? Defend you position

2. Write a memo to each to your esteemed visitors explaining your decision and telling them why (if necessary) you rejected their suggestions