Topics: European Union, United Kingdom, International Financial Reporting Standards Pages: 13 (2757 words) Published: January 18, 2013

Harmonization vs standardization

Harmonization - A process of increasing the compatibility of accounting practices by setting bounds to their degree of variation. Eg. EU Commission

Standardization – The imposition of a more rigid and narrow set of rules. Eg. IASB

Reasons for harmonization

Pressure comes from those who regulate, prepare and use financial statements.

1) Investors and financial analysts
• Need to be able to understand the financial statements of foreign companies that they invest or wish to invest. • The statements are reliable and comparable; easier to make comparison • Need the confidence in the soundness of the auditing

2) Government and Securities Commission
• The governments are interested to protect the investors within their spheres of influence • But, Securities Commission may demand financial statements that are consistent with domestic practices. • Better to standardize especially in issuing of shares internationally

3) Multinationals
• Simplified the jobs of financial accountants of multinational companies to prepare and consolidate financial statements from all around the world which were prepared on the same basis. • Easier to prepare comparable internal information for the appraisal of the performance of subsidiaries in different countries • Easier for other appraisal performance comparisons too • Easier to transfer accounting staff from one country to another • Cost of capital can be reduced by reducing the risk for investors

4) International accountancy firm
Advantage to the international accountancy firms because they will have more clients internationally

5) Tax authorities
To overcome tax authorities complication when dealing with foreign incomes by differences in the measurement of profit in different countries

6) Government in developing countries
Governments in developing countries easier to understand and control the operations of multinationals

Obstacles to harmonization

1) Differences between accounting practices of different countries Different reasons for the preparation of accounting information Shareholder view presentation vs creditor/tax/conservative presentation Have to have major changes in attitude and law

2) Harmonization is useful when it concerns similar users who receive information from companies in different countries Two sets of rules: one for parent company and one for consolidation

3) Lack of strong professional accountancy bodies in some countries Operate through private sector (independent) will not be effective in all countries

4) Nationalism
Unwillingness to accept compromises that involve changing accounting practices towards those of those countries

5) Lack of knowledge or interest in accounting
Difficult to alter internationally – set standards in response to a change of mind or a change of circumstances

6) Economic consequences on accounting standards
The economic consequences may vary from country to country and this might be taken into account by those who set the standards. Hence, might force to de-harmonization.

Measurement of harmonization:
1) De jure harmonization (rules, standards)
2) De facto harmonization (financial reporting practices)

Organisations involved in harmonization process

1) The International Accounting Standards Committee (IASC)

• Founded in 1973
• Accountancy bodies of nine countries: Australia, Canada, France, Japan, Mexico, the Netherlands, the UK and Ireland, the US and West Germany • Operated until 2001
• It was succeeded by IASCF – IASB
• IASC is independent from other bodies, but since 1983 close connection with International Federation of Accountants (IFAC) • IASC concerns only with IAS
• Aim: to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and...
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