Harmonisation of Accounting Standards

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Harmonization of International Accounting Standards
Need for Harmonization of International Accounting Standards

Introduction

As there has been a tremendous growth in the market place with the existing accounting practices, this leads us to question why do we need harmonization of International accounting standards, what are its advantages and what are the barriers that hinder harmonization? Although accounting may be the "language of business," a common language has never been necessary -- at least as long as the world economy consisted of a set of more or less distinct national economies.

(Mednick 1991) (Cited in: www.wetherhead.cwru.edu) This, however, is no longer true. We now have a global economy and it has affected the entire business world. For instance, today's global corporation may have more than one headquarters, and its production and distribution facilities are probably scattered throughout the world. Commodity prices, interest rates and currency exchange values have become internationally linked -- with the result that governments around the world are increasingly supporting harmonization of accounting practices and national policies. (Walters) (Cited in: Bisgay and Jayson 1989) Harmonization is necessary because standard national financial statements are virtually useless; financial markets in more regulated countries are threatened with a loss of market share; and multinational corporations must prepare multiple reports for different nations they do business in. (Nobes and Parker 1991) (Cited in: http://ecocomm.anu.edu.au) There is a need for harmonization for accounting standards in order to help the foreign investor to understand the financial statements of the foreign companies who's shares they might want to buy.(Iqbal, Melcher and Elmallah 1997) Financial information is a form of a language. And if the language of financial information is to be put to use, so that investment and credit decisions can more readily be taken, it should not only be intelligible, it should also be comparable.

(Belkaoui 1994) These new environmental factors of the global economy, the international monetary system, the Multinational Corporation and foreign direct investment create an environment in which business transactions, their conduct, measurement and disclosure, takes new and distinctive form that call for a specific accounting sub discipline or the harmonization of accounting practices.

Advantages of Harmonization

(Turner 1983) The greatest benefit that would flow from harmonization would be the comparability of international financial information. Such comparability would eliminate the current misunderstandings about the reliability of foreign financial statements and would remove one of the most important impediments to the flow of international investment. (Choi, Frost and Meek 1999) Harmonization would save time and money that is currently spent to consolidate divergent financial information when more than one set of reports is required to comply with the different national laws or practice. It will also improve the tendency for accounting standards throughout the world to be raised to the highest possible level and to be consistent with local economic, legal and social conditions.

(Nobes and parker 2002) It would be beneficial to those countries which still do not have adequate codified standards of accounting and auditing and to international accountancy firms with clients of firms which have at least one foreign subsidiary. It would also help in raising foreign capital as investors, financial analysts and foreign lenders will be able to understand the financial statements of foreign companies (Samuels and Piper 1985) (Cited in: Blake and Hossain 1996) and they would be able to compare the investment opportunities which will help them to make the right investment decision. The benefit International accounting firms will have with the harmonisation of accounting practices will be the...
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