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

References: 1) Doupnik, S. and Taylor, M.E. (1985) ‘ An empirical investigation of the observance of IASC standards in Western Europe’, Management International Review, Vol 25, no 1 2) Evans, L. and Taylor, M.E. (1982) ‘Bottom line compliance with the IASC: A comparative analysis’, International Journal of Accounting, Fall 3) McKinnon, S.M. and Jannell, P. (1984) ‘The IASC: A performance evaluation’, International Journal of Accounting, Spring 4) Nair, R.D. and Frank, W.G. (1981) ‘The harmonization of international accounting standards, 1973-1979’, International Journal of Accounting, Fall 5) Nobes, C.W. (1998) ‘The future shape of harmonization: some responses’, European Accounting Review, Vol 7, no 2 6) Nobes, C.W. ed. (2001) GAAP 2001: A Survey of National Accounting Rules, Ernst & Young for IFAD. Also available at www.ifad.net. 7) Parker, R.H. (1996) ‘Harmonizing the notes in the UK and France: a case study in de jure harmonization’, European Accounting Review, Vol 5 no 2 8) Tay, J.S.W. and Parker, R.H. (1990) ‘Measuring harmonization and standardization’, Abacus, March 9) Walton, P. (1992) ‘Harmonization of accounting in France and Britain: some evidence’, Abacus, Vol 28 no 2 10) Weetman, P. Jones, E.A.E., Adams, C.A. and Gray, S.J. (1998) ‘Profit measurement and UK accounting standards: a case of increasing disharmony in relation to US GAAP and IASs’, Accounting and Business Research, Summer.

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