Last Updated 10 Aug 2020

Accounting Standards – Internationalization

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Introduction

There is no controversy in the fact that there should be global standards of accounting for a truly global economy. Financial statements make it essential and underpin the complete system of market and information for the comparability of data available so as to have several benefits like uniformity, cost reduction, integration of data of various regions, better decision making and many more advantages.

Reasons For Variation in Accounting Standards

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The environment of a country in which it functions molds its Accounting Practices. Following are the variables for varying standards in Accounting Practices:

Legal system

The Accounting globe can be alienated into countries, which have ‘legalistic’ or ‘nonlegalistic’ approach (Nobes et al., 1999). The non-legalistic approach can be seen in countries using general law. In these countries, accounting does not stand upon law but on private sector (Choi et al., 2002). The legalistic approach that is used codifies laws. In divergence with the common law, the codified law system needs to extend rules for the Accounting and financial reporting (Nobes, 1999). In these countries the function of law is to illustrate manners that are suitable in the society (Choi et al., 2002).

Provider of finance

The three key bases for external capital are shareholders, banks and government (Hill, 1999).  This variety of capital supplier means that accounting practices fluctuate in order of the demand of capital suppliers. In the case of shareholder ownership, (For instance U.K. and the U.S.), information revelation will be more essential than in countries, where capital is lifted from banks or governments.  Hence, financial record in the US and UK are individual investors oriented. The accounting practices in countries with banks as major capital supplier have an interest to keep bank’s investment. This has led to more conformist way.

Taxation

There is no relationship between tax and accounting law in countries like UK & US. When accounting standards are formed, the only focus is how to provide the information. Taxation related queries are not considered in such countries (Achleitner, 2000). Contradictory to this, in nations like France and Germany, tax and accounting systems are ruled in an identical manner (Nobes and Parker, 2000).

National culture

National culture of countries affects accounting practices. According to Hofstede’ study; countries do have weak or strong culture depending upon its geographical and economical power. Thus, some countries dominate their practices and some just adopt them. (Nobes and Parker, 2000; Roberts et al., 1998)

Other Factors

  • Securities Exchange Commission and stricter accounting regulations for protecting the shareholder.
  • Countries with lofty economic growth and hyperinflation (South American countries) have a large pressure on accounting practices.
  • Political and economic bondings with other countries have a chief influence in shaping accounting practices. (Roberts et al., 1998)

 [International Financial Accounting – a comparative approach Practices] (source: Roberts C, 1998)

Need for International Harmonization of Accounting Standards

National cultures are inherent, slow to change, and so will possible confine international harmonization efforts. Cultures transform to last and oppose.  The direction and extent of change varies according to external and ecological factors. These international stresses for change signify that existing national accounting traditions and practices will be challenged in the years ahead as new problems are recognized and the stress for international harmonization shall increase.

In addition, international stress and concern will become more important factors in the growth and variation of accounting standards in each country. As the world is moving towards more and more globalization, the need for homogeny of accounting standards arises. Several companies are becoming global and they require international standards to adhere so as to have uniformity.

  • International harmonization of accounting standards

Harmonization is an activity of shifting to a system of uniformity or standards. In other words, harmonization aims at reducing number of permissible accounting alternatives and promoting higher compatibility.

The IASC standards are now being accepted by number of stock exchanges including London, Singapore, German, Hong Kong and Swiss stock exchange. So, now in globalized environment it is necessary to take steps towards having uniform accounting standards across the world. IASC receives loud support from accounting and professional bodies across the world.

 

  • Reason for Accounting Harmonization
  • Benefit from the perspective of preparation
  • Benefit from the perspective of uses
  • Benefit from the viewpoint of preparation

If the companies operating in more than one country use same standards across their subsidiaries, it can save a lot of cost. A simple internal reporting structure can help in better comparison, less ambiguity and smooth operation. Cost saving can be enhanced, if consolidated financial statements are used further making it easier for companies. One set of accounting gives credibility to external users. It will be easier to acquire capital for them.

(2) Benefit from the perspective of uses

From the user’s point of view including the investors or a bank, accounting harmonization gives a lot of advantage. Investors, banks or owners are interested in finding information regarding its financial performance. Accounting harmonization gives them room to compare between companies and countries so that analysis becomes more fruitful for them. Similar accounting standards will lead to better compatibility in the market. In this way, investors, banks and other stakeholders like rating agencies can take more clear decision on the basis of harmonized accounting standards.

(Source: The International Harmonization Process of Accounting Standards (2003): Susanne Fritz, Christina Lämmle)

Alternative Approaches

  • “Rebuilding” IASC and local accounting standards
  • Start US GAAP (Generally Accepted Accounting Principle)

(Source: Global Harmonization of Accounting Standards: Md. Salim Uddin)

 Conclusion

From the foregoing debate, t is obviously apparent that international harmonization of accounting standards is crucial to encourage the international capital market. The study revealed that accounting harmonization carries multidimensional benefits to both the customer of financial statements e.g. investors, banks or owners so as to facilitate economic decision. The stakeholders who are related to and are interested in foreign stock market, international financing and raising finance globally are eager in receiving information, which enables them to make investment/financing decisions.

Financial statements based on global GAAP would facilitate the customer to make practical evaluation between countries and companies. In fact, it is predictable that greater degree of comparability in results shall provide better understanding, lower risks and better organized selections of investments. From the historical perspective of accounting standards harmonization, it has been understood that international process of accounting harmonization started in 1959 i.e. before the conception of the International Accounting Standards Committee (IASC) in 1973.

Progressively, harmonization hard work accelerated with the lively support of various national and international professional accounting standards setting bodies and international development/financing organizations. Still global synchronization of IAS is one of the most significant issues in front of accounting standard makers, securities market controller, stock exchanges, and those who practice or make use of financial statements. Read also about s ources of accounting standards

Analysts and investors should go on with their hard work to endorse the global harmonization of accounting standards all-inclusive, and should vigorously contribute in the procedure of standard-setting both countrywide and globally to make certain accounting harmonization.

References

  1. Global Harmonization of Accounting Standards: Md. Salim Uddin :1-15
  1. Susanne Fritz, Christina Lämmle: The International Harmonisation Process of Accounting Standards (2003) (http://www.ep.liu.se/exjobb/eki/2003/fek/003/
  1. Choi, F.; Frost C.; Gary, K. (2002): International Accounting, Prentice Hall, New Jersey, 4th edition.
  1. Hill, C. (1999): Competing in the Global Marketplace; Irwin McGraw Hill, Boston, 3rd edition.
  1. Hofstede, G. (1991): Cultures and Organizations: Software of the Mind, McGraw-Hill Book Company, New York.
  1. Achleitner, A. (2000): International-Accounting-Standards: Ein Lehrbuch zur internationalen Rechnungslegung, Franz Vahlen GmbH, München, 2. Auflage.
  1. Nobes, C.; Parker, R. (2000): Comparative International Accounting, Financial Times –Prentice Hall, Hartlow.
  1. Nobes, C. (1999): Towards a General Model of the Reasons for International Differences in Financial Reporting, in: International Accounting and Comparative Financial Reporting, edited by Nobes, C. (1998), Edward Elgar Publishing Limited, Cheltenham.
  1. Roberts, C.; Weetman, P.; Gordon P. (1998): International Financial Accounting – a comparative approach, Financial Times Pitman Publishing, London.
  1. Nobes, C.; Parker, R. (2000): Comparative International Accounting, Financial Times Prentice Hall, Hartlow.

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Accounting Standards – Internationalization. (2018, Mar 15). Retrieved from https://phdessay.com/accounting-standards-internationalization/

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