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International Accounting Harmonization and Assess
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It is believed that harmonization of accounting standards can eliminate these issues by “increasing the compatibility of accounting practices by setting bounds to their degree of variation” (Nobes and Parker, 2008, p75). Organisations such as the International Accounting Standards Committee (IASC) have formed with this objective in mind, but their success has been limited. It is claimed by a number of sources that international accounting harmonization will bring a number of benefits to stakeholders. Roberts, Weetman and Gordon (2008) claim that harmonization would eliminate dual reporting costs for multi-national companies.
Regulators of a foreign stock exchange may require statements to be adjusted in order to match the local standards or at least produce a reconciliation statement highlighting the variations in standards. Harmonization would remove this problem and ensure all statements are valid worldwide. However, less developed countries will predictably have less influence on the standards that are put into place. The principles may not be appropriate for these nations, especially if they have a developing economy or no capital market transactions (Larson and Kenney, 1995).
The lack of worldwide accounting harmonization can also hamper investors. Miles and Nobes (1998) state that whilst standards are varied, professional fund managers find it difficult to understand statements prepared in certain countries. Investors often avoid trading in these companies, potentially leading to them missing a profit making opportunity. Harmonization of standards would reduce the chances of misunderstanding, thus reducing the likelihood of poor decisions being made (Roberts et al, 2008). Although comparability may be improved, other features of a business may be hidden, such as the differences in business activity.
The original changeover to the new standards may also cause confusion for newly adopting nations, especially if the standards are viewed to be decreasing the accuracy of the company accounts (Barth, Clinch and Shibano, 1999). In each country of the world, accounting standards need to be set either under law or by an independent body. This means that various costs are generated in order to implement and monitor standards. If certain countries are implementing practices that are similar or even the same as another country, it makes little sense for both nations to be incurring these costs (Roberts et al, 2008).
Although global standards would minimise these implementing related costs, they are not relevant for companies only operating in one country. There is also a danger that, if one body monopolises standards, the quality of practices will reduce because of a lack of competition from other accounting bodies (Sunder, 2002). It is claimed that international accounting harmonization would enhance the global economy by providing a “level playing field” (Weber, 1992, p1). Those regulating and auditing accounts will all gain access to the same information, enabling a smoother evaluation process.
Without free trade, international standards would allow trade restraint systems to be exact, reducing the risks for those involved in trade (Weber, 1992). However, Goaltz (1991) argues that such benefits may not be achieved. A strong global market already exists and has developed without harmonized international standards. Elimination of capital controls and improved communications have increased the money available to businesses and the worldwide market is likely to continue to grow in size. Another group that would benefit from harmonization would be the tax authorities.
Profit measurement often varies between countries, making it very difficult for tax professionals to measure income and calculate tax. However, the tax authorities have themselves have reduced harmonization by allowing last in first out (LIFO) for the purposes of tax in the US, which is not allowed in other countries such as the UK. Deferred tax has also been allowed in Continental Europe, which is not the case in other nations (Nobes and Parker, 2008). The IASC was formed in 1973 by accountancy bodies from all over the world.
The committee’s objective is to “work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements” (Murphy, 2000, p 472). The body has since restructured and became the International Accounting Standards Board (IASB) in 2000. The standards set by the board have gone some way to achieving the desired objective, but there have been a number of barriers that have prevented true harmonization (Street and Shaughnessy, 1998).
Accounting standards need to match the environment they are employed in and this is difficult when each country is unique in areas such as education, law and economy. With these variables as they are, it is hard to see how perfect harmony can be achieved. Between 1973 and 1988, the IASC implemented a total of 26 generic standards. These standards were flexible and prescribed little in the way of disclosures. Garrido, Leon and Zorio (2002) report that in 1988 the IASC became concerned about the low level of comparability the standards had produced.
This resulted in a large proportion of options for treatment being removed, and standards also highlighted the preferred treatment in order to increase uniformity. In 1995, the IASC made an agreement with the International Organization of Securities Commission (IOSCO) to produce a core set of standards by 1999 in exchange for endorsement. This resulted in more options for treatment being removed and an increase in the level of disclosure. Garrido et al (2002) state that the standards produced in 1999 has achieved a good harmonization level due to the increased comparability of financial statements and the reduction of alternative treatments.
Murphy (2000) conducted research into whether adopting of international accounting standards (IASs) had increased harmony between Swiss companies and companies from the UK, USA and Japan. The assessed practices were depreciation, inventory, financial statement cost basis and consolidation. The study showed that harmony had increased between countries between 1988 and 1995. Companies from Switzerland, the US and the UK adopting IASs all used straight-line depreciation, whilst the Japanese mostly used the mixed or accelerated method.
The IAS for inventory practices was still flexible allowing for many methods and it was therefore difficult to attribute the adoption of IASs to any harmony that had occurred. This was also the case with financial statement cost basis where historical costing or price level costing could still be used. However, harmonization increased for consolidation, with the majority of companies from all four countries consolidating all of their companies after adopting IASs. It is true that company comparability increased during this period but results do not clearly show that the changes were due to the adoption of IASs.
Das, Shil and Pramanik (2009) suggest that one of the biggest reasons for only limited adoption of IASs is the fact that the US has shown reluctance in applying the standards. The US has the biggest market and was an important figure in forming the G4 nations. It therefore sets an example to other members and may influence their decisions in whether to adopt IASs. It is also very difficult to get every single country to buy into the standards of the IASB as they operate under various legal, economic, social and cultural systems, often harbouring different accounting philosophies.
Certain countries may not recognise the reasons to change the objectives of their accounting standards to comply with those of the IASB. Larson and Street (2004) also state that there are translation issues for some nations. Despite the standards being made available in the majority of languages, these are not always up to date. It is difficult for nations not receiving up to date translations as they have little chance to develop experience using the standards. In 2004, Hungary was using practices developed in 1994.
Another body concerned with international accounting harmonization is the International Federation of Accountants (IFAC), which is a group of accounting bodies from various countries representing professional accountants (Saudagaran, 2009). The body has released a code of conduct for the practices of professional accountants. However, despite Clements, Neill and Stovall (2010) suggesting that the code has been a success, almost 50% of member organisations have not employed the code. This is mainly due to cultural differences such as the level of individualism present within a nation.
Nations such as the USA or Canada concentrate on the impact of adopting practices on themselves directly and not on the world as a whole. As a result these countries are likely to be more reluctant in adopting the code (Clements et al, 2010). It is clear that international accounting harmonization would bring about a number of benefits for stakeholders. It would reduce costs for companies, especially those who have invested in a foreign subsidiary. It would also allow for investors to make easier decisions and save national governments money.
However, there are some drawbacks for developing countries where standards may not be appropriate. Investors and staff may be confused by the change in practices and the overall quality of standards may reduce. It is therefore debateable whether the IASBs continued efforts to harmonize standards are worth it. They and other bodies involved with harmonization have undoubtedly made successful strides since 1973, but some barriers to complete standardization look potentially immovable
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