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MA MANAGEMENT AND INTERNATIONAL BUSINESS FINANCE ASSIGNMENT Financial information maybe, in simple terms, understood as information with regards to the functioning of the enterprise and details of its resources. Accounting of financial information is all about providing data that helps to understand the financial position of the organisation, how resources have been used, future changes etc. It is a part of communication. Proper accounting of financial information is essential and it also helps in proper decision-making. Previously financial information used to be communicated only internally. But with the rise in growth and globalisation, there has been communication of financial information externally too. There are several users of financial information. The users of financial reports use the information obtained from financial statements for specific purposes. Investors, competitors, suppliers, government agencies, general public, employees etc. are some of the various user groups. But there are differences in the way financial information is reported in different countries. The accounting standards are different in different countries. "Accounting of financial information differs in content and application from country to country. In some situations accounting differences lead potentially to inefficiencies, missed opportunities and distortions of economic behaviour." (Walton, Haller and Raffournier, 2003, pg 1). Differences in accounting standards can lead to misinterpretations of the data obtained from it. " Misunderstandings can occur not only because of differences in the method in which the information is sent but also because of differences relating to the perception and interpretation of the information by the receiver." (Walton, Haller and Raffournier, 2003, pg 2). Misunderstood information then becomes obsolete. Several factors constitute an explanation for the differences in the financial reporting of countries. Some of the important factors are as follows: 1. LEGAL SYSTEMS: Reporting of financial information depends to a great extend on the legal system of the country. " Over the years two types of legal systems have developed. The common law system that originated in England is developed from case law. ...read more.


This work resulted, in 1993, in the approval of a set of ten revised standards, which were applicable for the first time for financial periods starting on or after 1 January 1995. After 1995, in order to accelerate modification of the process IASC entered into a new understanding with IOSCO and produced a redefined set of core standards. Once the standards had been set, the IASB has to refine and extend the standards. Reviewing and improving the existing range of standards was the first amends 12 of the existing standards." (Walton et al, 2003, pg 40) HARMONIZATION OF FINANCIAL REPORTING "Harmonization may be understood as a process that is aimed at increasing the compatibility of accounting practices by setting bounds to their degree of variation." (Nobes and Parker, 1995, pg 118). With the growth in international business and globalisation, the financial reports and information of one country are being used in another for several purposes. Therefore is has become necessary that there exists some kind of standards for the preparation of financial reports. "Investors and financial analysts need to be able to understand the financial statements of foreign companies whose shares they might wish to invest in. Statements from different countries must be reliable and comparable. The advantages of harmonization for multinationals are much more important. It helps in appraising companies for potential takeovers and other aspects like investment appraisal, performance evaluation and other decision-making uses of financial information. International accounting firms also benefit from harmonization as it makes the preparation, consolidation and auditing of financial statements less taxing." (Nobes and Parker, 1995, pg 118). But there are several obstacles in achieving harmonization. "The size of the present differences between the accounting practices of different countries is the fundamental obstacle. It is practically impossible to set standards that harmonize the financial reporting in every country. The lack of strong professional accountancy bodies in some countries is another hurdle. ...read more.


2) The Norwegian company, Norsk Hydro, reports a 1992 income of NOK 167m but shows that it would be NOK 1763m according to US rules i.e. 956per cent higher. 3) The shareholders equity of the News Corporation, an Australian company, was A$11699 according to Australian rules but A$4232 according to US rules. The sources of current pressure for harmonization are (Saudagaran, 2001, pg 34) 1) INVESTORS: The sudden upsurge in cross- border securities listing has increased the number of investors who make use of the financial information of foreign countries. Since the accounting standards are different in every country, comparison of the financial statements id difficult. Moreover, they cannot be considered as a reliable source on the basis of which decisions can be taken. Investors and financial analysts favour harmonization because they believe that it will help lower the cost of investing abroad and enhance their ability to make effective investment decisions across borders. 2) MULTINATIONAL COMPANIES: As capital, product and labour markets are becoming increasingly global, most large companies find themselves having to diversify geographically to effectively compete with their competitors. Multinational companies account for a large percentage of the global trade. The efforts of multinational companies to tap foreign investors and to attract leading preparers of financial statements will be adversely affected by the differences in the financial reporting. Reduced cost of preparing consolidated financial statements, ease in monitoring subsidiaries abroad, more meaningful managerial accounting reports and more relevant performance evaluation methods are the additional advantages of harmonization to multinational companies. 3) DEVELOPING COUNTRIES: Most developing countries implement accounting standards that inspire confidence of the foreign investors, in order to attract them. International accounting standards provide a low-cost option for developing countries that do not have the resources to develop an extensive set of domestic accounting standards. Moreover, adopting a harmonizes set of international accounting standards also saves developing countries from having to provide expensive reconciliation to the GAAP of foreign providers of capital. ...read more.

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