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Harmonisation of accounting standards in Europe

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Introduction

Critically evaluate the effectiveness of the European Union and the International Accounting Standards Board in promoting harmonisation of accounting standards in Europe. 2,280 words (excluding cover sheet, contents, quotes, references, tables and bibliography.) Table of Contents: 1. Introduction.....................................................................................Page 3 2. Reasons and importance of harmonisation of accounting standards.....................Page 3 3. Obstacles to harmonisation....................................................................Page 4 4. The effectiveness of the IASB in promoting harmonisation..............................Page 5 5. The effectiveness of the EU in promoting harmonisation..................................Page 7 6. Conclusion.......................................................................................Page 11 7. Bibliographie......................................................................................Page 12 1. Introduction: This essay highlights that the existence of major differences in the financial reporting practices of companies in different countries in Europe lead to great complications for those preparing, consolidating, auditing and interpreting financial statements. It is for that reason that the EU and the International Accounting Standards Board (IASB) are involved in attempts to harmonise accounting mainly to facilitate the comparisons of financial practices in different countries. The expression harmonisation has been used to explain efforts to move towards a global financial accounting system. It is a process of increasing and improving the compatibility of accounting practices, by setting restrictions to their degree of variation. Wolk at al. describe harmonisation of accounting standards as the "degree of co-ordination or similarity among the various sets of national accounting standards and methods and formats of financial reporting"1. It can also be described as the "process of bringing accounting standards into some sort of agreement so that the financial statements from different countries are prepared according to a common set of principles of measurement and disclosure."2 This essay aims therefore to evaluate the effectiveness of the EU and the International Accounting Standards Board in promoting the harmonisation of accounting standards in Europe. 2. Reasons and importance of harmonisation of accounting standards There are many reasons for the promotion of the harmonisation of accounting standards. The main reason of harmonisation is that comparisons of financial reports can be made in different countries and providing interested parties in international markets with improved quality information upon which they can base their credit and investment decisions. ...read more.

Middle

To summarize, the IASB was relatively effective in promoting harmonisation of accounting standards, however the fact that they could not impose the standards on companies decreases their power and makes it harder for them to promote the harmonisation. The IASB has to ensure fast application of new standards and communicate them to the member countries as well as it has to improve its efforts and work closely with the European Union, especially after the implementation of IFRSs in 2005 in order to avoid any uncertainty throughout the EU. 5. The effectiveness of the EU in promoting harmonisation The EU has itself "placed great emphasis on accounting harmonisation but it will be a slow progress...since national idiosyncrasies in accounting are deeply rooted and intertwined with ideas and practices outside the confines of accounting itself".12 On the 14th of March 2002, the European Parliament regained initiative to harmonise financial reporting standards by proposing that by January 2005, listed companies are required to publish their group annual financial statements in accordance with International Accounting Standards rather than comply with the national reporting requirements. However the EU established the basis of the harmonisation programme even earlier. Since the Treaty of Rome of 1957, which include the establishment of the free movement of persons, goods and services, and capital, the EU was active in promoting harmonisation of European countries. More specifically, the Common Industrial Policy (1970)13 encouraged the creation of a unified business environment, including the harmonisation of company law and taxation, and the creation of a common capital market. In order to encourage the free movement of capital within the EU, it was necessary to create a flow of consistent and homogenous financial information from European companies. The EU attempts to harmonise company law and accounting through two main instruments14: Directives, which must be incorporated into the laws of member states; and Regulations, which become law throughout the EU without the need to pass through national legislatures. ...read more.

Conclusion

By announcing the introduction of IFRSs in 2005 it has found a common financial reporting method for businesses in the EU. With the introduction of the Euro, this helped the introduction of the IFRSs because it facilitated cross-border comparisons of financial statements. All in all I think that the EU has been relatively effective in promoting harmonisation. The harmonisation has the results that it is now is more sufficient and more effective for companies in particular, because it is now easier to make comparisons of companies in different countries in the EU. There is a reduction in the risk of misinterpreting the financial numbers or time lags in evaluating the results. That means that it reduced investment delays and missed investment opportunities. 6. Conclusion It obvious now, that compulsory use of IASs for listed companies' consolidated statements may lead to an end of the use of national standard setting in some countries. For example the UK is likely to adopt the IASs for all purposes, because it makes no sense for them in running two different accounting systems. The IASB and the EU were both concerned and active in promoting harmonisation of accounting standards. However, in my opinion the most powerful promotion towards regional harmonisation among leading countries is the EU. This could be explained, as the harmonisation of accounting is one of the many aims of its Commission as part of the EU's overall objective, which is to remove economic barriers within the EU. The harmonisation in Europe was mainly achieved by the introduction of the EU Directives. The fourth Directive has caused some change in most EU countries in formats of accounts or disclosure or valuation procedures. The seventh Directive has achieved a significant degree of harmonisation of group accounting.22 The EU's transition to IFRSs it can be argued is one of the largest accounting conversions in history, as they impact on over 9,000 companies and bodies in the European Union. 7. ...read more.

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