International Accounting Harmonization

International accounting harmonization

Abstract

Harmonization is the process of reducing differences in financial reporting processes across the world. The goal is to achieve some comparability with financial statements. When harmonization exists, complications for individuals and corporations who use these financial statements decrease significantly. There are several organizations around the world***, who have formed in hopes of creating an international system of accounting. This could mean a standard that would apply across the world. The implementation of such a process could be beneficial for all countries, especially with the expansion of businesses offshore.

International Accounting Harmonization

Introduction

"Harmonization” in the field of accounting is the process of creating a similar set of procedures by establishing boundaries as to how much they can differ across the world. “As a result of globalization, the accounting profession has become increasingly aware of the need to establish a single set of accounting standards that would be valid in the international arena” (Garrido, León, and Zorio, 2002). Businesses that have expanded offshore have witnessed firsthand the problems when dealing with national accounting differences.

National governments and regulatory agencies all over the world have typically set accounting and auditing processes. Each country has historically had its own set of procedures. “Now, the developing global economy and growth in cross-border financing are creating an environment that would benefit from greater harmonization of accounting standards at both the international and the national levels” (Roussey, 1994). Harmonization will require the assistance of investors, business analysts, corporations, organizations, government bodies and any others involved in offshore financial matters.

History

Efforts to coordinate are not new. The European Union’s formation of The Treaty of Rome in 1957 had a similar goal in mind – to create a system of legal and economic harmony. Three years later, Jacob Kraayenhof, one of the founders of today’s world-renowned accounting firm, KPMG, began urging accountants to work on international accounting standards. “In 1967, the Accountants International Study Group was formed” (Deloitte, 2005). The International Accounting Standards Committee (IASC) was formed in 1973.

The IASC is now known as the IASCF, the International Accounting Standards Committee Foundation. It is still a non-profit corporation with a presence in Delaware, Maryland; however, it is headquartered out of London, England.

The IASCF is not alone in its quest for harmonization. There are several other organizations that promote and encourage international accounting harmonization. These are just a few:

European Union
International Organization of Securities Commissions
International Federation of Accountants
World Trade Organization
International Monetary Fund
World Bank

Currently, the US prepares its financial statements in accordance with GAAP, Generally Accepted Accounting Practices. “The ...

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The IASCF is not alone in its quest for harmonization. There are several other organizations that promote and encourage international accounting harmonization. These are just a few:

European Union
International Organization of Securities Commissions
International Federation of Accountants
World Trade Organization
International Monetary Fund
World Bank

Currently, the US prepares its financial statements in accordance with GAAP, Generally Accepted Accounting Practices. “The United States is also considering IAS/IFRS "harmonization”(Hyperion, 2005). Both Mexico and the London Stock Exchange accept GAAP procedures.

There is big interest worldwide in harmonization. Many corporations are voluntarily adopting International Accounting Standards. Several countries already base their national accounting standards on IAS.

Emphasis on international accounting and financial reporting has increased in recent years. Those who have found the niche now serve as consultants to businesses who have moved their operations offshore, or who are importing/exporting, and do not have the expertise required to handle international finance matters. Overall, the goal is that better economic decisions may be made within the EU and the global economy.

Advantages

Having a set of harmonized standards in place is beneficial when preparing and auditing financial statements for intercontinental businesses. Those who report and audit internationally will become more efficient as well. Time and money can be saved when corporations only have to comply with one set of requirements.

Another advantage of international harmonization is that the process itself could encourage economic growth. “If European requirements are harmonized with those of the United States, it would more than double the market for conforming IT products and create an even greater incentive for manufacturers to develop accessible products” (Stuckert, 2005).

Additionally, investors, lenders, and other businesses would have better information available to them if they could better understand where foreign businesses stood financially. If unfamiliar with their accounting practices, poor decisions can be made due to lack of information. Trading partners are able to determine who they can contract with. With globalization, businesses will be more apt to trade across borders.

Disadvantages

Critics of international accounting systems argue that information will be difficult to derive from non-domestic accounting standards. They also contend that “with different social and economic institutions and with different cultures, laws, business practices, and business ethics, one wonders whether a single set of accounting rules truly harmonizes anything” (Ketz, 2004).

In areas where different economic environments exist, harmonization could be considered useless. If a nation has its own practice in place, adapting to one of an international nature where items exist that are irrelevant to the situations of that nation could create more harm than good. Accepting and adopting international standards could be impossible in some cases.

The practice could also create overload for corporations who attempt to comply. Another factor may be that US corporations may be held to higher standards than its counterparts. There is also the possibility of national political involvement interference. This could compromise standards. Additionally, it seems that there is no one current body that could mandate a global GAAP.

European Union (EU)

The EU is an intergovernmental union of 25 European countries. “The European Union's activities cover all areas of public policy, from and policy to and ” (Wikipedia, 2005). This year, all 25 members of the EU converted from the International Accounting Standards to International Financial Reporting Standards (IFRS). This meant that over 2,000 businesses in the United Kingdom converted from GAAP to IFRS.

IOSCO

Established in 1983, the International Orgnization of Securities Commissions is made up of more than 80 nations worldwide. The organization’s objectives are to establish international consensus, exchange information, establish standards and effective surveillance of international transactions, and to provide bilateral assistance for the effective administration against offenses.

IFAC

The International Federation of Accountants is a global organization for the accounting field. “It works with its 163 member organizations in 119 countries to protect the public interest by encouraging high quality practices by the world's accountants” (IFAC, 2005). The IFAC consists of 2.5 million members accountants who work in all sectors. Organized in 1977, the group works along with the IASC and IOSCO as well.

World Trade Organization

The World Trade Organization was formed in 1995. “The WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War” (WTO, 2005). The objective of the organization is to ensure that trade flows “smoothly, freely, fairly and predictably.” Since the WTO’s implementation, there has been a financial crisis. The WTO works with various other organizations in hopes of curbing this crisis, however, the organization’s agreement states that “standards shall not be prepared, adopted or applied with a view to, or with an effort of creating unnecessary obstacles to global trade” (Business Wire, 1998). This places the WTO in a difficult position.

International Monetary Fund (IMF)

The International Monetary Fund is an organization that exists to oversee the global financial system. It is responsible for monitoring foreign exchange rates, and balance of payments. It is comprised of 184 countries. The IMF utilizes the International Accounting Standards Board's International Accounting Standards (IAS) for its accounting practices, and the International Federation of Accountants' International Standards on Auditing for it’s auditing practices.

U. S. GAAP vs. International Accounting Standards

In 1996, the Financial Accounting Standards Board published A Report on the Similarities and Differences between IASC Standards and U.S. GAAP. An update was made in 1999. The objectives of the comparison study are to provide information to help assess whether IASC standards would be acceptable for securities listings in the United States, to offer a tool for investors and others to use in comparing U.S. companies with companies that use IASC standards for financial reporting, and to give FASB and the IASC a basis to raise the quality of their standards while narrowing the differences between them.

The result of the study meant many things for U. S. investors. It became import to understand the differences between the two standards. Previously, U. S. investors in U. S. markets were provided with “either U.S. GAAP financial statements or reconciliations from foreign financial statements to U.S. GAAP” (FASB, 1999).

Conclusion

There appears to be a need for international accounting harmonization with the amount of business that is going offshore. In 1989, transactions in U. S. securities by foreign investors and transactions in foreign securities by U. S. investors may have reached $5.4 trillion.

Accounting harmonization could save time and money for some nations. Organizations such as the IASB, IOSCO, OECD, et al are working hard to push their missions. However, as shown under disadvantages, some locations may serve better maintaining the current accounting practices versus using an international set of standards. The standards may not be applicable and could cause confusion. Nonetheless, a global GAAP may be in the future.

References

Business Wire (1998, October 15). Business And Government Leader Discuss Ways To Eliminate Trade Barriers To Expand International Trade & Global Prosperity. Retrieved September 2, 2005 from FindArticles, Web site:

Garrido, P., León, A., Zorio, A. (2002). Measurement of formal harmonization progress: The IASC experience. International Journal of Accounting, 37(1).

Hyperion (n.d.). International Accounting Standard (IAS/IFRS) Adoption. Retrieved August 30, 2005 from Hyperion, Solutions Web site:

International monetary fund (2002, November). FASB Issues Analysis of U.S. and International StandardsList of Standards, Codes and Principles. Retrieved August 25, 2005 from , Web site:

Ketz, J. E. (2004, June). FASB and IASB: Bumps Along the Road to Harmonization. Retrieved September 2, 2005 from SmartPros, Accounting Web site:

Roussey, R. S. (1994, April). The changing world of international accounting and auditing. Retrieved August 24, 2005 from FindArticles.com, Web site:

Stuckert, H. (n.d.). In Support of Harmonized Global Accessibility Standards. Retrieved August 27, 2005 from SAP Design Guild, Custom Development Management Web site:

Thetford, S. (2005). Global Accounting Harmonization: A Challenging Change. The Trusted Professional, 8(6).

The trusted professional (1999, November). FASB Issues Analysis of U.S. and International Standards. Retrieved August 26, 2005 from Web site:

Wikipedia. (2005). Retrieved 26 August 2005, from http://en.wikipedia.org/wiki/European_Union.