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International Accounting Harmonization - Essay Example

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This essay "International Accounting Harmonization" discusses the factors causing differences in accounting practices like taxation system, capital provider, national culture, and other influences that constitute accounting practices of a nation. The essay analyses support from IOSCO and IFAC…
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International Accounting Harmonization
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?International Accounting Harmonization Overview The International Accounting Standards Board (IASB) was founded on 1st April 2001 as the descendant of the International Accounting Standards Committee (IASC). The IASB is a London based institution which was funded privately. Accounting is regarded as the language of business and hence IASB insists that accounting must speak an international language. In order to make global business transactions easier, the IASB/IASC had dealt with different accounting practices across the Europe in association with EU. As the first step, the fourth and seventh company law directives obliged the companies and group of companies to prepare accounts on a harmonised basis (Accounting Harmonisation). The main aim of the IASB/IASC was to overcome the international trade barriers arising out of different national laws. As Akyuz, Bulca, and Mustafa (n.d.) opine, the IASB/IASC thought that accounting harmonisation process would bring coordination in accounting procedures across the Europe and subsequently it would lead to the establishment of a single market. In order to harmonise the international accounting practices as a whole, the IASB/IASC firstly gave emphasis on the community law harmonisation. It is essential to note that a harmonisation programme at community had not been experimented until IASB/IASC did it. Forex News (2010) reflects that the accounting harmonisation process had been mainly practiced through policies which might drive member states to achieve the proposed objectives. Similarly, the multinational companies were facing troublesome challenges to prepare coordinated financial statements at the end of the year since they might have branches across the globe and each branch would have distinct accounting practices in accordance with respective nation’s law. In the words of Mogul (2003), the efficient completion of this harmonisation process would facilitate multinational companies to systematically analyse the performances of its subsidiaries functioning at different countries. Challenges Although the harmonization process was able to bring many fruitful outcomes, the IASB/IASC has faced many challenges with implementing this process smoothly. Different companies in Europe had different accounting procedures and their financial periods ended at different times. As a result of these differences in opening and closing of financial periods, IASB/IASC faced cumbersome difficulties in launching the proposed harmonization process simultaneously across the Europe. Heterogenic accounting philosophies prevailed in different countries were some other barriers which the IASB/IASC had to deal with. In the opinion of Fritz and Lammle (2003) some specific environmental factors play crucial role in moulding the accounting practices of each country and these factors vary from country to country. In most parts of Europe, professional accounting organisations did not have the authority to fix accounting standards; it was completely left to the choice of governmental authorities. Likewise, the vague interpretations and ineffective supervision of IAS/IFRS caused further problems toward the harmonisation process. They could not ensure the convergence of various interpretations of standards. It can be seen that height of IASB’s aims also adversely affected the effectiveness of IASC/IASB. It targeted the formulation of a single global market with common accounting practices in its premature stage and it seems to be highly challenging. Similarly, acceptance of IAS/IFRS at SEC was a major challenge to IASC/IASB. Moreover, national standard-setter, governments, and companies tried to influence the operations of IASB in order to defend their own interests. Support from IOSCO and IFAC International Organisation of Securities Commission (IOSCO) is the security regulators’ organisation that represents more than 80 countries and it works for enhancing cross border capital accumulation. Similarly, International Federation of Accountants (IFAC) aims at initiating of a world-wide accountancy profession. Since the ultimate objectives of IOSCO and IFAC were very similar to those of IASC/IASB and EU, these two organisations have supported the harmonisation efforts of EU and IASC/IASB to a large extent. The operations of IASC/IASB necessitated the need of a capital market and it was duly supported by IOSCO (The IASB and the International Organization of Securities Commissions). In 1994, the IOSCO reviewed the framed standards of IASC and suggested certain improvements for weaker ones. The IASC and IOSCO formed a work plan in 1995 by which the IOSCO has recommended its members to act in accordance with the designed plan. This plan was completed in 1999. In order to increase its efficacy in operations, the EU also cooperated with IASC and IOSCO. According to European Commission policy developed in 1995 “rather than amend existing directives, the proposal is to improve the present situation by associating the EU with the efforts undertaken by IASC and IOSCO towards a broader international harmonisation of accounting standards” (cited in Epstein and Mirza, 2001, p.21). The IFAC has supported the IASC/IASB to set the accounting standards and it has also assisted the EU in the accounting harmonisation process. In 1984, IFAC agreed that IASC would have complete freedom in setting international accounting policies and IASC was entitled to publish remarks on international accounting issues. In addition, all members of IFAC became the supporters of IASC (History: IASB). The combined operation of IFAC with IASC assists international and cross EU harmonisation. Anyhow, IOSCO and IFAC had played an inevitable role in amplifying the international accounting harmonisation operations of EU and IASC/IASB. Achievements Although the objectives of EU and IASC/IASB had not been achieved completely, they could bring some notable changes in the persisted accounting practices. The vehement efforts taken by both organisations could introduce reasonable modifications in the mode of accounting practices of deferred taxes, and it can be regarded as the most harmonized area. The establishment of a comparable basis in financial reporting can be attributed to the achievements of EU and IASC/IASB (International Financial Reporting Standards IFRS). The combined activities of EU and IASC/IASB have led to the formation of 33 accounting standards which were widely accepted. These well designed accounting standards encouraged different countries to use IAS guidelines so as to eliminate dissimilarities. It is evident that these organisations could attain the support of a number of economies for they have begun practicing IAS accounting standards. The thoughtful activities of IASC/IASB and EU ensured the support from national standard-setters. The IASB has the strength of eight national standard-setters that represent the Board of IASC Foundation. Therefore, IASB got genuine support from these subsidiary organisations in discussing and revising the proposed accounting standards. In addition to these eight national standard-setters, the IASB had obtained suggestions from users of financial statements, stock exchange experts, and financial analysts. This strong relationship of IASB with national standard-setters have assisted them to increase the efficacy of their operations as the support of these subsidiaries enabled IASB to easily control the accounting practices of various countries. Similarly, the powerful encouragement from the part of IOSCO also helped the IASB to get closer to their aims. In order to support activities of IASB, the IOSCO recommended its members to insist the multinational companies to adopt accounting practices as directed by IASB (US Securities and Exchange Commission). This recommendation aided the IASB to get broader acceptance for their practices and procedures. As a result of adoption of IAS practices by multinational companies, IASB got a prominent position in the international capital market. Likewise, it is identified that EU has adopted a positive approach to the practices developed by IASB. The EU employed the IAS procedures to prepare consolidated financial statements of all listed European companies. Fritz and Lammle (2003) reflect that the complete acceptance of IAS guidelines by EU can be defined as the response from EU to the indifferent attitude of US regulators. Anyhow, EU’s acceptance of IAS practices was the milestone in the history of IASB. The companied strategies of IASB and FASB toward the establishment of single set of global accounting rules can also counted as the achievement of IASB. According to Shil, Das, and Pramanik (2009), it is a known fact that US capital market has an important place in the world; therefore the acceptance of IAS by US capital market has strengthened the scope of IASB. It is essential to analyse the factors causing differences in accounting practices. These factors are illustrated in diagram 1 (see Appendices). From the diagram, it is evident that factors like taxation system, capital provider, national culture, and other influences constitute accounting practices of a nation. It is a known fact that taxation system varies from country to country; sometimes the difference can be seen even between the states of a nation. The difference in taxation system necessitates the adoption of special featured accounting practices that can meet the requirements of the particular taxation system. Similarly, accounting practices of an organization largely varies depending on the interests of the capital provider. Since capital is the essential factor for a business, the accountants are forced to alter the accounting procedures in a way that it would meet the long term objectives of the investors. It is precise that traditional customs and practices which are the part of national culture also have a significant role in shaping the national accounting practices. Some scholars argue that generally an organization does not deviate from its conventional modes of practices because it would cause large administration expenditure. Legal system of home countries would impose certain restrictions on companies and such regulations would be the major constraints to international accounting harmonisation process. Other influences which determine the national accounting practices include company byelaws, characteristic of competitors, and mode of company operation. Appendices Diagram 1 (Source: Fritz, S & Lammle 2003, p.17). Reference ‘Accounting Harmonisation: A New Strategy VIS-A-VIS International Harmonisation’, Communication From The Commission, Viewed 25 Feb 2011 Akyuz, Y, Bulca, H & Mustafa, UC n. d, ‘The Activities of Turkish Accounting Standards Board (TASB) For Improving The Quality of The Financial Knowledge and General View on Turkish Financial Reporting Standards (TFRS)’, Viewed 25 February 2011 Epstein, B & Mirza, A 2001, IAS, Interpretation and Application, John Wiley & Sons, New York. Fritz, S & Lammle, C 2003, ‘The International Harmonisation Process of Accounting Standards’. Avdelning, Institution Division, Department. Forex News 2010, ‘The Process of accounting harmonization in the European Union: Towards international standards’, AVAFX: Online trading center, Viewed 25 Feb 2011 Forex News 2010, ‘The Process of accounting harmonization in the European Union: Towards international standards’, AVAFX: Online trading center, Viewed 25 Feb 2011 ‘History’, n. d, International Accounting Standards Board, Viewed 25 Feb 2011 ‘International Financial Reporting Standards (IFRS): An AICPA Backgrounder’, n. d, AICPA IFRS.com, Viewed 25 Feb 2011 ‘The IASB and the International Organization of Securities Commissions’, n. d, Deloitte Global Services Limited, Viewed 25 Feb 2011 Mogul, SS 2003, ‘Harmonization of Accounting Standards’, Accounting, Viewed 25 February 2011 Shil, CN, Das, B & Pramanik, AK 2009, ‘Harmonization of Accounting Standards through Internationalization’, CCSE: International Business Research, Vol. 2, No. 2. Read More
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