Harmonisation of Accounting Standards - Essay Example

?HARMONISATION OF ACCOUNTING STANDARDS al Affiliation) Efforts to harmonize accounting standards began decades ago, with the primary objective being the need to provide a professional shape and essence to accounting standards and the harmonization process in general (Organization for Economic Co-operation and Development 2007, pg.17). For a long time, accountants in various countries around the world have deemed it necessary to bridge the gap between different aspects of accounting; this can only be achieved through harmonization of the different accounting standards around the world. Despite this, there are still some variants of accounting practices that are very independent and strong, and therefore they act as obstacles to harmonization. They include UK GAAP, IAS, US GAAP etc. More positive, however, has been the improvements in recent times in terms of global convergence; this has convinced various stakeholders that there is still hope that harmonization can be achieved sooner rather than later. Local and international standard setting agencies have initiated harmonization projects that have largely been successful; it will therefore not be too long before a common set of standards guides and controls the accounting world. This will give the accounting profession an identity of legal discipline in its truest sense. This paper examines the issue of harmonization and other aspects that relate to it, for example challenges and advantages. Key Words accounting standards, harmonization of accounting standards. Introduction The harmonization of accounting standards has developed into a hot topic among accounting professionals all over the world (Black 2007, pg.26). Accounting standards can be defined as authoritative statements issued by acclaimed accountancy agencies that relate to different aspects of treatments, disclosures and measurements of accounting events and transactions, and that signify best accounting practices. Accounting standards are highly influential in the general reporting of financial statements, as well as the preparation of those statements. The clamor for harmonization can be understood better if one takes a look at other disciplines that have managed to develop their own standards and harmonize them globally. For example, in the United Kingdom (UK) electrical and electronic engineers abide by the Institute of Electronic and Electrical Engineers’ (IEEE) standards and principles that define and shape their professional practices (Samir 2003, pg.20). Why, then, is it so difficult for accountants to have a common set of codes that create some uniformity in their line of work and their practices? Over the years, it has been widely acknowledged that the differences in existing standards in various countries have so often been greatly underestimated. As a result of this, achieving uniformity has been a herculean task of sorts; the first step towards failure is usually underestimating the gravity of a problem (Srkant 2005, pg.64). As a consequence, attention has shifted towards understanding the various accounting standards in existence and trying to address how they can be merged. Although it has been met with huge obstacles, results have been better than in previous attempts. History of Harmonization The concept of harmonizing accounting standards dates back to the 19th century when the notion of “International Accounting Standards” was put forward in the 1st International Congress of Accountants which was held in St. Louis in 1904. In 1957, at the 7th International Congress of Accountants in Amsterdam, Mr. Jacobkraayenhof discussed the need for international accounting standardization and cooperation. In 1966, talks were held among various professional bodies like the Association of the Institute of Certified Public Accountants of America, the Canadian Institute of Chartered Accountants and the Institute of Chartered Accountants of England and Wales (Siegel & Shim 2006, pg.33). The talks were led by the then President of the Institute of Chartered Accountants of England and Wales, Sir Henry Benson. The outcome was that a study group was formed and charged with conducting comparative research on the accounting practices and thoughts among participating nations. It carried out almost twenty studies on auditing and accounting topics during its eleven-year tenure, and eventually its senior officers decided to establish global standards. According to Nobes (1996, pg.29), a meeting was held in 1972, and during the 10th International Congress of Accountants at Sydney, the ICCAP (International Coordination Committee for Accounting Profession) was formed as a forerunner to the creation of a recognized organization for the IAS (International Accounting Standards). The IASC (International Accounting Standards Committee), now IASB (International Accounting Standards Board) came into being after 16 accounting agencies representing 9 countries (Canada, France, the United States of America, Germany, the United Kingdom, Japan, Netherlands and Mexico and Australia) reached an agreement on 29th June 1973. Its secretariat and headquarters is in London (Most 2004, pg.41). Advantages of a Common set of Global Reporting Standards (Harmonization) Harmonization is meant to benchmark and improve the quality and standards of financial reporting; it brings about consistency and uniformity and helps ensure comparability in financial data published by companies. In addition to this, harmonization ensures that important information found in financial statements is provided to different users like suppliers, investors, lenders, shareholders, management, creditors, researchers, regulatory bodies, competitors and the society at large in a fair and uniform manner regardless of geographical location or any other affiliations. Harmonization also allows and makes it easy for different accounting bodies to work together whenever necessary in order to achieve common objectives and for the betterment of the practice of accounting (Reddy 2000, pg.14). Harmonization also provides the international community with a single entity; the diversity inherent in stockholding is of no consequence today if accounting systems can generate real-time general purpose financial statements. The awareness of capital markets investors has risen sharply, globalization is becoming more apparent and the number of investors is increasing at a rapid rate. Owing to this, harmonization has been put forward as a catalyst for the process of economic decision-making (Oppermann 2001, pg.104). Harmonization fastens this process, and therefore facilitates the rapid creation of new business opportunities within a short time. Why Harmonization of Accounting Standards is felt to be important by Accounting Standard setting bodies such as the ASB and IASB Accounting is generally recognized (and referred to) as the’ language of the business’; this language calls for the reporting of business affairs in a universally comprehensible way. There is therefore a need to control this language for the benefit of everyone concerned, and hence the need for harmonization (Hwang 2001, pg.78). Companies need to keep pace with the rapid progress that is being witnessed in the field of accounting, otherwise they will not be able to protect and promote their business in the global market place. The process of harmonization is accepted as the core element in the journey towards the implementation of a single set of accounting standards around the world. Implementation Challenges faced by both the Accounting Standards Board (ASB) and International Accounting Standards Board (IASB) if there is to be a successful move to International Financial Reporting Standards The quest for harmonization has faced multiple obstacles and will continue to face them unless appropriate measures are taken in order to fast track harmonization (Wilkins 2004, pg.19). Both the Accounting Standards Board (ASB) and the International Accounting Standards Board (IASB) will encounter a number of challenges if they are to complete a successful move to International Financial Reporting Standards (IFRS). These challenges include, but are not limited, to the following: a) Accounting standards are normally created in different countries under different social, economic, legal and cultural environments. Because of this, diversity is inherent in accounting standards all over the world (Rivera 1999, pg.58). If harmonization is to be realized, it is imperative that an agreement be reached as to the core function of financial reporting. IASB standards are often oriented to cater for the needs of capital markets and investors, and therefore countries that have different philosophies in terms of financial reporting would be hard-pressed to harmonize their standards with IFRS. For this reason b) The harmonization of accounting standards based on a global approach will no doubt raise the question of principles versus rules. IASB standards are usually principles-based, therefore countries that make use of rules-based standards will encounter significant challenges in the harmonization of their standards with the IFRS. c) The other major challenge for nations adopting IFRS is the shortage of labor and in particular, IFRS-trained personnel. For instance, in 2009, 6 months before China’s listed firms adopted IFRS, there was a high demand for accountants that could translate into millions in the next few years if the new standards are implemented for all firms in the country, not just the ones that are listed (Booker & Jarnagin 2010, pg.52). China had to get its more than 1,100 listed firms to adopt the necessary financial reporting systems and at the same time train adequate qualified accountants to meet future demand. As a result of this, some companies failed to achieve the transition on time. Examples of areas where Accounting treatments have been recently harmonized and areas where Accounting treatments adopted by the ASB and IASB still differ Japan is a major supporter of IASB. The Japanese Institute of Certified Public Accountants is now collaborating with IASB in order to bring Japanese standards at par with international standards (Blake 1995, pg.43). Japan has also collaborated with IASB in a project with the aim of removing the differences between IFRS and Japanese Accounting Standards (JAS). The Canadian Accounting Standard Board (CASB) has already adopted International Financial Reporting Standards (IFRS), this means that out of the original G4 nations, the United States is the only member that has not switched to international standards. Over to Egypt, where Egyptian Accounting standards are ready to adhere to international accounting standards with the only sticking points being some specific minor differences. Apart from Egypt, other Arab Nations like Kuwait and Jordan have also adopted IFRS (Memani 2006, pg. 75). Israel and Iran have not shown a willingness to use International Accounting Standards. In both countries, all companies that want to be listed in their respective stock exchanges must follow their accounting principles. References Black, Geoff 2007, Accounting standards, London: Longman. Blake, John 1995, Accounting standards, 5th ed. London: Pitman Publications. Booker, Jon A., & Jarnagin, Bill 2010, Financial accounting standards: explanation and analysis, 2d ed. Chicago, Ill.: Commerce Clearing House. Hwang, Soo Chiat 2001, The international harmonization of accounting standards and its effect on the development and implementation of accounting standards in Singapore, Clayton, Vic.: Monash University. Nobes, Christopher 1996, International harmonization of accounting, Cheltenham, UK: E. Elgar Publications. Oppermann, Henry 2001, Accounting standards, 9th ed. Lansdowne [South Africa: Juta. Organization for Economic Co-operation and Development 2007, Accounting standards Harmonization, Paris: Organization for Economic Co-operation and Development. Memani, Ronald 2006, Accounting a Milestone for Global Markets, New York: Wiley & Sons. Most, Kennedy 2004, International Conflict of Accounting Standards, A Research Monograph, London: Penguin. Reddy, Kenneth 2000, Accounting standards and Gaps in Practices in India. Management accountant, Chicago: ICWAI. Rivera, Joseph 1999, The Internationalization of Accounting Standards: Past Problems and Current Perspectives, International Journal of Accounting, 24(4), 320-342. Samir, Monahan 2003, Harmonization of Accounting Standards. Chartered Accountant, ICAI, x Accountant, London: ICAI. Siegel, Joel G., & Shim, Jae 2006, Accounting handbook, 4th ed. Hauppauge, NY: Barron's. Srkant, Singh 2005, Accounting Standards – will the World be talking same language? London: ICAI. Wilkins, Richard M. 2004, Accounting standards, London: Institute of Chartered Accountants in England and Wales. Read More