Harmonization of International Accounting Standards - Essay Example

Table of Contents Introduction 2 Desire of Harmonization of International Accounting Standards 2 Attainability of Harmonization of International Accounting Standards 5 Conclusion 7 References 8 HARMONIZATION OF INTERNATIONAL ACCOUNTING STANDARDS It is explained whether the harmonization of the International Accounting Standards is desirable and attainable. Introduction The accounting standards are the most favorable accounting treatments, practices, measurement techniques and disclosures adhered by the recognized accounting bodies. They are aimed at production of such information which helps the user of a financial statement, namely the investor, shareholder, lender, supplier and customer, management etc, which serves his purpose. The harmonization of these International Accounting standards has recently become one of the most debatable issues in the accounting circles. The desire of harmonization of International Accounting Standards There is an immense need of the harmony of the accounting standards in the modern age of globalization as services and business have increased the impact of cross-border borrowings and investments. (Mogul, 2003) The uniformity and harmony in the International Accounting Standards (IAS) gives the shapre of a single entity to the global society. The user of the financial statement looks for similar information when he uses the financial statements as per his own perspective and difference of treatments, measurements, disclosures and practices etc causes him to get off track when he tries to obtain the information that is beneficial to him. There are various aspects and reasons for which the harmonization of the International Accounting Standards is desirable, some of which are discussed: Full realization of gains from global economy: There is a strong desire of the harmonization of the International Accounting Standards in order to fully realize the gains of the global economy. It will help the global economy in many ways, such as the fact that the uniformity will provide exact and perfect information to the global users of the financial statements which will minimize the exchange and transaction costs and will provide a standard data to the user of the financial statement, irrespective of the fact where he resides. (Shil) Harmony in the Audit and Regulatory aspects: There is also a need for the information given by the International Accounting Standards to be uniform for the auditors and the regulators. This uniformity will help the auditors and regulators in evaluating the information correctly and giving identical opinions on the financial statements. Once the opinions of the auditors will be uniform for similar cases, it would be beneficial for all the users of the financial statements to draw correct conclusion for their purpose which will help the industry and the market equally. Need of uniformity for purpose of trade: There is a requirement for the standrads to be uniform because through standardization the international tarrifs, restraints mechanism and quotas will become more exact and the investors will be able to take better decisions, minimizing the use of resources and management cost. As the foreign trade is taking new dimensions and investments and borrowings are increasing, there is a need that the foreign investors get a common picture of the financials of the entiry where they are willing to invest in order to obtain a relevant decision. A common investor, which has no know how whatsoever of the reporting responsibilities of the other coutry, is unable to form a decision for a beneficial investment as he looks at things from the regulations and standards of him own country. Requirement of uniformity in Stock and Capital Markets: Due to the recent growth and development of the stock exchange and the numerous foreign lisitings from all over the world in the stock exchanges of other countries have also cried out for the need of uniformity of the accounting standards. It has been estimated that around 20%, 16% and 82% of the companies are foreign originated companies are listed in the New York, London and Luxemborg Stock Exchanges respectively. (NBER) In order to regulate these foreign listed companies, there is a strict requirement of a financial system which is complied on globally acceptable standards for attraction of investors, as the overseas investors desire to keep an eye on the fitness of the issuers of the securities which they are going to invest. (Rakshit) Need of harmonization to decrease the cost of reporting: A problem faced by the multinationals is that they have to pay an additional cost for their reporting responsibilities and have to cater with difficulties for their manner of undertaking a transaction. This creates a possibility that a particular transaction may give rise to a defferal under one accounting standard and a recognition of profit under the other, this is the reason why the multinationals that have their operations in both he UK and the US face this problem while the preparation of the consolidated financial statements. (Shil) Certain instants have been identified where a certain company had declared a profit under their basic standards that they follow and when the International Standards or Generally Accepted Accounting Principles (GAAP) are applied, a loss is proven to be incurred. This creates uncertainity among the investors as well. The management has to bear an extra cost in order to prepare the financial statements according to the standards of the foreign countries where their companies are listed and while the preparation of the consolidated accounts as they cannot apply the same standards to the whole of the financial statements. Even the auditors face complications during the group audit of these companies. Attainability of Harmonization of International Accounting Standards Another fact that has been argued in the recent age of globalization is that of the attainability of the uniformity of the accounting standards and its possibilities. It has been a point of discussion that can all the countries, that have been traditionally following a particular accounting standard, adhere to following a single International Accounting Standard? Harmonization through Standardization: If uniformity is to be brought in the International Accounting Standards, it can only be done through Standardization. A complete core set of financial standards should be produced in order to standardize the policies, procedures, treatments, measurements and disclosures etc used to present the data in the financial statements. It is necessary to spot the standards which are acceptable to all the regulators and commissions that govern the accounting bodies all over the globe. (Weber) This can be done by first taking out the common points which are present in the accounting standards followed globally and to present them in a unified tone and manner, which is understandable and acceptable to the whole accounting community. Standardization can be attainted when the approaches which are followed globally are brought in conformity with each other, such as the US GAAP, IAS, Indian GAAP, Australian standards etc are all modified to produce a single and globally recognized International Accounting Standard. Once these standards will be imposed, eliminating all the other traditionally followed accounting standards, all the financial statements will represent financial aspects similarly and a complete set of financial statement will be produced. Some studies have also pointed out that the countries which have improper reporting or poor quality reporting should be brought under the same standards, so that the standardization can be attainted fully and implemented all over the globe. Efforts for harmonization of International Accounting Standards: Many international organizations have contributed their efforts in order to harmonize the International Accounting Standards and eliminate the disparity in their accounting standards. Many accounting bodies, such as the International Coordination Committee for Accounting Profession (ICAAP), International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC) etc have put their efforts together in order to harmonize the accounting standards. IASC has carried out several agreements in order to boost the production of “complete core set of Standards” which can be used by both the national and foreign listings. “Presently, the International Accounting Standards Committee (IASC), which has a representation of 112 countries which have over 150 accounting bodies, has issued over 40 standards in order to bring uniformity and coherence in the diversity of the accounting policies and standards followed by the countries all over the globe.” (Shil) Conclusion It has been analyzed by the critics all over the globe that, due to the fact that different countries use different accounting standards and procedures to present their data, a common person faces a lot of difficulty in analyzing the information for his purpose and benefit. Apart from the understanding, the representation of information is not coherent as a profit under one standard is a loss under the other. It can be concluded that in today’s age of globalization, it has become incumbent that the International Accounting Standards be uniform and homogenous because the users of the financial statements look for identical information that gives them a uniform understanding. This is only possible when all the countries adhere to the same accounting treatment and a complete and coherent core set of Standards are produced. References Mogul, Samir S. "Harmonization of Accounting Standards." Chartered Accountant 2003. NBER. 2010. . Rakshit, W. J. Hati and D. "Integrating accounting standards." (2002). Shil, Nikhil Chandra. "Harmonization of Accounting Standards through Internationalization." International Business Research (2009): 194-201. Weber, Cameroon M. "Harmonization of international accounting standards." The National Public Accountant (n.d.). Read More