Harmonization of Financial Standards and Reporting Standards - Literature review Example

Harmonization of Financial standards and reporting standards Introduction In existing period of time, practices undertaken by business organizations have become quite globalized. In order to address different problems of international business environment such as intensive competition and dynamic business conditions, business organizations are undertaking international business expansion strategy. However, there are a number of different issues, which are required to be confronted by business organizations. Lack of integration of its existing business operations and practices with the norms and practices followed in the host country is one of the major issues emerged in front of business organizations in contemporary globalized business scenario (Godfrey and Chalmers 2007). In relation to this discussion, the integration of accounting practices followed by the company with that prevailing within the host country is also an important issue faced by the company in its global business practices. In order to address this issue, the phenomena of harmonization of different accounting standards and practices and emergence of a common set of accounting standards has come into lime light (Choi, Frost and Meek 1999). In this context, the paper aims to discuss the phenomena of harmonization and evolution of one common set of accounting standards in the most empirical manner. The paper intensively focuses upon financial and reporting standards and need of their harmonization. The paper also investigates the significance of different international bodies and organizations such as International Accounting Standard Board (IASB), International Federation of Accountants (IFAC), and Accounting standards Board (ASB) in the context of making the process of harmonization of reporting and accounting standards more smooth and effective (Deegan and Unerman 2011). Financial accounting and reporting standards and their needs Financial accounting can reporting standards can be considered as guidelines and direction provided by the apex regulator authorities of the country for the purpose of aligning accounting practices undertaken by individuals and business organization in maintaining their accounts and reporting the financial records in a fair manner. In relation to this, different accounting and reporting standards reflects some crucial accounting principles on the basis of which, an organization can undertake fair and effective accounting practices (Nobes 1999). As the span of and importance of business activities of different organization in an economy is quite vital, having integrity of accounting practices becomes quite essential phenomena. These standards are quite essential for the purpose of preventing misrepresentation of different accounting information and its financial status in the market by a company so that cases of financial frauds can be minimized up to a significant level. Financial frauds are quite harmful for the orientation of financial system of a country in the long run because different ill practices of business organizations, such as misrepresentation of accounting information, leads to decrease the trust of investors in the financial system (Soltani 2007). As per the solution of this problem, it has become quite essential for countries to have some specific standards for accounting practices and reporting. These standards are known as General Accepted Accounting Principles (GAAP). Different countries have pursued some different standards for accounting in order to aligning all the accounting practices undertaken within the reason and preventing any related offences (Choi, Frost and Meek 1999). Need of harmonization in financial reporting standards The term i.e. harmonization of accounting standards, refers to the efforts undertaken by the international society for the purpose of enhancing the mutual agreement in accounting practices among different countries so that an integrity in action can be promoted. The process of harmonization of different accounting stands includes the creation of a specific and common set of laws and principals of accounting for the purpose of providing some specific guidelines and direction to different business organizations of different countries to make accounting practices undertaken by them aligned and quite effective at international market place. Sometimes the process of harmonization is misunderstood as the standardization. However there is a significant difference between these two different terms. For instance, Standardization of accounting practices eyes towards the reduction the number of alternatives of the process, and have only one standardized system. In contrast to this, in spite of reducing alternatives, harmonization aims to create a mutual understanding and harmony among various accounting standards across the world so that the conflict among them can be reduced (Nobes and Parker 2000). In existing globalized business environment, development of harmonization among various accounting systems at global level has become an utmost requirement of business organizations and global economy. Increasing liberalization phenomena among different countries across the world has encouraged business organizations to make their direct or indirect investments in foreign countries. Due to this business expansion strategy business organizations have to recheck their operational practices as per the norms and practices undertaken within a foreign country. Accounting principles and reporting standards are one of them. Variations in accounting systems lead to create some critical problems in undertaking their accounting practices. In order to prevent conflict among accounting standards of different countries, there is a need of some effective steps from the side of international community (Nobes 1999). Creation of harmony among different standards and GAAP prevailing within different countries across the world is one of the major accounting practices undertaken within the existing business environment. In addition to this, there are a number of other advantages of having a common International Financial Reporting Standards (IFRS), which prompt developed as well as developing country to align their own GAAP with IFRS. With the help of harmonized financial standards at international level can be good prospect for development of international business practices up to a significant level. Owing to these intensive reasons, the international community has started to show positive attentions towards the harmonization of their own GAAP with international standards (Godfrey and Chalmers 2007). Role of different international bodies in harmonization of different accounting standards across the globe In order to achieve harmonization of different accounting standards, there are some intensive institutions and bodies at international level. In this context, some prominent non-profitable and regulatory bodies, such as International Federation of Accountants (IFAC), IASB (International accounting standards board) and FASB (Federation of accounting standards board), which handles issues in harmonization of different accounting standards at global level (Godfrey and Chalmers 2007). The role of such international bodies is quite important in the proper establishment of IFRS and its implementations in various countries across the globe. As the implementation of a harmonized set of common accounting standards at global level is not an easy task as this integration can be restricted due to various issues. For instance, there can be a significant difference between principles of accounting in GAAPs of two different countries. For creating harmony between these differences between different accounting principles, there is a need of having proper monitoring and regulation. In this context, the role of different agencies and regulatory bodies becomes quite vital (Sale 2007). In addition to this after the implementations of common IFRS, which is harmonized accounting standards, proper evaluation and monitoring of the success of the harmonization process is one of the most critical requirements. In this context, different international agencies play an important role. They handle different issues arisen after the adoption of IFRS by a country and provide crucial solutions of such issues (Nobes 1999). In addition to this, these different international organizations are also designed for the purpose of enhancing the awareness among underdeveloped nations regarding different accounting standards. For instance, International Federation of Accountants (IFAC) has contributed in the proper placement of Harmonization process by establishing International Forum on Accountancy Development (IFAD) for the purpose of enhancing the level of accounting professional in different underdeveloped and emerging countries. This institution is driving international business organizations to raise their standards regarding accounting and auditing of financial reports (Lawrence 1996). In addition to this, the International Accounting Standard Board (IASB) aims to create an effective and understandable set of common financial standards at international level (i.e. IFRS). The main purpose of such common financial standards is to integrate different general purpose financial statements. The organization also reviews the existing IFRS norms and practice at global level and makes some crucial amendments and revisions in it so that different norms and practices can be made more compatible and aligned with the existing business environment (Hùegh-Krohn and Knivsflae 2000). Significance of harmonization of financial reporting standards Harmonization of financial reporting can be considered as quite positive and effective steps undertaken by international society for the purpose of inducing international integration of business and accounting practices. In addition to this, there are some other important potential outcomes of harmonization of financial reporting standards, which is signifying the viability of harmonization of different financial accounting and reporting standards (Weygandt, Kimmel and Kieso 2010). (1) The first and foremost significance of harmonized financial standards is that the process reduces the complexities prevailing within cross boarder business transactions. In the international business expansion, lack of compatibility within different accounting standards in different countries is the major restricting factor promotion of international business. The Harmonization of different accounting standards will be proved quite helpful for the business organizations to undertake their business practices in the foreign country in the fairest and the most effective manner (Norton, Diamond and Pagach 2006). (2) Another important significance of the harmonized financial standards is that this process helps in having some common and equal measures for global companies to present themselves in the global market. This reduces the chances of occurrence of financial frauds and scams at international level. There are a number of different scams and financial highlighted in recent period of time in which, the business organization have presented their financial reports as well as their financial position in the market in a manipulated manner. The proper alignment of a harmonized accounting standards and reporting practices will be quite helpful to identify and addressing different frauds undertaken by business organizations (Tudor and Dragu 2010). (3) In addition to this, the proper implementation of a common set of global reporting standards after harmonizing different accounting standards can be proved quite helpful in reducing the diversity of accounting standards and reporting standards in different countries of the entire world. The integrity of such important accounting norms can be proved quite helpful for the organization in minimizing translation and reconciliation cost, which is a major of component of its overall operational expenses. In this way, the harmonization leads to decrease the cost of capital. The lower cost of capital, helps the organization to attract a large pool of investors from all over the world. Along with this, prevention of regulatory arbitrage from different financial transactions across the globe is also a crucial significance of the harmonization of different accounting standards of different companies (Jennings,Robinson, Thompson and Duvall 1996). These are some of the positive aspects of harmonization process which is inducing different nations across the globe of having a common set of accounting standards. Issues involved in the harmonization process Although there are a number of different advantages of harmonization process, yet there are some restricting factors which can raise some critical issues in universal adaptability of a common set of harmonized accounting standards. The first and foremost issue in this context is that the harmonization process can affect the unique identity of accounting system of a country quite adversely. In this concern, harmonization of different accounting standards can also affects different business practices and trends prevailing within the country as domestic business organizations are required to make some intensive changes in their existing operational framework (Epstein and Manzoni 2006). This can be proved a critical task for the local business organization. The harmonization of accounting practices can also provide foreign business organizations an edge over domestic organization. This is not quite favorable situation for development of domestic business industries in the country. In addition to this, there are a number of differences in accounting practices followed by different countries. The integration of such differentiated accounting principles and standards can be proved quite problematic (Weygandt, Kimmel and Kieso 2010). Conclusion On the basis of review of the entire discussion, it can be revealed that in existing business environment, there are a number of different factors which is aimed to promote harmonization of different accounting standards prevailing within different countries. In this direction, the role of different international institutions such as ASB, ISAB, and IFAC is quite effective in promoting a successful integration of different accounting standards. References: Choi, F.D.S., Frost, C.A., and Meek, G.K. 1999. International Accounting. 3rd ed. New Jersey: Prentice-Hall, Inc. Deegan, C. and Unerman, J. 2011. Financial Accounting Theory. McGraw-Hill. Epstein, M.J. and Manzoni, J. 2006. Performance Measurement and Management Control: Improving Organizations And Society. Emerald Group Publishing Godfrey, J.M. and Chalmers, K. 2007. 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