Accounting Harmonisation: An Impossible Dream - Essay Example

ACCOUNTING HARMONISATION: AN IMPOSSIBLE DREAM? Introduction Over the recent past, there has been an increase in the need for the world to adopt the accounting standards, with some of the countries adopting the standards, others opting not to. Originally developed by the European Union nations as a way of harmonizing their financial reporting standards, the realization that these standards could potentially unify the world’s accounting and reporting standards saw the recommendations by various bodies for the world to adopt them. Over time, as different countries increasingly adopt them, harmonization of their accounting standards is yet to become a reality. Countries adopt these standards with their own capacity, but do not harmonize them with the rest of the world. While some countries adopt part of the accounting standards, others adopt them entirely. However, the individual capacity with which countries adopt these standards makes the differences in their harmonization. Globally, approximately 113 countries having adopted these standards, have realized of their potential in the international business context. Germany and United Kingdom, have adopted these standards. Interestingly however, there is no harmony in their accounting standards. Benefits of harmonisation There are a myriad of factors contributing to the increased campaign for the adoption of the accounting standards by various countries. The benefits accrued from this harmonization necessitate the compliance of countries with these standards. The ability of these standards to unify the world’s accounting and reporting standards is the main reason for this awareness. The unification of the world reporting standards, which would put all countries in the same accounting standards as the rest of the world, is the main reason for this advocacy. According to Erchinger & Melcher (2007), the world’s capital markets are likely to gain from the convergence of the world financial reporting standards, if the share trading and investments are anything to go by. Erchinger & Melcher (2007) further argue that the quality with which the people responsible for drafting these standards undertook their mandate is commendable. Their comprehensive nature and rigorousness of their application are the main reasons why the world hopes to benefit from these standards. As the drafting process was free of political influence makes these standards envy by many countries, especially those already using the standards. The accounting standards further have the potential of harmonizing the international financial reporting standards. Especially for companies operating in different countries, observe Ramanna & Sletten (2009), the adoption and subsequent harmonization of these countries’ accounting standards would consequently help in harmonizing these companies’ financial reports. Currently, companies that have a global network suffer from the problem of data harmonization, thus spending considerable amounts of their revenues and time while harmonizing their financial reports. Notably, all organizations whether subsidiaries of a large multinational or a regional firm, have to draw their annual or semi-annual financial reports in accordance to the standards of the host country. Subsequently, a company with many branches will receive the financial reports of its subsidiaries in these formats (Ramanna & Sletten 2009, p. 22). In order to draw a final draft, the organization has to interpret the various financial reports, translate them in order to report them according to the country’s accounting standards (Erchinger & Melcher, 2007). Harmonizing the accounting standards would thus eliminate these hurdles, thus saving considerable amounts of time and money as all reports would be available in similar styles. Additionally, these standards hope to minimize and if possible completely eliminate losses by investors in firms across the globe. Poorly managed firms, but which creatively report their financial performance in impressive balance sheets and statements of income, argue Kothari & Lester (2012, p. 339) suffer during economic crises. The harmonization process and the requirement of disclosure clause in the accounts seek to eliminate these issues. Causes of differences & the potential to overcome In trying to improve accounting and reporting standards by different organizations and firms, accounting experts cite convergence of accounting standards as the best way of achieving uniformity. Experts hold diverse views on this argument, dividing them into two groups, the proponents and the opponents (Pounder 2009, p. 21). While the proponents hold the belief that converging accounting standards is the best way of achieving uniformity globally in accounting standards, opponents believe otherwise. According to Archer, et al. (1995, p. 74), such a move would create more problems and confusion than it would solve. Shil, et al. (2009, p. 197) argue that the main argument according to them is the differences in political systems and tax rules. In fact, some of the critics point out the ability of these standards compromising the sovereignty of the countries across the world. If made mandatory, and a requirement for all countries to pledge compliance, then there is no independence of countries in making their individual decisions. As the situation currently stands, compliance of the various countries globally mainly focuses on the reports (Jaggi & Low, 2000, p. 517). Indeed, some experts hold that making it mandatory for all countries to adopt these standards is a move seeking to undermine the small countries by the big countries. Developed by the European Union, countries such as the United States feel that by adopting these standards would make the EU appear rather superior economically to the US. Equally, while Germany and United Kingdom have adopted these standards, they are yet to harmonize their reporting and accounting standards, as is the requirement. The desire to protect their political interests and the differences in the political systems are contributing factors to the lack of harmonization (Shil, et al., 2009, p. 194). Germany and United Kingdom differ in the approaches they use while listing subsidiaries of foreign companies or foreign companies listed on local exchanges. While there are no different rules in listing these companies in the United Kingdom stock exchange (PWC 2013, p. 145), Germany stipulates certain rules guiding the listing of foreign companies in its local foreign exchange (PWC 2013, p. 86). Trying to harmonize the two countries is thus subject to compromise of either of the countries’ plans. Differences in tax regimes are yet another factor contributing to the lack of harmonization of these standards (Vansteeger, 2005, p. 8). The differences in the various countries’ tax systems makes the harmonization just a mare dream. Tax, being a sensitive issue for different countries potentially influences the decisions of various governments. Some countries set high tax rates, while others set low tax rates. The calculations involved in arriving at the rate of taxation considerably differ (Lehman 2005, p. 983). With this difference comes the differences in tax regimes, and as such, harmonization becomes impossible (“EC Accounting Harmonisation”, web, p. 6). According to PWC, Germany has am independent tax regime. According to this regime, there is the absence of relationship between taxable profit and statutory legal entity statutory accounts. The United Kingdom on the other hand has a quasi-dependent tax regime, which principally bases taxable profit on the legal entity statutory accounts. There is however the inclusion of a number of adjustments in the tax law in areas such as capital gains, where the taxable profit is not derived from the accounts (Fritz & Lämmle 2003, p. 9). Although some governments regard this adoption and harmonization as rather political, cases of success in their adoption and harmonization by different countries could serve as examples of their respect for the political systems (Nobes & Parker, 2012, p. 12). Further, since different countries have different tax regimes, developing a framework that allows countries to report in their own tax regimes is the only way to solve this problem (Erchinger & Melcher 2007, p. 128). Otherwise, all countries will adopt the standards, but will disregard any efforts trying to harmonize their regimes with those of other countries. Actual progress in harmonisation Since the decision that all countries should adopt the accounting standards, the process has made tremendous steps in the adoption process. Many countries globally, approximately 113 countries adopted and use these standards. However, these countries are yet to harmonize their accounting standards as is the requirement. While some have actually complied, others are yet to. The biggest arguments so far are the differences between the IFRS and the GAAP for the case of the United States. Even with politics playing a key role in the entire scenario, the technicalities in the harmonization process remains. FASB (2014, web) report that since the recommendation by the EU that all companies trading in the European Securities Market adopt these standards in 2002, and all non-European companies using the GAPP up to 2007 to comply, other countries followed suit (Larson & Street, 2004, p. 95). Veerle (2005, p. 4) cites the impediments faced by countries in trying to harmonize the accounting standards. Although factors such as the true fair view principle of the accounting standards, the changes in the legal requirements and the uses of financial statements in different countries formed the biggest argument for the failure of adoption, the existence of exceedingly many options for the members’ states hampered the entire process (IFAC, 2014, web). Despite these challenges, Veerle (2005, p. 4) argues that this process has indeed not failed completely. The changes in the requirements, coupled with the members understanding on the uses of these reports considerably influences the harmonization process. The similarities in the national accounting systems in the EU are an indication of the progress made in the harmonization of these standards (Pacter 2014, p. 7). Although not all countries have adopted these standards, the increased numbers of countries using the standards is impressive. While the harmonization process still faces hurdles, countries in the European Union have made tremendous steps in the harmonization process. with the European Securities Market serving as a case study for all the countries yet to adopt these standards, and as an indication that there are hopes in the harmonization of these standards, countries are likely to change their perception, and adopt these recommendations. Conclusions & recommendations for the future Since the recommendation of the accounting standards as global standards of reporting, there are tremendous efforts made towards adopting them by different countries. At least 113 countries globally have complied with these standards. The ability of these standards to remove all challenges multinational companies face in reporting their financial statements necessitates their adoption and harmonization. By all countries harmonizing their reporting standards, it is possible to reduce the time and costs involved in the translation of financial reports by multinational companies having a global network. However, there are logistical issues in the harmonization process. The differences in the political system, coupled with differences in tax regimes of various countries considerably affect the harmonization process. Although Germany and the United Kingdom have adopted these standards, they are yet to harmonize their reporting standards. The success of the process in the European Securities Market is proof enough of the likelihood of the world harmonizing the accounting standards. However, as the situation currently stands, few countries have actually harmonized their standards. There are still hopes that in the end, countries will achieve harmonization, thus making the dream a reality. It is however likely that politics will play a big role in future as various countries bear in to the pressure of adopting these standards. It is recommended that the politics of the day, though having considerable influence on the business in the country, respect the harmonization process. If the world hopes to harmonize the standards, then political differences and aggressive campaigns on the importance of these standards will play a big role in the success. Works Cited Archer, S., Delvaille, P., and McLeay, S 1995, The Measurement of Harmonisation and the Comparability of Financial Statement Items: Within-Country and Between-Country Effects. Accounting and Business Research. 25 (98), pp. 67-80. EC Accounting Harmonisation: An Empirical Study of Measurement Practices in France, Germany and the UK Erchinger, H., and Melcher, W 2007, “Convergence between US GAAP and IFRS: Acceptance of IFRS by the US Securities and Exchange Commission (SEC).” Accounting In Europe, 4(2), 123-139. doi:10.1080/17449480701727908 FASB 2014, International Convergence Of Accounting Standards-Overview, web. Accessed 20 February 2014 Fritz, S., & Lämmle, C 2003, The International Harmonisation Process of Accounting Standards. http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663 IFAC, 2014, IPSASB eNews, accessed 20 February 2014 http://www.ifac.org/news-events/2009-10/ipsasb-enews Jaggi, B. & Low, P. Y. (2000) Impact of Culture, Market Forces, and Legal System on Financial Disclosures. The International Journal of Accounting. 35 (4), pp. 495-519.  Kothari, S. P., and Lester, R 2012, “The role of accounting in the financial crisis: Lessons for the future.” Accounting Horizons,26(2), 335-351. Accessed 20 February 2014 http://search.proquest.com/docview/1081894601?accountid=45049 Larson, R. K., & Street, D. L 2004, Convergence with IFRS in an expanding Europe: progress and obstacles identified by large accounting firms’ survey.Journal of International Accounting, Auditing and Taxation, 13(2), 89-119. Lehman, G 2005, A critical perspective on the harmonisation of accounting in a globalising world. Critical Perspectives on Accounting, 16(7), 975-992. Nobes, C. & Parker, R. (2012), Comparative International Accounting, London: Prentice Hall.  Pacter, P 2014, Global Accounting Standards—From Vision to Reality, CPA Journal, pp. 1-10. Accessed http://www.ifrs.org/Features/Pages/Paul-Pacter-Global-Accounting-Standards-From-Vision-to-Reality-January-2014.aspx Pounder, Bruce. Convergence Guidebook for Corporate Financial Reporting: Epub Edition. John Wiley & Sons Inc, 2009. Print. PWC 2013, IFRS adoption by country, pp. 1-278. Accessed http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/pwc-ifrs-by-country-apr-2013.pdf Ramanna, K., & Sletten E 2009, “Why do countries adopt International Financial Reporting Standards?” Working Papers -- Harvard Business School Division Of Research, 1-46. Shil, N. C., Das, B., & Pramanik, A. K 2009, Harmonization of Accounting Standards through Internationalization. International Business Research, 2(2), P194. Vansteeger, V 2005, The current state of accounting harmonization: impediments to and benefits from harmonization (No. 05/322). Ghent University, Faculty of Economics and Business Administration. Read More