Question

A. Discuss two (2) advantages of global harmonizing of accounting standards. Has there been any recent success with regards to the harmonizing of accounting standards? Provide details.

Answer 1

Advantages of global harmonizing of accounting standards :-

1. Increase and Growth in International Business:

The main stimuli for harmonisation comes from the enormous expansion that has taken place in world trade and in international investment since the end of World War II. As international business and investment multiplies, accounting’s international dimension broadens, international financial reporting has become more important as the tool of communication among businessmen, entrepreneurs, financiers and investors.

At the same time, variations are evolving in accounting principles, audit practices, financial statement presentations, and professional standards. If accounting reports are to become a universal means of communication, action must be taken to harmonies world-wide efforts to meet the international users’ needs.

John C. Burton at 1980 Proceedings of Arthur Young Professors Round Table on “The International World of Accounting & Challenges and Opportunities” remarked:

“…today, as more business is done internationally, as more capital crosses borders, as more investors seek investment opportunities in other countries, as more managers of international business attempt to better understand performance of foreign subsidiaries, the problem of diverse accounting standards becomes more acute…. There is also the argument for a common need to communicate—a common language problem that suggests that it is useful if we talk in the same terms. The world is too small today to have national boundaries create many bases for totally different principles of economic environment.”

Robert L. May, President of International Federation of Accountants, in his speech (1986) delivered at Australian Accountants Centenary Congress, Sydney, observes:

“There is a greater need than ever before for comparability of international financial data. Government, lenders, businesses, shareholders everywhere—they all need information in a form that is reliable, that is understandable, and that will encourage the flow of international investing rather than inhibit it. In a world where finance and trade are international, it seems utterly incongruous that the accounting standards are not. In a world where the world ‘multinational’ is almost a cliche, it seems strange that it has had so little application to accounting. In a world where national economies are so linked together that crisis in one can send shock waves rolling into every corner of the universe, it seems entirely against logic that accountancy professionals must heed the out-of-date doctrines of separatism.”

2. Multinational Companies:

A major force in the movement toward international harmonisation has been the economic self-interest of multinational companies. Multinational firms are the preparers of financial information.

With diversity in accounting standards from country to country, these firms face a myriad of accounting requirements from the countries in which they operate. The burden of this financial reporting would be lessened with increased harmonisation which would simplify the process of preparing individual and group financial statements.

Multinational companies would benefit from harmonisation on the following counts:

(a) Consolidation of overseas subsidiaries would be easier due to harmonisation as financial statements from all round the world would be prepared on the same basis.

(b) Many large companies want to raise money in more than one country and in international markets, and so need to produce accounts which can easily be understood by investors in many countries. For this reason, the World Federation of Stock Exchanges is said to be encouraging the acceptance of international accounting standards.

(c) The task of preparing comparable internal information for the appraisal of the performance of subsidiaries in different countries would be made much easier. Many aspects of investment appraisal, performance evaluation and other decision-making uses of management accounting information would benefit from standardisation.

Management control would be more easily accomplished. The appraisal of foreign countries for potential takeovers would also be greatly facilitated. Multinational companies would also find it easier to transfer accounting staff from one country to another.

3. Globalization of Capital Markets:

Nowadays, investors seek investment opportunities all over the world. Similarly companies seek capital at the lowest price anywhere. The problem that this creates for investors, of course, is that accounting differences can completely obscure the comparisons and other analyses that they must make in order to assess various investment opportunities.

Paul Volcker, Chairman of International Accounting Standards Committee (IASC) Foundation Board of Trustees, said:

“If markets are to function properly and capital is to be allocated efficiently, investors require transparency and must have confidence that financial information accurately reflects economic performance. Investors should be able to make comparisons among companies in order to make rational investment decisions. In a rapidly globalizing world, it only makes sense that the same economic transactions are accounted for in the same manner across various jurisdictions.”

4. Developing Countries:

There is an argument that countries that do not have any domestic accounting standards would benefit from international standards in that it would enable them to adopt a readymade system. They would not have to produce their own, they could adopt (perhaps with some slight modification) the international standards. If this were possible it would of course save them a great deal of time and expense.

Many developing nations do take a great interest in international standards. Nigeria, for example, one of the developing countries who are members of IASC has adopted these standards, and companies over a certain size are required to produce accounts that conform to such standards.

Recent progress with regards to hormonization of accounting standards are:-

2013: IFRS FOUNDATION ESTABLISHES ACCOUNTING STANDARDS ADVISORY FORUM

The International Financial Reporting Standards Foundation in early 2013 established the Accounting Standards Advisory Forum (ASAF) to improve cooperation among worldwide standard setters and advise the IASB as it develops International Financial Reporting Standards (IFRS). The FASB was selected as one of the ASAF’s twelve members. The FASB’s membership on the ASAF is an opportunity to represent U.S. interests in the IASB’s standard-setting process and to continue the process of improving and converging U.S. Generally Accepted Accounting Principles and IFRS. The FASB was nominated for membership on the ASAF by the FAF Board of Trustees, which oversees both the FASB and its sister standard-setting board, the Governmental Accounting Standards Board (GASB).