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Harmonization of International Accounting Standards: Advantages & Disadvantages, Obstacles & Solutions

Harmonization of International Accounting Standards: Advantages & Disadvantages, Obstacles & Solutions

 

                As the trend for globalization in business becomes increasingly important for economic success, many issues arise through international business practices for corporations, governments, and investors.  Due to the many conflicting codes and practices that exist between various national financial accounting standards throughout the world, international business becomes harder to analyze as information is not easily comparable between competitive industries.  (Diaconu 2007)  Because there is no standard international code for financial reporting around the world, many multi-national corporations are forced to reconcile their financial information to conform to multiple financial reporting standards.  This process of reconciling financial information for conformity with different accounting systems can be expensive, and also make information misleading.  As a result of the massive increase in international business and the difficulty of reporting accurate universal financial information, initiative has been taken to create a harmonization of accounting standards between nations.  Harmonization of accounting standards between nations is a very important current issue which has many possible benefits or consequences, as well as many obstacles to overcome for success.  This paper will examine potential advantages and disadvantages of a harmonized international accounting standard; discuss various obstacles associated with the creation and implementation of these standards, and provide possible solutions to overcome these obstacles.

                There are many potential advantages associated with harmonization of accounting standards.  The world economy could benefit through increasingly educated investment decisions which would lead to overall global economic growth.  Accounting information can be interpreted by experts to reduce the risk of investment.   One of the main tools used in financial analysis is the comparability of financial information for similar businesses in competition.  Internationally adopted accounting standards would increase this ability to compare similar industries and make investment decisions less risky through greater intelligence.  A standardization of international accounting information would facilitate easier interpretation for financial experts all around the world seeking to invest internationally.  This increased ability to interpret information could potentially result in an overall increase in educated global investment.  Another potential benefit from the harmonization of international accounting standards would be the reduced costs associated with multi-national corporations who must reconcile their accounting information for multiple accounting standards.  (Diaconu 2007)  Countries with scarce resources could also take advantage of international accounting standards, because they would not have to invest resources creating and regulating national accounting standard-setting agencies.  In order to be listed on credible stock exchanges, businesses must abide by the financial reporting requirements of the stock exchange it wishes to sell securities through.  Stock exchanges around the world could profit from a harmonization of accounting standards, as more companies begin to adopt the international standard, they will become eligible for listing.  As the amount of listings grows on the stock exchanges so will the volume of securities transactions.  (Marion and Cengage 2001)

                Although there are many promising advantages of harmonization, there are also many potential disadvantages.  One possible disadvantage of harmonization can be seen through the role culture plays in developing national accounting standards.  Countries may view compliance with international accounting standards as a threat to their nationalism and view compliance as submission to the will of other countries.  A major condemnation of harmonization comes from underdeveloped countries who view harmonization as an obligation placed on them by countries with superior economies.  Another disadvantage of harmonization is the vast amount of disparity that exists between different countries accounting practices.  The abundant differences in accounting practices world-wide would surely lead to substantial changes for any country who adopted the international standard.  These substantial changes would lead to many expenses for businesses in countries conforming to a new international standard.  Another common criticism of harmonization is the argument that an international accounting standard will not be flexible enough to deal with all the dilemmas faced by nations with differing problems and circumstances.  National accounting standards can be modified as situations change, and policies can be implemented without consent of all the nations involved in an international accounting system.  (Diaconu 2007)

I have outlined some of the advantages and disadvantages that could possibly arise from implementing a harmonized international accounting standard.  Now I will examine some of the barriers that prevent harmonization from proceeding.  Many countries have different accounting methods which are regulated in different degrees by their government.  Some countries use professional organizations to set accounting standards, whereas others are regulated strictly by the government, and some countries such as the U.S. use both professional organizations and the government to set accounting standards.  The differences seen in the accounting standard-setting bodies of the world give rise to the question: Who will write and regulate the international standard of accounting?  The U.S. is the largest economy in the world and could be an easy answer to this question, but there are many critics of the FASB standards used in the U.S.  Many believe that U.S. accounting standards are overly complicated.  Another barrier of harmonization is the argument that capital markets have already adjusted to international business without a set standard.  Many believe harmonization is not necessary and present systems are working well enough.  (Diaconu 2007)

There are many potential advantages and disadvantages of international harmonization of accounting standards, as well as many obstacles restricting implementation.  Many companies in the European Union submit to International Accounting Standards, and many other corporations reconcile financial information to provide IFRS financial statements as well as U.S. GAAP.  Because the U.S. is the largest economy in the world many international companies adopt U.S. GAAP financial statement to increase ability to trade with the U.S.  Companies in the U.S. must always conform to U.S. GAAP and reconcile any other financial statements to meet the GAAP requirements.  One possible solution to the problem of setting international accounting standards would be to provide a choice between the two most popular systems: the American GAAP or the European IAS/IFRS.  As more companies favor one method over the other that method will eventually become the international standard.  (Diaconu 2007)  There are many possible solutions to implement harmonization, but in the end, complete harmonization of accounting principles will probably never be realized.  There are too many variables to account for and too many groups of people in political power with too much to lose.  (Weber 1992)

References

Diaconu. Paul, Impact of Globalization on International Accounting Harmonization (January 18, 2007. 17 Nov, 2010. Available at SSRN:

http://ssrn.com/abstract=958478

 ”International Accounting Standards.” Encyclopedia of Business and Finance. Ed. Allison McClintic Marion. Gale Cengage, 2001. eNotes.com. 2006. 17 Nov, 2010

http://www.enotes.com/business-finance-encyclopedia/international-accounting-standards

 

Weber, Cameron M. “Harmonization of International Accounting Standards. | Professional Services Accounting Professionals Center from AllBusiness.com.” Small Business Advice and Resources from AllBusiness.com. The National Public Accountnant, 1 Oct. 1992. Web. 18 Nov. 2010. http://www.allbusiness.com/accounting/methods-standards/339832-1.html


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