International Harmonization of Financial Reporting (2)

8/10/2019 International Harmonization of Financial Reporting (2)

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Chapter 2

International Harmonization of Financial Reporting

Learning Objectives

1. Explain the meaning of harmonization.2. Identify the arguments for and against international harmonization of

accounting standards.

3.Discuss major harmonization efforts.

.Explain the principles-based approach used by the International

Accounting Standards Board IASB!

!hat is harmonization"

Harmonization-- the process of increasing the le"el of agreement in

accounting standards and practices bet#een countries.

Harmonization is not the same as stan#ar#ization

#hereas standardization implies the elimination of alternati"es in

accounting for economic transaction and other e"ents $ %armonization

refers to reduction of alternati"es #hile retaining a high degree of

flexibility in accounting practices$ so harmonization allo#s different

countries to ha"e different standards as long as the standards do not

conflict.

$he t%o &levels' of Harmonization

%armonization in accounting standards$ #hich is increased

agreement in accounting rules.

%armonization in practice$ #hich is increased agreement in actual

accounting practices.

%armonization in standards may or may not result in

harmonization in practice.

(rg)ments for an# against Harmonization (rg)ments for Harmonization *+

&roponents of accounting harmonization argue that '-

%armonization expedite the integration of global capital

mar(ets and ma(e easier the cross-listing of securities because

of the comparability of )inancial statements.

%armonization facilitate international mergers and ac*uisitions.

%armonization reduce in"estor uncertainty and the cost of

capital.

%armonization reduce financial reporting costs.


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%armonization allo# for easy adoption of high-*uality

standards by de"eloping countries.

(rg)ments for Harmonization *+

&roponents of accounting harmonization argue that its not

necessary to force all companies #orld #ide to follo# comment setof standards.

Significant differences in standards currently exist .

+he political cost of eliminating differences.

,"ercoming ationalism/ and traditions.

&erhaps it #ill not pro"ide significant benefits.

0ill cause Standards ,"erload/ for some firms.

Di"erse standards for di"erse places is acceptable.

Harmonization ,ffortsOrganizations involve#

Association of South East Asian ations ASEA!.

1nited ations 1! 2 European 1nion E1!.

International ,rganization of Securities 3ommissions I,S3,!.

International )ederation of Accountants I)A3!.

IASB and )ASB.

International Organization of -ec)rities Commissions IO-CO/.

-ee %eb site http'22###.iosco.org

Established in 4567$ International ,rganization of Securities

3ommissions I,S3, today I,S3, is the leading organization for

securities regulators around the #orld $ #ith about 489 ordinary$

associate$ and affiliate members from about 4:: countries $ and aims

among other things to '

Achie"e impro"ed mar(et regulation internationally.

)acilitate cross-border listings.

Ad"ocates for the de"elopment and adoption of a single-set of high

*uality accounting standards.

International Fe#eration of (cco)ntants IF(C/.

-ee %eb sitehttp*00ifac.org

)ormed in 4566$ International )ederation of Accountants I)A3! aims

to de"elop international standards of auditing$ ethics$ education$ and

training $ In pursuing these goals I)A3 has contributed to the

harmonization process in many #ays as '

Began International )orum on Accountancy De"elopment I)AD!

to enhance the accounting profession in emerging countries. +hat
http://www.iosco.org/http://ifac.org/http://ifac.org/http://www.iosco.org/http://ifac.org/


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#as in response to criticism from the #orld ban( after the Asian

financial crises that the accounting profession #as not doing

enough to enhance the accounting capacity capabilities in emerging

countries .

Started the )orum of )irms to raise global standards of accountingand auditing Details at %%%.ifa#.org!.

, ,)ropean nion *

-ee %eb site http*00e)ropa.e)0in#een.htm

+he European 1nion E1 #asthe E1 #as established by the +reaty of;aastricht on o"ember 4558 upon the foundations of the pre-

existing European Economic 3ommunity$ founded in ;arch 4596

#ith the signing of the +reaty of uxemburg$ and the etherlands!$

and no# E1 3omprising ?6 member states .

+he European 1nion E1 %as #or(ed to harmonize accounting

standards #ithin the E1$ primarily by #ay of t#o directi"es$ E1

directi"es possess the force of la# .

Fo)rth 4irective 1567

a set of comprehensi"e accounting rules co"ering the content of

annual financial statements$ their methods of presentation and

measurement and disclosure. +he )ourth Directi"e built on the

principle of a true and fair "ie#./

-eventh 4irective 1573

re*uires consolidated financial statements for company groups of

a certain size.

International (cco)nting -tan#ar# 8oar# I(-8/

International Accounting Standard Board #as created in ?::4 to

replace the predecessor$ the IAS3 International Accounting

Standards 3ommittee!.

IAS3 #as established in 4568 by an agreement of the leading

accounting profession bodies in 4: countries the 1nited States of

America$ Australia$ 3anada$ )rance$ =ermany$ @apan$ ;exico$

etherlands$ 1nited ingdom and Ireland !.

+he IAS3 harmonization effort from 4568 to ?::4 e"ol"ed in

se"eral phases$ the initial phase #as the issuance of ? IASs$ the
http://www.ifad.org/http://europa.eu/index_en.htmhttp://www.ifad.org/http://europa.eu/index_en.htm


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approach #aslowest-common-denominator$ so many of these

standards allo#ed multiple options.

IASB #or(s to#ard harmonization of international accounting

standards.

+he mission of IASB is to de"elop$ in the public interest$ a singleset of high *uality$ understandable and international financial

reporting standards I)


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Also$ I))alitative characteristics of information

Understandability should be understandable to people #ith

reasonable financial (no#ledge.

Comparability allo#s for meaningful comparisons to financial

statements of pre"ious periods and other companies.


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Relevance useful for ma(ing predictions and confirming existing

expectations.

Reliability free from bias neutral! and represents that #hich it

claims to represent representational faithfulness!.

Definition assets$ liabilities$ and other financial statement

elements are defined.

Recognition guidelines as to #hen to recognize re"enues and

expenses.

eas!rement "arious bases are allo#ed$ historical cost$ current

cost$ realizable "alue$ and present "alue.

"inancial capital maintenance

,ne approach to income measurement. et income represents the increase in net financial assets$

excluding o#ner transactions.

+he approach in 1.S. =AA&.

P#ysical capital maintenance

Another approach to income measurement.

et income represents increase in physical producti"e capacity.

Excluding o#ner transactions.


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Str!ct!re and Content of "inancial Statements

&ro"ides information on presentation format'

3urrent2noncurrent.

Items to be included on face of financial statements.

3ontent of notes.

First $ime (#options of IFR-s IFR- 1/

&ro"ides guidance for first time adoption.

;uch used in ?::9$ particularly in E1.


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$he

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International Harmonization of Financial Reporting (2)