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International Harmonization of Accounting Standards

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International Harmonization of Accounting Standards
Table of Contents
  1. Introduction
  2. Discussion
  3. Recommendations
  4. Conclusion
  5. References

Introduction

Considering the numerous financial transactions that occur daily across the globe, it is crucial to adopt accounting as a tool for evaluating these transactions. Therefore, global financial transactions must adopt international accounting standards that will create a common platform for conducting business. The main function of accounting as a field of study and a career is to provide financial information about economic entities that are crucial in financial decision-making. Therefore, accounting should function within a wide scope, which incorporates various parties that engage in international transactions. Of interest are the United States’ accounting standards, U.S.-GAAP, and the European Accounting Standards, which have different core principles and thus limit trade and financial transactions between the two nations. The growth of international trade and the rapid flow of goods and services have triggered economic integration among neighboring countries. The narrowing of the gap between buyers and sellers has attracted interest concerning the establishment of uniform international accounting standards. The conceptual frameworks of international accounting standards include mutual recognition, reconciliation statements, and standardization of global accounting principles.

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Discussion

The international process for the harmonizing of accounting standards started around 1960. The recent development indicates that the harmonization process is still ongoing. There have been increasing agreements on issues that previously caused deadlock to the process. Although the harmonization of global accounting standards is vital, the description of the status quo in the harmonization process is vague (Benston, 2006). The harmonization of accounting standards should define various aspects of accounting so that the preparation of financial statements from different countries occurs in accordance with a stipulated set of principles of measurement and disclosure. In this regard, uniform standards will ensure the synergy of accounting principles from different parts of the world. Concerning material harmonization, accounting standards and practices across the globe should apply similarly to different enterprises from different countries. In consideration of the aspects of formal harmonization, relevant bodies should incorporate in the harmonization process the similarities and diversities exhibited in accounting standards for different countries, economic blocks and groups (Choi, 2003).

Another aspect of the international accounting framework is the mutual recognition of accounting standards. In this regard, the financial statement of a country should be acceptable globally. This approach can ease the complexity associated with global accounting, which entails the interpretation and reorganization of financial statements from different countries. Such an aspect of mutual recognition in financial statements already exists in some countries. For example, there is mutual recognition between accounting standards in the United States and Canada. This implies that any company whose accounting statements meet the criteria of the United States’ accounting regulations can easily operate within the Canadian market regulations. Thus, the mutual recognition of accounting standards is possible among the parties in this case. One of the major drawbacks of the mutual recognition of accounting statements is that both the developer of the statements and the end-user must be familiar with the two different sets of accounting standards. In this regard, it is arguable that mutual recognition is only possible between countries with similar core accounting principles. For example, it is considerably difficult to apply the mutual recognition of accounting standards between the United States and Europe due to the diverse accounting principles within the two nations. Although European stock markets accept companies’ financial statements based on the United States accounting principles and regulations, such companies cannot access crucial capital markets in the United States.

Reconciliation is another crucial aspect of an internationally harmonized accounting framework. It allows foreign companies to prepare financial statements based on the accounting principles and regulations of their offshore-entities host countries (Garner et al., 2008). However, the companies have to provide a reconciliation statement between diverse accounting standards for different countries. In this regard, considerations entail aspects such as the net income and shareholders’ equity of a country and their comparison to the standards for other countries. Reconciliation aims to indicate major divergences between accounting standards of different countries. Reconciliation is crucial because it enables foreign investors to receive financial data about assets and profits relating to their investment in another country based on that country’s accounting principles. For example, it is possible for companies that use International accounting standards to enroll in the United States’ capital market if they can prepare reconciliatory accounting statements from the perspective of the United States’ GAAP. Reconciliation is less expensive compared to the preparation of complete accounting statements in accordance with foreign principles of accounting. However, a reconciliation statement cannot provide an absolute financial description for a company since it only provides a financial summary.

Another significant aspect of the harmonization of international accounting standards is the concept of a standardized accounting framework. The main objective of accounting standardization is to establish a common platform for various accounting tasks. The realization of financial uniformity is beneficial to all concerned parties since various aspects of accounting will have synergy. In this regard, it is possible to create harmonized accounting practices that will remain viable from the global perspective. The realization of harmonized accounting standards will facilitate easier financial transactions among different countries. This will considerably boost international trade since there will be minimal cases of time wastage in the preparation of reconciliation statements, which have limited information concerning the financial overview of a company. An aspect of uniformity in accounting standards would mean that similar accounting principles, regulations, and practices would apply to all the parties in the global market.

Recommendations

A large number of international companies exhibit minimal interests concerning the need to conform to accounting regulations and standards in countries where they intend to invest. However, research shows that companies may considerably benefit from the aspect of uniform accounting standards in both the local and international markets. A common approach towards all the financial reports for a certain company gives the company an appropriate platform for conducting performance evaluations (Godfrey & Chalmers, 2007).

Moreover, this approach is less confusing and minimizes mistakes that may arise during the preparation of financial statements. A uniform accounting approach allows the use of one set of accounting principles in various jurisdictions and capital markets. In this regard, companies can minimize their operating costs because the preparation of consolidated statements is easier unlike that of accounting statements, which adopt different approaches. This approach will improve the verification of the credibility of external financial reports submitted to a company’s headquarter. Uniform accounting standards eliminate the variation in performance figures for a company with entities in different countries. International companies can considerably minimize the costs that arise from the preparation of financial statements, which have to conform to the accounting standards of different countries, by adopting global accounting standards. Thus, international entities will easily access major financial markets, which will make it simpler for them to conduct business in the worldwide market.

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From the end user’s point of view, uniform accounting standards are advantageous since users of financial statements such as investors, banks, or entrepreneurs do not have to analyze different versions of financial reports for a given company. Uniform financial statements enable investors, banks, and entrepreneurs to buy, sell or postpone investment plans relating to a company. Furthermore, uniform financial statements enable end-users to compare varying performances by a company with entities in different countries. Thus, it is easier to create reports concerning a particular financial transaction irrespective of the country in which it occurred. In other words, an accounting uniformity can create effective financial comparability and compatibility between companies across the globe. It would make it easier for banks, investors, and financial analysts to make informed decisions. The possibility of financial comparability between companies leads to improved understanding, low risks and increased efficiency concerning the selection of investment opportunities (Most, 1993). A significant percentage of the users of financial statements commonly encounter problems concerning the interpretation of the provided information due to the production of such information under nondomestic accounting standards. Most financial users claim that the harmonization of accounting standards to meet a global perspective will facilitate their interpretation of financial statements. In this regard, they can make appropriate decisions based on comprehensive information derived from various financial reports.

Conclusion

The harmonization of global accounting standards is a crucial step towards the streamlining of trade in the global market. This is because uniform accounting standards will create a well-developed and well-functioning international capital market whose functioning is comprehensible to any interested party. Using the information obtained from standardized financial statements and reports will allow companies and investors to generate funds and capital for investment through the international market. This is an essential precondition for a well-developed economy. Furthermore, it is appropriate to conclude that the harmonization of accounting standards is a complex issue that must involve numerous consultations if it is to succeed. Although the process may be slow and entail challenges such as disagreements and conflicts among the participants, the benefits associated with the realization of its objectives are numerous.

References

Benston, G. J. (2006). Worldwide financial reporting: the development and future of accounting standards. Oxford: Oxford University Press.

Choi, F. D. (2003). International finance and accounting handbook (3rd ed.). Hoboken, N.J.: J. Wiley.

Garner, D. E., McKee, D. L., & McKee, Y. A. (2008). Accounting and the global economy after Sarbanes-Oxley. Armonk, N.Y.: M.E. Sharpe.

Godfrey, J. M., & Chalmers, K. (2007). Globalisation of accounting standards. Cheltenham, UK: Edward Elgar.

Most, K. S. (1993). The future of the accounting profession: a global perspective. Westport, Conn.: Quorum Books.

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