Critically evaluate the effects of harmonization of Accounting standards

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Discuss and critically evaluate the effects of harmonization. Illustrate the effects of harmonization or the lack of it through case studies.


This report is mainly concerned on issues that have taken place during the ongoing process of harmonization of accounting standards in the world over. In fact, there is a lot of research that showing that various reasons of the continuing question about the harmonization of accounting standards either on positively nor negatively. Accounting standards are policy documents that issued by recognized accountancy bodies (Such as IASB) relating to the way to measure, the way to treat and in what way to disclose accounting transactions. Thus, converging these standards arising from a number of reasons, ‘to facilitate a transparent and meaningful reporting of financial information, to reduce accounting alternatives to a reasonable and practical level, to enhance comparability of financial statements in time and space and to encourage consistency in accounting practices’ (Srinivas, n.d.). However, it is found that there are still several issues that going to face during harmonization particularly in current globalized nature of business worldwide. This report is also going to examine the difference accounting system between IFRS and Germany, which accounting standards they have been followed or whether there is a difference of how accounts have been prepared among listed or unlisted company.


Harmonization is aimed for reducing the differences that taken places while processing financial reports around the world. Harmonization is an essential to facilitate, to help to achieve some levels of comparability of financial statement in the way that they are being prepared and presented. As with the globalization, financial statement of national entities are presented to those clientele all crossed the world, instead of serve for the requirements of domestic users. This situation would be more pronounced if a corporation is going to have an expansion to global, to other countries, they may decide to have more than one headquarters, and scattered its production or distribution facilities throughout the world. Its prices of commodity, interest rates or currency exchange values will become linked internationally. There is a problem would occurred that the financial statements prepared using accounting standards of one country might not be able to become understandable in the same sense in another country, which would require them to draw up other financial statements following a different conceptual framework, and this has led to the necessity of harmonization. There are several organizations that have been work to eliminate or mitigate the differences or issues between financial reporting standards and achieve the goal of international harmonization. Once the international harmonization can be achieved, several countries definitely could benefit from it as it would help to improve the access to the international financial markets, even an increase in future investments may be triggered due to the improvement of investors’ knowledge and confidence.

According to Walters(1989), “Harmonization is necessary because standard national financial statements are virtually useless; financial markets in more regulated countries are threatened with a loss of market share; and multinational corporations must prepare multiple reports for different nations they do business in”.

The first and most importance advantage that would flow from the harmonization of reporting standards is the ability to compare of international information (Dudovskiy, 2013). As different sets of financial reporting standards, the way financial statements prepared and presented are different from each other which cause hardly to compare them. If the level of comparability could rise, it would be easier for company to prepare financial statement under one set of rules and investors who understand the financial statements due to the nature of IFRS and make well thought investment decisions which also reduce trade barriers among countries allowing more access to international capital markets. Harmonization is also working for saving more time and money that is currently spent to consolidate the divergence of financial information while there is more than one set of reports is required to comply with the different national practice or laws and in some sense that the tendency for accounting standards has raised throughout the world to an higher possible level and to become more consistent with local social, legal or economic conditions. And this was another advantage that would be achieved since harmonization, which is consistency. The consistency contributes to provide a better understanding among the investors, lenders and other businesses since they would own the ability to predict. Even companies operating in different countries also can use their expertise and systems in all countries that they are operating due to the consistency of the reporting standards.


Achieving convergence in globe in accounting standards is not easy, especially there is a number of issues need to be overcome. International Accounting Standard Board (IASB) is working to harmonize financial reporting and accounting standards across the globe. International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) are created by the IASB to harmonize accounting standards among all the countries around the world. Harmonization is aimed to ensure that the financial reporting around the globe can be prepared by using the same accounting rules or accounting standards. Several advantages can be achieved if preparing the accounts using the same accounting standards, such as to ensure that accounts prepared in different countries is comparable. However, there are a number of issues that harmonization of accounting standards is facing,

First of all, since the increasing globalization of business and capital market, has triggered a demand for a uniform of accounting standards. For many years, all countries developed their own accounting standards, some of them are rules based, and others might be principle-based. They were all different, however, in order to moving towards globalization; these standards were necessary to be harmonized which inevitably will raise the question of rules versus principles. Such as U.S. GAAP (Generally Accepted Accounting Principles) is essentially rule-based with codified array of details of accounting procedure to be followed, whereas International Financial Reporting Standard (IFRS) is principle-based standards. The difference between these two approaches is on the methodology to assess an accounting treatment. Under IFRS, the review of the facts pattern is more thorough whereas, under U.S. GAAP, the research will be more focused on the literature.

Second issue of harmonization will be the developed accounting systems, under different countries with different economic and social institutions, taxation system, political system, business and laws practices, and cultural differences. For example of cultural and language differences, culture and language in the accounting profession should be a means or, a channel, through which accounting standards are adaptable over the world. If investors and creditors encounter difficulties to understand the financial statements, they would be hesitating when they are going to invest or lend funds to such business (Schroeder & Clark, 1995). If the measurement rules for accounting were the only issue among countries, then a straightforward translation would be sufficient to interpret the report and make it universally understood. However, countries also exhibit substantial differences from various perspectives like economic and cultural that preclude only simple interpretations, even though the figures may generated by using the same accounting standards (Disconu, n.d.).

Moreover, it is believed that harmonization of accounting standards would create a situation called “Standard overload” (Choi, Frost and Meek, 1999). They argued that businesses will have to follow with a number of additional costly and complex international requirements while they are still hardly dealing with their countries’ pressure which may come from social or economy.


In general, accounting rules and practices is differed between countries more for individual companies than for groups, which illustrated by financial statement formats and accounting principles. Since several decades of harmonization within the EU and since the IFRS that adopted by EU for the consolidated statements of listed company groups, this part will focus on the several important differences that were still exists. These differences exist both for financial statement formats and for accounting principles.

German General Accepted Accounting Priciples (German GAAP) are principle-based accounting standards that consist of underlying principles so called principles of proper bookkeeping (GoB) which are both codified and non-codified. The source for codified GoB and the majority of further accounting standards is the German Commercial Code (Handelsgesetzbuch, HGB). As a result of lack of legal requirement details for specific accounting issues (e.g. guidance on leasing accounting), additional literature and court decisions interpreting accounting issues were made as an essentially part of the German Accounting System. The German GAAP keep evolved and adjusted gradually to the changes in the accounting environment. Each country’s accounting system has defined its objectives and develops according to that. Hence, financial statements according to the German GAAP are not only prepared to churn out information to investors. They also function as the basis to determine distributable profits which serve to protect creditors of the company. The creditor protection is the dominant objective in Germany. Therefore, because they found that creditors are mainly focus or interested in the capital remaining about how company to strengthen the capacity to repay when due, the German GAAP is more focusing on capital maintenance. When Germany parliament realized that both previous European efforts to harmonize accounting regulation and existing German GAAP cannot meet the expectations or demands of those capital market-oriented companies in German, they start to responded and opened its accounting system to international accepted accounting standards before any European legal measure on the application of IFRS was decided upon. In 1998, listed companies were allowed to prepare consolidated financial statements according to the IFRS or US-GAAP instead of German GAAP. A less rigorous approach has chosen on by Germany when they implement IFRS. For public listed company (listed in any EU Member State), the application IFRS is mandatory to Group Accounts but is prohibited for Individual Accounts; for unlisted company, IFRS is optional to Group Accounts but also prohibited for Individual Accounts.

The recent reform of German GAAP (Bilanzrechtsmodernisierungsgesetz- BilMoG) marked the most comprehensive revision of statutory accounting principles in the last 20 years which aims to establish modern but less complex accounting principles as an adequate, sustainable alternative to IFRS and to improve the information content of German GAAP financial reporting by implementing elements similar to IFRS. This revision reduces the differences between IFRS and German GAAP (revised) in certain areas, but increases or changes them in other areas.

For instance, there is different requirement of components of financial statement between IFRS and German GAAP (revised). IFRS requires that a complete set of financial statement should comprise: the statement of financial position; statement of comprehensive income; statement of changes in equity; statement of cash flows; and notes (include. a summary of significant accounting policies). And there is further requirements apply when accounting policies are applied retrospectively or items are reclassified. Similar to IFRS for consolidated financial statements, as well as for publicly traded companies. For single-entity financial statements, statement of cash flows and statement of changes in equity are not required. It is optional for companies who have to prepare consolidated financial statements to include segment reporting. Publicly traded companies who do not have to prepare consolidated financial statements can add segment reporting to their individual financial statements. Further financial statements include a management report.

Not only the composition, they also define terminologies differently. Such as, the definition of cash and cash equivalent in statement of cash flow. According to the Financial Accounting, Reporting and Auditing services provided, Under IFRS, “cash includes cash on hand and demand deposits; cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent when it has a maturity of three months or less from acquisition date. Cash may also include bank overdrafts repayable on demand but not short-term bank borrowings (these are considered to be financing cash flows).” In contrast, “required by German GAAP (revised) “Cash funds” (defined as first-grade liquid funds) only include cash and cash equivalents. Investments classified as cash equivalents must be readily convertible to cash without significant losses in value and may be subject to only minor changes in value. Cash equivalents therefore generally have maturities of not more than three months, measured from the date of acquisition. Bank overdrafts which are repayable at any time and which are an integral part of an enterprise’s cash management may be included in cash funds.”

In the case of Siemens which is a German based Multinational Corporation with a business portfolio of activities predominantly in the field of electronics and electrical engineering. According to their Annual report for FY2013, “their Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), as well as with the supplementary requirements of German law pursuant to Section 315a (1) of the German Commercial Code (HGB) and full IFRS as issued by the International Accounting Standards Board (IASB).” A true and fair view of the net assets, financial position and results of operations of the group has been given in accordance with these requirements. Whereas, unlike their Consolidated Financial Statements, which are prepared in accordance with the International Financial Reporting Standards (IFRS), they also prepared or disclosed other statements which is based on the recommendations or in accordance with the rules set out in the German Commercial Code (Handelsgesetzbuch), German Corporate Governance Code (GCGC) and German Accounting Standards (DRS), such as Compensation Report or the Stand-Alone Financial Statements of Siemens AG.


It is very difficult to judge the future of international accounting standards. But today, many of the countries are either adopting IFRS directly or adapting them by issuing domestic Accounting Standards in harmony with IFRS. There is also an attempt to harmonize US GAAPs with IFRS (Srinivas .G, n.d.). On the basis of the reported examining, this report further recommends that, harmonization of accounting standards do will bring several advantages to the world over, but meanwhile there still left much effort that IASB and other institutions need to work on since the global convergence towards International Financial Reporting Standards (IFRS) will continuously influences the development of other statutory accounting system. For instance, they may need to put more efforts to reduce the major differences between International Financial Reporting Standards (IFRS) and other national standards issued by different countries. These differences in financial reporting practices between nations make it difficult to compare and interpret financial statements of firms listed in different countries.


IASB has been worked on Harmonization of accounting standards for very long period already.In order to bring about the harmonization of international accounting standards, there still have large amounts of barriers and difficulties that the IASB needs to overcome. However, a number of benefits also can be derived as well which will come from the harmonization. Once it has brought uniformity in the preparation of accounts, the accounts of companies will become more transparent and comparable which in turn will help the investors to make the right investment decision. Nowadays, although the European Union Commission has been declared that ‘all the EU listed companies will use IAS for consolidating their accounts from 2005’, but it still has a long way to go.


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