In answering the essay question it is necessary that I firstly begin by defining what harmonisation is and explaining what it implies upon financial reporting. This understanding of harmonisation will provide a foundation for me to then establish how both the European Union (EU) and the International Accounting standards Board (IASB) have contributed towards harmonising financial reporting. I will be examining both their roles and the extent of their influence upon harmonisation, focusing on their individual work, particularly the Fourth and Seventh EU Directives and the IASB issue of International Financial Reporting Standards IFRS. Following this analysis I will then consider the limitations of the EU and IASB in their attempts to harmonise financial reporting, assessing how their efforts in some cases hinders harmonisation. Lastly, in drawing upon my previous analysis I will evaluate who I believe has been more successful in their approach and in making my judgement taking into consideration key ideas from Thorell and Whittington (1994) as well as those of Hoogendoorn (2006).
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A general definition of harmonisation is recognised as been 'when governments or organisations harmonise laws, systems or regulations agreeing to make them the same or similar' (Oxford dictionary 2009). In the context of financial reporting, 'harmonisation is the process of increasing the compatibility of accounting practices by setting bounds to their degree of variation' (Nobes & Parker 2004). This explanation therefore implies that the purpose of harmonisation is to reduce the discrepancy between financial reports prepared by various countries, thus improving the overall global comparability of accounts. This subsequently allows similar issues to be dealt with in similar ways across national borders (Elliott & Elliott 2009) limiting the deviation within the methods of financial reporting. Harmonisation has become increasingly important with increasing business operations and issue of shares on a global basis; it is pursued both at the regional level by the EU to reduce country differences and a global level by the IASB (Alexander, Britton & Jorrissen 2009).
Having established what harmonisation means to financial reporting I will now look at the EUs principal contributions towards it. The EU has been involved in the issuing of Directives and more recently regulations, with the endorsement of IASs (Alexander, Britton & Jorrisen 2009). The European commission originally launched a company law harmonisation programme with the objective of providing a 'level playing field' for all companies within the Union (Haller & Walton 2003) focusing on regional harmonisation of financial accounts. The major EU Directives that have influenced financial reporting are the Fourth and Seventh Directives (Nobes & Parker 2004). The Fourth Company Law Directive covers public and private companies and its articles include those referring to valuation rules, formats of published financial statements and disclosure requirements (Nobes & Alexander 2008). Its purpose is to ensure annual accounts contain comparable and equivalent information and represent a true and fair view (Alexander, Britton & Jorrissen 2009). This was followed by the Seventh Company law Directive which extended the principles of the fourth directive to the preparation of consolidated accounts (Alexander, Britton & Jorrissen 2009). It addressed the problem of identifying groups and defining which companies should be required to draw up consolidated group accounts (Thorell & Whittington 1994).
Although the Fourth and Seventh Directives contributed to regional harmonisation of financial reports; evidenced by the FEE surveys into published accounts, which concluded a degree of harmonisation had been achieved (Thorell & Whittington 1994), it became evident EU directives were too troublesome and slow to achieve harmonisation (Alexander, Britton & Jorrissen 2009). Firstly the significant number of countries and institutions concerned meant that initial concepts were quickly compromised and as a result a mixture of practices and traditions were drawn from a number of countries (Haller and Walton 2003) an example of this can be identified when the UK and Ireland joined the 'common market' in 1973, resulting in the Fourth directive been amended to introduce the concept of a 'true and fair view '(Nobes & Alexander 2007) a major principle used in the preparation of financial accounts in the UK. This picking and choosing of existing practices clearly hinders harmonisation and evidently does not improve compatibility of accounting (Thorell and Whittington 1994). It can be merely seen as window-dressing existing practices (Thorell and Whittington 1994) for true harmonisation to be successful options are detrimental in the longer term (Thorell and Whittington 1994). Secondly where it provides unrealistic to come to agreement on a single procedure or principle progress was made possible by agreeing to options within the Directive; Directives can be regarded as historical compromise between Anglo-Saxon and continental European accounting systems thus allowing countries to preserve some of their own traditions (Haller & Walton 2003) and therefore not contributing to the comparability of accounts or reducing their variation. Thirdly the contents of a Directive do not have to be followed by individuals within a member states unless and until the contents of the Directive are enacted by legislation within the state (Alexander, Britton & Jorrissen 2009), making the harmonisation process time consuming and preventing international comparability. Moreover each EU directive exists in numerous language versions applicable to its particular member state. Language versions may therefore differ and be interpreted differently (Alexander, Britton & Jorrissen 2009). Divergence between harmonisation financial reporting may therefore be inevitable due to language conflicts and differing interpretations. These downfalls have been identified by the EU, now recognising that global harmonisation has become more important that regional harmonisation, it has instead orientated itself towards aiding international harmonisation of accounts. In 1995 the EU developed an 'Accounting Strategy', to analyse the degree of conformity between the IASs and the content of the European Accounting directives (Alexander, Britton & Jorrissen 2009). In 2001 the Commission published a regulation which required member states to pass legislation to make IAS compulsory for consolidated accounts from 2005( Haller& Walton 2006), requiring all companies listed in the European Union economic area to publish IAS consolidated financial statements.
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Having identified the endorsement by the EU of standards set by the IASB, I will now consider the roles and influence the IASB has had upon harmonisation and judge how successful they have been. The IASB is the successor of the IASC, differing in its structure and governance, currently governed by trustees who are not involved with standard setting, as well as a standard setting board (Nobes & Alexander 2007). The IASB has responsibility for all technical matters including the preparation and implementation of standards (Elliott & Elliott 2009) they are also expected to establish and sustain liaison with national standard setters to promote the convergence of national accounting standards and IAS/IFRS (Alexander, Britton & Jorrissen 2009). The importance of the IASB work towards harmonisation of financial reporting can be seen in three main areas; the adoption of IFRS as national rules, their influence on national regulators and the voluntary adoption of IFRS by companies (Nobes & Alexander 2007). In order to establish the IASB impact upon harmonising financial reporting it is essential I initially look at their predecessor the IASC since some of their previous achievements have facilitated in the IASB success towards harmonisation. The IASC is recognised for its setting of numerous standards and its development of a conceptual framework although in its early years it lacked in power and influence resulting in standards accommodating alternative and acceptable practices (Thorell & Whittington 1994). However in 1989 the IASC adopted the E32 on the comparability of financial statements with the aim of reducing options within the standards narrowing the degree of choice and consequently helping reduce the divergence between financial reports. In addition a significant contribution towards harmonisation resulted from an understanding with the International Organisation of Securities Commission (IOSCO) which focused upon setting a 'core set' of IAS that could be used by stock exchange regulators as a common basis for listing worldwide. In May 2000 the IOSCO endorsed IASC proposed IAS as the basis for worldwide listings, this support gave the IASC greater dominance and authority as a worldwide standard setter, having no formal authority itself securities regulators could assist in adherence with IASs (Alexander, Britton & Jorrissen 2009). More recently the IASB has been involved in improving existing standards and working alongside national standard setters to avoid differences between IFRS and national standards (Alexander, Britton & Jorrisen 2009). Many standard setters have now adopted the IFRSs, with several accounting standards been set jointly by the IASB and national standard setters (Alexander, Britton & Jorrisen 2009). Voluntary adoption has also increased, with many companies adopting IFRSs believing investors prefer financial statements prepared this way. Further support was contributed by the EU endorsement of IAS as a basis for listing in all EU stock exchanges form 2005.
There have however been numerous problems with the implementation of IFRS which may limit their success at harmonising financial reporting. Firstly the influence of the IASB is different in every country, it is recognised the influence of the IASB is more significant in developing countries then industrialised countries as many developed countries already have their own traditions and their own accounting rules (Nobes & Parker 2004), furthermore the implementation of IFRS has been both complex and costly thus making the process time consuming (Hoogendoorn 2006) this not only contributes to harmonisation being a drawn out process but also the costly nature may make many countries and organisations reluctant to adopt IFRS. Comparability is significantly impeded by the lack of balance sheet and income statement formats (Hoogendoorn 2006) again limiting the extent of harmonisation that can be achieved, accounts will not be comparable if a variety of formats are adopted. Fair value and impairment approaches involve subjective estimates of future cash flows, estimates are entity specific and there is sometimes a large range of acceptable amounts (Hoogendoorn 2006). IFRS may also be seen as being too complex making financial accounts difficult to understand (Hoogendoorn 2006) and allowing different interpretations to be made.
Taking a broader view it is apparent that there are always going to be some inconsistencies within financial reporting from a global perspective, harmonisation is a political process (Alexander & Nobes 2007), with some countries believing IFRS undermine their traditional methods of financial reporting (Elliott & Elliott 2009). Additionally the objective of the IASB is in making high quality, comparable accounts available to the public (www1) however it should be noted that in some countries the requirement for public information is limited due to financing of businesses being through banks rather than share issue therefore accounts are prepared with a different objective in mind to that of the IASB. IFRS also leave room for judgement and interpretation, countries come from different cultures and their interpretation will be partly influenced by history and previous practice (Hoogendoorn 2006), therefore some diversity is unavoidable (Hoogendoorn 2006). It could also be argued that true harmonisation may not actually be beneficial as it would probably require a strict rules-based approach to the standard setting process (Hoogendoorn 2006) which may encourage organisations to look for loop holes and discourage countries from adopting IFRS. To conclude the successfulness of IASB in harmonising financial reporting may rely upon the overall objectives for the production of financial statements. Some countries may not perceive a requirement for the need of comparable financial accounts due to lack of share issue funding, furthermore in those countries where comparable accounting is essential, it is clear a more competent method of ensuring accounts comply with IFRS is required.
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In summary having analysed both the EUs and IASBs contribution towards harmonisation it is clear both have experienced success as well as difficulties in their movement towards harmonising financial reporting, difficulty seems to be particularly significant in the area of enforcement for both the IASB and EU . The EUs individual work has been focused upon regional harmonisation between member states, however recognising the problems within its Directives and the need for more global harmonisation has led to its endorsement of IFRS. The IASB has been dominant in international standard setting, their standards can be applied worldwide and any company may wish to implement them. However it has no means of enforcing its standards, which is currently the job of the stock exchange regulators (Haller & Walton 2003). With result many companies still do not fully comply with IASs evidenced in the Financial Times International Accounting standards survey 1999 (Elliott & Elliott 2009). It would appear the work of the IASB is currently more successful in harmonising financial reporting globally however the endorsement of IASs by the EU has given the IASB a more favourable position as a global standard setter. For successful harmonisation to continue it is clear that greater enforcement of IFRS is required both in the EU and globally, which by require greater support from stock exchange regulators or the establishment of a regulatory body to monitor compliance within each country.