International harmonization of the accounting standards

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Pros and cons of international harmonization of the accounting standards.

The aim of this paper is to discuss the pros and cons of international harmonization of the accounting standards and assess the effect of the EU Fourth Directive on the national accounting in the United Kingdom, the Netherlands, France and Germany. Accounting is one of most important parts of any business to run properly, in many cases instead of the term accounting is used “the language of business”. The accounting profession covers wide range of tasks, but mainly is concerned on organizing, maintaining, recording and analyzing the financial activities of a given company. The main accounting mission is to translate the numbers of the financial transactions into meaningful information for the investors, who would like to know what is the financial status and the future prospects of the company, the shareholders of the companies, who need this information in order to run their business better, this information could also be important for the bankers, who need this calculations in order to lend a credit. Furthermore, the main task of the accountants is to follow and record every transaction of the business, they are dealing with everything, which the company owns or owes. Accounting can be divided into different groups and they are financial accounting, auditing, management accounting and tax accounting. The financial accounting is focusing on the preparation of the financial statements and mainly reporting the company`s financial information of the business. Management accounting is dealing with the analysis and reporting the information for internal use. Auditing is dealing with the financial statements and sharing their opinion whether they are true and fair, tax accounting is concerned with fees, which companies are obliged to pay. But the main issue in accounting is the harmonization of accounting standards. Every organization is preparing their financial statements according to their standards, but in this way will be very difficult for the users to use the financial reports. Harmonization means that many countries are following the same rules and principles in accounting, they are working in harmony and this is the main purpose. Every country has an accounting standard board, which defines the standard which should be followed when preparing the financial statements. If the companies are following strictly this standards introduced and regulated from the boards, this is a clear harmonization of accounting standards.

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Accounting standards shows how particular transactions or events should be noticed in the financial statements. Harmonization is a law and process, which tries to make common accounting standards around the world. Although every country from the EU State has boards, which to regulate their rules and laws, the main purpose of the harmonization is to:

  • Create common laws, regulations, standards and practices and this rules to apply and the main reason is this standard to be used and applied to business, which operate in more than member State.
  • The next idea of the harmonization is to decrease the compliance and regulatory burdens for the businesses, which operate in a national or multi-national level.

European Union`s goals are to reach homogeneity of the laws in the member states, in order to reach free trade and to protect the citizens. The objective is to be made an unification to some extent, but not a vision of total unification. This means that is tried to be reached a relatively partial comprehensive, because they don’t want to make a sole authority of laws. European Union is not focusing on the entire law to be regulate it, their objectives are not be regulated only specific issues and to manage particular situations for particular types of parties. According to Rathore (2009) the harmonization “is to bring about convergence of national accounting standards and international financial reporting standards (IFRS) to quality solutions”, because since “the 21st century the term harmonization is losing ground to convergence”. The best example of harmonization is the formation the European Union, but most specialist share that there is no harmonization project, which reach its end. Basically, the harmonization is designed to fit in different legal systems under a basic framework.

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Since September 2011 the boards are trying to harmonize to some extent the United States standard (GAAP) with the International Accounting Standards (IAS). The boards are motivated to integrate this two standards with the only thought of making equal conditions for global business, based on accountant and auditors, which will take decisions and make opinions over an equal methodology. Many of the specialists consider that definitely this will improve accountability, enhance the economic decision making and decrease the issues with the international transactions and the problems with the exchange rates.

But the accounting standards have many disadvantages. This integration with GAAP and IAS will be very complex, because there are many differences between both standards. For instance, if both standards are going to be harmonized, this means that the government has to change the tax accounting system, because IAS is using Modified Accelerated Cost Recovery System for depreciating assets, while GAAP states that they have to use the straight-line depreciation method. Another negative effect, with this harmonization will be that the US small business will suffer, because they spend more on regulatory compliance and this is an important factor, which will bring them many difficulties to expand and grow. Furthermore, in the US there are different tax laws, banking and financial principles, which govern the business. If both standards will be tried to be harmonized this will be in conflict with the constitution law in the United States.

On the other side, аs so many boards and specialist are trying to harmonize both standards, this leads to many advantages, which definitely will make it easy for global business. Because the international business require uniform accounting standards, this is necessary for easier growth of the companies, the number of the multinational companies, investors and the cross-border listings on the stock exchanges. The first advantage of this harmonization can be named comparability. Investors and the analysts will also benefit from this comparability, because they will rely on a higher level of comparability of the financial statements. At the moment there is a problem with comparability, because different transactions are being used differently in different countries, which lead to misleading. Another important factor of this harmonization is the reducing of the reporting costs. Financial reporting is very expensive, which means that companies, which are operating in different countries have to pay high costs for the preparation of the financial statements in accordance with the accounting principles in every different country, and then they have to pay much more this statements to be consolidated. Multinational business will benefit from the harmonization, because they will be able to prepare only one report and not different reports for every different country and not preparing it individually for each country. Also, the harmonization will benefits the multinational companies, because in that way they will be able to have a systematic view on how their subsidiaries are running. Existence of harmonization will bring to companies equality and there won’t be companies in different countries which will be privileged or unprivileged. Another advantage, which the harmonization will bring is the international credibility. Credibility is an important factor here, because the accountant, investors, auditors and other can easily the company’s performance, based on equal standards, which they well know. This to some extent will lead to confidence that the financial statements and the reports are presented true and fair. Nowadays the harmonization is a challenge and controversial issue, because the harmonization will change the accounting standards to a professional manner. Definitely the harmonization will eliminate the misunderstandings, which rise up in the financial reportings and auditing reports, because due to now the comparability is a serious obstacle for many international investors. Harmonization has a great advantage that will save time and costs to many international investors to consolidate their financial information, having in mind that one report is necessary to meet the international legal practice. Many specialists consider that harmonization is a very simple solution to important and major problems. But one of the serious advantages that the merger of this two accounting standards will bring is that the issue with the cross-border financial report will be solved.

Standardization is another factor, which can help many problems to be resolved, but it seems to be very difficult for implementation, because standardization is a process of developing and implementation of technical standards. Standardization is a factor, which could also bring compatibility, interoperability, safety, repeatability and quality to the accounting world, it can also make easy as forming a custom processes. Standardization is an agreement, according to which all parties, companies, organizations are obliged to follow specific rules and principles set by guidelines. S simple example of standardization is the principle in the United States (GAAP), according to which every companies listed on the U.S. stock exchange are obliged to follow strictly. GAAP was created by FASB to ensure that all financial statements and reports will be relevant, easy to understand, comparable, reliable, consistent and that are presented fairly. Standardization will be very useful in business processes, where the companies need a regular level or quality to be reached by their subsidies. Standardization has many advantages and disadvantages. For instance standardization eliminate duplicate effort by cutting costs and give a great opportunity to companies to take advantage of the economies of scale, when they are purchasing supplies, but the main problem is that the companies may lose this advantages, if it decides to standardize its operations. By standardization many companies may lose their uniqueness, because if a restaurant, which offers more special and specific menu standardize its menu and their menu is predictive, in that way there is a high probability for this restaurant to lose its clients, and this clients to decide to visit restaurant, which offer more variety menus. Another disadvantage factor of the standardization is the probability of loss of responsiveness. This means that if a company decides to expand its business to new markets, standardization may work against them, because if they decide to change something in their business this will take a lot of time and definitely will costs much money. Standardization also could be Unsuited to Some Aspects of Business, because it has major advantages in many areas in the business, but to some extent should be taken into consideration the customer`s needs. Factors as customer serving, pricing, distribution, and advertising should be managed from the local market to be more successful. Another disadvantage of the standardization stifles creativity and response time, because if the standardization is accepted and the rules are entrenched, then is very difficult to be changed. However, the world is changing with every minute, that is why we need a standard, which afford us to make often changes.

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There is huge difference between harmonization and standardization. Standardization, for instance means that McDonald use one of the best ketchups for their products all the world, to some extent this reinforces their brand. But on the other hand harmonization is about consistency. Harmonization is dealing with the common goals and outcomes.

There are six available organizations, which are playing important role in trying to harmonize the accounting standard differences and they are the following:

1.Badan International Accounting Standards Board (IASB)

2.Komisi European Union (EU)

3.Organisasi International Capital Market Commission (IOSCO)

4.Federasi International Accountants (IFAC)

5.Kelompok United Nations on International Standards of Accounting and

6.Kelompok Work in Accounting Standards Organization of Economic Cooperation and Development

Harmonization is a complex process, which will be beneficial not only for the national of multi-national companies, but also to local market and small businesses. In addition harmonization will bring credibility to the accounting world, which means that people working in this business will be able to review the different accounting financial statements and reports. In addition comparability will rеmove any misunderstandings and misleading concerned with the financial statements, whether they are presented true and fairly. Actually, this harmonization is a very difficult process, because it covers many laws to be changed and many problems to be solved. Harmonization of all international standards to some extent is a great idea and will be beneficial to all around the world.

Bibliography

  1. Eisen, P. (2007). Accounting. Barron`s Educational Series Inc
  2. Rathore, S. (2009). International Accounting. PHI Learning