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International business has been expanding rapidly over the past few decades. With the expansion of the financial market, financial accounting standards get more significant for a company. However, the emergence of transnational corporations and technological advancement has changed the requirement of accounting standards. Since each country has different accounting standards, there is a trend to adopt a single body of internationally accepted financial reporting standards.
This paper first introduces the development of the national and international standards, particular discusses the history between IASB and FASB .Secondly, it defines the Harmonization, and especially explores the advantage and disadvantage. Finally, the paper provides an explanation of how Convergence of Accounting Standards work in a Global Environment.
1Background of the IASB
The International Accounting Standards Board (IASB) is a sector body that is composed of international members who set the standards for international companies (Financial Accounting Standards Board, 2010). (Deloitte Global Services, 2010). IASB was established in 2001 and is based in London, United Kingdom. The Board members come from nine countries and they come from a variety of backgrounds and bring diverse credentials and experiences to the board. The IASB's goal is very clear to develop a set of high quality global accounting guidelines for financial statements that are relevant for creditors, investors and decision makers. The IASB also joint work with national accounting standards agencies to make sure that everyone is in agreement around the world.
International Accounting Standards Committee (IASC) was recreated in June 1973 as a result of an agreement by different countries, such as Australia, Canada, United States, and so on.(Camfferman and Zeff, 2007 ) The IASC treated the task of reducing the differences in accounting practices across countries as the main objective. The name of the process was Harmonization which was increased comparability of financial statements in various countries. However, it was replaced with the IASB in 2001.The original committee IASC created International Accounting Standards (IAS). After that, the IASB created accounting standards today known as 'international financial reporting standards' (IFRS) which replaced IASs.
This harmonization is needed due to the globalization of businesses and services and increase in cross-border investments. According to Samir S. Mogul(2003), harmonization of accounting standards can be defined as the continuous process of ensuring that Generally Accepted Accounting Principles (GAAP) are formulated, aligned and updated to international best practices with suitable modifications and fine tuning considering the domestic conditions.
The general motive of accounting harmonization is to make financial statements comparable from companies in different countries. Especially, as if there are no logical conflicts, it allows for different standards in different countries. However, every coin has two sides.
It is possibility of Harmonization of accounting standards. Firstly, the economic operation makes the convergence of international harmonization of accounting standards possibility. ç›®å‰¼Œä¸-ç•Œå„å›½å¤å¤šé‡‡ç”¨ä¸åŒç±»åž‹çš„å¸‚åœºç»æµŽä½“åˆ¶ã€‚ At present, most countries around the world use different types of market economic system. å…¶å…±åŒç‰¹ç‚¹æ˜¯å¤åŠ›åŸ¹è‚²å¸‚åœºè®©å¸‚åœºåœ¨èµ„æºé…ç½®è¿‡ç¨‹ä¸èµ·åŸºç¡€æ€ä½œç”¨ã€‚ The common feature is developing the market in resource allocation to let the market play a fundamental role in the process. The way ofçŽ°ä»£å…¬å¸æˆä¸ºä¼ä¸šçš„ä¸»è¦ç»„ç»‡è¡¨å¼¼Œå›½å®¶ä¸»è¦é‡‡ç”¨ç»æµŽæ‰‹æ®µå’Œæ³•å¾‹æ‰‹æ®µå¯¹å®è‚ç»æµŽå®žæ-½ä¸åŒçš„ç¨‹åºçš„å®è‚è°ƒæŽç‰ç‰ã€‚ç»æµŽè¿è¡Œæ-¹å¼çš„è¶‹åŒä¸ºé‡‡ç”¨ç›¸åŒæˆ-ç›¸è¿‘çš„ä¼šè®¡åŽŸåˆ™ã€ä¼šè®¡æ-¹æ³•æä¾›äº†å¿…è¦æ¡ä»¶ã€‚ Economic Operation provided the essential condition for adopting the same or close accountant the principle. In addition, governments and organizations increasingly recognize the International Accounting Standards to carry out coordination activities; in the formulation and revision of national accounting standards, the full reference and adoption of internationally accepted accounting practices. è¿™ä¸ºä¼šè®¡å‡†åˆ™çš„å›½é™…åè°ƒæä¾›äº†çŽ°å®žçš„å¯èƒ½æ€ã€‚ This provides a realistic possibility for international harmonization of accounting standards.
Secondly, due to among the political, economic, legal, cultural and educational exchanges become more frequent, increasing exchanges between various groups, it creates the external environment for international harmonization of accounting standards. Finally, with the increasing number of international and regional economic, political organizations, a series of international and regional professional accountancy body (including the IASC, ICAC, IAA, CAPA, etc.), international accounting and reporting Standards Working Group of Experts, the International Accounting and Reporting Standards Ad Hoc Intergovernmental Working Group of Experts set up, etc., and they are engaged in hard work, both of them create the conditions for international harmonization of accounting standards (http://www.accsky.net/article/sort082/sort083/info-13708.html)
There are some benefits of Harmonization. With the harmonization of reporting standards, it would be easier for multinational companies to fulfill the disclosure requirement for stock exchanges around the world. (Paul Diaconu,2007) The harmonization of accounting standards will help the world economy in the following ways. Firstly, it is easier for MNCs and international accounting firms to transfer accounting personnel to other countries. It can evaluate the performance of a multinational company who having subsidiaries and each country has its own set of GAAP. Secondly, it is convent for companies to access foreign capital market. It would also help in raising foreign capital as investors, financial analysts and foreign lenders will be able to make clear of the financial statements of foreign companies (Samuels and Piper, 1985) and they could make the wise investment decision through compare the investment opportunities. In addition, it also reduces the capital cost and consequently, improves the performance of a company. Thirdly, it is simplified for MNC's the evaluation of possible foreign takeover targets. At last, due to some counties do not have adequate codified standards of accounting and auditing, It is beneficial for them to international accountancy firms with clients of firms, which have at least one foreign subsidiary.(Nobes and Parker 2002) because will allowed the comparisons without any other compilations.
In spite of the advantages, Harmonization still has negative effects. First of all, there is no need to force all companies worldwide to follow a common set of rules. (Mc Graw-Hill,) It would lead to a situation of standards overload, which could increase the cost of the preparation of accounting information of enterprises. For example, after the outbreak of Enron, there was a change happened that a rule-based turned to the principle-based. To be sure, rules-based accounting standards contain a large number of exceptions and so on. Secondly, significant differences in standards currently exist, such as political cost of eliminating differences. Diverse standards for diverse laces are acceptable.
2.1 convergence and Harmonization
From the surface of a single sense, the "Harmonization " means that the decrease on the basis of recognition of differences between an increase in common, while "convergence" means that ultimately the same, by the Harmonization to convergence, but increase the target standards. But from another perspective, the ultimate goal is to coordinate and implement uniform and consistent development of international accounting standards, its time may be longer or shorter, while the convergence is in the affirmative on the basis of real differences in the progressive realization of the same, may be a long gradual process.( Xiaoming,SONG ,2010)
Many accounting researchers have defined the harmonization of accounting. Salter (1995) thought harmonization is to reduce differences in accounting practices between countries. However, Arpan and Radebaugh believed that harmonization is setting the limit of the accounting practices in order to compare the financial statements.
3Convergences Conceptual Framework
3.1Definition of Conceptual Framework
The full name of Conceptual framework is "the concept of financial accounting and reporting framework (CF)". Accounting to Existing accounting standards, high-quality financial accounting conceptual framework could guide the development of new accounting standards; deal with new accounting problems which have never happened before.( Jinruo ,zhang2007)
Paton and Littleton (1940) indicated a description of the company's accounting should be made on the basic of building a framework. The accounting theory should be coherent, coordinated, internally consistent rationale. The coherent, coordinated, internally consistent theoretical system "became the financial accounting conceptual framework to develop guidance Ideas and quality evaluation criteria.
The early years of IASC, The Financial Accounting Standards Board (FASB) was always believed that the Accounting standards they have developed were the highest quality accounting standards in the world. Even IASC improved the comparability of the comprehensive revision of existing standards, making it to be the Core Standards, FASB still reluctant to cooperate with the IASB to seek the convergence of accounting standards. (Jinruo ,zhang 2007)
Around the beginning of the new century, a series of financial scandals broke out in U.S. Many organizations in different countries started questioning the GAAP standard- setting rules. With the FASB's reputation got down, the IASB were growing rapidly. In the same time, US began to reflect on its GAAP Because of the change, Americans were concerned about the how to keep the charm of the U.S.capital markets. After careful consideration, the U.S. FASB decided to cooperate with IASB as a super power in order to get the greatest degree of control to access to IASB. Meanwhile, if IASB want to achieve greater success, it must strengthen work with FASB. In this way, how to improve the quality of accounting standards became an important thing for IASB and FASB. (Ruozhang, J, 2007)
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) currently continue their efforts to converge their standard into a single set of high-quality financial reporting standards to eliminate a variety of individual differences between United States Generally Accepted Accounting Principles ( U.S. GAAP) and the International Financial Reporting Standards (IFRS) (Schroeder, Clark, & Cathey, 2005). The goal of this project is to regulate accounting standards and principles while enhancing consistency, comparability, and efficiency of financial statements produced in global financial markets.
In October 2002, the FASB and IASB announced the memorandum of understanding ("Norwalk Agreement"), marking a significant step toward formalizing their commitment to the convergence of the United States and international accounting standards (Convergence with the International Accounting Standards Board (IASB), 2010). Under the "Norwalk Agreement," the FASB and IASB acknowledged their commitment to the development of high-quality compatible accounting standards that can be used for both domestic and cross-border financial reporting. They also committed to use their best efforts to make their existing financial reporting standards compatible as soon as practicable, and to synchronize future work programs to make certain that compatibility is achieved and maintained (Schroeder, Clark, & Cathey, 2005).
3.2 Convergence of Accounting Standards
Global convergences of accounting standards are products to a certain extent of capital market. Before that, it was the international accounting harmonization connected to the national accounting.
Recently, with corporations expanding in many global markets; it is crucial that the two boards (FASB and IASB) improve on their relationship G20 met again to call for the acceleration of global convergence. They hoped the international accounting bodies to make their great efforts to accomplish a single set of high quality, global accounting standards and achieves their convergence project by June 2011. (News from
However, it is not easy to Convergences Conceptual Framework. Both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) take the responsibility to develop the standards and methods for financial accounting. In addition, the structure of them is similar. The main difference is that the IASB deals on an international level and the FASB on an American. The IASB has to contemplate how global businesses make decisions and operate financially. US. GAAP is the laws of accounting in the United States. They govern how accountants measure, process, and communicate financial information about companies to the majority of Americans (Horngren, Harrison, Jr., & Bamber, 2005). Similarly, IFRS are principles, standards, interpretations, and the framework adopted by the IASB, stating how particular types. FASB and IASB have undertaken several initiatives to aid in the convergence of common standards, however, five areas take precedence: financial instruments, revenue recognition, leases, statement of comprehensive income, and fair value measurement. These areas require immediate attention because there is vast divergence between GAAP and IFRS.
There are a lot of different between the FASB and the IASB. For example, they argued about how to determine the initial recognition of the fair value. IFRSs defined the liabilities fair value as defined as "pay" amount, SFASl57 defined as "transfer" price. SFASl57 indicate that purchase price and sell price is different from the initial recognition of the transaction price ,and it do not represent the fair value all the time; and IAS39 have pointed out that the transaction price at initial recognition of financial instruments is the best evidence of fair value. A comprehensive, uniform guide to the fair value measurement plays a significant role in IFRSs. Since the fair value of the guidelines in more applications, the problem which lack of uniform guide becomes prominent. After the financial crisis, people argue a lot about the fair value measurement model. In the failure of the circumstances, the fair value leaded the financial institution to write down too much by market capitalization, causing loss and decline in capital, thereby the majority of financial institutions sell assets to make the market trading prices fall. In that way, there was no doubt that fair value was contributed to the damage the financial crisis. The current financial crisis exposed the disadvantage of the fair value method, which force countries to improve the guideline. (http://www.cei.gov.cn/loadpage.aspx?Page=ShowDoc&CategoryAlias=zonghe/ggmflm_zh&BlockAlias=zjzjsd&filename=/doc/zjzjsd/200804242389.xml)
With the rapid expanding of business, companies had to adapt to the changes due to the different accounting standards. Besides, there has been a tremendous change in the market place, which leads people to develop the International accounting standards. Even the humanization has a number of disadvantages; the IASB need to ensure the uniform application of accounting standards between different countries. From IASC to IASB, the Harmonization of accounting standards, in spite of the long-time process, there is a trend that convergence framework need to be implemented between IASB and FASB. Currently, there are still differences between IASB and FASB, such as the recognition of fair value. People should catch up with when the change occurs. In that case, it is necessary to stay on the top of the new regulations.