In the following Assignment we will discuss the efforts of the EU and the IASC/IASB to harmonise the accounting practices. We will look at the main objectives relating to accounting practices, regionally and internationally, of the two organisations. We will analyse the reasons behind why both the EU and the IASC/IASB worked to harmonise the accounting practices and the achievements for both organisations in harmonising the accounting practices. We will evaluate the work and challenges faced by both organisations and how other organisations such as the IFAC and the IOSCO helped the two organisations to tackle the issues faced trying to reach their objectives of harmonising the accounting practices.
A brief history of the two organisations, and their objectives, in as far as they relate to accounting practices regionally and/or internationally, as necessary.
The EU originally created in the mid 1940's to unite neighbouring countries grew to have a much more significant purpose. In 1957 the European Economic Community (EEC) was created to build an integrated economic market between the six founding members of the EU. The EEC was known as the common market and as time went on and more countries joined the EU, the EEC later became known as the European Community (EC). The EC became one of the main pillars of the EU and its aim was to help create a regional market between membered countries where there is a freedom of transporting goods and labour. As the number of countries increased the EU set directives for each country to follow to harmonise accounting practices, the two directives related to harmonising the accounts are the fourth directive of 1978 and the seventh directive of 19883, which will be discussed further into the assignment. The reason for harmonisation was to help reduce costs of preparing and producing financial reports, and make it easier to compare the reports between the countries to help build the investors' confidence within the market.
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The IASC was formed in 1973 by an agreement of a number of accountancy boards from a number of countries around the world such as; Australia, Japan, USA and UK. IASC built a framework and set a several standards to guide companies how to create financial accounts which can be comparable internationally and make investors more confident in the accounts and market. For over two decades more countries adopted the standards of the IASC, however to create a more effective board to govern the accounting standards of both the national and global accounts, IASC took a structural change. After the structure change, the board gained more power and was renamed as the international Accounting Standard Board (IASB), a board which would operate under the IFRS. Similar to the EU, the IASC/IASB aimed to harmonise the accounting standards internationally to create a "common" market.
A critical evaluation, using relevant academic literature, of the motives behind the harmonising of accounting practices by these organisations.
Harmonisation of accounting practices has become an issue of debate between accounting professionals around the world.
It is argued that accounting policies should be uniform amongst the world; there are a number of ways that Harmonisation will help the economy, these include: helping International Transactions and reducing exchange costs in order to provide perfect information, Improving financial markets through standardizing information and improving government accountability. Harmonising the Accounting policy would help globally through the "level playing field". Lacking free trade will mean that the Accounting Standards will allow the system to be much more precise and less risky for those in trade which will allow investors to make valuable decisions and recourses will be managed more effectively.
Dramatic growth within International Trade and internationalisation of firms has developed new means of communication and the appearance of international competitive forces is worrying the financial market severely. A number of Organisations across the world are trying to reduce the disparity in accounting standards between communities and trying to eradicate its differences (Nair and Frank 1980). The IASC includes 153 accounting bodies which represent 112 countries and have so far issued 41 principles to harmonise and diversify the accounting standards and policies within the different countries, excluding Canada, USA and Japan. IASC represented itself in 1973 and went through a number of phases before coming to its former stage. In 1995 it signed an agreement with the IOSC in order to complete "comprehensive core set of standards" which would enable national listing and Cross-border. This took place due to the recognition of Global Accounting Standards, giving direction to interpret. In May 2000, a massive breakthrough was accomplished when the IOSCO had accepted the 30 core International Accounting Standards.
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Harmonising is basically the difference in practice between countries (Doupnik 1987) and the level of Accounting practices is stronger today than ever before. The IASC is worried with removing needless disparities in accounting principles and practice throughout the globe (McComb, 1982). Devastatingly, the harmonization of accounting practices undergoes a lack of harmonization between the standards at the national level in diverse countries and the formulation of standards by the IASC (Rivera, 1989). A number of obstacles in the process of harmonization have been overcome, progressing to meeting accounting principles and procedures amongst countries have been achieved. Meeting initiatives are now functioning more effectively. There are still many differences which are now reducing.
Nobes (1987) criticised such studies on the grounds that the PW surveys were not sufficiently reliable to support the conclusions drawn. Similarly, a 1988 survey by the International Accounting Standards Committee (IASC) of its members to determine the extent of adoption of IAS has been portrayed as wishful thinking rather than fact (Meek & Saudagaran 1990). So yes, It could be argued that harmonization of accounting practises can have its positives and negatives, Nobes (1987) believes that harmonization of accounting practises is unreliable based on the analysis of PW surveys. Further data is required to draw meaningful conclusions as to whether harmonization is useful in the long run when assessing financial organizations.
The motives behind the harmonising of accounting practices by the EU and IASC/IASB
Harmonising can be defined as in the coordination process, through the establishment of a common set of standards to eliminate the differences between the national reporting guidelines. The main motives behind harmonising are to ensure that financial statements and disclosures by companies are reliable and comparable across companies in different regions(Nobes and Parker 2012). There are several reasons that EU and IASC/IASB want to doing harmonising of accounting practices. Firstly, the motivation for the creation of the IASC was due to the need for a common international language of accounting to serve capital markets(Whittington 2005). Common accounting standards can increase the comparability of the company in different countries and then help investors make their decisions, furthermore to reducing the costs of MNEs in preparing multiple sets of accounts and reports. Harmonisation increases comparability as it remove the need for national GAAPs which are only to individual countries. For EU countries, it gives member countries a conditions of equality as no country is disadvantaged by its national GAAP. This will makes EU investors easily evaluate potential investments in foreign markets in EU. Also For them to build a bridge between the company and market cooperation with other countries and reduce risks (Nobes and Parker 2012). Secondly, reduce costs for enterprises seeking to list their shares in the financial report of the EU in its foreign relations. Such as listed companies access to cheap financing, as well as easier for foreign investors to invest in the company and increase their confidence (Epstein and Mirza 2001). Thirdly, it is helpful for developing countries growing. Developing countries of the European Union member can use a ready-made high quality standards at minimum cost and effort. For example, a developing country may encountered some difficulties and problems during made their standard. If it adopt unified standard which is already made that will avoid the cost and effort they will spend on solve their own problems. To develop high quality and understandable international accounting standards to guide high quality, transparent and comparable information in financial reporting. Thus accounting standards will help the global capital market participants and other users' decision making (Elliott and Elliott, 2009). Finally, Depends on the qualitative characteristics of financial statements made by IASC followed the FASB, In order to forecast the risk, the accounting information must include all these three characteristics: relevance, reliability and comparability. Therefore, the IASB want to harmonising of accounting practices to develop high quality and understandable international standard to guided high-quality, transparent and comparable information in financial reports. Accounting standards will help the decision-making of the global capital market participants and other users, but also to encourage the use and rigorous application of standards ( IFRS Foundation Constitution ias.com, 2010).
The work they have carried out and the challenges they faced in working towards harmonising accounting practices. This section should also show how IOSCO and IFAC have supported the harmonisation efforts of these two organisations.
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The EU and IASB (then IASC) took their first steps towards harmonisation in the 1970's. The EU launched its 'Fourth Directive' in 1978 which set out accounting rules for limited liability companies. The Fourth Directives contained no rulings for consolidated accounts. The Directive set out compulsory formats for balance sheets and the profit and loss account. It also required that all financial statements should give a true and fair view and set out measurement rules for companies.
However, according to Lewis and Pendrill (2004), pre-Fourth Directive differences in accounting systems in EU member states meant it took nearly a decade for the Directive to be fully adopted. One of the problems that led to this was the requirement for all accounts to give a 'true and fair view'. However, this term was only really familiar with UK accountants and other EU states had not really come across it (Lewis and Pendrill 2004). This meant that it took time for those countries to first understand and then use the true and fair view method.
Furthermore, every point in the Directive was not binding and member states could choose whether to adopt them fully or not. For example, member states could decide for themselves if small or medium companies had to act on these rules fully or not. The UK was one of the countries that didn't see the point of small companies having to adhere to these points but other countries did.
In addition to all this the EU gave member states a choice over which balance sheet format they wished to use. There was no single standard format members were required, instead they were given a choice of two formats. This led to a lack of comparability.
The EU's Seventh Directive came into force in June 1983. This concerned rulings solely for consolidated accounts as this was not dealt with by the Fourth Directive.
The major problem faced in agreeing to the terms of the Seventh Directive was that some EU members had no legislation at all relating to the preparation of consolidated accounts. The major obstacle in harmonising methods of preparing consolidated accounts was "defining the circumstances in which consolidated accounts should be required" (Lewis and Pendrill 2004). They eventually settled on the UK method where group accounts were required if a company owned more than half of another company or had legal control over the other company.
The Directive also set out how consolidated accounts should be prepared. However like with the Fourth Directive member states were given autonomy over certain points which again led to a lack of comparability.
Whilst the EU's moved towards harmonisation was focussed on the continental, European level, the International Accounting Standards Committee (IASC) which was succeeded by the International Accounting Standards Board (IASB) has worked to achieve harmonisation on a more global level.
Figure 1: Adapted from International Financial Reporting, A comparative approach; 3rd edition
The above table shows a broad overview of the steps taken by the IASC (later IASB) towards harmonisation. Stages 1 and 2 focussed on issuing general standards that were incredibly flexible which resulted in a serious lack of comparability.
Therefore, the stage 3 from 1989 onwards sought to address this problem especially as cross-border financing was increasing (Gordon 2005).
The next step saw the International Organisation of Securities Commissions (IOSCO) work closely with the IASC in identifying core standards that could be used in cross-border "offerings and listings as an alternative to national accounting standards" (Gordon 2004).
By 1995 the EU had moved away from regional harmonisation and decided to support IASC. After the completion of IOSCO's work with IASC in 2000, the EU announced that all EU companies would have to comply with the IAS/IFRS set out by IASC by 2005.