25/09/2015

Need for Harmonisation as a Reason for International Differences in Financial Reporting

Need for Harmonisation as a Reason for

International Differences in Financial Reporting
Posted on January 24, 2013 by John Dudovskiy
Harmonization is aimed at reducing differences in financial reporting processes around the
world. The goal is to achieve some level of comparability in the way financial statements are
prepared and presented. When international harmonization occurs, the difficulties for
companies and individuals considerably decrease in presenting the financial statements
and their interpretations. There are several organizations that have been trying to eliminate
the differences between financial reporting standards and achieve international
harmonization. If international harmonization is achieved, many countries would benefit
from it as it would improve the access to the international financial markets and improve
the confidence and knowledge of investors which may even trigger an increase in future
investments.
As mentioned by Wiley (2000) even if the harmonization is achieved, this will not be fully as there still will be differences in
preparation and presentation of financial statements due to reasons such as taxation, culture and the political factors that
shape up the accounting standards in any country.
Harmonization, as being different from standardization, is the process of creating a similar set of procedures by establishing
boundaries as to how much they can differ globally. However, standardization is the process of unifying the reporting
standards to make them the same. However, this is almost impossible to achieve. Therefore, harmonization has been
implemented considering the facts that even the harmonization can not eliminate the international differences in reporting
standards. Garrido, Len, and Zorio, 2002 stated that the globalisation has been one of the main drivers of moving towards
harmonization by eliminating differences. This has been increasingly important in the case of multinational companies
when operating internationally and using different sets of reporting standards which made it less efficient to compare the
financial statements. Another importance for harmonization has been an increasing focus on investors as they benefit from
new IFRS due to investor oriented approach.
The accounting and auditing processes were developed by governments and regulatory bodies all over the world according
to the specific needs of those countries. However, as mentioned by Roussey (1994) the need for one set of international
reporting standards have increased even more as the businesses are going global and growth in cross-border financing are
creating an environment that would benefit from greater harmonization of accounting standards at both international and
national levels. To achieve harmonization, the parties such as investors, business analysts, corporations, organizations,
government bodies should work in cooperation.
There are several organizations that promote the harmonization of IFRS globally. These are just a few of them:

European Union
International Organization of Securities Commissions

http://research-methodology.net/need-for-harmonisation-as-a-reason-for-international-differences-in-financial-reporting/

1/4

25/09/2015

Need for Harmonisation as a Reason for International Differences in Financial Reporting

International Organization of Securities Commissions

International Federation of Accountants
World Trade Organization
International Monetary Fund
World Bank

Advantages of Harmonization
The first and most important advantage of harmonization of reporting standards is to achieve comparability in financial
statements. Due to different sets of financial reporting standards, the way financial statements prepared and presented are
different from each other which make it complicated to compare them. This is even more noticeable in multinational
companies when they operate in more than just one country. If international harmonization is achieved, the level of
international comparability also increases making it easier for companies to prepare the financial statements under one set
of rules; investors who understand the financial statements due to the nature of IFRS and make well thought investment
decisions.
There will be increased auditing efficiency and money saving as companies has to use only one set of reporting standards.
This also serves to reduce trade barriers among countries allowing more access to international capital markets.
Another advantage worth noting is the consistency to be achieved under IFRS as it was one of the objectives of IFRS as a
single reporting standard. The consistency also contributes to better understanding between investors, lenders and other
businesses as there will be the nature of predictability in place. Moreover, companies operating in different countries also
can use their expertise and systems in all countries they are operating due to consistency of the reporting standards.
Another benefit that derives from consistency is the time scale needed to implement in new countries as there will be no
need to learn and adapt to new county specific rules except minor adjustments.

Disadvantages of Harmonization
As mentioned by Ketz (2004), information will be difficult to obtain from domestic accounting standards. He further states
that according to critics of international accounting systems, with different social and economic institutions, political
approaches, tax implications, laws and business practices, a single set of rule which is IFRS is hard to be achieved and even
if achieved, it will be less useful than it has been expected. This indicates that even if international harmonization is
achieved it will be impossible to eliminate every single difference in international reporting standards.
Another disadvantage of harmonization is when there exists different economic environment as harmonization could be
considered useless. If a particular country has its own practice in place, and even though they adapt to use one of the
international reporting standards, it could be more harmful to the country rather than make anything good. This is because
the irrelevant element of the new reporting standard may be of no use and therefore may even introduce ambiguity and
complication to that countrys reporting standards.
The differences make it difficult to distinguish changes in the performance from the effects arising from the use of different
accounting requirements. The aim of accounting harmonisation is to make the financial statements of companies
comparable with the financial statements of companies in other countries. On the simplest level, harmonisation is the
process of bringing international accounting standards into some sort of agreement so that the financial statement from
different countries are prepared according to a common set of principles of measurement and disclosure.
The desirability of uniform accounting has been apparent throughout the lifetimes of many people, however only in the last
twenty years or so has the ease for it become irresistible. One factor mentioned by Alexander and Nobes (2008), has been the
increasing globalisation of businesses. Because the globalisation pushing large companies go multinational, those
companies are operating internationally and following different accounting standards depending on the requirements of

http://research-methodology.net/need-for-harmonisation-as-a-reason-for-international-differences-in-financial-reporting/

2/4

25/09/2015

Need for Harmonisation as a Reason for International Differences in Financial Reporting

companies are operating internationally and following different accounting standards depending on the requirements of
the local government.
The successful completion of Uruguay Round of GATT, leading to the establishment of the World Trade Organization and
expansion of European Union further creates multinationals that require a uniform accounting reporting standards.
As claimed by Alexander and Nobles (2008), the increasingly global nature of capital markets also triggered a demand for a
uniform accounting standards. They claim that if businesses are multinational in scope, it is likely that they will wish and
need to raise their capital in many different countries. And they are assisted in this by increasing competition among the
capital markets, each anxious to increase its share of world business. Indeed, competition among the capital markets may
the strongest factor in encouraging a change of attitude by national regulators towards International Accounting
Standards. And the strongest capital markets see the ability to accept International Accounting Standards as enabling
them to compete more effectively: the need to prepare extra accounts to have a cross-border about the desirability of
allowing domestic companies to use international standards for domestic companies may be content with the stock
exchange quotations in other countries and see no need for a quotation on the domestic exchange.
Moreover, Kirk (2005) also states that the trends towards greater globalisation, the motivation of companies for seeking a
uniform accounting system are strong.
If companies have to prepare their accounts according to several different sets of rules, in order to communicate with
investors in the various capital markets in which they operate, or for other national purposes, they incur a considerable cost
penalty.
The importance of international accounting harmonization is now widely accepted for several reasons (Alexander and
Nobes 2008).
First, the rapid development of international capital markets is strengthening their dominant role as economic resource
distributor. How information disclosed to the market is a central issue in ensuring market efficiency.
Second, the increasing frequent cross-listing of multinationals generate an urgent need for a single universal set of
accounting standards for these firms in order to reduce information production costs and send out a unified, reliable
message to the market.

Third, the activities of institutional investors are becoming increasingly internationalized. Their presence in foreign
markets is forcing domestic listed firms to play the accounting game by global rules.
References
D. Alexander and C Nobes, 2008, International Financial Reporting Standards: Context, Analysis and Comment,
Routladge, London
Kirk, J & Miller, M, 1986, Reliability and Validity in Qualitative Research, Sage Publications, United States of America
R EL A T ED A R T ICL ES :

Measures to Increase

Sources o f Finance

Foreign Direct

Sectoral and

Banking P rofitability
Function

available to SMEs in
China

Investment (FDI) and

the Economy o f China

geographical
distribution o f Foreign
Direct Investment (FDI)

http://research-methodology.net/need-for-harmonisation-as-a-reason-for-international-differences-in-financial-reporting/

3/4

25/09/2015

Need for Harmonisation as a Reason for International Differences in Financial Reporting

in Chi...

Cultural differences as a
reason f or international
differences in Financial
Repo...

Taxation as a reason f or
international
differences in Financial
Reporting

Borrowing and
Provision o f Finance as
a Reason f or
International
Differences in ...

Personal Reflection
Sample: preparing a
Research Report f or
ACCA

Effects o f Financial
Crisis o n Consumer
Spending in UK

Emergence and
expansion o f IFRS

Current Challenges
Faced by International
Monetary Fund (IMF)
and the Ways o f De...

Financing the
Healthcare

This entry was posted in Finance. Bookmark the permalink [http://research-methodology.net/need-for-

harmonisation-as-a-reason-for-international-differences-in-financial-reporting/]
.

http://research-methodology.net/need-for-harmonisation-as-a-reason-for-international-differences-in-financial-reporting/

4/4