UNIT 5 INTERNATIONAL ACCOUNTING HARMONIZATION

Main o o o o o topics: General aspects regarding accounting diversity Conceptual approach for accounting harmonization Accounting harmonization forms Formal harmonization : national and international approach Material accounting harmonization the major desideratum of the harmonization process o General conclusions

GENERAL APECTS REGARDING INTERNATIONAL ACCOUNTING DIVERSITY Accounting, in the main, is a technology applied within a variety of political, economical and social contexts. All the time, these aspects have had national valences, as well as international ones, but beginning with the 90s, the globalization of the accounting regulation and practices gained a certain importance, such that in the national vision regarding financial reporting and the accounting system can no longer be sustained. In this way, due to the development of certain activity fields, the existence of a global accounting environment was reached, in which more and more frequently, the accent is put upon unity at the level of financial reporting, in maintaining the national diversity at a certain level context. Within the accomplished research, Nobes and Parker (2006) have identified a series of activity domains that have recorded a certain determinant evolution for the global accounting environment. From this we mention: ->Major political events like the global domination of the US and the extension process of the European Union. ->Economic globalization, including the process of liberalization and significant increase of international trade and foreign direct investments ->The appearance and manifestation of the financial global markets ->The typology of the entities over the property, including privatization process, registered at the level of certain states ->Modification occurred in the international monetary system level ->The significant increase of multinational companies (MNEs) Within a global economical environment found in a permanent movement, accounting and accounting systems, national or international couldnt remain indifferent, understanding this fact as a certain state of passivity, of independence actually, reporting to the regional and/or global economic manifestations. Practically, we can appreciate the modifications within the global economy have generated a propagation effect within the accounting and financial reporting sphere, determining in this way a global accounting environment considered to be in a permanent modification, changing and evidently, development. Such a state, when lacking a movement control, generates significant amplitudes in the time line evolution of the analyzed environment. The effort to attenuate or to control these amplitudes is known in the international accounting sphere as harmonization. Taking into consideration that the domain that is often disputed at an international accounting diversity level is the one of the financial reporting, on the one hand, because of the national regulations and on the other hand, because of the typology of the categories of users of present financial-accounting information on different countries, that could be analyzed on one point. In case we elaborate a complete typology of the differences found within the accounting systems, we have to deal with two large categories:

a) Differences regarding the presentation, recognition and measurement of the accounting elements b) Differences regarding the financial-accounting information perception and rendering Under these circumstances we estimate that accountancy is a technology that applies in many political, economical and social contexts, but starting with the 1990s, the globalization of regulations and of accounting practices developed a particular importance, in conclusion, the national vision of the financial reporting and of the accounting system cannot be supported anymore. This way, due to the evolution of these activity domains (political, social and economical), we assist to the creation of the global accounting environment, where we focus more and more on the unity concerning the financial reports, in the situation of maintaining at a certain level the national diversity. The differences in the sphere of financial reporting are thought to be normal, and this fact is due to a series of determining factors, either in a positive way or in a negative one. Apart from these approaches, we express our beliefs that there is a relevance point beyond which the international accounting diversity becomes a determining factor opposed to the harmonization process. According to this point, the accounting diversity can have a positive role, becoming a stimulus of the accounting harmonization process, in a way where the dimension of the diversity doesnt represent an obstacle in the elaboration of a language of accounting globally accepted. All the elements considered to be determining factors of the accounting diversity generated a real discussion between the authors of the studies that dealt with such problematic, because it is difficult to establish if a certain element can be labeled as cause of the diversity or its consequence. A synthesis of the accounting diversity determining factors, according to the most recent approaches, can be thus developed: The degree of global economic integration The finance resources The politic and legal system The fiscal system The accountant status The culture The language of accounting Any other possible external influences can be placed in a different category

CONCEPTUAL APPROACH FOR ACCOUNTING HARMONIZATION If we focus on the conceptual approach of the accounting harmonization, the convergence and the standardization we will notice there is in the technical literature a significant diversity of these processes visions and dimensions specific for the international accountancy. Apart from these concepts, we can highlight the fact that the major purpose of the international accounting harmonization is very important because the variation of the international accounting practices is very large. Defining the accounting harmonization concept and especially the material harmonization one is often pretty difficult to realize. In this concept, Herrmann and Thomas assumed an attempt (1995) that has defined the material harmonization concept from two different perspectives, as follows: Harmonization is defined under the similarity aspect regarding the frequency of the option for a certain accounting nature policy at the level of several selected states. According to this acceptation, the harmonization process is realized when

the companies from each selected state opts for the same accounting nature policy, with the same frequency Harmonization is defined by the degree of concentration of a certain option for a certain accounting nature policy. Based on this reasoning, the harmonization degree raises together with the increase in the number of companies that opt for the same accounting nature policy. On the other side, if it were to define the material harmonization we can state that it represents that process in which the diminution of the accounting alternatives and options level is wanted, fact that represents an increase in the harmonization degree of the accounting practices and implicitly, of the comparability degree. If we start from the statement that the harmonization is a process to a harmony state, and the last one is a state of fact, than we can state that the material harmonization is indeed the process of increasing the degree of comparability between regulations and practice, and the state of harmony is attained when the variance of the differences between the two elements remains relatively constant. ACCOUNTING HARMONIZATION FORMS We sustain the approach according to which the existence of a single set of accounting regulations globally accepted represents a desideratum hard to achieve, but the harmonization need of the accounting systems and the premises of a spontaneous movement support the hypothesis according to which reducing the differences between the accounting systems represent a possible project for future researches. At the base of such a process must be found the two major manifestation forms of the accounting harmonization process formal and material harmonization. The difference between the definitions of the two harmonization forms is clearly observed by Fontes et al. (2005), who sustain the idea according to which the differentiation between the formal and material harmonization is very important. Thus the formal harmonization refers especially to the way the accounting standards are elaborated, and the material harmonization focuses on the level of accordance and comparability demonstrated in the present accounting practice as opposed to the process of implementation of the accounting standards, within the national accounting systems. Further on, we can state that in fact the formal harmonization is a necessary first step towards the material harmonization. Although there are alternant solutions and realities, we sustain the idea according to which hitting the target of a financial reporting practice globally accepted must pass through the intermediary phase of accounting regulations harmonization. On the other hand, the studies done by van der Tas (1988) differentiate the formal harmonization of the material harmonization and the spontaneous ones. According to this approach, the formal harmonization is in fact the harmonization of the existing accounting regulations; the material harmonization refers to the accounting practices influenced by the regulations or by the market forces, while the spontaneous harmonization represents a subcategory or a particular form of the material harmonization. The spontaneous accounting harmonization can be seen as a deviation or an alternative to the natural evolution of the accounting harmonization process, based on the formal harmonization-material harmonization relation. Such a situation appears when there are reiterated deficiencies during the regulations harmonization process or when its course rhythm doesnt respond to the conformity and adjustment need of the financial reports, come from the accounting practice and reality. On the other hand, we can estimate that the spontaneous harmonization is a response reaction to the need of accounting harmonization coming from the accounting practice or, in other words, the

spontaneous harmonization is a result of the market forces and not an effect of the accounting regulations and of the process of their harmonization. FORMAL HARMONIZATION: NATIONAL AND INTERNATIONAL APPROACH The formal harmonization began long before this problematic made the object of the researches in the domain of international accounting, once the financial repeating in northern countries, at the beginning of the 1930s. The concept of formal harmonization refers to the way the accountancy standards are written, which actually implies a direct reference to the legal and quasi legal aspects of this process, unlike the material harmonization which mostly refers to how frequent the politics, the methods and the treatments provided in the accounting regulations are applied in practice. If we take into consideration the characteristic elements of this process, we can state the idea that the formal harmonization represents a process of wide scope, with a high complexity level, based on a unit of factorial influences that usually come off between two sets of accounting regulations, no matter their amplitude. The concerns in the domain of accounting harmonization measurements, on a national, regional or international scale represent actually a normal issue of fact, which through the results obtained may contribute to achieve the desideratum afferent to the existence of a set of accounting standards globally accepted or to the development of accounting globalization process. Within these conditions, we can state that in the sphere of formal harmonization there is the necessity to realize more empirical or descriptive researches in order to understand, on one hand, if the process of accounting harmonization must continue, and, on the other hand, if its reprise proves necessary, the way this harmonization process must be implemented on a national, regional or international scale. MATERIAL ACCOUNTING HARMONIZATION THE MAJOR DESIDERATUM OF THE HARMONIZATION PROCESS As long as the organization and the presentation of financial situations in different countries is influenced by the existence of different sets of regulations, as well as the existence of certain differentiated practices, the issue of material accounting harmonization can be considered as a maximum actuality one. To better understand the material harmonization process it is appreciated to be of a major importance the ability to identify the impact that the change of accounting options and afferent policies have upon the degree of comparability of the practices at an intra-state level as well as at an interstate level. Going further on, we can consider that a special importance is allocated to the degree of influence that the inter-state situation has over each national accounting system involved in an accounting harmonization process at a practice level. The harmonization of the accounting practices tends to become an important factor into attaining the desiderata of a common market existence, fact that can have significant consequences especially at a regional level. If such an acceptation is real then we can foresee that the political factor tends to obtain a decisive importance in accounting harmonization realization process. At the level of the realized studies shows that the European Directives have proven that they play an important role in realizing a significant approach to the national accounting standards, at the level of the member states, and also at the level of the candidate states of EU member or in the case of the states that are in close relations with the member states. The issue of material harmonization, irrespective to the level we report to, has to be regarded with a professional reasoning based on empirical evidence, because there are the tendencies that at a conceptual level the maximum degree of harmonization to be associated with an absolute level of compatibility.

A maximum harmony situation is obtained when all the companies from all the states in the world use the same accounting method. Actually, this desideratum is surely impossible to realize. This is why we consider the justified the identification of a significance threshold over which the degree of comparability between the practice and the regulation attains a level considered satisfactory, by the beneficiaries or users of the financial accounting information. Regarded to a global perspective, the accounting practices harmonization issue tends to become, if it isnt already, an integrated part of what is called globalization or globalization phenomena. This process with global valences has generated a situation according to which companies are no longer limited in identifying the financing sources and investment activities, to the level of their home country. If we propose to define the material harmonization we can state that it represents that process where the diminution of the alternatives level and accounting option is intended, what means an increase of the harmonization level of the accounting practices and implicitly of the comparability level. On the other hand, starting from the statement that the harmonization is a process that leads towards a harmony state which afterwards becomes a real state, then we sustain the idea that the material harmonization is actually the process of the compatibility level increase between regulations and practice and the harmony state is reached when the differences variation between the two elements is contestant. For a better understanding of the material harmonization process it is very important to be able to identify the impact the modifications of the afferent policies and accounting options have over the comparability level of the practices not only at an intrastate level but also at an inter-state level. Further on we can consider that a particular importance is given to the influence that the inter-states situation has over each national accounting system involved in an accounting harmonization process when it comes to practice. The existing researches in the measurement sphere of the material harmonization level as well as in the sizing sphere in the international accounting regulations impact over the national accounting systems generated a series of results correlated on one hand to the IASC/ IASB status, and on the other hand to the development of the standards issued by the international authority. Due to this aspect we started the descriptive analysis of the results from the material harmonization measurement sphere applied on the IASB evolution and the standards issued by this authority. If we take into consideration the division into periods of the IASB evolution established in the previous chapter we can establish the systematization periods of the researches results in this analysis sphere, as follows: The material harmonization level in the context of some flexible accounting standards The material harmonization in the context of the internal standards comparability desideratum The material harmonization effects as a result of the IOSCO agreement The material harmonization sizing in the financial reporting standards context Taking into consideration this delimitation in time we can state that the period prior to 1989 is characterized mostly by a high level of diversity and less through a medium level of the harmonization degree, situation present in the following periods. If we bear in mind the existing studies during 1989-1995 we can state that the defined material harmonization level is high in certain problems (for example, postponed taxes) and on the other hand is even absent when it comes to other elements (like: assets depreciation, goodwill, development and research expenses etc) and the international accounting harmonization process, can be characterized at most through a medium level. Analyzing also the similar researches in the material harmonization sphere for the 1995-

2003 period we can state that the international accounting harmonization process, as a whole, can be characterized through important evolutions of the reached harmonization level, not only for certain accounting systems but for certain accounting problems as well. A remarkable fact is that the efforts made for the material harmonization as well as the afferent researches of this problem intensified reaching a high level of complexity. If we consider the research instruments used in these researches and if we anticipate the research methods during the studies from the next period we are entitled to state that in this period (1995-2003) a maximum level of the debates regarding the van der Tass indexes, was reached. The central element of the results obtained by the existent studies during 2003-2007, we can state that the international accounting harmonization process manifests liberally especially when it comes to the accounting practice. A remarkable aspect is that 2 out of the 3 studies are focused on the sizing problem of the material harmonization level on a regional scale, and all 3 researches study the IRFS implementation effects in the national accounting systems. Thus, in the technical literature (Aisbit, 2001) were mostly identified a series of limits afferent to the research methodology. These can be classified in two important categories, as follows: Problems afferent to the causal deduction, or in other words, problems typical to the professional reasoning of research; Problems afferent to the indexes characteristics of the material harmonization level measurement (Aisbitt, 2001, p.60) A series of suggestions for further researches were given beyond the existing studies limits. Starting with the examples mentioned in the studies, we are entitled to generalize these suggestions, as follows: o Avoid data loss and the optimum sizing of the accounting elements necessary for the analysis o In these studies where the number of accounting elements differs from one category of analyzed elements to another, the interpretations must be carefully analyzed, taking into consideration also the effect of such an approach over the calculated measurement indexes o All the necessary efforts have to be made so that the allotment and the analytical reasoning of the measurement elements to be accomplished in order to sustain the validity of the research o To increase the relevance and the reliability of the studies it is recommended to use those pieces of information that can be obtained from the producers of the accounting-financial information and to recur to the restriction of the analysis performed in those companies that present the information clearly and unambiguous. Considering all these aspects, we can conclude that the role of the existing researches in the material harmonization sphere is very complex and of high importance. We appreciate that the studies for the material harmonization measurement are aimed at the international accounting harmonization process. GENERAL CONCLUSIONS If we refer to the conceptual approaches developed around the spontaneous, material and formal accounting harmonization problem we can state that we are dealing with a complex of elements that gravitate around the so-called desideratum of the unit through diversity. As a consequence, we stress the substantiation of a series of conclusions out of which we mention the following: The general typology of the accounting systems differences shows that we are dealing with 2 important categories of differences:

Differences regarding the presentation, the recognition and the measurement of the accounting elements Differences regarding the perception and interpretation of the accounting-financial information According to the existing conceptual approaches we can consider that the formal harmonization is actually the harmonization of the existing accounting regulations, the material harmonization refers to the accounting practices influenced by regulations or by the market, while the spontaneous harmonization is a subcategory or a particular form of the material harmonization The spontaneous accounting harmonization can be considered a deviation or an alternative at the normal evolution of the accounting harmonization process based on the material harmonization- formal harmonization contact. Such situations appears when there are bugs in the regulations harmonization process or when the progress rhythm does not completely match the comparability and conformity need of the financial reports came out of the practice sphere and the accounting reality On the other hand, we can state that the spontaneous harmonization is response reaction to the accounting harmonization need generated by the accounting practice or, in other words, the spontaneous harmonization is a result of market power and not a consequence of the accounting regulations and their harmonization process. The problem of the cost sizing of IRFS/IAS implementation on an accounting system represents a present concern of major importance in virtue of its implications (profit-cost report), in the sphere of the researches regarding the international accounting harmonization.