HARMONIZATION OF

ACCOUNTING
STANDARDS
INTRODUCTION

• Accounting is shaped by the environment in which it operates

• Various factors in the environment shape the practice of financial reporting.
• Every country has its own unique environment which shape its accounting system. e.g. Australia require
environmental report.
• Various countries have adopted accounting systems which suit their environments.
• While there is large variation in accounting systems adopted in various countries, it has commonly
accepted that there are two financial accounting model
1. Anglo-American model
2. Continental European model
ANGLO-AMERICAN MODEL

• Accounting is influenced by professional bodies rather than the government

• Emphasizes on the role of capital market
• In turn force companies to disclose true and fair view of the business.
• Business are forced to disclose because there is competition for capital amongst companies
CONTINENTAL EUROPEAN MODEL

• Characterised by little input from professional bodies

• Stronger reliance on the government.
• Heavy rules on tax and nature of rules tend to protect the interest of creditors and lenders because they
supply companies with funds.
REASONS FOR INTERNATIONAL
ACCOUNTING DIFFERENCES
• Colonial inheritance and political systems
• Taxation
• Level of education and accountancy profession
• Legal systems
• Culture and religion
• Language
• Economic systems
DEFINITION

• “the process of bringing international Accounting Standards into some sort of agreement so that the
financial statements from different countries are prepared according to a common set of principles of
measurement and disclosure”
• harmonization of Accounting Standards can be described as "the degree of co-ordination or similarity
among the various sets of national Accounting Standards and methods and formats of financial
reporting”
AIM

• the aim of the international harmonization process of Accounting Standards is to reduce or overcome
differences world-wide, in order to reach a better international comparability of financial statements
• 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.
CATEGORIES OF HAMONIZATION

• harmonization has been broken down into two aspects:

1. Material and
2. formal harmonisation.
• Both formal and material harmonization may refer to the degree of dis-closure or to the accounting
method selected. The former is called disclosure harmonization and the latter measurement
harmonization.
• formal or de jure harmonization refers to harmonization of accounting regulations (laws and/or
accounting standards) and
• material or de facto harmonization refers to harmonization in the actual practice of companies.
 ADVANTAGES OF HARMONIZATION

• The greatest benefit that would flow from harmonization would be the comparability of international
financial information.
• save time and money that is currently spent to consolidate divergent financial information when more
than one set of reports is required to comply with the different national laws or practice.
• It would be beneficial to those countries which still do not have adequate codified standards of
accounting and auditing and to international accountancy firms with clients of firms which have at least
one foreign subsidiary.
• It would also help in raising foreign capital as investors, financial analysts and foreign lenders will be
able to understand the financial statements of foreign companies and they would be able to compare
the investment opportunities which will help them to make the right investment decision.
CRITICISM OF HARMONIZATION OF
ACCOUNTING STANDARDS

• First criticism is that underdeveloped countries and developing countries see harmonization of
international accounting standards as an imposition of standards by economically superior countries.
• Another criticism is that the fact that accounting is flexible in nature and can adopt to different number
of situations but if accounting standards are harmonized it is believed that they won't be flexible
enough and the standards set internationally cannot possibly cater for the wide range of national
circumstances, legal systems, stages of economic development, and cultural differences.
EFFORTS MADE TO ENSURE HARMONIZATION OF ACCOUNTING STANDARDS

• Requirements of capital markets.

• Adoption of IAS by countries.
• Co-operation with national standard-setters
• EU regulation
• Co-operation of IASB and FASB
CONCLUSION

• there are a number of benefits as well which will come with the harmonization of international
accounting standards. It will bring uniformity in the preparation of accounts and will make the accounts
of companies more transparent and comparable which in turn will help the investors to make the right
investment decision
• in the current situation it is very difficult to judge the future of international accounting standards but
one can say that slowly but steadily countries are moving to the harmonization of international
accounting standards.