Challenges In International Harmonisation Of Accounting Standards: An Overview

International Harmonization: An overview

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I chose the topic of challenges in International Harmonisation of accounting standards because it is a topic of great debate at the moment since the harmonisation of accounting is crucial.

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With the production of the coursework, I discovered about my research skills. I was able to understand the importance of accounting standards harmonization and also studied about the hindrances that are caused in its process.

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International Harmonization: An overview

The international approach initiated by various countries for the achievement of mutual understanding and help regarding financial reporting is known as International Harmonization of accounting standards. It allows many countries to follow similar rules and regulations while preparing financial statements and reports. Such approaches help professional accountant companies in understanding the financial reports of innumerable companies either internationally or locally.

There are many international as well as national organizations that are involved in the process of international harmonization of the accounting standards, such as the Accounting Standards Codification (ASC), International Accounting Standards Board (IASB), European Commission (EC) and Financial Accounting Standards Board (FASB). The raising of foreign capital is also facilitated by international harmonization. Foreign lenders, investors and financial analysts have been able to understand the foreign companies’ financial reports and are able to compare the opportunities of investment that would assist them towards making the appropriate investment decisions. However, there are various challenges that pose in the process of international harmonization of the accounting standards. These are explained below:

Conflict of Interest

Conflict of Interest

There are various users who wish to accomplish harmonization in the accounting standards. As such, multinational corporations are pressurized for offering financial statements and reports in a more synergized way. The users here are referred to parties such as general public, trade unions, accountants, auditors, management, government, trade unions, employees and multinational corporations.

Management

The Multinational companies are managed by these parties because of which, their concerns about the accounting standards are very high since they have to implement necessary decisions which involve international mergers and acquisitions.

Multinational Enterprises (MNEs)

Multinational enterprises operate across counties which becomes their area of concern with regards to the accounting standards. These enterprises have to deal with the accounting standards of the countries they are in.

Accountants

Accountants are the people responsible for the preparation of the accounting standards by making use of the relevant information and updating them internationally. The international accounting and reporting behavior are influenced by these accountants as they are involved in setting up of the standards processes also.

Government

Government wishes to be compatible at both national and international levels. In order to stabilize the economy by way of formulating policies, government is in constant need from the multinational enterprises for the purpose of monitoring their activities.

Trade Unions and Employees

The national policies and certain activities of the business are influence by the trade unions and the employees. Information regarding future prospects and the performances including the benefits provided to the employees are also required by these parties.

Political

Political obstacle is revealed by Nationalism with regards to harmonization. Countries have a constant fear of renouncing the control of their accounting regulations to outside countries, especially when other nations replace their accounting standards and regulations. As a result of nationalism, it accounting standards that are developed by other countries may not be accepted (Nobes and Parker, 2004). Individuals and companies wish to preserve their ineptitudes and deficiencies which arise due to changes in accounting standards for benefitting from the same. There are countries which are still on the verge of development and countries holding imperial powers are more sensitive to such infringements (Ali, 2005).

Regulators

According to Brown and Tarca (2005), enforcing the rules is very different from making the rules. IASB is considered to set the standards and not enforce the standards. IASB has specifically shown interest in allowing the companies that are generally weak at adopting (Ball, 2006). IASB’S mission stands unsuccessful if the enforcement is not acquired at the global level. In order to ensure compliance and righteousness of accounting standards, IASB relies mostly on goodwill its regulators, auditors, stock exchanges, government departments and its agencies and not rely on any national government (Saw, 2011). Even if the implementation is achieved for such standards at a global level, a lack of international regulator is still lacking. 

Investors

The disclosures of the financial prospects, performances and positions of the multinational companies are needed by them on an overseas level where the comparability is also demanded.

Management

Bankers and Lenders

Capital is provided by this group, hence comparable financial position, information and future prospects are required by them.

International Accounting Firms

Auditing firm is included by these parties; hence they require identical practices of accounting for providing better outcomes while also improving their relationships with the tax authorities and their clients as well.

As mentioned above, the motives of these groups are distinct towards the harmonization of accounting standards, due to which indirect impact in caused on the economy for following particular routes. In ASEAN, usually there is an enormous harmonization degree in the economies on the basis of the capital markets. The main reason of this is that, disclosure is required by the investors and bankers towards the investment and lending. Subsequently, this becomes a hindrance, because the economy would want to implement the harmonization for their own aspects, while ignoring the other factors of harmonization like social or environmental regarding ASEAN.  

Complex requirements of Accounting

Even though there is a need of harmonization by all stakeholders, the expectations of stakeholders are different that makes it antithetical and divergent. There is a need by harmonization for several financial reporting requirements which is not possible within a specific standard. It is bounded by application standard’s flexibility and limited alternatives (Chairas and Radianto, 2001).

In the Vietnam case, the rigid link between the financial control rules for state-owned companies, the accounting and regulations of taxation have generated several hindrances in the development. The reformers seek for a solution for maintaining such particularity in the accounting system’s development process (Phuong and Richard, 2011). Additions and alternations were only made in the financial regulations and taxation reporting that was prescribed for the state sector. The maintenance of the such regulations could potentially harm the quality of accounting information and operational management.

Economic Obstacle

One of the serious obstacles in the harmonization process is the lack of an accounting profession that is unified and competent personnel for the implementation of new accounting system (Narayan, 2000). Many accountants till this date prefer to maintain the classic style of book-keeping and do not welcome accounting practice changes and alterations. Such accountants can be considered as untrained as they do not have a good hold over the changes in the market. They fail in changing themselves with the ever changing and complex environment of today’s business world. Such issues were mainly escalated in Vietnam. Consequently, business had to go through adverse complications and difficulties for converging with rules of the International Accounting Standards (IAS), there was no allowance for adoption by the exclusive professional bodies (Phuong & Richard, 2011).

Operating cost escalation

The overall cost of the users is diminished by the process of harmonization; however, these costs have a possibility of increasing at places of capital assets investment, especially for the MNCs. For example, with the adoption of the IFRS, it will be required by the accounting profession to be educated and aware of the new accounting standards. In the same way, the universities and colleges that deal with the profession of accounting would have a need of curriculum revision (Fosbre, Kraft and Fosbre, 2009). Hence, this indicates clearly that in order to bring changes with processes such as harmonization, more and more time and cost would be needed

System enhancement

For undertaking new regulations and principles, every company across the globe would need to make certain system enhancements for the presentation of their financial reports. Here, the employment of specific software for the financial statements’ production with the IAS standards would raise the costs. According to a report of Johnson (2009), in Europe, the companies that had revenue of 500 million to 5 billion, spent 0.05% of their revenue for the adoption of IFRS.

Expertise for smooth transactions

As mentioned in the above points, changes and system enhancements would be essential for the process of harmonization. These two aspects can be provided by the accounting experts. However, the employment of such expertise, while also avoiding technical difficulties, the organizational costs might escalate and rise quickly.

Consequences

Compliance with international standards would require additional cost, since, the new costs of accounting software and staff training might cause a drain on the resources and finance of new, small and emerging companies (Urif, 2015). The large accounting companies are more resource rich, hence would become crucial and their monopoly would grow further in providing the services that is needed by the markets and international institutions of finance. The smaller companies would be adversely affected due to such oligopoly (Brüggemann, Hitz and Sellhorn, 2013).

Reference List

Ali, M.J., 2005. A synthesis of empirical research on international accounting harmonization and compliance with international financial reporting standards. Journal of Accounting Literature, 24, p.1.

Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), pp.5-27.

Brown, P. and Tarca, A., 2005. A commentary on issues relating to the enforcement of International Financial Reporting Standards in the EU. European accounting review, 14(1), pp.181-212.

Brüggemann, U., Hitz, J.M. and Sellhorn, T., 2013. Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), pp.1-37.

CHAIRAS, I. and RADIANTO, W., 2001. Accounting Harmonization in ASEAN: the process, benefits and obstacles. 2001. 140 f (Doctoral dissertation, Master Thesis, International Accounting and Finance, Göteborg University).

Fosbre, A.B., Kraft, E.M. and Fosbre, P.B., 2009. The Globalization of Accounting Standards: IFRS vs. US GAAP.

Johnson, S., 2009. Guessing the costs of IFRS conversion. CFO Magazine.

Narayan, F., 2000. Financial Management and Governance Issues in Viet Nam: Volume 1. Asian Development Bank.

Nobes, C. & Parker, R., 2004. Comparative International Accounting, 8th edition, Prentice Hall-Financial Times, London, pp.53-95.

Phuong, N.C. and Richard, J., 2011. Economic transition and accounting system reform in Vietnam. European Accounting Review, 20(4), pp.693-725.

Saw, P., 2011. A Global Accounting Standard: The Holy Grail? In Theory and Practice of Corporate Social Responsibility (pp. 193-207). New York: Springer, Berlin, Heidelberg.

Urif, F., 2015. The Progress of Harmonization Accounting Standards in ASEAN Countries (Malaysia, Singapore, and Thailand): A Review of the Research Literature.