Harmonization and International Accounting Standards

1. Harmonization and International Accounting Standards   ACC4305 Chapter 5

2. Terminology • Harmonisation vs. standardisation

3. Reasons for harmonization • Investors and creditor needs • Multinational company needs • Intergovernmental transnational bodies needs • Needs of international accountancy firms

4. Obstacles to Harmonization • The size of accounting differences • The different purposes of accounting • The lack of strong professional accounting associations • The strength of nationalism • The economic consequences of accounting standards

5. The International Accounting Standards Committee (IASC) • Purpose • To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance • Composition • Members of accountancy bodies from over 100 countries • Standards • Standard setting activity has been successful • Enforcement: The IASC has no enforcement powers

6. IASB • Founding members retained significant influence, including: • Australia • Canada • Germany • Japan • Mexico • The Netherlands • United Kingdom • United States

7. IASB • Objective: • “(a) to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance, and (b) to work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements.” • Goal is to achieve comparability for investors while reducing the costs to MNE’s of preparing multiple sets of information.

8. Has the IASC been successful? • The activity of publishing and promoting standards has been positive • The implementation of standards is questionable • Initially, standards were following closing a compromise between US & UK accounting • Since 1995, this has changed • Example of IAS 9 – Research & Development Costs • Problems of “options” within standards

9. Has the IASC been successful? • Successful implementation depends on which type of country: • Developing countries • Nigeria, Malaysia, Singapore • Emerging countries • Eastern Europe • Continental Western Europe and Japan • Initially some resistance • Overcame as IAS truly became international • Part of some regulations or allowed in France, Japan, etc. • Capital-market countries • Little impact as IAS standards are close to the ones used in these countries • Today a mutual influence can be observed

10. Recently • IASB endorsed by International Organization of Securities Commissions (1988); • European Union requires all EU listed companies to prepare consolidated returns based on International Accounting Standards since 2005, • SEC reviewing endorsement of IAS for cross-border listings; and • Gap between IAS and (US/UK) GAAP is narrowing.

11. What are the appropriate standards for each country? • The controversy surrounds the utility and usefulness of harmonization: • World-wide single set of standards • Facilitates trade, investment, staff deployment, etc. • Each country develops their standards (all potentially different) • Allows accounting systems to be well adapted to their environments • Dual standards for each country • Dual standards do not need to be applied to all firms (groups, multinationals, listed)

12. European Union Harmonization • Treaty of Rome (1957) objective • To establish the free movement of persons, goods and services, and capital throughout Europe; • To create a unified business environment, including the harmonization of company law and taxation, and the creation of a common capital market.

13. European Union Harmonization • Specific obstacles • The fundamental differences between the creditor/secrecy in the traditional Franco-German systems and the investor/disclosure in the Anglo-Dutch systems; • and between the law/tax based rules and professionally set standards • The harmonization of company law and accounting are accomplished through two main instruments: directives and regulations. • Directives: must be incorporated into the laws of member’s states • Regulations: these become laws through the EU without the need to pass through national legislatures 

14. The Fourth Directive • Adopted by the EU in 1978 • Introduced the concept of “true and fair” to all member countries • The concepts of accruals, prudence, consistency, and going concern were specifically articulated • Added disclosure was required for the effects of tax accounting • Established a “Contact Committee” of the EU • Required compulsory formats • Required detailed valuation requirements • Required an extension of disclosure • Required an expansion of auditing to more companies

15. The Fourth Directive • Observations • Asset valuation, formats, or disclosure practices have not been “standardized” • There has been some harmonization • Problems of options • The area of weakest harmonization is measurement practices (i.e., lease accounting and foreign currency translations were not mentioned in the fourth directive)

16. The Seventh Directive • Approved in 1983 • Consolidated Accounts • Defined “group” (U.K. vs. German) • Measurement of Performance and Financial Position • Harmonize existing legal requirements • Treatment of: • Historical cost accounting • Inventory Valuation and Depreciation • Goodwill • Current replacement cost • Revaluations to market value • Price level adjustments