Chapter 2 International Harmonization of Financial Reporting Learning Objectives 1. Explain the meaning of harmonization. 2. Identify the arguments for and against international harmonization of accounting standards. 3. Discuss major harmonization efforts. .Explain the principles-based approach used by the International Accounting Standards Board IASB! !hat is harmonization" Harmonization -- the process of increasing the le"el of agreement in accounting standards and practices bet#een countries. Harmonization is not the same as stan#ar#ization #hereas standardization implies the elimination of alternati"es in accounting for economic transaction and other e"ents $ %armonization refers to reduction of alternati"es #hile retaining a high degree of flexibility in accounting practices$ so harmonization allo#s different countries to ha"e different standards as long as the standards do not conflict.
$he t%o &levels' of Harmonization %armonization in accounting standards$ #hich is increased agreement in accounting rules. %armonization in practice$ #hich is increased agreement in actual accounting practices. %armonization in standards may or may not result in harmonization in practice.
(rg)ments for an# against Harmonization (rg)ments for Harmonization *+ &roponents of accounting harmonization argue that '%armonization expedite the integration of global capital mar(ets and ma(e easier the cross-listing of securities because of the comparability of )inancial statements. %armonization facilitate international mergers and ac*uisitions. ac *uisitions. %armonization reduce in"estor uncertainty and the cost of capital. %armonization reduce financial reporting costs.
%armonization allo# for easy adoption of high-*uality standards by de"eloping countries. (rg)ments for Harmonization *+ &roponents of accounting harmonization argue that its not necessary to force all companies #orld #ide to follo# comment set of standards. Significant differences in standards currently exist . +he political cost of eliminating differences. ,"ercoming ationalism/ and traditions. &erhaps it #ill not pro"ide significant benefits. 0ill cause Standards ,"erload/ for some firms. Di"erse standards for di"erse places is acceptable.
Harmonization ,fforts Organizations involve# Association of South East Asian ations ASEA!. 1nited ations 1! 2 European 1nion E1!. International ,rganization of Securities 3ommissions I,S3,!. International )ederation of Accountants I)A3!. IASB and )ASB.
International Organization of -ec)rities Commissions IO-CO/. -ee %eb site http'22###.iosco.org Established in 4567$ International ,rganization of Securities 3ommissions I,S3, today I,S3, is the leading organization for securities regulators around the #orld $ #ith about 489 ordinary$ associate$ and affiliate members from about 4:: countries $ and aims among other things to ' Achie"e impro"ed mar(et regulation internationally. )acilitate cross-border listings. Ad"ocates for the de"elopment and adoption of a single-set of high *uality accounting standards.
International Fe#eration of (cco)ntants IF(C/. -ee %eb site http*00ifac.org )ormed in 4566$ International )ederation of Accountants I)A3! aims to de"elop international standards of auditing$ ethics$ education$ and training $ In pursuing these goals I)A3 has contributed to the harmonization process in many #ays as ' Began International )orum on Accountancy De"elopment I)AD! to enhance the accounting profession in emerging countries. +hat
#as in response to criticism from the #orld ban( after the Asian financial crises that the accounting profession #as not doing enough to enhance the accounting capacity capabilities in emerging countries . Started the )orum of )irms to raise global standards of accounting and auditing Details at %%%.ifa#.org !.
, ,)ropean nion * -ee %eb site http*00e)ropa.e)0in#een.htm +he European 1nion E1 #as the E1 #as established by the +reaty of ;aastricht on o"ember 4558 upon the foundations of the preexisting European Economic 3ommunity$ founded in ;arch 4596 #ith the signing of the +reaty of
uxemburg$ and the etherlands!$ and no# E1 3omprising ?6 member states . +he European 1nion E1 %as #or(ed to harmonize accounting standards #ithin the E1$ primarily by #ay of t#o directi"es$ E1 directi"es possess the force of la# . Fo)rth 4irective 1567 a set of comprehensi"e accounting rules co"ering the content of annual financial statements$ their methods of presentation and measurement and disclosure. +he )ourth Directi"e built on the principle of a true and fair "ie#./ -eventh 4irective 1573 re*uires consolidated financial statements for company groups of a certain size.
International (cco)nting -tan#ar# 8oar# I(-8/ International Accounting Standard Board #as created in ?::4 to replace the predecessor$ the IAS3 International Accounting Standards 3ommittee!. IAS3 #as established in 4568 by an agreement of the leading accounting profession bodies in 4: countries the 1nited States of America$ Australia$ 3anada$ )rance$ =ermany$ @apan$ ;exico$ etherlands$ 1nited ingdom and Ireland !. +he IAS3 harmonization effort from 4568 to ?::4 e"ol"ed in se"eral phases$ the initial phase #as the issuance of ? IASs$ the
approach #as lowest-common-denominator $ so many of these standards allo#ed multiple options. IASB #or(s to#ard harmonization of international accounting standards. +he mission of IASB is to de"elop$ in the public interest$ a single set of high *uality$ understandable and international financial reporting standards I)
I(-8 9 :ajor Initiatives Comparability Project Begun in 45C5$ #hich can be described as the second phase of the IAS3s effort +he third phase #as the )rame#or( for the &reparation and &resentation of )inancial Statements!. +he comparability of financial statement &roject aims at eliminate most of choices of accounting treatment currently primeted under IASs. 3omprehensi"e re"ie# of existing IAS $ and as areult many of IASs #ere re"ised In order to increase rigor of IAS.
IOSCO Agreement +he final &hase IAS3 #or( to harmonization . Begun in 4558 and ended #ith the creation of IASB in ?::4 +he main acti"ity during this period #as establishment of a core set of 8: accounting standards could be endorsed by I,S3, for crosslisting . Standards agreed upon by I,S3, and IAS3.
I(-8 9 Revise# -tr)ct)re +he restructured IASB is o"erseen by the IAS3 )oundation #hich also o"ersees' +he International )inancial
Also$ I)
I(-8 ;erspective IASB attempts to follo# a &rinciples-Based approach to standard setting. As such accounting standards are grounded in the IASB )rame#or( .
( ;rinciples+8ase# approach
I(-8 Frame%or< an# IFR-s I(-8 Frame%or< more #etails re=)ire# in single file abo)t Frame%or
>)alitative characteristics of information Understandability should be understandable to people #ith reasonable financial (no#ledge. Comparability allo#s for meaningful comparisons to financial statements of pre"ious periods and other companies.
Relevance useful for ma(ing predictions and confirming existing expectations. Reliability free from bias neutral! and represents that #hich it claims to represent representational faithfulness!.
Definition assets$ liabilities$ and other financial statement elements are defined. Recognition guidelines as to #hen to recognize re"enues and expenses. eas!rement "arious bases are allo#ed$ historical cost$ current cost$ realizable "alue$ and present "alue.
"inancial capital maintenance ,ne approach to income measurement. et income represents the increase in net financial assets$ excluding o#ner transactions. +he approach in 1.S. =AA&.
P#ysical capital maintenance Another approach to income measurement. et income represents increase in physical producti"e capacity. Excluding o#ner transactions.
;resentation of Financial -tatements I(- 1/ $his stan#ar# provi#es g)i#ance in the follo%ing areas P!rpose of financial statements to pro"ide decision-useful information. Components of financial statements balance sheet$ statements of income$ cash flo#s$ changes in e*uity$ and notes to the financial statements. "air presentation the o"erriding principle of financial statement presentation. Acco!nting policies Should be consistent #ith all IASB standards. 0hen specific guidance is lac(ing$ use standards on similar issues$ and definitions of the financial statement elements.
$asic principles and ass!mptions
Accrual basis2going concern2comparability.
Str!ct!re and Content of "inancial Statements &ro"ides information on presentation format'
3urrent2noncurrent.
Items to be included on face of financial statements.
3ontent of notes.
First $ime (#options of IFR-s IFR- 1/ &ro"ides guidance for first time adoption. ;uch used in ?::9$ particularly in E1.
se of IFR-s ,vi#ence of s)pport for IFR-s Adoption by the E1 public companies in the E1 #ere re*uired to begin using I)
I(-80F(-8 Convergence $he ?or%al< (greement
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