subject: Harmonization of International Accounting [print this page] Harmonization of International Accounting
Globalizing the United States' accounting standards is not a new idea. The concept of converging the standards first arose after WWII with the flow of money across international borders. At first, efforts were focused on harmonization, reducing differences among the accounting principles used in major markets around the world. By the 1990s, the term harmonization was replaced by the concept of convergence which encourages the development of a single set of accounting standards that would be used in at least all major capital markets.
In 1973, The International Accounting Standards Committee was created and it became the first international standards-setting body. In 2001, it became recognized as the International Accounting Standards Board (IASB). Shortly after, the FASB and IASB started working together to spread international standards which have reached the European Union and over 100 other countries. As of 2009, Japan and China were also working to converge their standards with IFRSs. And most recently, in February 2010, the Securities and Exchange Commission (SEC) announced its support of the convergence of global accounting standards.
It is a principle of business that comparable and reliable financial information is critical for markets to operate smoothly. There has been a dramatic growth in the number and size of multinational corporations, foreign investors, cross-border purchases and sales of securities. Therefore, because of the many social, economic, legal, and cultural differences among countries, the accounting standards and practices in different countries vary widely. Due to this, Similar transactions are being accounted for differently in different countries. It has become increasingly difficult for economies to operate smoothly because the financial reports are now questionable. To improve the comparability of financial statements, harmonization of accounting standards is advocated.
Harmonization strives to increase comparability between accounting principles by setting limits on the alternatives allowed for similar transactions. Other benefits of the harmonization of international accounting standards is that it will make accounts of companies more comparable and reliable. By doing so, investors will have information to make the right investment decisions. These standards would dramatically improve the efficiency of global capital markets by lowering cost of capital, improving comparability, and enhancing corporate governance.
The goal of convergence within the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) is to improve consistency, comparability and efficiency in global markets. The boards agreed that trying to eliminate differences between standards that are both in need of significant improvement is not the best use of resources, Instead, new common standards should be developed. Eliminating the differences between U.S. GAAP and IAS will result in replacing existing standards with completely new ones.
The staff of both Boards have developed short and long-term plan of action for achieving convergence. Currently, the IASB is operating on joint projects with the FASB. These joint projects are possible because of cooperation between the two boards. Their cooperation involves a variety of activities on similar time schedules to improve efficiency, like the sharing of resources. Increases in cooperation between the IASB and FASB is the inclusion of a IASB member on site at the FASB offices to facilitate information exchange between the two.
The short-term convergence plans focus only on a select group of differences between the U.S. GAAP and IFRS, like choosing which standard is best fitted for a world economy. As of now, the FASB and IASB are working together on issues based upon Recognizing Revenue and Business Combinations. Meanwhile, the staff of the FASB is currently working on a long-term research project that seeks to identify all of the differences between U.S. GAAP and IFRS. The project includes differences in standards addressing recognition, measurement, presentation or disclosure. As a result of these and other initiatives, the FASB expects to make significant progress toward international convergence in the next few years.
Globalizing accounting standards will create important benefits. Investors will benefit because of the comparability in international financial statements. These statements will be understood globally so that economies can watch and enforce the rules of accounting. Multinational corporations benefit from not having to prepare different reports for different countries in which they operate. Stock exchanges benefit from the growth of listings and transactions in the market. It is important to note that the success of globalizing these standards revolves around the coordination of the IASB and other national standard setting bodies. Therefore, the IASB has become increasingly interested in researching the national standard setters. The research provides insight on problems that exist at the local level and it assists in governing the activities of those nations.
The process of harmonizing international accounting standards has come a long way because of many bumps on the road. Some critics doubt the need of globalizing these standards. However, the question is not whether or not it will happen, it's when. There is a need for a single set of accounting standards, and with the approval of the SEC, the implementation of these standards is not a long time away.
