A New Perspective on the Harmonisation of International Accounting Standards

  • CRUX

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Blog by CRUX Accounting And Financial Consultancy

For long there has been a debate on whether to have a single set of accounting standards for everybody or not. This concept of harmonisation has been vastly influenced by globalisation. The idea was first put forward by the International Accounting standards committee (IASC), which was created by the collaboration of major accounting bodies back in 1973, and which was responsible for the creation and promotion of international accounting standards (IAS). Back in 2001, the IASC was replaced by International Accounting Standards Board (IASB) and the standards created under them are called International Financial Reporting Standards (IFRS).

In the beginning the process of harmonisation was greatly influenced by the US accounting standards: prior to the 2001/2002 scandal involving major companies like Enron, the US saw their accounting standards as having superiority over IFRS; however, after the scandals that took place, they were forced to reevaluate their attitude on their perceived superiority over the IFRS, which lead to a better perception of the harmonisation concept.

However, in order to fully understand the effects of harmonising accounting standards;

it is important to see both sides of the coin: the advantages and the disadvantages.

Some of the notable advantages include:

  1. Having harmonised set of accounting standards would help investors in making more accurate and timely decision: due to globalisation investors can now invest in many jurisdictions; however, in order to make good decision they need information presented to them under a uniform structure, which can be facilitated through a single set of accounting standards.
  2. The process of consolidating accounts for business working in multiple jurisdictions is facilitated through harmonisation: having a single set of accounting standards would not only reduce effort in consolidating accounts, but might also reduce inaccuracies in consolidating these accounts.
  3. Using the IFRS standards can help countries in their development and can attract foreign investment: investors would be more confident in investing into those economies whereby they are already familiar with the standards applied.

    Having focused on the advantages of harmonising accounting standards, it is also important to know the disadvantages of it as well.

The following are some of the important disadvantages of the concept:

  1. Cultural difference between countries can affect how certain things are accounted for. For instance, in Islamic countries where Islamic finance is used, interest is not allowed; however, this might not be the case in another country.
  2. The level of effort and cost required in order to have harmonised set of accounting standard: having a single set of standards for all is difficult to implement; especially for developing countries. There is huge difference in countries who have developed financial institutes and those who are just developing them. Thus, having the same standards for the developed country and for an underdeveloped country or even developing one, might be difficult to implement.
  3. Accountants, tax experts, CPAs would be required to get accredited by an international body, and how would this body enforce the rules and regulations on citizens of different jurisdiction and whether the body would have any enforcement authority over individuals.
  4. There have been steps taken over the last few decades in order to have harmonised accounting standards; however, this is a major step and though the proponents of the concept see the advantages of it, it is hard to disregard the disadvantages that they will bring.