NEED FOR HARMONIZATION OF INTERNATIONAL ACCOUNTING STANDARDS

Sa’eed Hassan Mohamed

(MSc -Accounting and finance)
Sa’eedym14@gmail.com
Jigjiga University, 2023

Abstract
Accounting is simply the language of business; like any other field of knowledge, it has its own
rules, regulations, and standards, which differ from region to region, country to country, and
economy to economy. Having single, universal standards is the dream of many accounting
practitioners, but we are still a long way from achieving it. Harmonization is the process of
increasing the level of agreement between accounting standards. This study seeks to describe the
necessity for and obstacles to international financial standard harmonization. After reading
papers, journals, and books, the researcher conducted a literature review to obtain a deeper
understanding of the issue and provide a more comprehensive picture of the topic of the study as
a whole.

Keywords: Harmonization, Accounting standards,

Introduction

Harmonization, from the Latin word Harmonia, means a simple approximation of two or more
legal systems to reduce or eliminate certain contradictions, Harmonization is therefore a process.
Harmonization consists of the adoption of a standard leaving margins of appreciation to the
addressees of the standard. It consists in bringing together legal systems of different (or even
divergent) origins and inspirations to make them consistent with each other by reducing or
eliminating their differences and contradictions (Wyatt, 1992).

It would be simple for a non- Accounting sphere to wonder why accounting standards shouldn't
be harmonized or even converged internationally since accounting is accounting, after all. The fact
that there is no distinct accounting for the third, second, or even first world is likewise a truth.
However, if worldwide harmonization is to be accomplished, there are benefits also considerable
challenges to be addressed in getting single universally accepted accounting standards, so It’s

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important to address current debates on international accounting standards on mainly bases of
benefits claimed for standards, as study Meeks and Swann (2009) adopts two approaches to the
question whether accounting regulation is best achieved by a single set of standards for the world,
or by competing systems, A single set of international accounting standards would increase market
efficiency, lower capital costs, and foster investor trust as commented by Deloitte in Security US
Security and Exchange Commission SEC in Concept Release: International Accounting Standards
(Deloitte, 2000).

History of Harmonization

Jacob Kraayenhof the father of the harmonization concept suggested a single reporting system for
all nations, later the Accountants International Study Group (AISG) was established in 1966 to
compare the accounting practices used in Canada, the United States, and the United Kingdom.
Later in 1972, a gathering of accountants was held in Sydney, and representatives of the three
nations mentioned above discussed creating an international federation to create accounting
standards for use across the world (Choi, Frost, & Meek, 2002).

The International Accounting Standards Council (IAS) was formed in 1973 and was responsible
for generating most of the International Accounting Standards (IAS). It also managed
compatibility between the IAS and prevailing accounting standards in member states. Other
organizations such as the OECD and African Accounting Council were also interested in the
progress of accounting standards. OECD released a testimony on the disclosure of financial reports
(Meeks & Swann, 2009).

Current global status of accounting standards harmonization

According to Li (2017), an Associate Professor of Accounting at the London School of Economics

stated that a vast literature has emerged. Now, with the hindsight of over 10 years, briefly reviewed
the academic literature to better understand the consequences of the global harmonization of
accounting standards, Frintrup, Schmidthuber, and Hilgers (2022), Governments and international
organizations must modify their present accounting regimes and transition to a system of
standardized accounting standards as a result of serious fiscal issues, the inability to compare
financial information, and growing calls for improved accountability, Due to this lack of accounting
harmonization and the presence of urgent f financial problems, the European Commission (EC)

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implemented a project to harmonize public sector accounting in 2013, (Rossi, Cohen, Caperchione, &
Brusca, 2016).

Financial transparency is important as it enables better decision-making for politicians, the

providers of financial support, and the public, Once again, the global financial crisis in 2008
illustrated the need for comparable and high-quality statistics and transparent
governments(Oulasvirta & Bailey, 2016), The IPSAS offer an internationally recognized system
of public sector accounting standards and were developed by the IPSASB (Pontoppidan & Brusca,
2016), Nevertheless, their effect on harmonization is limited because the IPSASB is a private
organization and IPSAS application is thus not mandatory(Harsányi et al., 2016).

Previous research on international accounting harmonization has already discussed the

implementation and adoption of international accounting standards.

Literature review

Historical literature
Anderson (1993) In ‘The Globalization GAAP’ published in Management Accounting, is
approaching the advantages of a common set of international accounting systems and the added
value created by such systems. Belkaoui (1994)In International and Multinational Accounting, is
presenting the factors which may affect the creation of an international accounting system. Berton
(2000) in “The Evolution of Research on International Accounting Harmonization” published in
the Journal of Accounting Literature, presents in figures the development of the harmonization
process over the world. Choi, (Falk, 1999)) in “International Accounting”, presented between
others the conflicts related to the implementation of a unique international accounting system
Ryten, Dunn, Neary, and Burnstock (2002)in “International Accounting Standards” published in
the Journal of Accounting Literature presented that the cultural and political barriers are the most
important enemies in the harmonization of the accounting. Iqbal, Melcher, and Elmallah (1997)in
“International accounting: A global perspective” presented the need for global harmonization in
accounting. (Mednick, 1991)in “Barriers to International Accounting Harmonization” published
in the Journal of Accounting Literature insists on cultural discrepancies between the countries and
their impact on the interpretation of economical phenomena. (Nobes, 2002)in “Comparative
International Accounting” presented other ideas about the advantages of developing countries to
access directly the international accounting system.

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 The objective of international accounting research is to highlight the connection between
accounting institutions and the stakeholder practices of actors. Being a long-standing
technique, accounting triggers global economic competition. Asa technique, it has turned into
a technology; as such it is qualified as technoscience in a contemporaneous dynamic. As a
result of its evolution, researchers increasingly agree on the terminology of "accounting
science"(NGUEMA, 2022).
Needs for accounting standards Harmonization
1. Globalization
Accountancy services in the world have a peculiar industrial organization. There are several
giant firms with a wide range of services operating all over the world. On the other hand, just
as in other professional services, there are numerous small firms and individual offices
providing accountancy services to local customers. In the latter half of the 1980s, a merger
boom occurred in the industry, and the creation of KPMG (1987), Ernst and Young
International (1989), and Deloitte Touche Tohmatsu (1990) set the stage for the so-called
“Big Six.” With the merger of Price Waterhouse and Coopers & Lybrand in 1998, the current
“Big Five” regime started. As shown in Table 1, these five firms have a huge number of
employees, including ample professionals, and operate worldwide. They believe that the
source of competitive edge is offering clients a wide range of services with wide geographic
coverage. Together with their technological superiority, these American-British accountancy
firms have established their dominance in the world, the globalization2 of the world's
economies has inevitably brought with it moves to establish a single set of financial reporting
standards. Developing such financial reporting standards seems to be a legitimate role for the
International Accounting Standards Board (IASB) and its forerunner the International
Accounting Standards Committee (IASC). The primary argument for a single set of financial
reports premised on principles of economic rationality is to achieve global harmonization (or
convergence), thereby creating an open and accountable world ((Lehman, 2005).

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 Table 1: Big five in the world

Name of the Company Number of employees Operating countries

Price water house Coopers 150,000 150+
KPMG 100,000 150+
Ernst and Young International 96,000 130+
Deloitte Touche Tohmatsu 82,000 132+
Arthur Andersen 72,000 84
Sources: [http://www/pwcglobal.com]; [http://www.oscaudit.or.jp];
[http://www.deloitte.com]; and [http://asahi.or.jp] (accessed on 10 June 2000).

2. The need for Comparable financial statements

The first and most important advantage of harmonization of reporting standards is to achieve
comparability in financial statements. Financial statements are created and presented in
diverse ways due to various sets of financial reporting standards, which makes it difficult to
compare them. Multinational corporations that operate in many countries will be much more
observant of this. The level of international comparability rises with the achievement of
international harmonization, making it simpler for businesses to prepare financial statements
following a single set of rules and for investors to comprehend the financial statements due to
the nature of IFRS and make well-considered investment decisions, There will be increased
auditing efficiency and money saving as companies has to use only one set of reporting
standards. This also serves to reduce trade barriers among countries allowing.
3. The rapid development of international capital markets
By strengthening their dominant role as economic resource distributors. How information is
disclosed to the market is a central issue in ensuring market efficiency.
4. Increasing frequent cross-listing of multinationals
This generates an urgent need for a single universal set of accounting standards for these
firms to reduce information production costs and send out a unified, reliable message to the
market.

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 Obstacles to harmonization of accounting standards
1. The economic gap between developed and developing nations

There is a wide economic gap between developed and developing nations. This gap is a hurdle in
bringing out harmonization in divergent accounting practices. It will be better to understand the
interaction between the economic and accounting system.

2. Spirit of Nationalism

The Spirit of nationalism among accounting professionals in different countries sometimes creates

hurdles in accepting compromises that they have to make in changing their accounting practices.

National pride prevents them from accepting willingly the idea that their accounting principles are

inferior to those of another country, Even though the accountant may be a strong proponent of
harmonization.

3. Different Legal Environments

The legal or statutory environment plays a dominant role in the development of accounting thought
in every country. Legal systems differ from one country to the other. Since the legal system in a
country exercises a strong influence over the accounting and reporting practices, it is clear that
unless and until uniformity in laws is possible, it will be difficult to achieve the goal of
harmonization of divergent accounting practices. Harmonization of legal systems is required
before harmonization of accounting practices there can be a civil code, common law system, and
continental system. For example, countries having continental systems are fussy about the
enforcement of rules. They do not leave room for an accountant’s role. More rigidity prevails there.

4. Varying Objectives of Financial Reporting

The purposes of financial reporting differ from country to country. That can be a possible cause of
variation in reporting practices also. Financial reporting in every country is done by keeping in
mind the targeted audiences. For example in North America target audiences are the investors and
creditors whereas in European countries like France and Germany, accounting is performed for
revenue and government agencies.

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Lack of Strong Professional Accounting Institutes

IASC at a global level is playing a dominant role in the development of IASs. This committee
operates through national professional institutes for example ICAI, and ICWAI is a member of
IASC. In countries, where professional institutes are not strong enough to get the standards
implemented in their respective countries it will be a difficult task to bring harmonization in
divergent accounting practices.

5. Economic Gap between Developed and Developing Nations

There is a wide economic gap between developed and developing nations. This gap is a hurdle in

bringing out harmonization in divergent accounting practices. It will be better to understand the

interaction between the economic and accounting system. Accountants of one nation should

maintain a strong link with accountants from other countries to understand practices prevailing in

different countries. In reconciling existing diversity in accounting practices, cooperation among

accountants, politicians, economists, and educationists is necessary.

6. Competition among international Standard Setters

Unwanted competition among International institutes which are engaged in developing accounting

standards is also a big hurdle in bringing out harmonization. For instance, ISAB, OECD, and IFAC

are trying to develop and review the efforts undertaken by different countries to reduce diversities

in accounting practices in their ways. Increased harmonization can be achieved if collective efforts
are undertaken by international standard setters.

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Key Differences between IFRS vs. US GAAP

The following are some of how IFRS and GAAP differ:

1. Treatment of inventory

One of the key differences between these two accounting standards is the accounting method for

inventory costs. Under IFRS, the LIFO (Last in First out) method of calculating inventory is not

allowed. Under the GAAP, either the LIFO or FIFO (First in First out) method can be used to

estimate inventory. The reason for not using LIFO under the IFRS accounting standard is that it

does not show an accurate inventory flow and may portray lower levels of income than is the actual

case. On the other hand, the flexibility to use either FIFO or LIFO under GAAP allows companies
to choose the most convenient method when valuing inventory.

2. Intangibles

The treatment of developing intangible assets through research and development is also different

between IFRS vs US GAAP standards. Under IFRS, costs in the research phase are expensed as

incurred. Costs in the development phase may be capitalized based on certain factors. On the other

hand, US GAAP generally requires immediate expensing of both research and development
expenditures, although some exceptions exist.

3. Rules vs. Principles

The other distinction between IFRS and GAAP is how they assess the accounting processes – i.e.,

whether they are based on fixed rules or principles that allow some space for interpretations. Under

GAAP, the accounting process is prescribed highly specific rules and procedures, offering little

room for interpretation. The measures are devised as a way of preventing opportunistic entities
from creating exceptions to maximize their profits. On the contrary, IFRS sets forth principles that

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companies should follow and interpret to the best of their judgment. Companies enjoy some leeway
to make different interpretations of the same situation

4. Recognition of revenue

Concerning how revenue is recognized, IFRS is more general, as compared to GAAP. The latter

starts by determining whether revenue has been realized or earned, and it has specific rules on how

revenue is recognized across multiple industries. The guiding principle is that revenue is not

recognized until the exchange of a good or service has been completed. Once a good’s been

exchanged and the transaction recognized and recorded, the accountant must then consider the

specific rules of the industry in which the business operates. Conversely, IFRS is based on the

principle that revenue is recognized when the value is delivered. It groups all transactions of

revenues into four categories, i.e., the sale of goods, construction contracts, provision of services,

or use of another entity’s assets. Companies using IFRS accounting standards use the following
two methods of recognizing revenues:

i. Recognize revenues as the cost that can be recovered during the reporting period

ii. For contracts, revenue is recognized based on the percentage of the whole contract

completed, the estimated total cost, and the value of the contract. The amount of revenue
recognized should be equal to the percentage of work that has been completed.

5. Classification of liabilities

When preparing financial statements based on the GAAP accounting standards, liabilities are

classified into either current or non-current liabilities, depending on the duration allotted for the

company to repay the debts. Debts that the company expects to repay within the next 12 months

are classified as current liabilities, while debts whose repayment period exceeds 12 months are
classified as long-term liabilities. However, there is no plain distinction between liabilities in IFRS,
so short-term and long-term liabilities are grouped. (Cfi, 2022).

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Summary of key differences between IFRS and US GAAP

US GAAP IFRS
Financial Statement
Presentation
Income Statement 3 years required 2 years allowed
Balance Sheet Current before non-current Non-current before current
3 years required 2 years allowed
Statement of Cash Flows Interest expense, interest income, and dividends Flexibility with the location of interest expense,
received in Cash from Operations interest
income and dividends
Each interim period is an integral part of fiscal Each interim period is a stand-alone period
Quarterly/Interim Reports year
MD&A required MD&A not required
Not allowed directly on the financial statements
Allowed on the financial statements themselves
Non-standardized metrics themselves
Alternative EPS prohibited Alternative EPS allowed
Recognition or Classification
Development Costs Expensed, exceptions include software and movies Capitalized when specific conditions are met
All Deferred Tax Assets recognized, offset with a
Income Taxes Deferred Tax Assets only recognized when
Valuation Allowance
probable
Investment Property Not separate from PPE A separate category
Biological Assets Included in Inventory Measured at fair value, separate from Inventory
Categories for operating and finance leases on
Leases Single category on balance sheet
balance sheet
Recognized when >50% likely, measurement
Recognized when >75% likely, measurement
Contingent Liabilities methods differ
methods differ
Referred to as Provisions
Measurement
LIFO allowed with other methods LIFO not allowed
Inventory Same method required with Inventory of similar
Method can vary across Inventory groups
nature
Historical cost Fair value allowed
Fixed Assets Separate depreciation of separable components
Cost segregations allowed, not required
required
Intangible Assets Historical cost Fair value allowed
Key Similarities in Recent
Changes
ASC 606 effective 2018 IFRS 15 effective 2018
Converged standard that focuses on a conceptual Converged standard that focuses on a conceptual
Revenue framework using a 5-step process for recognizing framework using a 5-step process for recognizing
revenue. revenue.
Minor differences in implementation and updates. Minor differences in implementation and updates.
ASC 842 effective 2019.
IFRS 16 effective 2019.
Leases over 12 months recognized as Right of
Leases over 12 months recognized as Right of
Leases Use Assets on Balance Sheet with
Use Assets on Balance Sheet with
corresponding Lease Liabilities. Distinguishes
corresponding Lease Liabilities. No
between Operating and Finance Leases. Finance/Operating Lease categories.

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 ASU 2015-03 No change
Debt Issuance Costs Debt issuance costs are now netted against the Debt issuance costs are netted against
outstanding debt the outstanding debt
This is only a general summary of some main areas. Consult applicable standards for specific information and guidance.
Figure 1: Summary of key differences between IFRS and US GAAP

Source:

Conclusion
In practice, harmonization of accounting standards tends to mean the process of increasing the
compatibility of accounting practices by setting bounds for the degree of variations. This can be
accepted to be the most suitable definition of the concept. Based on previous studies the
international harmonization of Accounting Standards is a process, which brings international
Accounting Standards into some sort of agreement, to achieve a common set of accounting
principles. 7000 European companies used the International Accounting Standards (IAS) in the
European Union (EU), beginning in 2005. The IAS is developed from the IASB. Furthermore, the
long-existing rejection of IAS in the U.S. seems to change. Coordination of agendas of the
American standard-setting board (Financial Accounting Standard Board (FASB) and the IASB
have been announced. In conclusion, the IASB plays a major role in the field of international
harmonization, The IASC has to, outlaw practices that are misleading or allow management too
much latitude; and then should try to eliminate options that do not contribute to fairness and
usefulness in financial reporting. Standard-setting bodies must have compromised on the serous
issues to narrow the gap between their standards.

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