1. Harmonization and International Accounting Standards
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
Investors and creditors: in the context of globalization and international investments,
it has become more and more crucial to understand/have access to financial information
from foreign companies. Quote the example of Novo.
Multinational: same reasons as above PLUS need to facilitate the consolidation
process – quote the example of BMS

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
IAS provides an inernational standard – useful for reporting to an international
audience.
Question: should you know UK, US, French, Moroccan or International accounting?

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
Stress that adoption has been easy and a true success story when:
* There were not many differences
* Adoption presented important cost benefits
* Adoption facilitated a complex regulatory problem

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