Standard Model
Why International Accounting Standards Should Be Harmonized
The world economy and international accounting would greatly benefit from having harmonized accounting standards that can be used by all countries. Historically there have been four main accounting standards models in the industrialized world. They are the United States, The United Kingdom, Continental Europe, and Latin American standards. The International Accounting Standards Committee (IASC) started to achieve convergence in 1973 with the United States, Canada, and the United Kingdom. Recently, the International Accounting Standards Board (IASB) has taken strides in achieving even more harmonization and convergence of accounting standards. All E.U companies have been required to base their financial reports according to the International Financial Reporting Standards (IFRS). Many other countries not in the E.U such as New Zealand, Hong Kong, Australia, and Israel have also taken steps to start harmonizing their accounting standards to that of the IRFS.
By harmonizing accounting standards it will help facilitate international transactions and minimize exchange costs; standardize information to world-wide economic policy-makers; improve financial markets information; and help to improve government accountability. By having harmonized standards it makes international investment decisions less risky, as well as for managers making international based financial decisions. It can be very tricky when non-domestic companies are listed in U.S stock exchanges because they are not using the same practices as the United States is most of the time. If all countries followed the same accounting policies it would create a global “fairness”. Auditors and regulators would be receiving and looking at the same information when evaluating companies. It is hard to compare the financial information of companies from different countries if they are not required to follow the same set of standards and rules in their accounting practices. In some cases companies are required to prepare financial statements under several different accounting practices; this takes up both time and financial resources of the company. Between countries where free trade is not present harmonized standards will allow nation’s tariffs and quotas to be more accurate as well as less risky for those involved in the trading.
Harmonization must first start out with standardizing the reporting requirements for financial statements by national securities regulators. The International Organization of Securities Commissions (IOSCO), which the United States’ SEC is a member of, is leading the development of an accounting policy for securities regulator’s reporting requirements. IOSCO has built in a policy which limits the amount of reporting alternatives a company can use when reporting its results of operating expenses and net worth. In 2002 the Norwalk Agreement formalized the IASB and FASB’s commitment to start converging accounting standards. Significant steps have been taken since the agreement; FASB and IASB meet on a regular basis. They are working jointly on trying to develop common standards in areas of business such as applying the acquisition method, revenue recognition, liability extinguishment, and leasing. A long term project has also been put in place to make conceptual framework for accounting standards with significant improvements in it. Under the framework there are two underlying assumptions, they are accrual basis accounting and the “going concern” principle. Governments’ accounting financial reporting standards also need to be harmonized throughout the world to assist with harmonizing all companies.
Lesser developed countries are also trying to promote accounting standards harmonization by establishing regional accounting associations as well as teaching accounting education programs. The International Monetary Fund has assisted in this effort by giving aid to governments. By having developing countries adopt international accounting standards as well it will help reduce the expense of creating domestic accounting standards. By harmonizing standards with the rest of the world developing countries with high inflation rates may be able to cut down on poor accounting practices.
For the entire world to have harmonized accounting standards the U.S must recognize international standards and start to abide by them. The U.S model is not the ideal model and it has been argued that the Internal Revenue Service’s standards are very complicated. Many authors argue that the U.S does not have a strong enough standards system to attract foreign firms and countries to its framework without adopting some international standards first.
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Standard Model
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