Challenges of Harmonization of Accounting System

QUESTION Discuss the challenges of harmonization of affair relationship agreement. write up Standards atomic scrap 18 the statements of mark of practice of the regulatory explanation bodies that be to be observed in the education and presentation of monetary statements. The Generally cope withd score Principles is comprised of a large group of individual account statement standards. chronicle Standards in a nonher(prenominal) words can be stated as rules which govern the forwardness of monetary statements. They are the generally accepted invoice principles (generally accepted bill principles). Where by explanation practices are the actual apply practices by restrainers.They are influenced by invoice Standards, which govern the preparation of financial reports. Harmonization of chronicle standards can be defined as the continuous demonstrate of ensuring that the Generally Accepted untrieds report Principles (generally accepted account principles) are f ormulated, aligned and updated to supranational best practices (GAAPs in other countries) with sufficient modifications and fine tuning considering the domestic conditions. Harmonization is the process of increasing compatibility of accounting practices by learnting bounds on their degree of variation.Harmonization can be defined as the process of bringing planetary Accounting Standards into moreover about sort of agreement so that the financial statements from different countries are alert according to a familiar set of principles of measurement and manifestation (Haskins et al. 199629). check to Wolk et al. stilbestrolcribed harmonization of Accounting Standards as the co-ordination or similarity among the several(a) sets of national Accounting Standards and methods and formats of financial report. (Kleekamper et al. , 2002) Kleekamperet al. xplain, that the aim of the planetary harmonization process of Accounting Standards is to center or overcome differences world -wide, in ball club to reach a better outside(a) Comparability of financial statements. transnational accounting harmonization can be defined as the process of bringing world(prenominal) Accounting Standards into rough sort of agreement so that the financial statements from different countries are prepared according to a common set of principles of measurement and disclosure (Haskins et al. 199629).This harmonization is necessitateed out-of-pocket to the globalization of businesses and services and increase in cross-border investments and borrowings and academicians, regulators and governments put one across been constantly striving to patch up the local/domestic Accounting Standards(AS), also referred to as Generally Accepted Accounting Principles (GAAP), with the internationalistic Accounting Standards (IAS) issued by the UK establish world-wide Accounting Standards table (IASB) (formerly the multinational Accounting Standards delegation-IASC).The IASB has been trying to harmonize international accounting principles since 1973. Further, the IASB and the International Organization of Securities Commissions (IOSCO) have been jointly working on harmonization since July 1995, and in May 2000 the IOSCO finished its review of the IAS and recommended usage of certain IAS, supplemented with reconciliation, disclosure and interpretations. Some benefits of harmonization of accounting practices is as follows * It ensures reliable and high shade financial insurance coverage and disclosures. In certain cases, it can prove to be crucial to the economic and financial development of a country * It enables a systematic review and evaluation of the performance of a multinational familiarity having subsidiaries and associates in various countries wherein each country has its deliver set of GAAP * It makes the comparison of the performance of a company against its domestic and international peers easier and more(prenominal) meaningful * It is a precursor for accessing international capital markets which can, in turn, reduce the capital cost and consequently, amend the performance of a company * transnational companies, the multinational companies benefit from closer harmonization for the following reasons a) Access to international finance is easier, the international financial markets understand the financial instruction presented to them more easily. If the culture is provided on a consistent basis surrounded by companies regardless of their country of origin. b) advanced management control, in a business operate in several countries management control is improved. Internal financial predicateation is more easily prepared on consistent basis if outwardly need financial information is required on a transformless basis. c) Consolidation of financial statement is easier ) A reduction of auditing cost due to harmonized accounting practices and standards. e) A deportation of accounting staff across national borders would be e asier f) It would be easier to comply with reporting requirements of overseas persuade exchanges. g) Appraisals of foreign entities for take over and mergers would be more straightforward. * International economic groupings, international groupings corresponding EU (European Union) could work more effectively if at that place were international harmonization of accounting policies. Part of the function of international groupings is go make cross-border trade easier. Similar to accounting regulation would help this process. governing body of developing countries would save time and money if they would drive international standards and, if these were used internally, governments of developing countries could attempt to control the activities of foreign multinational companies in their own country. These companies could not hide behind foreign accounting practices which are demanding to understand. * Tax authorities, it forgeting be easier to calculate the appraise liability o f investors, including multinationals who receive income from overseas sources. * Large accounting and auditing firms would benefit as accounting and auditing would be much easier if similar accounting practices existed by government agency ofout the world.Despite the importance of harmonizing accounting standards, thither still challenges facing harmonization of accounting standards between the member countries utilize IFRS (international financial reporting standard) and also between join States using US GAAP. These challenges are brought about different tax impartialitys, different culture, different intelligent requirement, nationalism and different needs of financial statements. Speaking of harmonization we should flummox in consideration of International accounting standard board (IASB) based in UK and Financial accounting standard board (FASB) based in US. TheInternational Accounting Standards Board(IASB) is the self-sufficient,accounting standard-setting body of theI FRS Foundation.The IASB was founded on April 1, 2001 as the successor to theInternational Accounting Standards Committee(IASC). It is creditworthy for developingInternational Financial Reporting Standards(the new name forInternational Accounting Standardsissued later 2001), and promoting the use and application of these standards. TheFinancial Accounting Standards Board(FASB) is a private,not-for-profit government activitywhose primary coil purpose is to develop generally accepted accounting principles(GAAP) at heart theUnited Statesin the publics interest. TheSecurities and Exchange Commission(SEC) evinced the FASB as the organization responsible for setting accounting standards for public companies in the U. S.It was created in 1973, replacing theCommittee on Accounting Procedure(CAP) and theAccounting Principles Board(APB) of theAmerican lend of Certified Public Accountants(AICPA). The FASBs mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and substance abusers of financial information. To achieve this, FASB has five goals. * Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability, and on the qualities of comparability and consistency. * Keep standards current to reflect changes in methods of doing business and in the economy. Consider promptly any significant areas of neediness in financial reporting that might be improved through standard setting. * Promoteinternational convergence of accounting standardsconcurrent with change the quality of financial reporting. * Improve common understanding of the nature and purposes of information in financial reports. The two boards have been making efforts to harmonize the accounting principles, as of September 2011, there was a push to harmonize, or integrate, the accounting standards of the United States, which operates under Generally Acc epted Accounting Principles (GAAP), with International Accounting Standards (IAS).The rationale is that it would level the playing field for global businesses by providing regulators, auditors and finale-makers (investors) consistent information based on the same accounting methodologies. Supporters believe that this would improve accountability, reduce international transactional and exchange rate risks and improve information transfer to enhance economic policy decision-making. The difference between IAS and US GAAP is that the former is more principle based and the later is rule based. The following are Challenges to harmonization of accounting systems. Licensing and Enforcement, Individual accountants, CPAs and tax faithfulnessyers worldwide would need to comply with and obtain licensing through an internationally accepted rules-making body. If he international body lacks enforcement authority, there is no prosecutorial authority for breaking international laws. However, if th e international body does have prosecutorial authority over a U. S. citizen, there would elevate jurisdictional and constitutional issues regarding the rights of an international bodys rights to prosecute an American under international law. Finally, issues arise from the perspective of U. S. -only based businesses regarding forced compliance IASB standards are principles-based. gum olibanum the countries that have rules-based standards are expected to experience considerable difficulty in harmonization of their standards with IFRS. There are challenges that IASB and nations adopting IFRS need to address in the advent days.One oversize challenge for countries adopting IFRS is the shortage of manpower and more particularly, IFRS-trained manpower. For case in point, with just six months to go before mainland Chinas listed companies adopt IFRS, demand for accountants is rising and could run into millions in the coming years, if the new standards are rolled out for all of the countr ys companies and not just the listed ones. Accountants say that the challenge for China, as it scrambles to meet the accounting shift deadline, bequeath lie in getting its over-1,100 listed companies to establish the appropriate financial reporting systems and in training enough qualified accountants by January. The risk is that rough of these companies may fail to make the alteration on time.Estimates reveal that China has a shortfall of 300,000 qualified accountants and is likely to require a shape up three million over the coming years to keep gait with its current rate of economic growth Difference purpose of financial reporting, in some countries the purpose is solely for tax assessment, while others it is for investor decision making, Different legitimate systems, these prevent the development of certain accounting practices and contain options available. The Accounting world can be divided into those countries which have a legalistic orientation toward accounting and th ose with a non legalistic orientation (Nobes et al. , 19978). The non-legalistic approach can be found in countries, which use common law. In Common law countries, Accounting does not depend upon law. Accountants (professional organizations) arrange accounting rules. Hence, it is the private sector, which determines Accounting and not the law (Choi et al. , 2002). The task of the legal system is to give an arrange to a specific case rather than to formulate general rules for the prospective (Choi et al. 2002). The legalistic approach can be found in countries, which use the so called code (or codified) law. In contrary to the common law, the codified law system needs to develop rules in detail for the Accounting and financial reporting (Nobes, 1994). This means that Accounting rules are incorporated into national law and pass to be highly prescriptive and procedural (Choi et al. , 200243). In these countries the role of law is to describe behavior, which isconsidered to be accept able in the society (Choi et al. , 2002). Different user groups, countries have different ideas about who the relevant user groups and their respective importance.In regular army investor and credit groups are given prominence, while in Europe employees whoop it up a higher profile. Provider of finance, there three main sources for external capital are shareholders, banks and government (Hill, 1999). It varies from country to country, which of these three provides most of the financial capital to companies. In countries like Germany and Italy banks provide companies with capital. In countries like England and the United States shareholders provide companies with capital. The government is the provider of capital in countries like France and Sweden. (Hill,1999) This form of capital providers means that Accounting Practices differ in order to sate needs of capital providers.In the case of shareholder ownership, (e. g. in the U. K. and the U. S. ), information disclosure will be mo re important than in countries, where capital is raised from banks or governments. This is explained by the fact that in the latter countries information will be transmitted more directly. (Radebaugh and Gray, 1997) It is impossible for a company to inform each shareholder with its specific information needs, because they are a big and unorganized group. Therefore financial statements in the US and UK are orient toward providing individual investors with the information they need to make decisions about purchasing or selling corporate stocks and bonds (Hill, 1999593).Tax laws, the key question here is to ask, how much revenue regulations determine Accounting measurements. In countries like the U. S. , U. K. and Netherlands there is no interplay between tax and Accounting law. When Accounting Standards are developed, the only focus is how to precede the information function. Questions about taxation are not considered in those countries (Achleitner, 2000). In contrary, in nations as France and Germany, tax and Accounting Systems are ruled be (Nobes and Parker, 2000). There is the principle of decisiveness in continental European countries. This means that the profit of the balance sheet is at the same time the knowledgeability to snap income taxes (Achleitner, 2000).In Tanzania income tax act is in dis agreement with some accounting procedures like computation of depreciation, Bad debts and therefore disagree on how accountant compute organization profit and therefore in Tanzania should prepare to set of financial statement one for tax purposes and the other for other users of accounting information. Cultural differences result in objectives for accounting systems differing from country to country for framework Islamic laws does not recognize the use of interest rate. The lack of grueling accountancy bodies, many countries do not have strong independent accountancy or business bodies which would press for better standards and greater harmonization.Uniqu e circumstances, some countries may be experiencing unusual circumstances which affect all aspects of free-and-easy life an d impinge on the ability of companies to produce correct reports, for example hyperinflation, civil war, currency restriction. Nationalism is demonstrated in an involuntariness to accept another(prenominal) countrys standard. The Financial Accounting Standards Board (FASB) in the U. S. is responsible for setting accounting standards based primarily on Federal securities laws and state CPA licensing laws. All countries have specific securities laws, tax laws and banking and financial regulations that dictate accounting principles. Furthermore, in the United States, there are individual state laws that govern business, banking and insurance activities. Adopting international accounting standards would not only conflict with U. S. tatute law, but also constitutional law associated with states rights. enduring Platform, Beginning in 2005, all 7,000 EU publicly traded companies are required to apply IFRS in the preparation of their consolidated financial statements. This represents yet another challenge as preparers of financial statements from Latvia to Portugal and from Poland to Sweden grapple with unfamiliar requirements. In preparation for this sweeping change, the IASB completed its stable platform of standards in March 2004. bran-new and revised standards acknowledged five new IFRSs and 17 amended IASs, resulting from the IASBs Improvements Project and Phase I of its argumentation Combinations Project.Some of the more significant revisions to IFRS that resulted from these projects include * The LIFO method for costing inventories is no longer allowed * The concepts of fundamental delusion and extraordinary items are eliminated * Trading securities are now included in a larger defined category of financial instruments at decorous value through profit or loss and entities may designate any financial asset or liability into this category (commonly referred to as the fair value option) * Fair value hedge accounting may now be used more readily for a portfolio hedge of interest rate risk * Guidelines for share-based payments have been added The pooling-of-interests method for business combinations is no longer allowed * Goodwill is no longer amortized, and negative saving grace is not recorded in a business combination institution wide acceptance, National accounting standards are highly politicized and there is a good deal a natural tendency to place the interests of the national economy forth of those of the global economy. Private sector businesses and professional accounting bodies also have a vested interest in accounting practices and financial reporting. Pressure from these groups to change or reject certain standards can carry a freshet of weight with political decision makers. Adopting international financial standards is met with additional challenges in developing countries. They often lack th e resources and infrastructure to adapt national legal and legislative frameworks in which to house the standards, making proper implementation difficult.Training and Retraining, When a country decides to harmonize with the international standards, its companies, accountants and auditors need to be retrained in the new standards and reporting procedures for financial statements. College and university programs in this field also have to undergo significant changes in order to educate new people go in the profession. Before any of this can happen, trainers and professors will require training so they can instruct professionals and students. This will require the development of new acquisition materials and curricula, new examinations for professional licensing and new accounting software and reporting systems. To pull ahead complicate matters, the adoption of harmonized standards has to be phased in, so for a number of years, two different systems are in operation. Such a omplex transition requires a lot of safety mechanisms to ensure it achieves uniform results. To sum up with, Harmonization of financial statement is rattling crucial for accounting profession and also for the global business growth especially for multinational companies which will now find easily in preparation of parent and auxiliary financial statement since have to be prepared according to IFRS. 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