Many authors have put together different definitions for accounting harmonization in various ways. It would seem not an easy word to define, as neither the European Commission nor other organs of the commission have explicitly defined the concept of accounting harmonization. Some have even complicated the whole concept, by attempting to substitute harmonization with standardization, as if to mean that the process is the same, rather than making it more compatible. 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.
Harmonization of accounting standards has become a highly demanded issue of discussion and debate among accounting professionals around the globe. Accounting Standards are the authoritative statements of best accounting practices issued by recognized expert accountancy bodies relating to various aspects of measurements, treatments and disclosures of accounting transactions and events, as related to the codification of Generally Accepted Accounting Principles (GAAP). These are stated to be the norms of accounting policies and practices by way of codes or guidelines to direct as to how the items, which make up the financial statements, should be dealt with in accounts and presented in the annual accounts. In fact, such statements are designed and prescribed to improve and benchmark the quality of financial reporting. They bring about uniformity in financial reporting and ensure consistency and comparability in the data published by enterprises. These are aimed at furnishing useful information to different users of the financial statements, such as shareholders, creditors, lenders, management, investors, suppliers, competitors, researchers, regulatory bodies and society at large.
The process of harmonization of accounting standards gives the global community a single entity. The diversity of stockholding doesn’t matter today if the accounting system can generate general purpose financial statements in real sense. Thus, along with the process of globalization, the awareness of investors in capital markets has increased manifold and the size of investors is multiplying. Foreign institution investors (FIIs) are investing in significant volumes globally, as also are several Indian companies through GDRs (Global Depository Receipts) and ADRs (American Depository Receipts). Hence, the need for harmonization of accounting standards has been strongly advocated globally in order to faster the economic decision-making process.
The mission for international harmonization of reporting practices cannot be as easy as looking at a cash flow statement, where you identify different ways of categorizing cash flows, alternative formats of presenting cash flows from operating activities and just many other differences. In addition, several issues such as: the bad debts provision; valuing marketable securities; and the treatment of long-term contracts, can be considered specific and given particular treatment.
Need for Harmonization of Accounting Standards
The increased globalization of capital markets has resulted in a need for international accounting standards. In an increasingly globalized world, it is clear that financial statements of companies operating under different accounting management systems are not easily comparable. This has led to the need and development of the International Accounting Standards Board (IASB) whose stated objective is the development of a single set of high quality, understandable, enforceable and globally-acceptable International Financial Reporting Standards.
The harmonization of accounting standards is needed due to the globalization of businesses and services and an increase in cross-border investments and borrowings. Some of the benefits of harmonization of accounting standards are:
- It ensures reliable and high quality financial reporting 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 say multinational companies having subsidiaries and associates in various countries wherein each country has its own set of GAAP.
- It makes the comparison of the performance of a company against its domestic and international peers easier and more meaningful.
- It adds to the international credibility of a company.
- It is a precursor for accessing international capital markets which can, in turn, reduce the capital cost and consequently, improve the performance of a company.
- It provides a level playing field where no country is advantaged or disadvantaged by its GAAP.
Additional benefits of a global financial reporting framework that can be achieved through harmonization are numerous and can include greater comparability of financial information for investors, greater willingness on the part of investors to invest across borders, lower cost of capital, more efficient allocation of resources; and even higher economic growth not only for companies and organizations but for governments also.