Chapter 2

International Harmonization of Financial Reporting

What is harmonization?
Harmonization -- the process of increasing the level of agreement in
accounting standards and practices between countries.
Harmonization is not the same as standardization
whereas standardization implies the elimination of alternatives in
accounting for economic transaction and other events , Harmonization
refers to reduction of alternatives while retaining a high degree of
flexibility in accounting practices, so harmonization allows different
countries to have different standards as long as the standards do not
conflict.

The two levels of Harmonization
Harmonization in accounting standards, which is increased
agreement in accounting rules.
Harmonization in practice, which is increased agreement in actual
accounting practices.
Harmonization in standards may or may not result in
harmonization in practice.
rg!ments for and against Harmonization
rg!ments for Harmonization "#
Proponents of accounting harmonization argue that :-
Harmonization expedite the integration of global capital
markets and make easier the cross-listing of securities because
of the comparability of inancial statements.
Harmonization facilitate international mergers and ac!uisitions.
Harmonization reduce investor uncertainty and the cost of
capital.
Harmonization reduce financial reporting costs.
Harmonization allow for easy adoption of high-!uality
standards by developing countries.
rg!ments for Harmonization "#
Proponents of accounting harmonization argue that its not
necessary to force all companies world wide to follow comment set
of standards.
"ignificant differences in standards currently exist .
#he political cost of eliminating differences.
$vercoming %&ationalism' and traditions.
Perhaps it will not provide significant benefits.
(ill cause %"tandards $verload' for some firms.
)iverse standards for diverse places is acceptable.
Harmonization $fforts
%rganizations involved
*ssociation of "outh +ast *sian &ations ,*"+*&-.
.nited &ations ,.&- / +uropean .nion ,+.-.
0nternational $rganization of "ecurities 1ommissions ,0$"1$-.
0nternational ederation of *ccountants ,0*1-.
0*"2 and *"2.

International %rganization of &ec!rities Commissions 'I%&C%()

&ee we* site http://www.iosco.org
+stablished in 3456, 0nternational $rganization of "ecurities
1ommissions 0$"1$ today 0$"1$ is the leading organization for
securities regulators around the world , with about 378 ordinary,
associate, and affiliate members from about 399 countries , and aims
among other things to :
*chieve improved market regulation internationally.
acilitate cross-border listings.
*dvocates for the development and adoption of a single-set of high
!uality accounting standards.
International Federation of cco!ntants 'IFC()
&ee we* site http"++ifac)org
ormed in 3455, 0nternational ederation of *ccountants ,0*1-
aims to develop international standards of auditing, ethics, education,
and training , 0n pursuing these goals 0*1 has contributed to the
harmonization process in many ways as :
2egan 0nternational orum on *ccountancy )evelopment ,0*)-
to enhance the accounting profession in emerging countries. #hat
was in response to criticism from the world bank after the *sian
financial crises that the accounting profession was not doing
enough to enhance the accounting capacity capabilities in emerging
countries )
"tarted the orum of irms to raise global standards of accounting
and auditing ,)etails at www)ifad)org-)
$, $!ropean ,nion "
&ee we* site http"++e!ropa)e!+inde-.en)htm
#he +uropean .nion +. was the +. was established by the #reaty of
:aastricht on &ovember 3447 upon the foundations of the pre-
existing +uropean +conomic 1ommunity, founded in :arch 3485
with the signing of the #reaty of ;ome by sex +uropean nations
,2elgium, rance, <ermany, 0taly, =uxemburg, and the &etherlands-,
and now +. 1omprising >5 member states .
#he +uropean .nion +. Has worked to harmonize accounting
standards within the +., primarily by way of two directives, +.
directives possess the force of law .
Fo!rth /irective 0123
a set of comprehensive accounting rules covering the content of
annual financial statements, their methods of presentation and
measurement and disclosure. #he ourth )irective built on the
principle of a %true and fair view.'
&eventh /irective 0134
re!uires consolidated financial statements for company groups of
a certain size.
International cco!nting &tandard 5oard 'I&5(
0nternational *ccounting "tandard 2oard was created in >993 to
replace the predecessor, the 0*"1 ,0nternational *ccounting
"tandards 1ommittee-.
0*"1 was established in 3457 by an agreement of the leading
accounting profession bodies in 39 countries ,the .nited "tates of
*merica, *ustralia, 1anada, rance, <ermany, ?apan, :exico,
&etherlands, .nited @ingdom and 0reland -.
#he 0*"1 harmonization effort from 3457 to >993 evolved in
several phases, the initial phase was the issuance of >A 0*"s, the
approach was lowest-common-denominator, so many of these
standards allowed multiple options.
0*"2 works toward harmonization of international accounting
standards.
#he mission of 0*"2 is to develop, in the public interest, a single
set of high !uality, understandable and international financial
reporting standards ,0;"s- for general purpose financial
statements.
0nternational *ccounting "tandard 2oard 1omprised of 36
members ,3> full, > part-time-.
5 members of 3> full time must have a formal liaison responsibility
with a national board.
"tandard development process is open and "tandards are
principles-based.
"ince establishment of 0*"2, focus is on global standard-setting
rather than harmonization per se.
I&5 6 7a8or Initiatives
Comparability Project
2egun in 34B4, which can be described as the second phase of the
0*"1s effort ,#he third phase was the ramework for the
Preparation and Presentation of inancial "tatements-.
#he comparability of financial statement ProCect aims at eliminate
most of choices of accounting treatment currently primeted under
0*"s.
1omprehensive review of existing 0*" , and as areult many of
0*"s were revised 0n order to increase rigor of 0*".
IOSCO Agreement
#he final Phase 0*"1 work to harmonization .
2egun in 3447 and ended with the creation of 0*"2 in >993
#he main activity during this period was establishment of a core set
of 79 accounting standards could be endorsed by 0$"1$ for cross-
listing .
"tandards agreed upon by 0$"1$ and 0*"1.
I&5 6 Revised &tr!ct!re
#he restructured 0*"2 is overseen by the 0*"1 oundation
which also oversees:
#he 0nternational inancial ;eporting 0nterpretations
1ommittee ,0;01-.
#he "tandards *dvisory 1ouncil ,"*1-.
*lso, 0;"s are subCect to due process and the 0*"1
oundation now periodically reviews its constitution.
I&5 9erspective
0*"2 attempts to follow a Principles-2ased approach to standard
setting.
*s such accounting standards are grounded in the 0*"2
ramework.
9rinciples#5ased approach
;epresents a contrast to a ;ules-2ased *pproach.
*ttempts to limit additional accounting guidance ,e.g., *"2
+0#s, *"2 0nterpretations-.
0s designed to encourage professional Cudgment and discourage
over-reliance on detailed rules.
I&5 Framewor: and IFR&s
I&5 Framewor: 'more details re;!ired in single file a*o!t
Framewor:()
#he most important phase of harmonization activity is releasing
ramework for the Preparation and Presentation of inancial
"tatements.
#he obCective and underlying assumptions of financial statements.
Dualitative characteristics of information.
)efinition, recognition, and measurement of elements in financial
statements.
1oncepts of capital maintenance.
Possesses obCective and underlying assumptions of financial
statements.
Primary obCective is to provide information useful to decision
making.
.nderlying assumptions include accrual-basis and going concern.
<!alitative characteristics of information
Understandability E should be understandable to people with
reasonable financial knowledge.
Comparability E allows for meaningful comparisons to financial
statements of previous periods and other companies.
Relevance E useful for making predictions and confirming existing
expectations.
Reliability E free from bias ,neutral- and represents that which it
claims to represent ,representational faithfulness-.
Definition E assets, liabilities, and other financial statement
elements are defined.
Recognition E guidelines as to when to recognize revenues and
expenses.
eas!rement E various bases are allowed, historical cost, current
cost, realizable value, and present value.
"inancial capital maintenance
$ne approach to income measurement.
&et income represents the increase in net financial assets,
excluding owner transactions.
#he approach in ..". <**P.
P#ysical capital maintenance
*nother approach to income measurement.
&et income represents increase in physical productive capacity.
+xcluding owner transactions.
;e!uires current costs for measurement of certain physical assets.
9resentation of Financial &tatements 'I& 0(
This standard provides g!idance in the following areas
P!rpose of financial statements E to provide decision-useful
information.
Components of financial statements E balance sheet, statements of
income, cash flows, changes in e!uity, and notes to the financial
statements.
"air presentation E the overriding principle of financial statement
presentation.
Acco!nting policies
"hould be consistent with all 0*"2 standards.
(hen specific guidance is lacking, use standards on similar issues,
and definitions of the financial statement elements.
$asic principles and ass!mptions
;eiteration of underlying assumptions.
*ccrual basis/going concern/comparability.
Str!ct!re and Content of "inancial Statements
Provides information on presentation format:
1urrent/noncurrent.
0tems to be included on face of financial statements.
1ontent of notes.
First Time doptions of IFR&s 'IFR& 0(
Provides guidance for first time adoption.
:uch used in >998, particularly in +..
;e!uires compliance with all effective 0;"s.
*llows exemptions when costs deemed to outweigh benefits.
,se of IFR&s
$vidence of s!pport for IFR&s
*doption by the +. E public companies in the +. were re!uired to
begin using 0;"s in >998.
0$"1$ has endorsed 0;"s for cross-listings.
:any developing nations have adopted 0;"s.
"ome countries disallow 0;"s for domestic firms but allow
foreign companies to use them.
..". is a maCor exception, does not allow use of 0;"s.
I&5+F&5 Convergence
The =orwal: greement
;eached in >99> 2etween the 0*"2 and *"2.
0s a promise of cooperation in standard-setting between the
0nternational *ccounting "tandards 2oard ,0*"2- and the inancial
*ccounting "tandards 2oard ,*"2-.
0*"2 and *"2 pledged to use there best effort to
3. make there existing financial reporting standards fully compatible
as soon as practicable .
>. to coordinate there work program to ensure that once achieved
compatibility is maintained
#he *greement ;epresents a significant step #o work toward
accounting standards convergence to achieve international
harmonization..
I&5+F&5 Convergence
The :e> initiatives in the =orwal: greement was ? pro8ects
3. %oint projects E boards will work together to address some issues
,e.g., revenue recognition-.
>. S#ort&term convergence E the tow board agreed to undertake "hort-
term proCect to remove differences between 0;"s and ..". <**P for
issues where convergence is deemed most likely.
7. IAS$ liaison E 0*"2 member in residence at *"2.
6. onitoring IAS$ projects E *"2 monitors 0*"2 proCects of most
interest.
8. Convergence researc# project E identification of all maCor differences
between 0;"s and ..". <**P.
A. Convergence potential E *"2 assesses agenda items for possible
cooperation with 0*"2.