Harmonization and International
Accounting Standards
ACC4305
Chapter 5
ACC4305
Michel Leseure
Terminology
• Harmonisation vs. standardisation
ACC4305
Michel Leseure
Reasons for harmonization
• Investors and creditor needs
• Multinational company needs
• Intergovernmental transnational bodies
needs
• Needs of international accountancy
firms
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Michel Leseure
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
ACC4305
Michel Leseure
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
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Michel Leseure
IASB
• Founding members retained significant
influence, including:
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Australia
Canada
Germany
Japan
Mexico
The Netherlands
United Kingdom
United States
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Michel Leseure
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.
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Michel Leseure
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
ACC4305
Michel Leseure
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
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Michel Leseure
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 crossborder listings; and
• Gap between IAS and (US/UK) GAAP is
narrowing.
ACC4305
Michel Leseure
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)
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Michel Leseure
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.
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Michel Leseure
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
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Michel Leseure
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
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Michel Leseure
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)
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Michel Leseure
The Seventh Directive
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Approved in 1983
Consolidated Accounts
Defined “group” (U.K. vs. German)
Measurement of Performance and Financial Position
Harmonize existing legal requirements
Treatment of:
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Historical cost accounting
Inventory Valuation and Depreciation
Goodwill
Current replacement cost
Revaluations to market value
Price level adjustments
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Michel Leseure