CHAPTER 3
INTERNATIONAL ACCOUNTING
Factors Influencing the Development
of Accounting Systems:
•
•
•
•
Level of education
Political system
Legal system
Economic development
Influences on the Development of Financial
Reporting
Agricultural
Resource Based
Tourist Based
Manufacturing
1.Type of
economy
2.Legal system
Codified
Common law
3. Political system
Democratic
Totalitarian
4.Nature of business ownership Private enterprise
Socialist
Communist
5.Stability of currency
6.existence of accounting legislation
7.Growth pattern of the economy
Growing
Stable
Declining
7.Education system
So what is the solution with such differences
• There are major differences in the financial reporting
practices of companies around the world.
• This Leads to great complications for those preparing,
consolidating, auditing and interpreting published
financial statement.
• Several organizations throughout the world have been
involved in attempts TO:
HARMONIZE or STANDARDIZE accounting.
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Harmonisation-BENEFITS AND BARRIERS
Improve quality of
reporting
Increase
comparability
of reports
prepared in
different
countries
Reduce reporting cost
for multi-national
companies
Facilitate
comparison of
Potential benefits
of harmonisation
Remove
barriers to
international
capital flows
Harmonisation-BENEFITS AND BARRIERS
Different purpose of
financial reporting
nationalism
Different legal
system
Lack of strong
accountancy bodies
Potential barriers
of harmonisation
Cultural
factors
Harmonization versus standardization
There are two ways of achieving accounting compatibility:
Harmonization: is the process of increasing the compatibility of
accounting practices by setting bounds to their degree of
variation.
- Harmony: is the state where compatibility has been achieved.
Harmonization is the minimization of diversity with a view to
increasing the comparability of financial information across
borders.
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Harmonization versus standardization
• Standardization: appears to imply working toward a more
rigid and narrow set of rules.
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Harmonization versus
standardization
Regarding Harmonization, there are two terms it’s
important to distinguish between them:
Harmonization of rules (de jure)
Harmonization of practices (de facto)
Tay & Parker’s point of view is the Harmonization
of rules (de jure) is more useful than the latter.
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Reasons for harmonization
The pressure for international harmonization
comes from those who regulate, prepare and use
financial statements like:
1. Investors and financial analysts.
 through understanding the F.S for foreign
companies in order to buy their shares.
 They would be sure that these statements are
reliable and comparable.
 Confidence in the soundness of auditing.
 Protecting investors.
 Companies that wish to issue shares widely.
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Reasons for harmonization
2. MULTINATION ENTERPRISES:
 In preparing consolidate Financial statements (in all
over the world in same basis).
 Comparing performance with subsidiaries.
 Evaluating performance.
 Transferring accounting stuff from country to another.
 Decision makers.
 IF ACCOUNTING CAN BE MADE MORE
COMPARABLE AND RELIABLE, COST OF
CAPITAL SHOULD BE BROUGHT DOWN
THROUGH REDUCING THE RISK FOR
INVESTORS.
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Reasons for harmonization
3. INTERNATIONAL ACCOUNTANCY FIRMS:
• It’s good for their large clients.
4. TAX AUTHORITIES:
• They have big problem by assessing foreign income by
differences in the measurement of profit in different
countries.
- ex. Using LIFO in USA.
5. Governments:
• in developing countries might find it easier to understand &
control the operations of MNEs if financial reporting were
more uniform.
6. LABOR UNIONS.
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Examples of the need for harmonization:
In the inventory valuation, practices in major countries include:
• Cost (FIFO, LIFO or weighted average),(e.g. some Japanese
companies).
• The lower of FIFO and net realizable value (e.g. general
IFRS practices in UK )
• The lower of LIFO and current replacement cost (e.g.
common US practice).
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