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Harmonization of international accounting standards.

It is argued that international accounting standards are a necessary part of the rapidly globalization economy. However it is important to outline the steps necessary to establish these standards. This paper explores the issues surrounding harmonization of accounting standards between nations.


To allow the gains from the global economy to be fully realized, it is argued that accounting policy should be standardized among nations. This "harmonization" of accounting standards will help the world economy in the following ways: by facilitating international transactions and minimizing exchange costs by providing increasingly "perfect" information; by standardizing information to world-wide economic policy-makers; by improving financial markets information; and by improving government accountability. International investment decisions and financial-based management decisions are then made with less risk.

A harmonization of accounting policy would help provide a "level playing field" globally. Regulators and auditors will be receiving the same information, facilitating the evaluation process. In the absence of free trade, international accounting standards will allow nations' tariffs, quotas and other trade restraint mechanisms to be more accurate and less risky for those engaged in trade. Investors and managers will be able to make more valuable decisions. World resources will be better managed and allocated. It is possible, due to their necessity, to have international accounting standards (IAS) harmonization. The following outlines the issues surrounding the development of these standards.

Systems for Change

Historically, there have been four accounting standards models in the industrialized countries: The United Kingdom, Continental Europe, the United States and Latin American models. The International Accounting Standards Committee (IASC) has taken the lead in the standardization of these models.(1) The IASC is the result of efforts begun in 1973 by the United States, Canada and the United Kingdom toward internationalism in accounting standards. Currently there are representatives from accounting bodies in 106 countries and there have been 31 standards issued to date. Most of these opinions correlate with American Institute of Certified Public Accountants' (AICPA's) Accounting Principles Board and Financial Accounting Standards Boards (FASB) statements.(2)

Harmonization must begin with a standardization of the reporting requirements by national securities regulators. Participants in the globalized financial markets are demanding international accounting standards.(3) The International Organization of Securities Commissions (IOSCO), of which the U.S. Securities Exchange Commission is a member, is taking the lead in the development of accounting policy for securities regulator's reporting requirements. IOSCO has a "built-in desire to reduce the number of acceptable alternatives" corporations can choose from when reporting the results of operations and net worth.(4)

In lesser-developed countries standardization has been promoted through the establishment of regional accounting associations and accountant education programs. The International Monetary Fund has aided in this effort by assisting governments with their financial management procedures. The industrialized nations' foreign assistance programs include training local accountants and professional development.

In the long run, the "level playing field" provided by harmonization (and the attendant market efficiency) should be expanded to include financial institution regulation, audit requirements, ethical standards, and tax and custom policies.

Policy steps

Efforts should be continued through IOSC to establish international corporate reporting requirements. A fundamental first step is to gain international agreement as to the definition of financial statement items. The catalyst should come through political pressure placed on securities regulators by international industry. Once international standards are set, the politicalization of domestic policies will cease.

In the short term, an approach to internationalism is to find standards acceptable to each local regulator. Next, the amount of variance allowed from a single standard should be reduced until additional standards placed on industry locally by regulators is removed. The curriculum of business school accounting programs, in addition to practicing accountants, must quickly adopt these international standards.

Government financial reporting standards also need to be harmonized to assist with international economic and exchange rate coordination efforts, such as those of the Group of Seven nations, the Asian and African Development Banks, the Organization for Economic Coordination and Development (OECD), and the International Monetary Fund. Harmonization would assist in realizing the "level playing field" that the above efforts are attempting to achieve. Additionally, accounting standardization would allow better policies to be formulated and for more accurate comparative analysis by domestic economic planners. The International Federation of Accountants (IFAC), whose membership is the same as the private sector IASC, is responsible for standards concerning accounting for educational and public sector entities, and audits and ethics issues.

Adoption of IAS by accounting bodies in developing countries would reduce the expense of creating domestic accounting standards. Countries with relatively high inflation might be able to reduce "indexing" and other poor polices such as periodic, government-mandated revaluation of long-term assets with the adoption of international accounting standards.



The creation of accounting standards is a political process. The major issues surrounding international accounting policy harmonization are shown in Table I. While it could be argued that in the U.S. the accounting profession sets a standard for self-regulation, in actuality, FASB standards are the result of complicated political processes and negotiation. Those with political power have a vested interest in domestic standards. It is not recognized in all nations and national industrial sectors that free trade is good for a nation's, and the world's, economy.

Accounting policy processes are different in each country, making it difficult to reach a consensus on standards. For example, the issues surrounding the use of purchase versus pool accounting for mergers, the reporting of goodwill and the value of assets net of deprecation (the question of fair market value versus historical value asset evaluation) need to be resolved.

The difficulty in establishing international economic cooperation has been proved with the recent breakdown of the General Agreement on Tariffs and Trade. Just as international and textile agreements have caused negotiation deadlocks, the process of setting accounting standards might be more the result of political than economic variables. A nation balances legal sovereignty with international cooperation.

The trend has been toward bilateral and trade-block agreements. The harmonization of European Community (EC) accounting standards is the most obvious model for trade-block accounting standardization.(5) EC standardization has begun with mutual recognition of prospectuses and related financial statements. World tax policy, with the recent exception of the EC, has been basically bilateral for negotiation of mutual tax recognition and withholding tax rates.


The difficulty in enforcing international law due to extra-territoriality requires that national governments promote and enforce accounting harmonization. Contracts between nations are more enforceable than those between citizens of different nations.

When encouraging harmonization, the International Organization of Securities Commissions (IOSCO) and the International Accounting Standards Committee (IASC) must not make U.S. economic hegemony an issue. The U.S. Government has not recognized any international accounting standards.(6) Additionally, the U.S. model may not be the ideal. It could be argued that U.S. Internal Revenue Service standards are confusing and needlessly complicated. One author believes that the U.S. is not competitive in its ability to provide a framework for attracting foreign firms to U.S. capital markets:

Companies that do decide to raise capital in the United States face two significant expenses: the accounting costs of restating of reconciling financial statements to U.S. GAAP to meet SEC requirements and the legal costs of meeting other SEC filing requirements.(7)

An argument against international accounting standard harmonization is that the costs of creation and adoption of IAS standards would not be worth the benefits. Goeltz (1991) believes capital markets have already adjusted to the existence of a global market (without a standardization) and investors and issuers have been able to make investment decisions.(8) The argument follows that full harmonization is probably not practical nor valuable.(9)

Accounting Standards, Capital Markets and International Economic Development


Accounting standardization will aid in the economic conversion of the Central European countries, East Germany, China and the Commonwealth of Independent States (CIS). International standards can be adopted to efficiently evaluate businesses to be sold by governments to the private sector. Infant stock markets and banking institutions need sound accounting systems.

International Economic Development

The role of developing nations in global economic development cannot be ignored. As sources of comparative advantage in labor and raw material, it is necessary to harmonize international accounting standards to measure the value of these assets in the world market. Government accounting needs to be standardized to assist in the efforts of inter-governmental economic development cooperation. Additionally, tax law standardization is necessary to minimize tax avoidance and to help create the "level playing field."

Capital Market Internationalization

Technology is increasingly providing the tools necessary to make accounting standardization a reality in the short-term. Telecommunication and computer technology is making instant financial information a possibility. International accounting standard harmonization is necessary to provide this accurate information.
Table 1
Major Issues Surrounding International Accounting Standards
Groups with Interest in Factors Causing
International Accounting Differences in Accounting
Standards Standards
Political Bodies National Tax Policy
Private Sector and Differences in Sources of
Professional Bodies Business Finance
Regional Bodies Legal Systems
Special Interest Groups Economic Environment


1 Philip R. Lochner, Jr., "The Role of U.S. Standard Setters in International Harmonization of Accounting Standards", Journal of Accountancy, September 1991, p. 108.

2 Peter D. Fleming, "The Growing Importance of International Accounting Standards", Journal of Accountancy, September 1991, p. 101.

3 Dennis E. Peavey and Stuart K. Webster, "Is GAAP the Gap to International markets?", Management Accountant, August 1991, P. 31.

4 Arthur R. Wyatt, chairman of the International Accounting Standards Committee (IASC) in Fleming (1991), p. 102-103.

5 Lochner, Jr. (1991), p. 108.

6 Lochner, Jr. (1991), p. 108.

7 Fleming (1991), p. 104.

8 Richard Karl Goeltz, "International Accounting Harmonization: The Impossible (and Unnecessary?) Dream", Accounting Horizons, March 1991, p. 86.

9 Goeltz (1991), p. 86.


Beresford, Dennis R., "What's FASB Doing About International Accounting Standards?" Financial Executive, May/June 1991.

Balke, John, "Problems in International Accounting Harmonization," Management Accountant, February 1990.

Economist, "Balancing the government's books," January 25, 1992.

Fleming, Peter D., "The Growing Importance of International Accounting Standards," Journal Of Accountancy, September, 1991.

Goeltz, Richard Karl, "International Accounting Harmonization,: The Impossible (and unnecessary) dream?" Accounting Horizons, March 1991.

Lochner, Philip R., Jr., "Worth Repeating: The Role of the U.S. Standard Setters in International Harmonization of Accounting Standards," Journal of Accountancy, September 1991.

Peavey, Dennis, E, and Webster, Stuart K., "Is GAAP the Gap to International Markets", Management Accountant, August 1991.

Sweeney, Robert B., "Ethics in an International Environment: Standards of Ethical Conduct for Management Accountants", Management Accountant, February 1991.

Cameron Weber, MBA, is a financial analyst with the U.S. Agency for International Development's Bureau of Private Enterprise. He has recently completed an MBA from the Robert O. Anderson Graduate School of Management at the University of New Mexico in Albuquerque. Other recent article topics include a systems approach to U.S. Government agency accountability, fiscal policy and competitiveness, a strategic plan for the New Mexico Business Innovation Center and establishing joint ventures in the People's Republic of China. Mr. Weber has a BSM in finance, from Tulane University and is a member of the Association of Government Accountants.
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Author:Weber, Cameron M.
Publication:The National Public Accountant
Date:Oct 1, 1992
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