Accounting harmonization is the process of minimizing the differences in financial reporting practices across national boundaries.
Accounting is a social science, and accounting practice varies across countries due to differences in culture, religion, history, legal and taxation systems, financing and business ownership systems, and level of economic development.
In recent decades, the process of globalization has created the demand for accounting harmonization through investors’ awareness that difference in accounting practice due to different rules discourages cross-border investments.
Accounting harmonization is also beneficial for multinational corporations operating and raising capital in different countries.
Further, accounting harmonization can provide significant cost savings in staff training and offers mobility and flexibility for public accounting firms.
Attempts to harmonize accounting standards and accounting practice internationally were initiated by the London-based accounting body called the International Accounting Standards Committee (IASC) Opens in new window.
The IASC Opens in new window was established in June 1973 as a result of an agreement by accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States. It was created with two key objectives:
- to formulate and publish accounting standards for global acceptance and observance; and
- to work for the improvement and harmonization of accounting regulation, standards, and reporting internationally.
In the early years of the IASC, its standards were too broad and thus were ineffective in improving comparability of financial statements internationally.
In the late 1980s, the International Organization of Securities Commissions (IOSCO) Opens in new window, a body comprising national securities regulators, had realized that having a set of accounting standards internationally had the potential for significantly reducing the reporting costs for multinational companies wishing to raise capital across national boundaries.
Subsequently, the IASC undertook a project to make its standards more restrictive and hence more acceptable to the IOSCO. By 1999 the IASC had revised its core standards, which were accepted by the IOSCO members with the exception of the U.S. Securities and Exchange Commission Opens in new window.
The IASC was superseded by the International Accounting Standards Board (IASB) Opens in new window in 2001. The IASB had adopted all of the IASC standards and embarked on issuing new standards under the name International Financial Reporting Standards (IFRS) Opens in new window.
The IFRS has since gained widespread acceptance among national regulators permitting or requiring publicly listed companies to comply with them in their financial reporting. As a result, in recent years, adoption of the IFRS has become the dominant trend rather than focusing on harmonization.
One of the main obstacles for global adoption of IFRS is the United State’s continuing reluctance to give up its own standards on the suspicion that IFRS are of lower quality and less comprehensive than the U.S. standards issued by the Financial Accounting Standards Board (FASB) Opens in new window.
In 2002, at a meeting in Norwalk, Connecticut, the IASB and the FASB agreed to harmonize their agenda and reduce differences between the IFRS and the FASB standards.
In 2006 a memorandum of Understanding was issued by the two standard setters to work toward achieving convergence between the IFRS and the FASB standards. Some progress has been made in this direction, although slowly. For example, since October 2004, the IASB and the FASB have had an ongoing project to develop a common conceptual framework.
As of June 2008, these two bodies have several joint projects to develop standards. A recent development is the concession offered to foreign companies in the United States with regard to their financial reporting.
Previously, foreign companies listed on the U.S. stock exchanges were required to issue their financial statements using either FASB standards or local accounting standards or IFRS and reconciling the IFRS- or local standards-based income to the FASB standards. Since 2008 foreign companies that are listed on U.S. stock exchanges and issue financial statements based IFRS no longer are required to do this reconciliation.