Harmonization of Accounting in Accounting Context
(a) Briefly explain what prompted some countries over the world to strongly advocate harmonization of accounting.
The important reasons which necessitate harmonization of accounting practices are well contained in the observation made by Saudagaran. “While the initial efforts at harmonization were mainly championed by political bodies and professional accounting organizations, current pressures to harmonize are driven by investor groups who use financial statements, multinational companies which prepare financial statements, regulators who monitor capital markets, the securities industry (including stock exchanges) which view itself as being significantly impacted by the global diversity in financial reporting requirement, and developing countries that often lack the resources to develop indigenous accounting standards.” These reasons may broadly be listed as: 1. Global flow of capital. 2. Emergence of MNCs. 3. Internationalization of accounting profession. 4. Administrative requirements. 5. Diversities in measurement of business income.
Global Flow of Capital
Harmonization of accounting practices is a necessity for getting enhanced flow of international capital. It is a well known fact that from ancient times to the recent euphoria of globalization, business never remained confined to national boundaries. As such, the flow of capital investments across nations is both a fact and a necessity. The flow, however, gets checked owing to international diversity in accounting practices.
Emergence of MNCs
Harmonization of accounting practices would greatly reduce the efforts, energy and money that are otherwise required by MNCs to put in for presenting financial reports as per country specific requirements. In other words, different countries follow different set of accounting rules for presentation of financial reports and as such MNCs operating in different countries will have to prepare multiple sets of financial reports to meet the legal requirements
The important reasons which necessitate harmonization of accounting practices are well contained in the observation made by Saudagaran. “While the initial efforts at harmonization were mainly championed by political bodies and professional accounting organizations, current pressures to harmonize are driven by investor groups who use financial statements, multinational companies which prepare financial statements, regulators who monitor capital markets, the securities industry (including stock exchanges) which view itself as being significantly impacted by the global diversity in financial reporting requirement, and developing countries that often lack the resources to develop indigenous accounting standards.” These reasons may broadly be listed as: 1. Global flow of capital. 2. Emergence of MNCs. 3. Internationalization of accounting profession. 4. Administrative requirements. 5. Diversities in measurement of business income.
Global Flow of Capital
Harmonization of accounting practices is a necessity for getting enhanced flow of international capital. It is a well known fact that from ancient times to the recent euphoria of globalization, business never remained confined to national boundaries. As such, the flow of capital investments across nations is both a fact and a necessity. The flow, however, gets checked owing to international diversity in accounting practices.
Emergence of MNCs
Harmonization of accounting practices would greatly reduce the efforts, energy and money that are otherwise required by MNCs to put in for presenting financial reports as per country specific requirements. In other words, different countries follow different set of accounting rules for presentation of financial reports and as such MNCs operating in different countries will have to prepare multiple sets of financial reports to meet the legal requirements