Challenges of Harmonization of Accounting System

QUESTION hash out the challenges of harmonization of radicals report remains. history Standards atomic number 18 the statements of code of practice of the regulatory bill bodies that be to be observed in the preparation and presentation of monetary statements. The Generally original chronicle Principles is comprised of a jumbo group of somebody accounting modulars. explanation Standards in other words can be verbalise as rules which g overn the preparation of fiscal statements. They argon the generally accepted accounting principles (generally accepted accounting principles). Where by accounting practices are the actual used practices by accountants.They are influenced by account Standards, which govern the preparation of financial reports. Harmonization of accounting standards can be defined as the continuous process of ensuring that the Generally Accepted Accounting Principles (GAAP) are formulated, aligned and updated to global best practices (GAAPs in other c ountries) with suitable modifications and fine mint considering the domestic conditions. Harmonization is the process of increasing compatibility of accounting practices by setting bounds on their phase of variation.Harmonization can be defined as the process of bringing planetary Accounting Standards into some strain of apprehension so that the financial statements from dispa crop countries are prepared harmonise to a common set of principles of measurement and disclosure (Haskins et al. 199629). According to Wolk et al. stilboestrolcribed harmonization of Accounting Standards as the co-ordination or similarity among the unlike sets of national Accounting Standards and methods and formats of financial coverage. (Kleekamper et al. , 2002) Kleekamperet al. xplain, that the aim of the international harmonization process of Accounting Standards is to number or overcome differences world-wide, in order to reach a better international Comparability of financial statements. w orldwide accounting harmonization can be defined as the process of bringing international Accounting Standards into some sort of agreement so that the financial statements from antithetic countries are prepared according to a common set of principles of measurement and disclosure (Haskins et al. 199629).This harmonization is indispensablenessed due to the globalization of businesses and operate and increase in cross-border investments and borrowings and academicians, regulators and governments bring on been constantly striving to harmonize the local/domestic Accounting Standards(AS), to a fault referred to as Generally Accepted Accounting Principles (GAAP), with the International Accounting Standards (IAS) issued by the UK based International Accounting Standards Board (IASB) (formerly the International Accounting Standards mission-IASC).The IASB has been trying to harmonize international accounting principles since 1973. Further, the IASB and the International Organization of Securities Commissions (IOSCO) occupy been jointly working on harmonization since July 1995, and in May 2000 the IOSCO finished its review of the IAS and recommended usage of genuine IAS, supplemented with reconciliation, disclosure and interpretations. Some benefits of harmonization of accounting practices is as follows * It ensures reliable and high quality financial insurance coverage and disclosures. In certain cuticles, it can prove to be of import to the economic and financial incurment of a country * It enables a systematic review and evaluation of the performance of a multinational partnership having subsidiaries and associates in various countries wherein each country has its own set of GAAP * It makes the comparison of the performance of a company against its domestic and international peers easier and more meaningful * It is a precursor for accessing international big(p) markets which can, in turn, debase the peachy cost and consequently, ameliorate the perform ance of a company * Multinational companies, the multinational companies benefit from close together(predicate) harmonization for the following reasons a) Access to international finance is easier, the international financial markets understand the financial education presented to them more easily. If the education is entrustd on a consistent basis amidst companies irrespective of their country of origin. b) modify management control, in a business operating in several countries management control is improved. interior financial information is more easily prepared on consistent basis if externally postulate financial information is required on a uniform basis. c) Consolidation of financial statement is easier ) A reduction of auditing cost due to harmonized accounting practices and standards. e) A transfer of accounting staff crosswise national borders would be easier f) It would be easier to comply with reporting requirements of overseas stock exchanges. g) Appraisals of fo reign entities for take over and mergers would be more straightforward. * International economic groupings, international groupings like EU (European Union) could work more efficaciously if there were international harmonization of accounting policies. Part of the function of international groupings is go make cross-border distri scarcelye easier. Similar to accounting regulation would help this process. Government of developing countries would save time and money if they would comprehend international standards and, if these were used internally, governments of developing countries could attempt to control the activities of foreign multinational companies in their own country. These companies could non hide behind foreign accounting practices which are difficult to understand. * Tax authorities, it will be easier to prefigure the revenue enhancement liability of investors, including multinationals who receive income from overseas sources. * Large accounting and auditing firms would benefit as accounting and auditing would be much easier if similar accounting practices existed throughout the world.Despite the importance of harmonizing accounting standards, there still challenges facing harmonization of accounting standards between the member countries use IFRS (international financial reporting standard) and also between United States using US GAAP. These challenges are brought about different tax laws, different culture, different legal requirement, nationalism and different needs of financial statements. Speaking of harmonization we should put in consideration of International accounting standard board (IASB) based in UK and pecuniary accounting standard board (FASB) based in US. TheInternational Accounting Standards Board(IASB) is the independent,accounting standard-setting body of theIFRS Foundation.The IASB was instituteed on April 1, 2001 as the successor to theInternational Accounting Standards Committee(IASC). It is responsible for developingI nternational Financial Reporting Standards(the new name forInternational Accounting Standardsissued later on 2001), and promoting the use and application of these standards. TheFinancial Accounting Standards Board(FASB) is a private, non-for- net profit system of ruleswhose primary purpose is to develop generally accepted accounting principles(GAAP) within theUnited Statesin the publics interest. TheSecurities and Exchange Commission(SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U. S.It was created in 1973, replacing theCommittee on Accounting Procedure(CAP) and theAccounting Principles Board(APB) of theAmerican Institute of Certified Public Accountants(AICPA). The FASBs mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. To achieve this, FASB has five goals. * Improve the utility program of financial reporting by focusing on the primary characteristics of relevance and reliability, and on the qualities of comparability and consistency. * salvage standards current to reflect changes in methods of doing business and in the economy. Consider promptly any significant areas of want in financial reporting that might be improved through standard setting. * Promoteinternational convergence of accounting standardsconcurrent with improving the quality of financial reporting. * Improve common understanding of the nature and purposes of information in financial reports. The two boards view as been making efforts to harmonize the accounting principles, as of kinfolk 2011, there was a push to harmonize, or integrate, the accounting standards of the United States, which operates under Generally Accepted Accounting Principles (GAAP), with International Accounting Standards (IAS).The rationale is that it would level the playing field for global businesses by providing regulators, auditors and decision-makers (investors) uniform information based on the same accounting methodologies. Supporters believe that this would improve accountability, reduce international transactional and exchange rate risks and improve information transfer to enhance economic policy decision-making. The difference between IAS and US GAAP is that the former is more principle based and the later is rule based. The following are Challenges to harmonization of accounting systems. Licensing and Enforcement, Individual accountants, CPAs and tax lawyers worldwide would need to comply with and obtain licensing through an internationally accepted rules-making body. If he international body lacks enforcement authority, there is no prosecutorial authority for breaking international laws. However, if the international body does hurt prosecutorial authority over a U. S. citizen, there would arise jurisdictional and constitutional issues regarding the rights of an interna tional bodys rights to prosecute an American under international law. Finally, issues arise from the perspective of U. S. -only based businesses regarding forced compliance IASB standards are principles-based. Thus the countries that form rules-based standards are expected to experience considerable difficulty in harmonization of their standards with IFRS. There are challenges that IASB and nations adopting IFRS need to address in the feeler days.One big challenge for countries adopting IFRS is the shortage of manpower and more particularly, IFRS-trained manpower. For case in point, with just six months to go before Chinas listed companies adopt IFRS, demand for accountants is rising and could rivulet into millions in the coming years, if the new standards are rolled out for all of the countrys companies and non just the listed ones. Accountants say that the challenge for China, as it scrambles to meet the accounting shift deadline, will lie in getting its over-1,100 listed comp anies to establish the appropriate financial reporting systems and in training enough qualified accountants by January. The risk is that some of these companies may fail to make the transition on time.Estimates reveal that China has a shortfall of 300,000 qualified accountants and is likely to require a further three million over the coming years to keep pace with its current rate of economic growth Difference purpose of financial reporting, in some countries the purpose is solely for tax assessment, while others it is for investor decision making, Different legal systems, these hamper the development of certain accounting practices and restrict options available. The Accounting world can be divided into those countries which have a legalistic orientation toward accounting and those with a non legalistic orientation (Nobes et al. , 19978). The non-legalistic approach can be found in countries, which use common law. In Common law countries, Accounting does not depend upon law. Accou ntants (professional organizations) arrange accounting rules. Hence, it is the private sector, which determines Accounting and not the law (Choi et al. , 2002). The task of the legal system is to give an answer to a specific case rather than to formulate general rules for the future (Choi et al. 2002). The legalistic approach can be found in countries, which use the so called code (or codified) law. In contrary to the common law, the codified law system needs to develop rules in detail for the Accounting and financial reporting (Nobes, 1994). This means that Accounting rules are incorporated into national law and tend to be highly prescriptive and procedural (Choi et al. , 200243). In these countries the business office of law is to describe behavior, which isconsidered to be acceptable in the society (Choi et al. , 2002). Different user groups, countries have different ideas about who the relevant user groups and their respective importance.In USA investor and credit groups are gi ven prominence, while in Europe employees enjoy a higher profile. Provider of finance, there three main sources for external capital are shareholders, banks and government (Hill, 1999). It varies from country to country, which of these three provides most of the financial capital to companies. In countries like Germany and Italy banks provide companies with capital. In countries like England and the United States shareholders provide companies with capital. The government is the provider of capital in countries like France and Sweden. (Hill,1999) This revolution of capital providers means that Accounting Practices differ in order to satisfy needs of capital providers.In the case of shareholder ownership, (e. g. in the U. K. and the U. S. ), information disclosure will be more important than in countries, where capital is raised from banks or governments. This is explained by the fact that in the latter countries information will be genetic more directly. (Radebaugh and Gray, 1997) It is impossible for a company to inform each shareholder with its specific information needs, because they are a big and unorganized group. Therefore financial statements in the US and UK are oriented toward providing individual investors with the information they need to make decisions about purchasing or selling corporate stocks and bonds (Hill, 1999593).Tax laws, the key point here is to ask, how much tax regulations determine Accounting measurements. In countries like the U. S. , U. K. and Netherlands there is no interplay between tax and Accounting law. When Accounting Standards are developed, the only focus is how to conduce the information function. Questions about taxation are not considered in those countries (Achleitner, 2000). In contrary, in nations as France and Germany, tax and Accounting Systems are command equal (Nobes and Parker, 2000). There is the principle of decisiveness in continental European countries. This means that the profit of the sense of balance sheet is at the same time the foundation to snap income taxes (Achleitner, 2000).In Tanzania income tax act is in dis agreement with some accounting procedures like computation of depreciation, Bad debts and therefore disagree on how accountant forecast organization profit and therefore in Tanzania should prepare to set of financial statement one for tax purposes and the other for other users of accounting information. Cultural differences result in objectives for accounting systems differing from country to country for congresswoman Islamic laws does not recognize the use of interest rate. The lack of strong accountancy bodies, many countries do not have strong independent accountancy or business bodies which would press for better standards and greater harmonization.Unique circumstances, some countries may be experiencing unusual circumstances which affect all aspects of everyday life an d impinge on the ability of companies to produce priggish reports, for example hyperinflati on, civil war, currency restriction. Nationalism is exhibit in an unwillingness to accept another countrys standard. The Financial Accounting Standards Board (FASB) in the U. S. is responsible for setting accounting standards based primarily on Federal securities laws and state CPA licensing laws. altogether countries have specific securities laws, tax laws and banking and financial regulations that dictate accounting principles. Furthermore, in the United States, there are individual state laws that govern business, banking and insurance activities. Adopting international accounting standards would not only conflict with U. S. tatute law, but also constitutional law associated with states rights. Stable Platform, Beginning in 2005, all 7,000 EU publicly traded companies are required to apply IFRS in the preparation of their consolidated financial statements. This represents yet another challenge as preparers of financial statements from Latvia to Portugal and from Poland to Swe den grapple with unfamiliar requirements. In preparation for this sweeping change, the IASB completed its stable platform of standards in March 2004. overbold and revised standards included five new IFRSs and 17 amended IASs, resulting from the IASBs Improvements depict and Phase I of its business Combinations Project.Some of the more significant revisions to IFRS that resulted from these projects include * The LIFO method for costing inventories is no longer allowed * The concepts of fundamental error and extraordinary items are eliminated * Trading securities are like a shot included in a larger defined course of study of financial instruments at fair value through profit or loss and entities may designate any financial asset or liability into this category (commonly referred to as the fair value option) * Fair value hedge accounting may at present be used more readily for a portfolio hedge of interest rate risk * Guidelines for share-based payments have been added The pooli ng-of-interests method for business combinations is no longer allowed * Goodwill is no longer amortized, and negative goodwill is not recorded in a business combination World wide acceptance, National accounting standards are highly politicized and there is oft a natural tendency to place the interests of the national economy onward of those of the global economy. Private sector businesses and professional accounting bodies also have a vested interest in accounting practices and financial reporting. Pressure from these groups to change or reject certain standards can carry a hooking of weight with political decision makers. Adopting international financial standards is met with additional challenges in developing countries. They often lack the resources and infrastructure to adapt national legal and legislative frameworks in which to house the standards, making proper implementation difficult.Training and Retraining, When a country decides to harmonize with the international stan dards, its companies, accountants and auditors need to be retrained in the new standards and reporting procedures for financial statements. College and university programs in this field also have to undergo significant changes in order to initiate new people entering the profession. Before any of this can happen, trainers and professors will require training so they can instruct professionals and students. This will require the development of new learning materials and curricula, new examinations for professional licensing and new accounting software and reporting systems. To further complicate matters, the adoption of harmonized standards has to be phased in, so for a number of years, two different systems are in operation. Such a omplex transition requires a lot of safety mechanisms to ensure it achieves uniform results. To sum up with, Harmonization of financial statement is very crucial for accounting profession and also for the global business growth especially for multination al companies which will now find easily in preparation of parent and subsidiary financial statement since have to be prepared according to IFRS. 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