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Summary International Accounting

Chapter 4 International harmonization

Harmonization is a process of increasing the compatibility of accounting practices by

setting bounds to their degree of variation. Many parties are interested in international
harmonization, including shareholders, stock exchanges, multinational companies, accounting
firms, trade unions and revenue authorities. The scope for harmonization is great because the
international variations in practice are very large. However, the obstacles are important, too. The
fundamental causes of differences remain and these are backed up by nationalistic inertia. At
present, the lack of an international enforcement agency is crucial. Harmony can be achieved
without uniformity, and vice versa example of inventory valuation, and the determination of cost
according to FIFO (first in, first out) or LIFO (last in, first out). It is possible to have de jure
harmony without de facto, if companies do not comply with rules.

Reason for, Obstacle to and Measurement of Harmonization

The pressure for international harmonization comes from those who regulate, prepare and
use financial statements. For this reason, various intergovernmental transnational bodies are
interested, among other things, in protecting investors within their spheres of influence. These
pressures will also be felt by companies that do not operate multinational. There are example of
the need for harmonization such as: cost (FIFO, LIFO or weighted average), (e.g. some Japanese
companies), the lower of FIFO and net realizable value (e.g. general IFRS practice in the UK),
the lower of LIFO and current replacement cost (e.g. common US practice). The most
fundamental of obstacles to achieving uniform practice is the size of the present differences
between the accounting practices of different countries. Statistical methods for the measurement
of de facto harmony and harmonization were first developed by van der Tas (1988, 1992). He
suggested an H (Herfindahl) index of national harmony, and I index (including a correction
factor) of international harmony, and a C or comparability index Archer et al
 The International Accounting Standard Committee

From the 1970s, a number of bodies were working for harmonization of accounting
practices and disclosures, notably the IASC, which published a substantial list of international
standards. IASs contained many options and gaps. However, with the support of stock market
regulators (IOSCO), IASs greatly improved by the end of the 1990s. They were adopted by some
countries and, in other countries, by some companies. There are other bodies concerned with
harmonization on a worldwide or regional basis. For example, in 2000, the EU Commission
proposed compulsory use of IASs for the consolidated statements of listed companies. A
Regulation on this was approved in 2002. The IASC was replaced in 2001 by a foundation and a
mainly full-time IASB. The IASB has been particularly influenced by its relationships with the
FASB and the EU.