Lecture Eight

Harmonisation: What is happening in practice?

defi e r accounting

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consider erceived benefits of ar onising accounting ractices internationally review obstacles and criticisms consider roles of IASB and EU (incl. IASB/FASB convergence roject) consider impact of armonisation as in practice

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although sometimes used interchangea l in practice, the terms dont mean the same thing harmonisation is the process of making standards ?) used in different countries more similar ( standardisation implies all countries settle on the ?) same standards (I whats descri ed as standardisation might not reall e ... e.g. if I R s are applied differentl in different countries (de jure s de facto)

Last week we saw good reasons for differences in accounting practices in different countries, so why gi e up national standards? easier access to foreign capital reduced costs for companies with listings on international stock exchanges reduced accounting costs and pro lems for multinational companies increased compara ility etween companies ( enefiting in estors) increased cost-effecti eness in accounting regulation
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the (percei ed?) economic consequences of new standards political accepta ility the perception that I R s deri e from an nglomerican accounting framework rele ance in some countries is there a real desire to harmonise/standardise? education/training issues the complexity of particular standards
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one of the founding principles of the was freedom of mo ement of people, goods and capital harmonisation in accounting clearly links to this principle historically the approach to harmonisation has - harmonisation was differed from that of the I tackled through prescripti e directi es in 2002 the agreed that groups listed in the would ha e to apply I R s from 2005
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before the mid-1970s huge ariations in accounting practice were found across urope the 4th (1978) and 7th (1983) Company Law Directi es ensured minimal le els of co-ordination of practice on the content and presentation of financial reports, and aluations methods used the 7th Directi e stated that financial reports were required to show a true and fair iew but these Directi es ha e produced little real harmonisation i.e. de jure de facto harmonisation
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there has been continuing conflict between Continental and nglo axon iews there has been a recognition of a need for global not regional harmonisation in the mid-1990s the Commission decided to but it retains the support the efforts of the I right to eto the application of indi idual standards within the area since January 2005 regulation requires that all listed groups should publish I R -based consolidated statements instead of compliance with the 4th and 7th Directi es and/or national standards

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the will adopt a standard only if recommended to do so by the uropean ccounting Regulatory Committee, which applies the following criteria:it is not contrary to the 4th or 7th Directi es it is conduci e to the uropean public good e.g. 32 and 39 (economic the rejection of I consequences again) it meets the specified criteria of understandability, rele ance, reliability and comparability (i.e. standard conceptual framework criteria)
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membership:` chair is ir Da id Tweedie ` 12 full time plus 2 part-time members selected for technical expertise and background ` no geographical or constituent domination ` two-thirds majority needed for a new standard objecti es:` to formulate and publish accounting standards and to promote their rigorous use and acceptance worldwide ` to work on the impro ement and harmonisation of regulations, accounting standards and procedures
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7,000+ companies listed on -regulated markets -endorsed I R s in consolidated are using financial statements since 2005 many other countries require or permit the use of I R s or incorporate them in their own national standards e.g. as di erse as rmenia, gypt, Nepal and the kraine the main hold-outs among de eloped countries are the , Canada and Japan, although in all three cases con ergence projects are under way

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the I has no enforcement powers it relies on other regulators to do this I s (and now I R s) ha e become more prescripti e o er time, partly as a result of pressure from other regulators such as IO CO (International Organization of ecurities Commissions) the C has been reluctant to accept I R s - but companies with listings using I R s no longer ha e to pro ide reconciliations to G P but there are worries that for C acceptance con erged standards will ha e to look more like G P
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the ebruary 2006 Memorandum of Understanding and I set out milestones for the between G P con ergence of I R s and areas co ered by the con ergence project include: business combinations, consolidation, derecognition, definitions of liabilities and equity, fair alue measurement guidance, financial instruments, financial statement presentation, re enue recognition

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the International inancial Reporting Interpretations Committee (I RIC) issues interpretations of standards where necessary such guidance is intended to promote the consistent application of I R s worldwide but there are fears that differences in local interpretations could reduce the benefits of using a common set of standards there might then be a migration to G P for companies capital markets, particularly if the C doesnt using accept the interpretations of I R s used, but this isnt an regulation at this point option under
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theres a widespread desire for global standards and considerable momentum behind the harmonisation process progress on con ergence has so far been more rapid than many sceptics predicted but there are considerable obstacles to true harmonisation or standardisation its not clear how uniform the application of I R s is pro ing in practice many of the difficult issues ( V , G P/I R reconciliations) are not yet settled the impact of I R s is ery idiosyncratic - it aries greatly between industries and companies
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Deegan &

nerman chapter 4

other suggested reading:` all, R. (2006), International inancial Reporting tandards (I R ): Pros and Cons for In estors, Accounting and Business Research, pecial Issue, pp. 5-27 ` Cairns, D. (2004), The Implications of I /I R for K Companies, International Journal of Disclosure and Governance, Vol. 1, No. 2, pp. 107-118
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Nobes, C.W. (2006), The ur i al of International Differences under I R : Towards a Research genda, Accounting and Business Research, Vol. 36, No. 3, pp. 23345 Tokar, M. (2005), Con ergence and the Implementation of a ingle et of Global tandards: The Real-life Challenge, Accounting in Europe, Vol. 2, pp. 48-68 Whittington, G. (2005), The doption of International ccounting tandards in the uropean nion, European Accounting Review, Vol. 14, No. 1, pp. 127-153

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