INTERNATIONAL

ACCOUNTING

Chapter 4: International
Harmonization
Learning objective:
• Assess the arguments for and against international
harmonization or standardization of financial reporting;

• Illustrate how harmonization can be measured;

• Outline the history, purpose and activities of the

International Accounting Standards Committee (IASC);
Learning objective:

• Explain how the IASC had different effects in different

types of country; summarize the relevance of other bodies
for harmonization;

• Explain the structure and workings of the International

Accounting Standards Board.
Introduction
• The preceding (and the following) chapters make it clear
that there have been major differences in the financial
reporting practices of companies around the world.
Introduction

• This had led to great complications for those preparing,

consolidating, auditing and interpreting published financial
statements.
Introduction
• As the preparation of internal financial information often
overlaps with the preparation of published information, the
complications spread to management accounting.
Introduction
• To combat these difficulties, several organizations
throughout the world have been involved in attempts to
harmonize or standardize accounting. Market forces also
contribute to this, as will become clear.
Introduction
• Harmonization’ is a process of increasing the compatibility
by setting bounds to their degree of variation.
‘Standardization’ appears to imply working towards a
more rigid and narrow set of rules.
Introduction
• It is also important to distinguish between harmonization
of rules (de jure) and harmonization of practices (de
facto). Tay and Parker (1990) point out that de facto
harmonization/standardization is more useful than de jure
harmonization/standardization.
Reasons for, obstacles to and
measurement of harmonization
Reasons for harmonization
• Standardization can reduce administrative costs, improve
the quality of accounting and increase comparability.

• The pressure for international harmonization comes from

those who use, regulate and prepare financial statements.
Reasons for harmonization
• Financial reports produced in one country are used in
various other countries.
Reasons for harmonization
• Investors and financial analysts need to be able to
understand the financial statements of foreign companies
whose shares they might wish to buy.

• They would like to be sure that statements from different

countries are reliable and comparable, or at least to be
clear about the nature and magnitude of the differences.

• They also need confidence in the soundness of the

auditing.
Reasons for harmonization
• Those companies that wish to issue new shares more
widely than on their domestic markets will see the
advantages of harmonized practices in the promotion
of their issues.

• International credit grantors such as the World Bank

also face the difficulties of international comparison.
Reasons for harmonization
• If accounting can be made more comparable and reliable,
the cost of capital should be brought down by reducing
the risk for investors.
Reasons for harmonization
• The international accountancy firms support
harmonization partly because it is good for their large
clients.

• Also, the tax authorities throughout the world have their

work greatly complicated, when assessing foreign
incomes, by differences in the measurement of profit in
different countries.
Reasons for harmonization
• Example of the need for harmonization
• Cost (FIFO, LIFO or weighted average) (e.g. some Japanese
companies until 2007);
• The lower of FIFO and net realizable value (e.g. common IFRS
practice);
• The lower of LIFO and current replacement cost (e.g. common US
practice).

• Adding all the differences together, the effects on earnings

or shareholders’ equity can be very large,
Obstacles to harmonization
• The most fundamental of obstacles to achieving uniform
practice was the size of the present differences between
the accounting practices of different countries.
Obstacles to harmonization
• The general dichotomy between investor/fair accounting
and creditor/tax/conservative accounting is an obstacle
that cannot be overcome without major changes in
attitudes and law.
Obstacles to harmonization
• Indeed, it is not clear that it should be overcome. If the
predominant purposes of financial reporting vary by
country, it seems reasonable that the reporting should
vary.
Obstacles to harmonization
• Harmonization is most useful when it concerns
similar users who receive information from
companies in different countries.
Obstacles to harmonization
• It may be that the relevant companies should follow
two sets of rules: one for domestic and another for
international consumption, or one for individual entity
statements and another for consolidated.
Obstacles to harmonization
• Another obstacle is the lack of an international
regulatory agency.
Obstacles to harmonization
• A further problem is nationalism. This may show itself
in an unwillingness to accept compromises that
involve changing accounting practices towards those
of other countries.

• Another manifestation of nationalism may be the lack of

knowledge of or interest in accounting elsewhere
Measurement of Harmonization

Statistical methods for the measurement of de facto

harmony and harmonization (P93+94)
The International Accounting
Standards Committee
History and purpose of the IASC
• A predecessor body, set up in 1966, was the Accountants’
International Study Group (AISG) at which the
professional bodies of Canada, the United Kingdom and
the United States examined their differences in
accounting practices.
History and purpose of the IASC
• The preliminary discussions towards setting up the IASC
were held at meetings arranged in the margins of the
Congress in Sydney in 1972.

• Another background factor was that the UK joined the

Common Market (later EU) in 1973.

• Both the UK and the US professions were concerned

about the draft Fourth Directive, which contained
unattractive accounting rules for UK companies and for
the European subsidiaries of multinationals
History and purpose of the IASC
• The IASC was independent from all other bodies, but from
1983 a close connection was established with the
International Federation of Accountants (IFAC)
History and purpose of the IASC
• The IASC was founded in 1973 by the accountancy
bodies of nine countries:
• Australia, Canada,
• France, Japan, Mexico,
• the Netherlands, the United Kingdom with Ireland,
• the United States and West Germany
History and purpose of the IASC
• The IFAC concentrates on such matters as auditing,
management accounting and the World Congresses of
Accountants.

• The IASC was concerned only with international

accounting standards. Its aim was ‘to formulate and
publish in the public interest accounting standards to be
observed in the presentation of financial statements and
to promote their worldwide acceptance and observance’
IASC’s Members
 History and purpose of the IASC-
• From 1983 to 2001, the IASC’s Constitution provided for it
to be run by a board of up to 17 members: 9 or 10 from
developed countries, three or four from developing
countries and up to four other organizations, generally
drawn from the IASC’s consultative group (which included
such bodies as the World Bank, the International
Confederation of Trades Unions and the International
Federation of Stock Exchanges).
History and purpose of the IASC
Board members of IASC (at 31 March 2001)
History and purpose of the IASC
• Each was represented on the board by a delegation of
two or three part-time people, with one vote per
delegation.
IASC’s Budget
History and purpose of the IASC
• Board members of the IASC contributed much of its
budget.

• The remaining members of the IFAC/IASC paid their

subscriptions to the IFAC, which then funded

• another element of the IASC budget. Publication revenue

and donations were also important.
Acceptance
The standards and acceptance of them
• The IASB adopted these standards en bloc in 2001, but
made major amendments and additions from 2003
Standards were preceded by exposure drafts. In order to
be published, an exposure draft had to be approved by a
two-thirds majority of the IASC’s board; a subsequent
standard by a three-quarters majority.
The standards and acceptance of them
• In 1989, the IASC published a conceptual framework,
which is somewhat similar to that of the FASB.

• There are also strong similarities with the later Australian

and British frameworks.

• The framework was also adopted by the IASB and is used

when preparing standards.
The standards and acceptance of them
• Countries influenced by the Anglo-American tradition are
most familiar with setting accounting rules in this way, and
are most likely to be able to adopt non-governmental
rules.

• It is not surprising, then, that the working language of the

IASC was English, that its secretariat was in London and
that most standards closely followed, or compromised
between, US and UK standards
The standards and acceptance of them
The standards and acceptance of them
The standards and acceptance of them
• By the late 1980s it had become clear that the substantial
number of options in IASs were an obstacle to further
enhancement of the status of the IASC’s work.

• In particular, IOSCO, a committee of governmental

regulatory bodies, held out the possibility that its members
(e.g. the SEC) might accept IASs for the financial
reporting of foreign companies listed on their stock
exchanges.

• However, IOSCO made it clear that a reduction in

options was essential.
The standards and acceptance of them
• After several years of detailed argument over the removal
of options, 10 revised standards were agreed in
November 1993 to come into force in 1995.
IASC’s Successful
Was the IASC successful?
• The IASC’s basic objective was to publish and promote
the acceptance of standards on a worldwide basis. This
objective might once have been thought to be too
ambitious in one respect and not ambitious enough in
another.
Was the IASC successful?
• Until fairly recently, to attempt worldwide standardization
seemed a hopeless and unnecessary target.

• The greatest benefits come from standardization among

countries where there are companies that publish
financial statements and that have foreign investors,
auditors, parents or subsidiaries.
Was the IASC successful?
• Until the 1990s, to try to bring the accounting of the Soviet
Union or China into line, for example, not only would have
had very few benefits but also would have been
impossible.

• However, the IASC became an important influence on

Russia and China when their communist economic
systems were dismantled, and so the description
‘worldwide’ is now appropriate, as examined later.
Was the IASC successful?
• More fundamental aim of standardizing accounting
practices was recognized.
Was the IASC successful?
• Success in this area up to 2001 will now be examined for
four types of country: developing countries, emerging
nations, continental Western Europe and Japan, and
capital-market countries.
Developing countries
• The adoption of IASs was a cheaper route for these
countries than preparing their own standards and has the
great advantage of making life easier for those domestic
or foreign companies or accountants with international
connections.

• The other advantage is avoidance of the politically

unattractive alternative (for some countries) of adoption of
US or UK standards. This use of IASs is of great value to
these many countries and serves the interests of
international harmonization by avoiding the creation of
different rules.
Developing countries
• However, there are some doubts about the suitability of
the standards for developing countries

• For example, the complication of the standards and the

extensive disclosures that they require might involve costs
that exceed the benefits for a country with few listed
companies.
Emerging nations
• Somewhat similar remarks as for developing countries
may be made about those nations that moved from
communist to capitalist economics, such as China and
Eastern Europe.

• They needed a ‘quick fix’ to their accounting practices as

they changed at breakneck speed from economies with
no ‘profit’, no shareholders, no independent auditors and
no stock markets.
Continental Western Europe and Japan
• Certainly, in 1973, the standard-setting philosophy and the
dominant idea of serving capital markets with ‘fair’
information was largely alien to continental Europe or
Japan. Nevertheless, the IASC moved forward with
considerable support from these countries and
remarkably little acrimony
Continental Western Europe and Japan-
The factors that helped this were
• The large representation of non-Anglo-Saxon countries on
the board and working parties, and the eventual
appointment of a Frenchman and then a Japanese as
chairperson of the IASC;

• National delegates from these countries who had been

trained in large accountancy firms or multinationals and
who were not governmental bureaucrats;
Continental Western Europe and Japan-
The factors that helped this were
• The desire in several board-member countries to
strengthen their capital markets and modernize their
accounting (particularly strongly felt in France and Italy
from the 1970s onwards);

• The increasing internationalization of the financial world,

such that even some German and Japanese companies
started to raise finance overseas;
• A desire to avoid US dominance of accounting, so that the
IASC seemed the less bad alternative.
Capital-market countries
• The content of IASs (certainly up to the improvements
project) was closely consistent with practices in such
countries.

• It seems, then, that they influenced the IASC, rather than

the other way round. Indeed, until the late 1990s, US or
UK standard-setters did not make major efforts to change
their rules in those cases where there was inconsistency
with IASs.
Other international bodies
International Federation of Accountants
(IFAC)
• This body came into being in 1977 after the Eleventh
World Congress of Accountants.
• It aims to develop a coordinated international
accountancy profession.

• A predecessor body, called the International Coordination

Committee for the Accountancy Profession (ICCAP),
which had been formed in 1972 after the Tenth Congress,
was wound up in favour of the IFAC. The IFAC represents
over 150 member accountancy bodies from around the
world.
International Federation of Accountants
(IFAC)
• Its work includes the setting of international standards for
auditing (via the International Auditing and Assurance
Standards Board), ethics, education and management
accounting; involvement in education and technical
research; and organizing a world congress every four or
five years.
The AISG, the G4+1 and the national
standard-setters
• As well as the ICCAP, another body was wound up in
1977 when the IFAC was formed – the Accountants’
International Study Group. As mentioned earlier, this
group had been formed in 1966 and comprised members
from professional bodies in Canada, the United Kingdom
and the United States. Its purpose was to study and report
on accounting practices in the three countries. Twenty
studies were issued, mainly on financial reporting matters.
International Organization of Securities
Commissions
• IOSCO was founded in 1983. It is an association of
governmental securities regulators, such as the Securities
and Exchange Commission of the United States. Such
regulators decide whether foreign or ‘international’
accounting standards are acceptable for the financial
reporting of domestic or foreign listed companies.
International Organization of Securities
Commissions
• In the late 1980s, IOSCO and the IASC reached an
agreement whereby IASC would improve its standards
and IOSCO would consider recommending them to all
their exchanges. IASC’s work of the 1990s was mostly
designed to satisfy IOSCO, which also joined the IASC
Board meetings as an official observer.
European Union
The International Accounting
Standards Board
Reform of the IASC in 2001 and
subsequently
The suggested reasons for a change included the
following:
• Reducing the load on the part-time board representatives,
who had been working very hard, particularly for the
previous two years as the core programme was
completed;
• Enabling a wider group of countries an organizations to
be members of the board;
• Increasing the degree of partnership with national
standard-setters so as to accelerate worldwide
convergence of standards.
Reform of the IASC in 2001 and
subsequently
• 2000 the member bodies confirmed this. The new
structure came into operation on 1 April 2001. It is headed
by the IFRS Foundation (formerly the IASCF) which is
legally registered in the United States. It is controlled by
trustees (22 of them in 2015), who have promised to
operate in the public interest.
Reform of the IASC in 2001 and
subsequently