HARMONIZATION OF DIFFERENCES
HARMONIZATION OF DIFFERENCES
Because of the different factors that influence the establishment of accounting standards and the practice of accounting in each country, there are significant differences in the way accounting is practiced. In the opening case, we discussed the disclosure of information by Daimler-Benz, a German corporation. Germany relies on the law for the basis of its accounting standards. When German auditors audit the financial statements of German firms, they try to make sure that the firms use accounting practices that are in compliance with the law. In fact, the audit report of Daimler-Benz states the following:
The annual accounts, which have been audited in accordance with professional standards, comply with the legal provisions. With due regard to the generally accepted accounting principles, the annual accounts give a true and fair view of the assets, liabilities, financial position and profit and loss of Daimler-Benz Aktiengesellschaft.
The reference to the legal provisions is significant. The British tend to establish their accounting standards through the private sector, so the law contains only general guidance as to the form and content of financial statements. However, the law does require that the financial statements reflect a true and fair view, so that tends to be the overriding principle in financial accounting and reporting. The Germans also have a true and fair view, but
they assume that their laws are true and fair, so compliance with the law is the same as a true and fair view.
This illustrates one of the ways that accounting standards and practices differ from country to country. The major reasons why accounting standards differ are as follows:
1. Varying perceptions of the objectives of business organizations, e.g., government-owned vs. private-owned.
2. Differing views regarding the purpose of financial statements, such as the legal vs. true and fair view described above.
3. Differences in the development of the accounting profession.
4. Influence of the tax laws.
5. Legal requirements.
6. Differences in basic economic facts, such as inflation in Brazil.
7. Lack of enforceability of worldwide standards.
8. Government vs. private-sector development of standards.
9. Widespread cultural differences—language, government priorities, societal needs.
10. A strong sense of nationalism and the desire to avoid dependency on outside influences for the establishment of accounting standards.
In spite of the reasons for differences in accounting, there are still a number of major forces leading to harmonization. The major force is the movement to an investor orientation in different countries. That implies that firms will need to provide information compatible with the needs of investors. Second, there is a global integration of capital markets taking place. Since investors can get access to investment opportunities around the world more easily and faster than ever, they need financial information that is more comparable. Third is the need on the part of MNEs to raise capital in capital markets outside of their own national markets and the desire to generate as few different financial statements as possible. Fourth is regional political and economic harmonization, such as the efforts to integrate in Europe. That harmonization has an impact on accounting as well. Finally, MNEs are pressuring for more uniform standards, not only for accessing global capital, but also for greater ease and reduced costs in their general reporting in each country and on a consolidated basis.
Given these incentives, some serious efforts have been undertaken to harmonize accounting standards on a regional as well as an international level. Regionally, the most ambitious and potentially most effective efforts are taking place'in the EC. The EC's Commission is empowered to set directives, which are orders to the member states to bring their laws into line with EC requirements within a certain transition period. The initial directives involved the type and format of financial statements, the measurement bases on which the financial statements should be prepared, the importance of consolidated
financial statements, and the requirement that auditors ensure that the fit cial statements reflect a true and fair view of the operations of the firm b audited.
The International Accounting Standards Committee (IASC), organ in 1973 by the professional accounting bodies of several primarily indus countries and Mexico, has worked toward harmonizing accounting s dards. Initially, the IASC wanted to develop standards that would have r and broad acceptance; thus it seemed to focus mostly on improved disclos More recently, it has been interested in tackling some more substantive iss It also issued an exposure draft on narrowing the options present in the ea standards so that it could have standards that are much more precise.
The IASC must rely on goodwill for acceptance of its standards sin has no legislative mandate as does the EC. However, with over 100 pre sional accounting organizations representing 70 countries and more 1 900,000 accountants in the IASC, a number of countries have used the s dards as models for their own legislation. Singapore, for example, adopted IASC standards successfully.
Most IASC standards have been issued after the relevant U.S. stande Consequently, there are few major differences between IASC standards U.S. GAAP. Apparently the presence of the United States as a foum member of the IASC has allowed it considerable input and influence in decision-making process. Although it would be difficult to imagine an L standard in substantial conflict with U.S. GAAP, there were some stand being considered in 1990-1991 that would conflict with U.S. GAAP anc quire a decision on the part of the U.S. standard-setting community as to role of international standards.
Because of the different factors that influence the establishment of accounting standards and the practice of accounting in each country, there are significant differences in the way accounting is practiced. In the opening case, we discussed the disclosure of information by Daimler-Benz, a German corporation. Germany relies on the law for the basis of its accounting standards. When German auditors audit the financial statements of German firms, they try to make sure that the firms use accounting practices that are in compliance with the law. In fact, the audit report of Daimler-Benz states the following:
The annual accounts, which have been audited in accordance with professional standards, comply with the legal provisions. With due regard to the generally accepted accounting principles, the annual accounts give a true and fair view of the assets, liabilities, financial position and profit and loss of Daimler-Benz Aktiengesellschaft.
The reference to the legal provisions is significant. The British tend to establish their accounting standards through the private sector, so the law contains only general guidance as to the form and content of financial statements. However, the law does require that the financial statements reflect a true and fair view, so that tends to be the overriding principle in financial accounting and reporting. The Germans also have a true and fair view, but
they assume that their laws are true and fair, so compliance with the law is the same as a true and fair view.
This illustrates one of the ways that accounting standards and practices differ from country to country. The major reasons why accounting standards differ are as follows:
1. Varying perceptions of the objectives of business organizations, e.g., government-owned vs. private-owned.
2. Differing views regarding the purpose of financial statements, such as the legal vs. true and fair view described above.
3. Differences in the development of the accounting profession.
4. Influence of the tax laws.
5. Legal requirements.
6. Differences in basic economic facts, such as inflation in Brazil.
7. Lack of enforceability of worldwide standards.
8. Government vs. private-sector development of standards.
9. Widespread cultural differences—language, government priorities, societal needs.
10. A strong sense of nationalism and the desire to avoid dependency on outside influences for the establishment of accounting standards.
In spite of the reasons for differences in accounting, there are still a number of major forces leading to harmonization. The major force is the movement to an investor orientation in different countries. That implies that firms will need to provide information compatible with the needs of investors. Second, there is a global integration of capital markets taking place. Since investors can get access to investment opportunities around the world more easily and faster than ever, they need financial information that is more comparable. Third is the need on the part of MNEs to raise capital in capital markets outside of their own national markets and the desire to generate as few different financial statements as possible. Fourth is regional political and economic harmonization, such as the efforts to integrate in Europe. That harmonization has an impact on accounting as well. Finally, MNEs are pressuring for more uniform standards, not only for accessing global capital, but also for greater ease and reduced costs in their general reporting in each country and on a consolidated basis.
Given these incentives, some serious efforts have been undertaken to harmonize accounting standards on a regional as well as an international level. Regionally, the most ambitious and potentially most effective efforts are taking place'in the EC. The EC's Commission is empowered to set directives, which are orders to the member states to bring their laws into line with EC requirements within a certain transition period. The initial directives involved the type and format of financial statements, the measurement bases on which the financial statements should be prepared, the importance of consolidated
financial statements, and the requirement that auditors ensure that the fit cial statements reflect a true and fair view of the operations of the firm b audited.
The International Accounting Standards Committee (IASC), organ in 1973 by the professional accounting bodies of several primarily indus countries and Mexico, has worked toward harmonizing accounting s dards. Initially, the IASC wanted to develop standards that would have r and broad acceptance; thus it seemed to focus mostly on improved disclos More recently, it has been interested in tackling some more substantive iss It also issued an exposure draft on narrowing the options present in the ea standards so that it could have standards that are much more precise.
The IASC must rely on goodwill for acceptance of its standards sin has no legislative mandate as does the EC. However, with over 100 pre sional accounting organizations representing 70 countries and more 1 900,000 accountants in the IASC, a number of countries have used the s dards as models for their own legislation. Singapore, for example, adopted IASC standards successfully.
Most IASC standards have been issued after the relevant U.S. stande Consequently, there are few major differences between IASC standards U.S. GAAP. Apparently the presence of the United States as a foum member of the IASC has allowed it considerable input and influence in decision-making process. Although it would be difficult to imagine an L standard in substantial conflict with U.S. GAAP, there were some stand being considered in 1990-1991 that would conflict with U.S. GAAP anc quire a decision on the part of the U.S. standard-setting community as to role of international standards.
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