The document discusses current issues in international accounting including differences between countries' accounting standards, efforts toward harmonization, and convergence of standards. It notes that historically accounting grew independently in different countries, resulting in considerable differences. Major factors influencing these differences include a country's legal system, taxation practices, capital providers, culture, and historical events. International organizations are working to reduce differences and increase comparability through harmonization and convergence. Critics argue convergence has limitations but supporters believe it will increase transparency and reduce costs for global businesses.

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Current Issues In Accounting :
 International Accounting Differences between Countries.
 Harmonization Of Accounting Standards.
 Convergence of Accounting Standards.
Prepared By :
NAZIR AHMED
Audit Trainee
Ernest & Young ( Authorized Trainee Employer )
The Institute of Chartered Accountants of England & Wales
Email : nazirahmed.ca@gmail.com

2.  International Accounting : Differences between
Countries :
Historically, accounting and reporting grew up largely independently, and often
very differently in different countries. Practice, regulation and especially the
mode of regulation differed often very greatly. Considerable differences exist
across countries in the accounting treatment of many items. For example,
companies in the United States are not allowed to report property, plant, and
equipment at amounts greater than historical cost . In contrast, companies in
the European Union are allowed to report their assets on the balance sheet at
market values. Research and development costs must be expensed as incurred
in Japan, but development costs may be capitalized as an asset in Canada and
France. Chinese companies are required to use the direct method in preparing
the statement of cash flows, whereas most companies in the United States and
Europe use the indirect method. Differences in accounting can result in
significantly different amounts being reported on the balance sheet and income
statement.

3.  CAUSES FOR DIFFERENCES INTERNATIONAL ACCOUNTING :
Why do financial reporting practices different across countries?
Accounting scholars have hypothesized numerous influences on a country’s
accounting system, including factors as varied as the nature of the political
system, the stage of economic development, and the state of accounting
education and research. A survey of the relevant variables has identified
the following items as graphical presentation being commonly accepted as
factors influencing a country’s financial reporting practices.

4.  Overview of graphical presentation for causes of differences :
Accounting
Practices
Providers Of
Capital
Taxation
System
Other
Influences
Legal System
National Culture
Figure : Causes of differences in Accounting Practices

5.  : CAUSES FOR DIFFERENCES INTERNATIONAL ACCOUNTING (Cont) :
 Legal system :
The Accounting world can be divided into “those countries which have a
‘legalistic’ orientation toward accounting and those with a ‘non legalistic’
orientation” The non-legalistic approach can be found in countries, which
use common law. In common law countries, Accounting does not depend
upon law. Accountants (professional organizations) arrange accounting
rules. The task of the legal system is to give an answer to a specific case
rather than to formulate general rules for the future.
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. This means that “Accounting rules are incorporated into national
law and tends to be highly prescriptive and procedural”. In these countries
the role of law is to describe behavior, which is considered to be
acceptable in the society.

6.  : CAUSES FOR DIFFERENCES INTERNATIONAL ACCOUNTING (Cont) :
An overview on legal systems, shown in the table below :
Common Law Code law
England and Wales France
Ireland Italy
United States Germany
Canada Spain
Australia Netherlands
New Zealand Portugal
Japan (Commercial Law)

7.  Taxation : In some countries, published financial statements form
the basis for taxation (North America, EU) , whereas in other countries,
financial statements are adjusted for tax purposes and submitted to the
government separately from the reports sent to stockholders (Germany,
France & Japan).
 Providers of Capital : The major providers of financing for business
enterprises are family members, banks, governments, and shareholders.
In those countries in which company financing is dominated by families,
banks, or the state, there will be less pressure for public accountability
and information disclosure. Banks and the state will often be
represented on the board of directors and will therefore be able to
obtain information necessary for decision making from inside the
company. As companies become more dependent on financing from the
general populace through the public offering of shares of stock, the
demand for more information made available outside the company
becomes greater. It simply is not feasible for the company to allow the
hundreds, thousands, or hundreds of thousands of shareholders access
to internal accounting records. The information needs of those financial
statement users can be satisfied only through extensive disclosures in
accounting reports.
 CAUSES FOR DIFFERENCES INTERNATIONAL ACCOUNTING
(Cont) :

8.  CAUSES FOR DIFFERENCES INTERNATIONAL ACCOUNTING (Cont) :
There can also be a difference in financial statement orientation, with
stockholders more interested in profit (emphasis on the income statement)
and banks more interested in solvency and liquidity (emphasis on the balance
sheet). Bankers tend to prefer companies to practice rather conservative
accounting with regard to assets and liabilities.
 National Culture : National culture of countries influences Accounting
Practices. how national culture could influence Accounting Practices of
countries. Generally the influence of the following variables :
 Large versus small power distance.
 Strong versus weak uncertainty avoidance.
 Individualism versus collectivism and.
 Masculinity versus femininity.

9.  CAUSES FOR DIFFERENCES INTERNATIONAL ACCOUNTING (Cont) :
 Other Influences : Another influence on Accounting Practices can be
called `factor of accident of history. Accidents of history refer to rules of
practices of Accounting, which developed due to crisis or shocks of systems
in general. To such kind of accidents of history belong for example collapses
of companies or financial crisis like in the beginning of the 1920`s when the
German and US stock markets collapsed. In the United States this accident
of history resulted in the creation of the Securities Exchange Commission
and stricter Accounting regulations in order to protect the shareholder. In
Germany the same accident leaded to Accounting regulations, which protect
the creditors.
In some countries with high economic growth and hyperinflation, as for
example in South American countries, inflation has a big influence on
Accounting Practices as well. For example, a practice of general price-level
adjustments instead of traditional practices of historical cost
measurements.

10.  CAUSES FOR DIFFERENCES INTERNATIONAL ACCOUNTING (Cont) :
Political and Economics Ties :
Accounting is a technology that can be relatively easily borrowed from or
imposed on another country. Through political and economic links, accounting
rules have been conveyed from one country to another. For example, through
previous colonialism, both England and France have transferred their
accounting frame works to a variety of countries around the world. British-
style accounting systems can be found in countries as far-flung as Australia
and Zimbabwe, Asia. French accounting is prevalent in the former French
colonies of western Africa. More recently, it is thought that economic ties
with the United States have had an impact on accountingin Canada, Mexico,
and Israel.

11.  Harmonization of Accounting Standards :
International accounting harmonization can be defined as “the process of
bringing international Accounting Standards into some sort of agreement so
that the financial statements from different countries are prepared
according to a common set of principles of measurement and disclosure”
.Harmonization means that deviating rules, which do not exclude
themselves, can continue to exist next to each other. That means
harmonization does not focus on the elimination of differences but on the
reduction of contradicting rules. the aim of the international harmonization
process of Accounting Standards is to reduce or overcome differences
world-wide, in order to reach a better international comparability of
financial statements .According to Meek & Saudagaran-harmonization has
been broken down into two aspects: material and formal harmonisation.
 Material Harmonization : Material harmonization refers to research
from a practical point of view. That means that the harmonization of
Accounting Practice applied by different enterprises, is regarded. It is
about the consistency in actual application.

12.  Harmonization of Accounting Standards ( Cont) :
 Formal Harmonization : Harmonization in terms of formal harmonization
is researched from a theoretical point of view, which means that the
similarities and diversities between rules and regulations of different
countries, clusters or groups are regarded .This concept considers only the
formal aspect of harmonization.
As alternative to harmonization, three other ways can be thought of
international accounting standard in order to make financial statements
comparable :
 Mutual recognition : Mutual recognition means that national financial
statements are accepted abroad. The possibility of mutual recognition
exists already in some countries like, for example, between the United
States and Canada. This means for American companies that their financial
statements based on US-Generally Accepted Accounting Principles will be
accepted. Furthermore, mutual recognition is as well possible between
European countries.

13.  Harmonization of Accounting Standards ( Cont) :
 Reconciliation : Reconciliation allows foreign companies to prepare
financial statements based on Accounting Standards of their home country.
The objective of reconciliation is to show major divergences between the
Accounting Practices. Hence, thanks to reconciliation foreign investors
receive data about assets and profits, which are based on their Accounting
principles.
• Reconciliation makes the comparison for investors easier.
• Another advantage of reconciliation is that it is less expensive, than
preparing a full set of financial statements in accordance with foreign
principles of Accounting.
• However, reconciliation is only a summary and cannot provide a full
picture of the company.
• Another disadvantage of this approach is that it is still combined with
costs, which would not exist, if there would be one set of international
accepted Accounting Standards.

14.  Harmonization of Accounting Standards ( Cont) :
 Standardization : Another term, distinguished from harmonization, is
standardization. It describes “a process by which all participants agree to
follow the same or very similar Accounting Practices. The end result is a
state of uniformity”. This state of uniformity is a condition in which
everything is regular, homogenous or at least unvarying.
Benefits Of Harmonization :
There are various benefits of harmonization. First, for many countries, yet
there is a codification of accounting and auditing standards are adequate.
Internationally recognized standards will not only reduce the cost of
preparing for these countries but also enables them to immediately become
part of main stream accounting standards internationally.
Second, the growing internationalization of the world economy and the
increasing interdependence of countries in the with international trade and
investment flows is the main argument of the existence of some form of
accounting and auditing standards applicable internationally.

15.  Harmonization of Accounting Standards ( Cont) :
Third, the need of companies to obtain capital from outside, given the
insufficiency of the amount of profit in the hold to fund projects and
foreign loans are available, has increased the need for harmonization.
Harmonization of accounting include:
 Harmonization of accounting standards relating to the reporting and
assessment reports.
 Harmonization of corporate disclosures made public on the stock
associated with the securities offering and listing on stock exchanges.
 Harmonization of auditing standards.
Explaining the pros and cons of international harmonization of
accounting standards : Concept is more popular than the standardization
of accounting standards in various countries is the concept of
harmonization. Harmonization of accounting standards is defined as
minimizing the differences in accounting standards in various countries.
Harmonization can also be interpreted as a group of countries that agree
on an accounting standard that is similar, but requires the implementation
does not follow the standard should be disclosed and reconciled with
mutually agreed standards.

16.  Harmonization of Accounting Standards ( Cont) :
Overview Of International Organizations That Promote Major
Accounting Harmonization :
Six organizations have become a major player in the determination of the
international accounting standards and in promoting international
harmonization of accounting:
1. International Accounting Standards Board (IASB)
2. European Union Commission (EU)
3. International Organization of the Capital Market Commission (IOSCO)
4. International Federation of Accountants (IFAC)
5. Intergovernmental Working Group of Experts of the United Nations on
International Standards of Accounting and (International Standard
Accounting and Reporting), part of the union conference - the nation in
trade and development (United Nations Conference on Trade and
Development - UNCTAD)
6. Working Group on the Accounting standards Organization of Economic
Cooperation and Development (OECD Working Group)

17.  Convergence of Accounting Standards
History :
International convergence of accounting standards is not a new idea. The
concept of convergence first arose in the late 1950s in response to post
World War II economic integration and related increases in cross-border
capital flows.
Initial efforts focused on harmonization—reducing differences among the
accounting principles used in major capital markets around the world. By the
1990s, the harmonization was replaced by the concept of convergence—the
development of a unified set of high-quality, international accounting
standards that would be used in at least all major capital markets.
The International Accounting Standards Committee, formed in 1973, was the
first international standards-setting body. It was reorganized in 2001 and
became an independent international standard setter the International
Accounting Standards Board (IASB). Since then, the use of international
standards has progressed. As of 2013, the European Union and more than
100 other countries either require or permit the use of international
financial reporting standards (IFRSs) issued by the IASB or a local variant
of them.

18.  Convergence of Accounting Standards
The following is a chronology of some of the key events in the evolution of
the international convergence of accounting standards.
The 1960s—Calls for International Standards and Some Early Steps
The 1970s and 1980s—An International Standard-Setting Body Takes Root
The 1990s—The FASB Formalizes and Expands its International Activities
The 2000s—The Pace of Convergence Accelerates: Use of International
Standards Grows Rapidly, the FASB and IASB Formally Collaborate, and
the U.S. Explores Adopting International Accounting Standards
Overview :
The international convergence of accounting standards refers to the goal
of establishing a single set of high-quality accounting standards to be
used internationally, and the efforts of standard-setters towards
achieving that goal. Convergence is taking place in various countries, with
over 100 countries having made public commitments supporting
convergence towards the International Financial Reporting
Standards(IFRS).Efforts towards convergence include projects that aim
to improve the respective accounting standards, and those that aim to
reduce the differences between them.

19.  Convergence of Accounting Standards
 Motivation :
Motivations for convergence include the belief that it will result in increased
comparability between financial statements, which will benefit a variety of
stakeholders. For example, the FASB believes that "investors, companies,
auditors, and other participants in the U.S. financial reporting system" will
benefit from converged standards because it will result in increased
comparability between the financial statements of different firms. A 2008
report by PricewaterhouseCoopers (PwC) stated that convergence of
accounting standards would contribute to the flow of international
investment and benefit "all capital markets stakeholders" because it :
 renders international investments more comparable to investors.
 reduces the cost of complying with accounting requirements for global
businesses.
 potentially establishes a more transparent accounting system with
greater accountability
 reduces "operational challenges" for accounting firms and
 gives standard-setters the opportunity to "improve the reporting model.

20.  Convergence of Accounting Standards
 Criticisms :
The goal of and various proposed steps to achieve convergence of accounting
standards has been criticised by various individuals and organizations. For
example, in 2006 senior partners at PricewaterhouseCoopers (PwC) called for
convergence to be "shelved indefinitely" in a draft paper, calling for the
IASB to focus instead on improving its own set of standards.
 Nature of standards :
Other criticisms center around the nature of the converged standards. For
example, some critics are concerned that convergence will increase the use
of fair value accounting.
Other critics have also respectively cited shortcomings with rules-based and
principles-based standards as reasons. Principles-based standards allow for
"different interpretations for similar transactions, and have also been
described as "less precise, while rules-based standards contain more
exceptions , and use bright-line rules and specific details to deal with "as
many potential contingencies as possible,

21.  Convergence of Accounting Standards
The above-mentioned PwC senior partners expressed that convergence will
lead to an accounting system that is too rules-based for non-US listed
companies, while other critics conversely criticize the principles-based
nature of the IFRS as making it difficult for preparers of financial
statements to defend against litigation.
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