The Advantages and Disadvantages of the Harmonization of Accounting Standards
As a global economy continues to become more prevalent in today’s society, there is a growing demand to set universal standards for all businesses and corporations. This particularly holds true in the field of accounting. One viable option is to incorporate harmonization into accounting practices around the world. The purpose of this report will be to explain the concept of harmonization and to highlight the advantages and disadvantages it will have on the corporate world.
As defined by Samir Mogul in Harmonization of Accounting Standards, harmonization is “the continuous process of ensuring that the Generally Accepted Accounting Principles (GAAP) are formulated, aligned, and updated to international best practices” (Mogul, 684). In current times, harmonization is directly related to the convergence of GAAP and IFRS, which is the International Financial Reporting Standards. GAAP is generally considered to be more rules-based whereas IFRS is considered to be more principles-based. Some of the differences between these two standards include variances in the income statement, inventory reporting, and earnings per share measurements. While many global economies have already adopted IFRS due to its more dynamic approach to globalization, the United States still continues to operate under GAAP. As economic pressures of globalization continue to increase, the concept of the United States transitioning to IFRS has become more imminent.
Universal accounting standards will provide many benefits to the global economy. As highlighted in Nicolas Pologeorgis’ The Impact of Combining the U.S. GAAP and IFRS, the goal of the Securities and Exchange Commission is “to consistently pursue the achievement of fair, liquid and efficient capital markets, thus providing investors with information that is accurate, timely, comparable, and reliable” (Pologeorgis). First, it will provide consistency across international markets. This will allow accountants to analyze companies across the globe regardless of the country in which they operate. Additionally, investors will easily be able to compare financial statements of international corporations since all companies will be adhering to the same set of standards. This will lead to an increase in international investments and overall economic growth.
Although there are numerous advantages to the harmonization of accounting standards, there are a few drawbacks related to the process as well. These include the length of time it will take to implement the new standards and the costs relating to the process. Accountants, management employees, and investors will have to educate themselves on the new accounting information, which will be costly to many corporations. Companies will also have to design new internal controls as the existing controls in place will become obsolete. Another hurdle of harmonizing accounting standards will be the unwillingness of countries to commit to a uniform code as many of them have different political, economical, and ethical systems. Another negative effect highlighted by Grant Houston in The Disadvantages of Harmonizing Accounting Standards is the impact it will have on small businesses in the United States (Houston). The compliance costs associated with the transition to new accounting standards will inhibit the expansion and growth of many small businesses across America.
Harmonization is a concept that will continue to be discussed with the current growth of the global economy. The idea of the United States transitioning to IFRS is still an extremely popular topic of debate in the accounting sector. Whether or not the benefits of harmonization truly outweigh the costs will be the ultimate factor in the decision.
Houston, Grant. “The Disadvantages of Harmonizing Accounting Standards.” Small Business. Chron, Sept. 2011. Web. 17 Nov. 2013.
Mogul, Samir S. “Harmonization of Accounting Standards.” Editorial. Chartered Accountant Jan. 2003: 681+. Web. 17 Nov. 2013.
Pologeorgis, Nicolas. “The Impact of Combining The U.S. GAAP And IFRS.” Investopedia. N.p., 21 Jan. 2013. Web. 17 Nov. 2013.