The paper "Accounting Standards and Harmonization" is an excellent example of a literature review on finance and accounting. The need for accounting standards has always been of vital importance. It is for this reason that more and more investigations were undertaken to create standards of accounting reporting. These include IRFS and GAAP.
International Financial Reporting Standards (IFRS)
IFRS has been designed in a way that countries all over the world can report their financial statements in a uniform or a standard format so that there would be a better chance to observe comparability in the financial reporting and interferences of different countries. It may be called as a global business language. IFRS was first referred to as international accounting standards (IAS) (Mirza et al., 2010)
Generally Accepted Accounting Principles (GAAP)
GAAP are guidelines or a framework set out by the local accounting regulatory bodies in different countries. In the US, FASB issues GAAP, which accountants have to follow in order to generate prepare and report financial statements of businesses (McEwen, 2009).
Harmonization of International Accounting Standards
Harmonization refers to a process in which accounting bodies of different countries aim to reduce the problems emerging from differences in the financial reporting standards. The purpose of harmonization is to set a high level of comparability in the business world. The difficulties companies face can decrease by removing disparities and differences in reporting of financial records and information and its interpretation (Shil et al., 2009).
It is argued by Carmona & Trombetta (2008) that harmonization of international accounting standards may still leave differences in reporting of financial information due to the strategies of different countries depending upon their laws and regulations for their companies. However, harmonization favors the unification of financial reporting standards to be followed by businesses globally.
Challenges of Harmonization
According to Wang (2014), there will be an increased positive market reaction when companies would have to report their accounts using international financial reporting standards. It indicates that there is a sense of harmonization with the help of IFRS that supports the ease of transfer of financial information, preparation of financial statements, and comparability of financial data between different countries (Wang, 2014).
In order to justify the positive impact of the implication of international harmonization standards, Nyor (201) in a descriptive study claimed that the adoption of harmonized standards would enhance the cross-border linking and comparability by eliminating gaps in reporting standards and address the issues related to financial reporting. It will ease access to the capital markets and businesses would have better opportunities to grow and create a higher economic activity (Nyor, 2012).
On the contrary, Pocrnjic (2013) highlighted an issue against the internationally harmonized accounting standards. According to the author, the adoption of these standards may limit companies to apply good strategies for reporting their financial statements. It will also increase transnational competition that can affect local businesses that do not have access to similar resources. Besides this, the companies, which have adopted these standards, have to face a lot of external pressures from authorities managing and regulating international accounting standards. The companies to incur higher costs to hire accountants and auditors who have the knowledge of international standards, and they have to alter their systems to incorporate new standards. They also have to submit or report their financial statements within a specific period. The author also claimed that international harmonized standards have not reduced the need for further research about the financial statement harmonization (Pocrnjic, 2013).
In a research, it was suggested that whenever new standards are being introduced, companies should be given the right to choose or deny or to suggest whether a new standard to be introduced is beneficial or not. It would decrease the pressure of compliance (Jannelli & Tesone, 2013).
Pending Accounting Issues Harmonization
The harmonization process has several accounting issues that are still pending for consensus between IASB and FASB. It suggests that a complete harmonization still remains pending. The researchers suggest that there should be some professional experts hired for reporting and inferring the financial statements in different companies so that there would be fewer complications in presenting the financial statements. Some investors think that the principles-based standards and frameworks (GAAP) require too much management while others feel satisfied with the logical-based or rules-based standards (IFRS) (Lakmal, 2014). It is the main pending issue, which has not been solved so far. Some investors disapprove the harmonization standards due to the ethical problems in their countries such as cultural issues and political issues. These are the controversies regarding the implementation of accounting harmonization standards which should not be taken as granted for the sake of applying a uniform way in presenting the financial statements globally (Beke, 2013).