May 2017 Q5 c&d

Advantages of Harmonization

• The first and most important advantage of harmonization of reporting standards is to achieve comparability in financial statements. Due to different sets of financial reporting standards, the way financial statements prepared and presented are different from each other which make it complicated to compare them. This is even more noticeable in multinational companies when they operate in more than just one country. If international harmonization is achieved, the level of international comparability also increases making it easier for companies to prepare the financial statements under one set of rules; investors who understand the financial statements due to the nature of IFRS and make well thought investment decisions.
• International Expansion
  Moving to a single set of global financial standards would also ease barriers to expansion for companies. If companies wish to expand overseas today, they need to consider international costs of compliance, which could mean adopting a completely new set of accounting records to meet statutory requirements in the new country. In some cases, this would nearly double the company’s accounting costs. For many small businesses, even the large rewards of moving overseas are dwarfed by these expansion costs.
• Central Authoritative Body
  From a policy-making standpoint, moving to a single set of global standards puts rule making into the hands of one body. Currently, accounting standards are set within each country by each standard-setting body, as well as by an international group. One set of standards would reduce disagreement between countries and international regulators, and it might also cut costs. In some countries, businesses are required to pay reporting fees that go to fund these standard-setting bodies. While the costs may not affect large companies, they can have a huge impact on a small business. Moving to a central authoritative body could reduce these costs drastically.
• There will be increased auditing efficiency and money saving as companies has to use only one set of reporting standards. This also serves to reduce trade barriers among countries allowing more access to international capital markets.
• Another advantage worth noting is the consistency to be achieved under IFRS as it was one of the objectives of IFRS as a single reporting standard. The consistency also contributes to better understanding between investors, lenders and other businesses as there will be the nature of predictability in place. Moreover, companies operating in different countries also can use their expertise and systems in all countries they are operating due to consistency of the reporting standards. Another benefit that derives from consistency is the time scale needed to implement in new countries as there will be no need to learn and adapt to new country specific rules except minor adjustments.                                                                     (Any 3)

Disadvantages of Harmonization

• Cultural Differences
  One of the criticisms of harmonized accounting standards is that the IASB has failed to fully take into account the cultural, political and social differences between countries. This is particularly relevant to their implementation in developing countries, where language barriers, attitudes toward accounting and other socio-cultural aspects may affect their interpretation and application. For example, when the harmonized standards were implemented in Jordan, they were first translated into Arabic. Even though technical accounting terms have been well-defined in Arabic, challenges arose when the English terminology was hard to interpret or used inconsistently and, therefore, difficult to translate accurately.
• Worldwide Acceptance
  National accounting standards are highly politicized and there is often a natural tendency to place the interests of the national economy ahead of those of the global economy. Private sector businesses and professional accounting bodies also have a vested interest in accounting practices and financial reporting. Pressure from these groups to change or reject certain standards can carry a lot of weight with political decision makers. Adopting international financial standards is met with additional challenges in developing countries. They often lack the resources and infrastructure to adapt national legal and legislative frameworks in which to house the standards, making proper implementation difficult.
• International Enforcement
  The success of harmonized financial reporting depends on individual governments enforcing adherence to the international standards once they have been implemented. In 2008, the French authorities allowed the bank Société Générale to transfer some of its losses from 2008 to 2007, meaning its financial statement for 2008 looked much better than the reality. This provoked an international outcry, not the least from the IASB. When exceptions are made, it undermines the integrity of the whole system and renders it ineffective.
• Training and Retraining
  When a country decides to harmonize with the international standards, its companies, accountants and auditors need to be retrained in the new standards and reporting procedures for financial statements. College and university programs in this field also have to undergo significant changes in order to educate new people entering the profession. Before any of this can happen, trainers and professors will require training so they can instruct professionals and students. This will require the development of new learning materials and curricula, new examinations for professional licensing and new accounting software and reporting systems. To further complicate matters, the adoption of harmonized standards has to be phased in, so for a number of years, two different systems are in operation. Such a complex transition requires a lot of safety mechanisms to ensure it achieves uniform results.
• Another disadvantage of harmonization is when there exists different economic environment as harmonization could be considered useless. If a particular country has its own practice in place, and even though they adapt to use one of the international reporting standards, it could be more harmful to the country rather than make anything good. This is because the irrelevant element of the new reporting standard may be of no use and therefore may even introduce ambiguity and complication to that country’s reporting standards.                                                                                       (Any 3)

• Historical cost is whereby assets are recorded at the amount of cash or cash equivalents paid or fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amounts of proceeds received in exchange for the obligation, or in some circumstances at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business..
• Current cost whereby assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently, and liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.
• Realisable (settlement) value is the amount of cash or equivalents that could currently be obtained by selling an asset in an orderly disposal. Settlement value is the undiscounted amounts of cash and cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.
• Present value is the presented discounted value of the future net cash flows in the normal course of business.