June 18, 2024


Business & Finance

Harmonization: Is It a Global or an International Thing?

4 min read

Harmonization is vital to accounting in today’s world. Harmonization falls under the concept of international convergence. As mentioned on the Financial Accounting standards Board website, convergence first came about in the late 1950s in response to post WWII economic integration and related increases in cross-border capital flows. According to fasb.org harmonization is described as reducing differences among the accounting principles used in major capital markets around the world. By the 1990s the definition of harmonization was replaced by the concept of convergence; which is the development of a unified set of high quality, international accounting standards that would be used in at least all major capital markets. Harmonization relates to globalization because globalization has a direct effect on harmonization. According to Emmanuel N. Emenyonu and Sidney J. Grey of Sacred Heart University and the University of Warwick, as published in The International Journal of Accounting, the International Accounting Standards Committee (IASC) was established in recognition of the problems posed by international accounting diversity. Leading professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, Netherlands, the UK, and the U.S. all came together to form this national committee in 1973. This was an attempt to promote the harmonization of international accounting practices. In 2001 the IASC was reorganized and became an independent international standard setter known as the International Accounting Standards Board (IASB). More recently over 100 countries and the European Union either require or permit the use of international financial reporting standards, also known as IFRSs, issued by the IASB or a local variant of them.

Since 2002 the FASB and the IASB have been working to innovate and converge U.S. generally accepted accounting principles (GAAP) and IFRS. As of 2013 Japan and China were working towards converging their standards with IFRSs. Even the Securities and Exchange Commission (SEC) supports the convergence of global accounting standards. The final step is to incorporate IFRS into the U.S. financial reporting system. As hard as it may seem to try to get different nations to follow the same accounting procedures, the IASC is not working alone. The United Nations and the European Union are two of the few agencies who are also involved with this process. The IASC is just the only organization to claim prime responsibility for promoting international accounting harmonization on a world-wide basis. Emmanuel and Sidney also mentioned since 1970 France, Germany, Japan, the U.K and the U.S. have become more harmonized, reducing the differences in accounting policies and practices internationally.

Harmonization even effects smaller local businesses around the country. In an article titled “How Accounting Practices Can Support the Globalization of Small Business” by Paul Thompson, the director of Global Accountancy Profession Support, he mentions a survey on US accounting firms. This survey was conducted by the American Institute of CPAs Private Companies Practice Section, which stated that 79% of respondents indicated that they anticipated international growth within the next five years. With international growth you must comply with international guidelines. Small businesses are a key aspect of the global economy. According to the Organization for Economic Co-operation and Development small businesses account for the majority of private sector employment and GDP, as well as a uniquely large share of new jobs.

Basically small businesses provide a large amount of jobs for the working class and they are a large source of entrepreneurship. Nowadays many small businesses manufacture products and provide services in many countries; as well as sell products to clients around the world. Small business are starting to mirror what large business have been doing for years. In a report from the Edinburgh group titled “Growing the global Economy through SMEs” data revealed a large amount of international activity from small businesses. About 75% of the small businesses that were surveyed have clients that add some sort of international aspect to their business. This includes buying goods or services abroad. Another 64% of small businesses reported that they sold merchandise or services to customers outside the US in 2013. This is a 12% increase from 2010, according to the National Small Business Association “Small Business Exporting Survey”.

Obviously Harmonization has played a key role in the evolvement of accounting. It is so important when dealing with globalization or international accounting, and has influence over how business work together. Businesses and big corporations across the world have slowly began to harmonize, working under similar guidelines based on IFRS and GAAP. It’s fascinating to see how fast the business world is moving and the direction that it is headed in. It is safe to say that pretty soon majority of the world’s major companies will all be harmonized and working to better the economy of their native countries.

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