Chapter 3, Problem 3.1C

To determine

Introduction:Harmonization in accounting standard refers to the practice of setting accounting standards which will be followed by different companies in different countries. It increases comparison between the companies by limiting the variation in the standards followed.

To explain: The advantages and disadvantages of harmonizing accounting standards.

Explanation of Solution

The advantages of harmonization in accounting standard is as follows:

Comparability: With the harmonization, all the companies will follow the same standards. It will help in easy comparison between the financial statements of different companies.

Reduce reporting costs: With harmonization in accounting, the parent company can prepare a combined financial statement of all its subsidiary companies. The parent company need not prepare different books of according for different country’s laws. It will reduce the reporting costs of the parent company.

International credibility: With the harmonization in accounting standards, the investors of one country can easily interpret the financial performance of other country’s companies. They can invest in different countries. It will lead to international credibility.

The disadvantages of harmonization in accounting standard is as follows:

Integration problem: Many countries have different laws for taxation purpose reporting and different laws for regulatory reporting. It will create problem in the integration of standards.

Negative effect on small business: The small business will have to apply new standards. It will increase the cost of training of accountants and preparation of financial statements according to set standards which will increase their cost of reporting.

International sovereignty issue: The different countries have different authorities for setting accounting standards, banking laws and taxation laws. It will create a problem in harmonization of accounting standards.