Question

What do you think about the value of harmonizing accounting standards for global equity markets?

Answer 1

The increased globalization of capital markets has resulted in a need for international accounting standards. In an increasingly globalized world, it is clear that financial statements of companies operating under different accounting management systems are not easily comparable. This has led to the need and development of the International Accounting Standards Board (IASB) whose stated objective is the development of a single set of high quality, understandable, enforceable and globally-acceptable International Financial Reporting Standards.

The harmonization of accounting standards is needed due to the globalization of businesses and services and an increase in cross-border investments and borrowings. Some of the benefits of harmonization of accounting standards are:

• It ensures reliable and high quality financial reporting and disclosures in certain cases; it can prove to be crucial to the economic and financial development of a country.
• It enables a systematic review and evaluation of the performance of say multinational companies having subsidiaries and associates in various countries wherein each country has its own set of GAAP.
• It makes the comparison of the performance of a company against its domestic and international peers easier and more meaningful.
• It adds to the international credibility of a company.
• It is a precursor for accessing international capital markets which can, in turn, reduce the capital cost and consequently, improve the performance of a company.
• It provides a level playing field where no country is advantaged or disadvantaged by its GAAP.

Additional benefits of a global financial reporting framework that can be achieved through harmonization are numerous and can include greater comparability of financial information for investors, greater willingness on the part of investors to invest across borders, lower cost of capital, more efficient allocation of resources; and even higher economic growth not only for companies and organizations but for governments also.