Accounting Harmonization

Accounting harmonization is the process that aims to achieve uniformity between the accounting regulations of various countries. That is, it consists of an agreement between different countries so that the accounting regulations reach a high degree of homogeneity.

Given the continuous growth of international transactions and globalization , the harmonization of accounting regulations is essential. This homogenization of criteria allows users of accounting information (mainly companies) to interpret and analyze this information correctly, even if it comes from third countries.

Advantages and disadvantages of accounting harmonization

First, as we have seen, it allows comparison between the accounting of companies in different countries. It even enables comparability with your own information. This allows for correct and adequate decision making, which would not be possible if the accounting regulations were not homogenized.

From a more global point of view, an accounting harmonization can determine whether or not a company is installed in a third country. If the accounting regulations of that third country are not harmonized, it is possible that the company is more reluctant to settle in that country, since it will have to apply regulations that are unknown.

Among the drawbacks, there is a limitation of legislative power in the accounting field, since it is subject to a supranational agreement. That is why many countries are reluctant to bring accounting harmonization agreements, since there is a transfer of their legislative power.

Phases of accounting harmonization, why is it important?

Accounting harmonization can be divided into three phases: a first phase, prior to harmonization; a second phase, in which countries are aware of the need to carry out accounting harmonization; and a third phase, in which countries already have their harmonized accounting regulations.

Phase 1

Usually, the accounting regulations of the countries are very different from each other, even in countries very close geographically. This is due to various causes, which are characteristic of each of the countries: economic, political, historical, etc. This disparity of criteria can damage many operations in the field of international trade (transactions, commercial agreements, impossibility of interpreting accounting information, etc.). This situation, therefore, may limit the free movement of international capital.

Phase 2

Due to these difficulties, countries consider the need to homogenize or harmonize their different accounting regulations, under uniformity criteria. The most common is that a common basis be established for all countries that are part of the accounting harmonization agreement and, on those bases, leave a discretion.

We are going to see an example in relation to this: in a process of accounting harmonization it can be determined as a common basis that in all accounting operations the accrual principle governs. However, with respect to the valuation of assets  , each country can be allowed to choose its valuation criteria. Therefore, based on the foregoing, all countries must apply the accrual principle in their accounting regulations (common base) , but may choose the method of valuation of their assets.

Phase 3

Accounting harmonization is the process that aims to achieve uniformity between the accounting regulations of various countries. That is, it consists of an agreement between different countries so that the accounting regulations reach a high degree of homogeneity.

 

Given the continuous growth of international transactions and globalization , the harmonization of accounting regulations is essential. This homogenization of criteria allows users of accounting information (mainly companies) to interpret and analyze this information correctly, even if it comes from third countries.

Advantages and disadvantages of accounting harmonization

First, as we have seen, it allows comparison between the accounting of companies in different countries. It even enables comparability with your own information. This allows for correct and adequate decision making, which would not be possible if the accounting regulations were not homogenized.

From a more global point of view, an accounting harmonization can determine whether or not a company is installed in a third country. If the accounting regulations of that third country are not harmonized, it is possible that the company is more reluctant to settle in that country, since it will have to apply regulations that are unknown.

Among the drawbacks, there is a limitation of legislative power in the accounting field, since it is subject to a supranational agreement. That is why many countries are reluctant to bring accounting harmonization agreements, since there is a transfer of their legislative power.

Phases of accounting harmonization, why is it important?

Accounting harmonization can be divided into three phases: a first phase, prior to harmonization; a second phase, in which countries are aware of the need to carry out accounting harmonization; and a third phase, in which countries already have their harmonized accounting regulations.

Phase 1

Usually, the accounting regulations of the countries are very different from each other, even in countries very close geographically. This is due to various causes, which are characteristic of each of the countries: economic, political, historical, etc. This disparity of criteria can damage many operations in the field of international trade (transactions, commercial agreements, impossibility of interpreting accounting information, etc.). This situation, therefore, may limit the free movement of international capital.

Phase 2

Due to these difficulties, countries consider the need to homogenize or harmonize their different accounting regulations, under uniformity criteria. The most common is that a common basis be established for all countries that are part of the accounting harmonization agreement and, on those bases, leave a discretion.

We are going to see an example in relation to this: in a process of accounting harmonization it can be determined as a common basis that in all accounting operations the accrual principle governs. However, with respect to the valuation of assets  , each country can be allowed to choose its valuation criteria. Therefore, based on the foregoing, all countries must apply the accrual principle in their accounting regulations (common base) , but may choose the method of valuation of their assets.

Phase 3

Once the agreement between the countries is signed, the accounting regulations are already harmonized among them. This implies a series of benefits, which we analyze below.

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