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Research Study on Harmonisation of International Financial Reporting Standards

Table of Contents


Research Background

International Financial Reporting Standards (IFRS) are a series of standards or principles aimed at standardizing financial reporting in firms, particularly those that operate in international arenas. IFRS harmonization began only a few decades ago, during the 1990s; prior to this, the assumption regarding accounting standards was that they were environmental and were intended to meet the needs of the individual country. Although there are still a number of countries that have not adopted IFRS (notably the United States, which still allows for reporting under US GAAP, the number of jurisdictions that have adopted IFRS over the past several years is very high. In particular, the 2005 adoption of IFRS by the European Union meant that all listed companies were required to use this reporting format. This report discusses the implementation of IFRS and the challenges involved in the implementation.

Key Objectives

The key objectives of this report are: 1. To discuss the intent and process of IFRS harmonization.
2. To identify some of the particular challenges of IFRS harmonization and how they have been overcome in the past.
3. To discuss whether IFRS harmonization has met its main objectives in a broad sense.

Theoretical Perspectives

Financial Report

There are a number of theoretical perspectives on the issue of IFRS harmonization. One such theoretical perspective is whether accounting standards have arisen to answer questions that are similar to all cultures, or whether different cultural environments seek to establish different norms to answer different needs. Under this view, IFRS harmonization emerges as a natural response to development of a similar need for accounting standards.

A second such perspective arises in institutional theory, which holds that institutions practice isomorphism, or convergence to a similar norm, due to demand for social legitimacy and acceptance within a given area or industry. A further extension of this theory is that these norms can be imposed from the outside; thus, the harmonization process would be considered not just in terms of internal social cohesion, but cohesion into a given society as a whole.

A third theoretical perspective is that of knowledge/power. Under this perspective, IFRS harmonization is seen as the natural outcome of a demand for increased knowledge regarding the operations of companies and control over these operations. Under this perspective, IFRS represents a belief system, which gains power (and thus formal and informal conversions and eventual harmonization) because it becomes a legitimate form of knowledge. Eventually, IFRS becomes the right or normal form of accounting principle, while others lose power and become less normal. These three perspectives allow for understanding of why IFRS may be adopted.

Research Methods

The research method that was used for this report was secondary (desk) research. This was chosen because of the wide availability of material regarding the topic as well as the restrictions on space and time required for the paper. The process involved searching through databases and library resources to identify peer-reviewed and scholarly sources of information regarding the topic, and then identifying a small number of sources that would be most useful for the outcomes of the paper. These resources were then analysed in order to determine what they would add, and information was arranged appropriately.

Research Findings

Intent and Purpose of Harmonization

The intent of harmonization is seen differently by a number of different researchers. One group determined that the harmonization process could be driven by increasing pressure on regulators to maintain up-to-date standards in an increasingly globalized world Under this perception, the use of harmonization means that international accounting bodies have a single source of adjustment for their own standards, in a sense "outsourcing (Chua & Taylor, 2008, p. 462)" the preparation of accounting standards. This also allows large companies, which may fall under the jurisdiction of multiple accounting standards bodies, to simplify their accounting procedures. Thus, the IFRS harmonization process is seen as a process that is driven by demand by interest groups as well as by the increasingly globalized nature of business.

A second discussion of IFRS harmonization indicates that the use of IFRS is driven by a principles-based approach, rather than a strictly quantified set of procedural standards. This implies that, while standards bodies adopting IFRS will be adopting standards that have a specific goal and intent, there is some existing flexibility that allows for the environment to have an effect on the specific procedures used. This refers to the point regarding the goal of standardization and whether it is a universal or environmental demand, allowing for the development of an environmentally determined set of procedures within an overarching set of universal standards. This is, according to Carmona and Trombetta, one of the major factors in why IAS/IFRS has become a widely adopted strategy for accounting harmonization.

Challenges in Harmonization

There have been a number of challenges observed in IFRS harmonization. One such challenge was seen in the EU harmonization process, where listed companies were required to use IFRS reporting principles, while non-listed companies were not required to do so. This is seen as a barrier to true convergence of reporting standards, and it may also create perverse incentives for firms to remain non-listed. Further barriers that were seen in the EU convergence process included a lack of sufficient information for pre-implementation preparations and the difficulty involved in dealing with unfamiliar transactions or those that were handled substantially differently from the previous accounting standards. However, the issue of difference between listed and non-listed firms has special significance, because it creates a lack of direct comparability between these firms. In particular, this reduced the utility of financial reporting in the short term, particularly to investors on local stock markets that may be required to deal with both internationally listed and locally listed firms. Contrary to the goal of increasing direct comparability, this indicates that the comparability between firms that are not operating at the same level could actually be reduced. Thus, the IFRS harmonization process can be difficult both at the operational level and for investors.

Has Harmonization Meet Objectives?

One of the stated reasons for IFRS harmonization is to increase the transparency of financial reporting and reduce the incidence of practices such as earnings management. (Earnings management is the practice of manipulating earnings just prior to a financial reporting cycle in order to improve investor perception and stock performance. In this respect, it appears that the objective has not been met. Jeanjean and Stolowy's comparison of earnings management practices before and after IFRS implementation in the United Kingdom, France, and Australia found that there was not a decline in earnings management following implementation. The researchers actually found that the use of earnings management increased in France, prior to expectations. This indicates that, in this respect, IFRS harmonization is not sufficient to prevent misuse of financial reporting.

Limitations of the Research

The main limitation of this research is in its briefness in treating the research topic. The topic of harmonization of IFRS is a topic that ahs a long history and a broad-ranging series of discussions, focusing on different geographies and previously existing standards. As such, this research must remain as a broad overview of the topic that only allows for a limited insight into the particulars of a given harmonization process.


A recommendation for this project is to expand the research in order to provide a more comprehensive understanding of the topic of IFRS harmonization. For accounting standards bodies currently contemplating IFRS harmonisation, there are a number of potential recommendations. These recommendations include ensuring that there are substantial resources available for firms that will be required to undergo changes to the accounting process and to consider implementing a single standard, rather than implementing different rules for local and international firms or for listed and non-listed firms. This will reduce the complexity of implementation and increase the comparability of firms that operate within the same market.

Reflection on Learning

My expectations of this assignment were that I would learn about the process of harmonisation of IFRS standards and identify specific factors in this harmonisation process. This did happen, although these findings were not necessarily what I expected at first. For example, I learned that larger industrial countries were not necessarily the first to harmonise their accounting standards, sometimes retaining standards long past the time when others had given them up, while other countries rapidly harmonised either due to lack of existing firm standards.

The most successful part of the research assignment was identifying specific issues within harmonisation to IFRS standards and determination of how these standards were harmonised. These issues have been thoroughly discussed within the literature and there were numerous case studies available. The least successful part of this research was identifying a theoretical foundation for the research topic. Although one was eventually identified, this is an issue that is not addressed explicitly by much of the work on the subject, and so was more difficult to identify.

If I were going to undertake the same topic in the future, I would begin by identifying a key theoretical foundation for the research, and then work from this theoretical foundation, rather than attempting to identify a theoretical base from works in the field. This would improve the overall outcomes by reducing the difficulty in finding a theoretical base and by more carefully focusing the research process. However, I would keep the process that I used to find sources and to identify the most well-regarded sources, which was highly effective in identifying useful research material.

In terms of learning development, there are two major areas that were developed. First, I improved my research skills, particularly my skills in finding sources and identifying appropriate sources from a wide range of literature. This was a difficult task in this case because of the wealth of resources available. Thus, it greatly improved my ability to determine whether a source was usable and useful, and how to fit a number of sources into a short paper with some relevance. This project also offered insight into the process of longer papers, allowing me to understand how a longer paper should be structured. Overall, this was a highly effective learning process, with particular emphasis on my ability to find and integrate sources.


Callao, S., Jarne, J. I., & Lainez, J. A. (2007). Adoption of iFRS in Spain: Effect on the comparability and relevance of financial reporting. Journal of International Accounting, Auditing and Taxation , 16, 148-178.

Carmona, S., & Trombetta, M. (2008). On the global acceptance of IAS/IFRS accounting standards: The logic and implication of the principles-based system. Journal of Accounting and Public Policy , 27, 455-461.

Chua, W. F., & Taylor, S. L. (2008). The rise and rise of IFRS: An examination of IFRS diffusion. Journal of Accounting and Public Policy , 27, 462-473.

Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory study of earnings management before and after IFRS adoption. Journal of Accounting and Public Policy , 27, 480-494.

Larson, R. K., & Street, D. L. (2004). Convergence with IFRS in an expanding Europe: Progress and obstacles identified by large accounting firms' survey. Journal of International Accounting, Auditing and Taxation , 13, 89-119.

Rodrigues, L. L., & Craig, R. (2007). Assessing international accounting harmonisation using Hegelian dialectic, isomorphism and Foucault. Critical Perspectives on Accounting , 18, 739-757.