Harmonization of financial statements refers to financial reporting that is based on international accounting standards that are accepted across the globe. The international business community recognized the need for uniform accounting standards. This has been necessitated by of the spectacular growth in the number and size of multinational companies, foreign investments and cross-border listings on the stock exchanges.
To improve the comparability against domestic and international peers, harmonization of financial statements is advocated. Harmonization strives to enhance comparability between financial statements by setting restrictions on the alternative accounting treatments allowed for similar transactions. The comparability of financial statements becomes doubtful if similar transactions are accounted for differently in different countries. Investors and analysts benefit from enhanced comparability of financial statements.
Financial reporting is a costly affair. Multinationals operating in countries with different accounting standards would incur high costs of preparing financial statements in accordance with each country’s accounting principles, then repeating the whole process for consolidation purposes. Harmonized financial statements benefits multinational corporations because they can prepare one report rather than one for each country in which they operate. In addition, it enables a systematic review and evaluation of the performance of foreign subsidiaries and associates.
Financial statements prepared on basis of the same accounting principles means that a level playing field is set where no country is privileged or underprivileged by its generally accepted accounting principles. Harmonized financial reporting standards that cut across national borders are not simply ideal for a better global market; they are elementary to its existence.
Reliability of financial statements is enhanced because investors and foreign companies are able to assess the company’s performance based on the standards well known to them. In addition, contradictions and inconsistencies in basic concepts are reduced. This gives the users of the financial statements confidence that the reports present true and fair view of the performance and position of the company.