plicit requirements for designation of derivatives as hedging instruments and require
specific documentation before hedge accounting can be applied. Most other countries
still do not specify when hedge accounting can be applied and do not specify how
hedge accounting should be applied. Most countries are quickly developing their own
derivative accounting rules or looking towards the IAS for guidance on accounting
for derivatives. For example, an accounting standard similar to FASB No. 133 was
developed under Japanese GAAP and became effective for fiscal years beginning
after March 31, 2000. Even though the two most influential and well-regarded stan-
dard setters have adopted similar approaches, hedge accounting remains a topic of
continual deliberation. In December 2000, the Joint Working Group of standard set-
ters was formed to develop a long-term solution for recognition and measurement of
all financial instruments at fair value. Gains and losses arising from changes in fair
value would generally be included in the income statement. No “deferral” or hedge
accounting would be permitted.
12.7 BENEFITS OF ACCOUNTING HARMONIZATION. Having explored some of
the ways in which countries’ accounting practices may differ, we can better appreci-
ate the benefits that can be obtained from harmonization. However, harmonization is
not an end in itself. The goal of harmonization should be for like transactions and
events to be given the same financial reporting treatment by different enterprises in
different countries. Similarly, harmonization should accommodate differences in ac-
counting treatment for different transactions and events.
Harmonization is even more important in today’s marketplace than at any time in
the past. As explained in the introduction to this chapter, an ever-increasing number
of companies are becoming international in scope. Technology is reducing barriers to
the exchange of information on a global basis. Furthermore, investors and lenders are
focusing their attention more and more on international companies and international
markets. The most accurate way for investors or creditors to make a business deci-
sion is to ensure that they are able to make cross-country company comparisons on a
level playing field and with comparable information.
Many feel that steps must be taken to minimize this diversity in accounting stan-
dards. If such an effort is going to be successful, the entire global business commu-
nity must be involved. The various securities regulators from each country must work
together so that there is no preference given to either a domestic or a multinational
company as far as accounting treatment or disclosure requirements are concerned.
The regulators must ensure that they fulfill their responsibility of providing compa-
rable information to their domestic investors.
The impetus for the change is already here. It is coming from the business com-
munities of Germany, France, and China and other countries whose large and pow-
erful companies face increasing pressure to obtain greater access to financial capital
and to lower their cost of capital. It is being accompanied by changes in corporate
governance and in the relationships between the enterprise and its management, its
employees, its shareholders, and its creditors. These companies need access to inter-
national investors and creditors, and there is an increasing understanding that a cap-
ital market will only attract investors if it is open, fair, and transparent. Because so
many companies are entering the world’s capital markets simultaneously, they have
a strong incentive to push for a reduction of accounting diversity to minimize the
complexity and costs of this task. Unsurprisingly, a number of organizations are now
involved in the quest for a harmonized set of international standards.
12 • 28 SUMMARY OF ACCOUNTING PRINCIPLE DIFFERENCES