12.8 OBSTACLES TO ACCOUNTING HARMONIZATION. There are many obsta-
cles present in the global environment that make harmonization difficult to achieve.
Each country’s own nationalism and pride serve as a deterrent to reaching this goal.
As demonstrated previously, there are many alternative methods to account for par-
ticular transactions. Each method can reasonably be considered the “best” or “cor-
rect” way, depending on one’s perspective. It will be difficult to get a country’s stan-
dard setters to accept alternative principles when they clearly believe that the
standards they have developed provide the best information from their national per-
spective. Countries’ standard setters have different objectives and users. For exam-
ple, the primary objective of financial reporting in the United States is to meet the
needs of shareholders, while in Germany the creditors’ perspective is the main con-
cern of the financial reporting process. Finally, a country’s legal tradition also influ-
ences its perspective. The United Kingdom has a common-law tradition, so it natu-
rally prefers more flexibility and less codification in its standards. Germany has a
Roman law tradition, which emphasizes stricter interpretation of the rules.
There are a number of costs in achieving harmonization. The level of costs to be
incurred depends upon the manner in which harmonization is achieved. If harmo-
nization is achieved by developing a loose, flexible framework into which a country’s
accounting standards fit, the costs would be far less than if a specific, rigid set of ac-
counting standards were imposed uniformly on all companies in all countries. Also,
the level of costs would vary, depending upon the specific standards required.
Another alternative is to require all companies to reconcile their financial state-
ments to one set of internationally accepted principles, similar to the requirement in
the United States for non-U.S. registrants to reconcile shareholders’ equity and net
income to U.S. GAAP for SEC filings. Under the reconciliation approach, the pri-
mary financial statements may continue to be prepared under the relevant company’s
national accounting principles. Thus, harmonization is achieved through reconcilia-
tion to an agreed benchmark such as IAS or U.S. GAAP. An advantage of the recon-
ciliation approach is that, with the exception of IAS, it is clear which country’s ac-
counting profession or standard setters have the standing to resolve accounting
issues. Thus, the German profession resolves issues that arise under German GAAP
and the U.S. profession resolves issues that arise under U.S. GAAP. In many in-
stances, companies coming to the United States for the first time will adopt account-
ing policies that, to the extent permissible by their home country standards, minimize
any differences from U.S. GAAP that actually need to be calculated. European com-
panies, for example, are currently anticipating the move to IAS by selecting options
that eliminate any difference between their home country GAAP, IAS, and U.S.
GAAP, where feasible. This is obviously a difficult task to manage given the rate of
change but, overall, the practical issues are generally resolved in a sensible manner.
In our experience, the major obstacle reconciliation presents non-U.S. companies
is that it frequently contains sensitive information. Generally, the potentially sensi-
tive information in the reconciliation detracts from an otherwise rosy picture of
healthy management performance. For example, we aware of situations where a bank
has accounted for transfers of nonperforming loans to related parties at book value
rather than reporting the impairment loss as would be required under U.S. GAAP.
Other situations have involved significant capitalized preoperating and start-up costs
that would need to be expensed to adhere to SEC staff views. But perhaps the most
salient reason for requiring the reconciliation came with the Daimler-Benz offering
in 1994. Under German GAAP, Daimler-Benz reported a profit of almost DM 200
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