Harmonization of financial reporting practices: Evidence from the airline industry
Tse, Tze Hong
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Increasing internationalization of capital markets has created an unprecedented demand for greater similarities in financial reporting practices. The need to compare financial information across international borders has been regarded as one of the main driving forces for harmonization of accounting systems. The purpose of harmonization is to reduce the diversities in financial reporting practices. While there are concerns as to whether harmonization is the optimal way to cope with diverse accounting information, the trend is in favour of harmonization. Prior studies on harmonization have focused on a range of different aspects. Although the purposes of many of the prior studies could be similar, varied results were found because of the differences in the issues selected, countries included, the analytical techniques adopted and the time frame studied. Nevertheless, it has been shown in some prior studies that the selection of a particular accounting method depends on the operating circumstances of the reporting company and that comparability of financial statements depends on the use of an accounting method that is appropriate to the reporting company’s operating circumstances. This study examines the material harmonization of international accounting in the airline industry. The diversities in accounting practices among international airlines had been such a major problem that the International Air Transport Association recognized the importance of achieving higher comparability and issued the Airline Accounting Guidelines covering the key financial reporting issues. The objectives of this study are to examine if there was any increase in harmonization in accounting policy choices and in the level of disclosure in the airline industry between 1999 and 2004. This study also examines the overall comparability of financial information from the industry harmonization perspective. The findings of this study show that there was a moderate increase in harmonization of accounting measurement issues as well as in the average overall disclosure index over the time period studied. However, while there was high consensus in some of the accounting measurement choices, the accounting policies adopted for several other issues were very diverse. Despite the moderate increase of the average overall disclosure index, the variations in the disclosure scores for some of the individual issues examined remained significant. These diversities in accounting measurement choices and variations in the level of disclosure would, therefore, create difficulties in comparing the financial information of the airlines. Overall, it can be concluded that there was some improvement in the comparability of financial information. However, there was much room for improvement, especially in terms of the quantity and quality of disclosure. Although comparability has increased as a result of harmonization, significant differences in financial reporting practices were found. From the industry harmonization point of view, it remains important to encourage companies, within one industry, to provide more comprehensive and more comparable disclosure of information in addition to the requirements of either international standards or the national standards that are followed.