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Iraq has the common epithet, the "Cradle of Civilization", as it was home to the earliest known civilizationon Earth, the Sumerian civilization, which arose in the fertileTigris-Euphrates river valleyÂ of southern Iraq. Notwithstanding the fact that it has a rich history roots, Iraq since the invasion in 2003 by countries of United States of America and Great Britain, has been regarded as a Cradle for Oil and Anti-Terrorism wars. Because of the unresolved feuds between countries, Economic and Business activities have been inert, and accounting practice is "as if" has been languishing.
Few have been written to supplement Accounting in Iraq. With this regard, this research will try to connect the missing links of accounting parlance in Iraq and prove the dynamism of Accounting, which no matter how Iraq's environment is an unhealthy ground neither for Business transactions nor for residency because of the war outbreaks. Still, Accounting is adoptive in nature that can operate under Iraq's situation. With the proposed title of the research; Iraq: Brick by Brick the study provides a wider horizon for Iraqi Accounting System and Tax Regulations. This research will provide compiled supplement materials of the Historical accounts of the development of accounting is Iraq, Accounting regulating body and their Provisions, Accounting system of Book keeping and tax regulations being Implemented. Also, this research will provide possible solutions and contributors in reforming accounting system in Iraq in accordance with its national reconstruction.
Iraq: Brick by Brick
Iraq is rich in history, culture and people. The land that now encompasses modern Iraq is known as the "Cradle of Civilization." Around 4000 BC the ancient Sumerian culture flourished here, originating land cultivation, irrigation, urban society and the first written alphabet. Known in ancient times as Mesopotamia, the land of Iraq figures prominently in the Bible, This is where the garden of Eden is depicted, where the tower of Babel was constructed, where Abram was first called by God to leave home and kin, and where the Hebrews were exiled following the destruction of the temple by King Nebuchadnezzar II of Babylon. Traversed by the Tigris and Euphrates rivers, Iraq is mostly desert, with mountains in the northern regions and fertile plains in the far south. It is surrounded by Kuwait and Saudi Arabia to the south, Jordan to the west, Syria and Turkey to the north and Iran to the east. A narrow strip in the far south borders on the Persian Gulf.
Iraq is known for its oil, having the second largest reserves in the world. Revenues from oil sales in the 1970s and 1980s enabled the country to make great strides in education, health care and basic infrastructure. Till 1990, Iraq was known as one of the most highly developed countries in the Middle East.
Some 22 million people call Iraq home. Seventy-five percent or more are Arabs, 15-20 percent is Kurdish and the remainder are Turkoman, Assyrian, or another ethnic group. The vast majority - 97 percent - is Muslim, and the remaining three percent is Christian.
Cradle for First Accounting Practice
Accounting was born before writing or numbers existed, some 10,000 years ago, in the area known as Mesopotamia, later Persia, and today the countries of Iran and Iraq. This area contains the Tigris Euphrates river valley, a large fertile area 10,000 years ago with a large thriving population and active trading between towns and cities up and down the two rivers.Â Writing and numbers would be not being invented for about another 5,000 years. At that time, merchants faced many of the same problems businesses face today. They had to ship their merchandise up and down the rivers, and that meant trusting a boatman with their goods. Unfortunately, not all boatmen were honest, and disagreements often arose about how much was shipped versus what was received at the other end.Â To deal with the problem, merchants came up with an ingenious plan. They made small clay tokens, in various shapes and with various markings, to indicate different products. One would mean a basket of grain; another would mean a pot of oil, etc. They had over 200 such tokens to indicate a large variety of common goods, including food, leather, clothing, utensils, tools, jewellery, etc.Â Before shipping their goods, a merchant would take one token for each item in the shipment, and encase the tokens in a ball of clay, called a "bollae" - meaning ball. The ball would be dried in the sun, given to the boatman, and then broken by the buyer on the other end of the transaction. The buyer would match the tokens with the items in the shipment, to verify that everything sent was accounted for.Â
This is the function ofÂ protection of assets, and is a major function of all modern accounting systems. It was important 10,000 years ago and is just as important now. Today we see merchants doing the same thing as their counterparts 10 millennia ago - today they get a bill of lading - a listing of the merchandise entrusted to a shipper.Â
The system of using bollae continued for almost 5,000 years, all before the invention of writing or numbers. One day, probably by accident, a wet clay bollae was rolled over a loose token, lying on the ground. The impression of the token was left in the wet clay. Merchants began pressing the tokens on the outside of the bollae, in addition to putting the tokens inside the ball.Â
Beehner (2007) cited in his Article the Economic Status of Iraq; Iraq's economy is dominated by theÂ oilÂ sector, which has traditionally provided about 95% of foreign exchange earnings. In the 1980s financial problems caused by massive expenditures in theÂ eight-year warÂ withÂ IranÂ and damage to oil export facilities by Iran led the government to implementÂ austerity measures, borrow heavily, and later rescheduleÂ foreign debtÂ payments. Iraq suffered economic losses from the war of at leastÂ US$100Â billion. After hostilities ended in 1988, oil exports gradually increased with the construction of new pipelines and restoration of damaged facilities. A combination of low oil prices, repayment ofÂ war debtsÂ which was estimated at aroundÂ US$3 billion a year and the costs of reconstruction resulted in a serious financial crisis which was the main short term motivation for theÂ invasion of Kuwait.
On November 20, 2004, theÂ Paris ClubÂ of creditor nations agreed to write off (80%) $33 billion of Iraq's $42 billion debt to Club members. Iraq's total external debt was around $120 billion at the time of the 2003 invasion, and had grown by $5 billion by 2004. TheÂ debt reliefÂ will be implemented in three stages: two of 30% each and one of 20%.Bohsem, Guido & Somerville, Glen, 1993) At the end of 2005, and in the first half of 2006, Iraq implemented a restructuring of about $20 billion of commercial debt claims on terms comparable to that of its November 2004 Paris Club agreement (i.e. with an 80% write-off). Iraq offered to its larger claimants a U.S. dollar denominated bond maturing in 2028. Smaller commercial claimants received a cash settlement of comparable value.
Indeed, Iraq had a rich civilization as it was one of the pioneers in the field of Accounting and also in the development of money. But Through the years Iraq experienced events that toiled their once rich civilization Such as Saddam Hussein's ascendency that brought series of wars, discovery of weapons of mass destruction and America's declaration of war against Iraq in pursuit of its Anti-terrorism campaign. War after war Iraq was susceptible to instability and temporalities with regards to their governance and accounting practice is no exception from it.
Iraqi accounting Governance
The Board of Supreme Audit (BSA) is the legislative body that is responsible for the issuance of accounting standards and policies in Iraq. The role of the said body is stated in Article 6 (1990, the Board of Supreme Audit Law):
Board of Supreme Audit was enacted and still into force the purposes of: Setting the role, duties, and specialties of the Board of supreme Audit and enhancing its role to participate in improving the performance of the state's institutions. to enable this Board to secure the auditing requirements and its needs of resources ,civil equipments , and information whether to say an opinion about the truth of the financial situations and the activity results or to evaluate theÂ performance of executive institutionsÂ under its review . To find administrative and organizational structures that goes along with the phases of the development of national economy and gives enough flexibility to the Board in planning and assigning duties and specialties.
Â Â To secure the required central supervision to direct controlling tasksÂ andÂ developing the bases principles ,means and ways of implementation and assess the results In addition to enablingÂ the Board to cover all the services and institutions of the state in the governorates with auditing and supervision with the highest level of competence and efficiency .
The Audit Advisory Board (AAB) is primarily responsible for organizing and supervising the auditing and accountancy profession within the "private sector" in Iraq, while the board of Supreme Audit (BSA) is responsible for the audit governmental entities (Al-Salman, 2009). The Chairman of Board of Supreme Audit (BSA) is the chairman of Audit Advisory Board (AAB).
Iraqi organizations and Foreign Entities operating in Iraq must use the Unified Accounting System (U.A.S) for statutory reporting, including audited financial statements which needs to meet the requirements of the tax authorities, The Central Bank of Iraq and The Registrar of Companies. Any organization may use any accounting Standards internally or for any other reporting purposes. However, reporting to Iraqi regulators should comply with U.A.S requirements.BSA being the legislative body responsible for issuance of standards stated in their accounting standard no. 1 the composition of the Board of Accounting and Auditing Standards along with this are other standards formulated by the Board:
Accounting Standard no. 2 Accounting Treatment about research and Development costs (1992)
Accounting Standard no. 3 Capitalizing Loans expense (1993)
Accounting Standard no. 4 Accounting of Change, Effect in Foreign Currency Price (1993)
Accounting Standard no. 5 Accounting on Inventory, Its evaluation and presentation in Financial Statements (1995)
Accounting Standard no. 6 Disclosure of Information that are Related with Financial Statements and Accounting Policies (1995)
Accounting Standard no. 7 Cash Flows (1996)
Accounting Standard no. 8 Information Reflecting the effects of changing Prices (1997)
Accounting Standard no. 9 Contingencies and Events occurring after Balance Sheet date (1997)
Accounting Standard no. 10 Disclosures of financial statements in Banks and Similar Institutions (1998)
Accounting Standard no. 11 Agricultural Accounting (1998)
Accounting Standard no. 12 Capital Profit and Loss (2000)
Accounting Standard no. 13 Accounting for taxes on Incomes (2001)
Accounting Standard no. 14 Accounting for Investments (2001)
Iraqi Accounting Rules - Book Keeping and Ledger Maintenance
Accounting Practice in Iraq may show aspects that are different from the generally followed rules. Disparities in the applied rules are results of Culture dynamism and Behaviour of the Environment. Alnajjar (2004) laid down these differences in the rules:
Organizations operate in Iraq should keep their accounts and ledgers in Arabic language and Reports issuance to the Iraqi regulators has to be in Arabic. These rules are implied because of the Arabic Dialect that is spoken all throughout Iraq.
Organizations can use internally any currency to record their accounting transactions but for the purpose of audited financial Statements to be presented to the concerned authorities needs to be Iraqi Dinars, since it is the official currency of the country.
Accounting treatments under U.A.S may carry ambiguity for certain international accounting policies such as the treatment by head of office charging a certain percent of its overhead to a contract being executed in Iraq, or the treatment of the "Management Expenses" incurred by the Head office in reliance with the activities of the entity operating in Iraq.
Iraqi Tax Regulations
One of the major sources of Income in Iraq is their Taxation. According to the Ministry of Finance in Iraq there are 5 tax categories that currently being implemented, which are: Corporation Tax, Personal income Tax, Social Security Contributions, Stamp Duty and Custom Duty and VAT/ Sales tax which is currently not in effect.
Income earned deemed to be earned in Iraq is subject to taxation. Corporation Tax is levied at a flat rate of 15% of the taxable profit, but for companies operating within the Oil Sector, a bill shall be passed to increase the rate of corporation Tax to 35% of the taxable profit. Taxable profit is the reported profit as per financial statements adjusted by certain unallowable expenses for taxation purposes such as:
Personal non-business expenses
Loss can be carried forward for five years in order to offset up to 50% from taxable income of the subsequent years. Foreign Entities operating in Iraq in the form of a Limited Liability company or branch shall be treated in the same manner indicated for taxation purposes.
Personal Income tax and Social Security Contributions
Personal Income tax rates are 3-15% based on the individual taxable income. Taxable income is the income earned by an individual after deducting allowable items such as, personal allowances, child allowances, as well as other deductible exemptions such as food, accommodation, transport and risk allowances. Income tax paid abroad on behalf of an expatriates employed in Iraq shall be off set against personal income tax liability incurred in Iraq. Staff Personal income has to be settled on a monthly basis, as it's the duty of the employer to collect the tax from the employees and send it to the concerned tax authority in this respect, In order to avoid penalties. The employee's social security contribution is 5% of the basic salary, while the employer's contribution is 12%. Social Security paid abroad for expatriate personnel operating in Iraq may be off set against their liability for social security as a result of their employment in Iraq.
Custom and Stamp Duty
Almost all imported materials except food and very limited types of materials are subject to 5% rebuilding Iraq fees. In addition, 1% export fees imposed on fair market value also the local government can impose additional fees of 1% to 2% from the fair market value of the imported goods and materials, if such goods will be used inside of such territory. Stamp Duty may be imposed upon signing of contracts with governmental entities. The current rate is 0.2% of the value of the contract, unless the contract itself stipulates that it is exempt from stamp duty.
Future Plans on Accounting Policies
Iraq is not included in the list of countries that are using the International Financial Reporting Standards as a basis for the accounting rules to be implemented. Uniform accounting is becoming irrelevant and a new accounting approach is needed. The question that needs to be addressed is which accounting system is best suited for use in new Iraq. International accounting standards may be considered as a good option. (Alnajjar, 2004)
Since 1990's a series of 14 accounting standards were announced loosely based on IFRS. But these accounting standards have fallen behind, one of which is the Standard on research and development costs (IAS 9 research and development costs), an international accounting standard that no longer exists since it was replaced by IAS 38 Intangible assets.( Al Bawaba,2010)
In 2009, the central bank of Iraq pre-announced its intention of converting the Financial Statements into IFRS. Late last year, in consultation with the IMF and the World Bank, Iraq has adopted a three-year action plan that identified priority measures in the areas of budget preparation, execution and reporting; cash management; public procurement; and the accounting framework. Specifically:
To improve budget preparation, Iraq will clearly define priorities, set ceilings in the budget circular for current and investment spending in line with a sustainable medium-term budget strategy, and develop overall sector strategies
To strengthen reporting and cash management, Iraq will require spending units to submit reports on all spending including investment, advances, and letters of credit no later than two months after the end of each month, and to reconcile these amounts with the cash balances at the beginning and end of the reporting period. Cash releases will be approved only after the Ministry of Finance has reviewed the report from three months before. This will reduce the idle balances in spending units' accounts to the minimum required to ensure the continuity of government operations. Moreover, by end-March 2010 Iraq will review all accounts in the banking system that are classified as central government accounts and reconcile them with Treasury records, and will return any idle balances received from the budget to the central Treasury.
With regard to advances, Iraq will review the outstanding stock of advances to identify those that are recoverable and set a time schedule for their recovery and for writing off irrecoverable advances based on appropriate authorization at a high level. Iraq will prepare a detailed report to document the results of the review. The basis on which debts have been classified as recoverable or irrecoverable, and actions taken to recover doubtful amounts before recommending that they are written-off will be clearly specified.
To strengthen internal audit and control systems, Iraq will re-examine its internal policies and procedures at the Ministry of Finance, as well as the accounting systems, processes and internal controls used by the accounting department; and review the internal controls of the largest spending units' operating systems. To strengthen the quality of its investment agenda and accelerate the reconstruction of Iraq's infrastructure, Iraq will ask the Board Supreme Audit (BSA) to review the largest investment projects financed with 2008 budget allocations. This audit report will evaluate the criteria for approving capital investment projects: whether a cost benefit analysis was carried out; the procurement process: whether it conformed to international standards of transparency and competitiveness; and the project management process: whether the projects were delivered on time and within budget. The report will provide recommendations that could be used in the following budgeting process to enhance the agenda on public investment.
Iraq will also undertake an assessment of the functionality of the Iraq Financial Management Information System (IFMIS) developed with the assistance of USAID, and make the changes required to ensure that this system is fully operational (with the inclusion of a commitment control system and the ability to produce regular comprehensive reports in line with best practices) in 2011.
Iraq will continue to submit to the BSA and to the Council of Representatives the final accounts for each fiscal year no later than September 30 of the following year. The BSA has already completed the audit of the final accounts of the federal budget for 2005-06, and it is reviewing the 2007 and 2008 accounts.
To avoid the obstacles Iraq has encountered last year in data collection for the census of public service employees, Iraq has narrowed the coverage to include all central government employees that work outside of security related areas. Iraq will make all efforts to have the census completed by September 30, 2010. After completion of the census, Iraq will move swiftly to eliminate ghost workers and adopt an action plan aimed at developing a computerized human resource database and a computerized payroll system, as a first step toward comprehensive civil service reform. In parallel, the BSA has begun a project to verify the personnel records in the line ministries in order to clean up the existing payroll.
Iraq has made some progress in developing a medium-term tax reform strategy with the objective of streamlining the tax system, broadening and diversifying the tax base, and increasing revenue collection. As a first step, in 2008 Iraq has introduced a mobile phone tax. Looking ahead, Iraq plans to introduce a sales tax in the coming years as a precursor for a value-added tax, and is also considering reducing the number of income tax brackets. Iraq has will seek technical assistance from the IMF and other international partners to support its tax reform efforts. Iraq will urge the Council of Representatives to adopt the new customs law that will establish a transparent and efficient tariff system with fewer exemptions.
Iraq being a third world country and an Arab nation makes their accounting practice very special and different from other countries' practices. But from the research, Iraq's condition did not directly affect the accounting practice and instead proved the dynamism of Accounting as it was able to adapt to Iraq's situation amidst the nuisance that was caused by the series of wars and of tyrannical leadership. Also, although accounting in Iraq is primarily used for tax regulation, Iraqi Accounting Standards and policies need to be refurbished because they have already fallen behind other third world countries in an Arab Nation. They should convert their standards in conformity with IFRS to take their chances on Globalization and revive their Civilization.
This is particularly important in the financial services sector. The internationalization of accounting standards has been driven by the globalization of capital markets. There were major increases in cross-border capital flows over the past few decades. This means that investable capital can move more quickly and efficiently to the most attractive investment opportunities worldwide.
Increasingly, global investors are awakening to Iraq's investment potential. But barriers exist to employing capital. Perceptions about security remain a problem. Modernization of the financial infrastructure needs to continue. Laws and regulations need further updating. And Iraq needs fluency in international standards for financial reporting. Â Â Â