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It is well known that the International Accounting Standards Committee (IASC) was established for the purpose of achieving harmony between the accounting practices of different institutions across the globe. In an era where shareholders, governments, and regulatory bodies are constantly putting pressure on companies to provide reliable and relevant information in their financial reports, a company will not last long in the rapidly growing capital market if it does not meet such demands. Therefore, a great number of countries are forcing their firms to comply to the common accounting standards decreed by the (IASB), the successor of the (IASC), to make it more convenient for financial statement users to make decisions. Nevertheless, there still exists a notable inconsistency in the adoption of international accounting standards across countries (AIA, 2001). Furthermore, a difference can also be observed in the accounting practices between countries and specifically between practices of institutions related the Gulf Cooperation Council (Hussain, Islam, Gunasekeran, &Maskooki, 2002). This paper consists of two parts; Part A and Part B. Part A will first show the degree of compliance by the GCC members to (IASB) standards by displaying the results and conclusions of a general study that was made by Al Shammari, Brown, and Tarca (2007). This is followed by Part B which talks about accounting practices performed by each country in the GCC. Finally the paper concludes.
Part A: Compliance of GCC countries to International Accounting Standards (IAS's).
About the GCC
The Gulf Cooperation Council, discussed in the study that follows, consists of six members that established a union in 1981. The six countries are bound together by a common Islamic and cultural perspective. From an economic point of view, the GCC total gross domestic product per capita (GDP) went up from $11,000 in 2002 to $14,208 in 2006 which shows a remarkable increase in economic power of the council members (Al-Shammari et al., 2007). Furthermore, governments of the GCC countries, in addition to the demands of a growing economy, have been under pressure from global organizations to conform to International Accounting Standards. In adopting the IAS's, the GCC members aim was to provide better quality financial reports to investors (Al-Basteki, 2000; Azzam, 1998; Hassan, 1998; Hussain, Islam, Gunasekaran, & Maskooki, 2002; Shuaib, 1999).
About the IASB
The international accounting standards board is responsible for creating the international standards to be used by institutions in the private sector worldwide. The aim of this unification of standards is to bring consistency and intelligibility to financial reports. The need for comparable financial statements on a global level was sparked by the quick growth of capital markets (Al-Shammari et al., 2007).
This next section will present the history of laws, articles, and standards that led to the creation of the regulatory framework for each country in the GCC being used today.
Kingdom of Saudi Arabia
In the beginning, and before SOCPA (Saudi Organization for Certified Public Accountants) was created, accounting regulations in KSA followed the commercial law issued by Royal Decree No. 23 during 1930 (Al-Qahtani, 2006). This law presented requirements related to recording transactions and book keeping. Furthermore, Order No. 422 which was set forth by the Ministry of Trade during 1968, presented guidelines for becoming a registered auditor (Al-Qahtani, 2006). Then in 1974, a regulation responsible for supervision of the auditing field in KSA was established after the appearance of the law for Certified Public Accountant (Al-Qahtani, 2006). Much later in 1992, Royal Decree No. M/12 was issued and required that the first law for public accountants be cancelled and replaced by new regulation. This regulation also required that SOCPA be established (Al-Qahtani, 2006).SOCPA is supervised by the Ministry of Trade and its main job is to develop and sanction accounting and auditing standards. This organization has issued 3 opinions and eleven accounting standards (Al-Qahtani, 2006).
Kingdom of Bahrain
Banks in Bahrain are obligated by law to comply with International Accounting Standards (Al-Qahtani, 2006). In the early 1980's, top accounting companies and global offices were invited to Bahrain by the Ministry of Trade and Agriculture (Al-Qahtani, 2006). The companies were combined to form a committee in charge of bringing uniform accounting practices to the Kingdom of Bahrain (Al-Qahtani, 2006). One of the key decisions that this newly formed committee had to make was whether to adopt the International Accounting standards into Bahrain and use them as the national accounting standards (Al-Qahtani, 2006). The committee concluded by recommending the adoption of all IAS's excluding Standard # 15 relating to information reflecting the effects of changing prices (Al-Qahtani, 2006).
State of Kuwait
Kuwait is currently using IAS as a framework for its accounting practice (Al-Qahtani, 2006). The first accounting law created in Kuwait was Law #3 and dealt with income taxes (Al-Qahtani, 2006). Article 3 of this law listed the accounts that have to be deducted to get the income after taxes(Al-Qahtani, 2006). Moreover, Article 4 of the same law involved ways for measuring the values of fixed assets (Fakhra, 1996). In 1962, Law #6 was created to regulate accounting practices and it was the first law in this field (Al-Qahtani, 2006). With regard to auditing financial statements, Law # 15 was issued in 1960 demanding that the statements be prepared according to GAAP (Al-Qahtani, 2006). Later on, a Permanent Technical Committee (PTC) was set up with the task of setting accounting standards by relying on the standards of developed countries as a guide (Al-Qahtani, 2006).
State of Qatar
Qatar lacks any local auditing or accounting standards. All institutions, except banks, use the commercial code and company law as a source for reporting and auditing standards (Al-Qahtani, 2006).Nevertheless, Al-Qahtani (2006) stated that, if examined carefully, Company Law #5 of 2002, shows several unintended accounting "standards". This law contains three-hundred and twenty -nine articles and one of these articles , namely Article # 185, states that firms should subtract an annual percentage from their gross revenues to account for asset depreciation (Al-Qahtani, 2006). This shows that the idea of depreciation is recognized albeit informally. Another article that shows evidence of informal accounting standards is Article #119. This article requires the preparation of statement of cash flow, balance sheet, and related disclosure notes by the BOD for comparisons with the same statements of the previous year and auditing (Al-Qahtani, 2006).
Sultanate of Oman
In 1976, Sultani decree #77 was issued and it was the first law that regulates auditing and financial practices in Oman (Al-Qahtani, 2006). Furthermore, complying to International Accounting Standards became obligatory in Oman when the Sultani Decree 53 was issued in 1996 requiring all firms in the country to prepare their financial statements by using the IAS's (Al-Qahtani, 2006).
United Arab Emirates
All banks and financial entities are required, by a federal law created in 1999, to prepare their financial statements according to International Accounting Standards (Al-Qahtani, 2006). With respect to auditing, Federal Law # 22 provides guidelines related to licensing and registration as well as the obligations of individuals working in the auditing profession (Al-Qahtani, 2006).
3. Compliance Study
In this part, we summarize the study of compliance performed by Al-Shammari et al. (2007) into three parts: Reporting requirements of GCC members ( summarized in Table 1.0), Measuring compliance and Results and conclusion.
Table 1.0: Shows the financial reporting requirements and enforcement proxy for GCC countries Source: Al Shammari, Brown, and Tarca (2007). IASs=1 if all companies use International Accounting Standards. Adoption=1 if country adopted IASs prior to 1998. Directors/Officers can be prosecuted for noncompliance=1 if directors or officers can be subject to legal action and penalties for non-compliance with accounting standards.ISA=2 if auditors use International Auditing Standards. Auditor examination=2 if auditors undergo an examination prior to admission to the profession. Auditor training=2 if auditors must meet professional training requirements. Two or more auditors=2 if company has more than one auditor. Enforcement body checks compliance=3 if stock exchange, government body, or central bank reviews financial statements for compliance. Enforcement body has taken action for noncompliance=3 if the stock exchange, government body, or central bank has taken action in relation to noncompliance with accounting standards. All information relates to the period 1998-2002.
Measurement of Compliance
Table 1.1 below uses fourteen standards which are: IAS 1,10,14,16,18,21,23,24,27,28,30,32,33, and 37. In addition, the table shows that requirements related to both measurement and disclosure and which are included in separate columns in the table. This reason for this separation is that there may be a difference in compliance between the two (measurement and disclosure) requirements (Street & Gray, 2001). Moreover, the values below the third and fourth columns are related to the number of items that will be measure with respect to measurement and disclosure. The total of the items is displayed in the values below the second column. Al-Shammari et al. (2007) created the table to use it as a "checklist" to measure compliance and it was compared with similar checklists utilized by KPMG and Ernst & Young in Kuwait for validation.
Table 1.1: Shows the disclosure and measurement items for each standard
Source: Al Shammari, Brown, and Tarca (2007).
Authors' Results regarding compliance
In viewing their results, Al-Shammari et al. (2007) found that the average level of mandatory compliance for over all the years and for all companies was 0.75. Furthermore, they discovered that the mean level for measurement and disclosure compliance was 0.81 and 0.69 respectively. Al-Shammari et al. (2007) also observed that there was a rise in the average level of compliance from 0.68 in 1996 to 0.82 in 2002. This suggest the GCC area has shown an improvement in compliance with International Accounting Standards (Al-Shammari et al., 2007). Moreover, the UAE showed the greatest mean level of compliance at 0.80 while the least level was that of Qatar at 0.70 (Al-Shammari et al., 2007). All these values discussed above are included in Table 1.2 shown below.
Table 1.2: Mean compliance scores by country and year
Source: Al Shammari, Brown, and Tarca (2007).
Note 1: The scores range from 0 to1, where 0 is the lowest and 1 is the highest score
Note 2: The letter N next to each country name refers to the sample size ( the number of companies in each country)
Authors' Conclusions regarding compliance
In their study, Al-Shammari et al. (2007) concluded that International Accounting standards have been "adopted by law but not in practice" due to numerous instances of non-compliance by companies in the GCC countries. Al-Shammari et al. (2007) also stated that although there has been violation of certain laws related to accounting standards by auditors, no corrective action has been taken against the firm; however, action was taken for similar violations in Kuwait and Oman.
Al-Shammari et al. (2007) discuss possible reason for noncompliance by stating the following:
Our results suggest that although a set of mechanisms to promote compliance among GCC companies is in place, activities of enforcement bodies have been insufficient to ensure compliance. Possible reasons are a lack of professional training and payment of salaries to attract sufficiently qualified staff. Also, the enforcement bodies have other responsibilities and there may be a lack of commitment from governments, at a policy level, to enforcement. In the face of scarce resources, efforts might be more effective if focused on monitoring companies that are smaller, have fewer international investors, and borrow proportionately less. Thus, the findings may be relevant to national regulators and the Gulf Co-Operation Council Accounting and Auditing Organization (GCCAAO)in their efforts to harmonize financial reporting.(2007,p.444).
Limitations of Study
In their study, Al-Shammari et al. (2007), decided against using all International Accounting Standards for measuring compliance .Therefore, they excluded IAS 12, 15, 19, 26, 29, 34, 11, 17, 20, 22, 31,35,38 because they could not be applied to firms in the GCC countries. Furthermore,
IAS 39 was excluded because it was inapplicable to the study period, IAS 2 and 7 were excluded because there was insignificant variation within sample, and IAS 8 as excluded because there was negligible disclosure related to the standard (Al-Shammari et al., 2007). Another Limitation that Al-Shammari et al. (2007)faced was that they could not compare their compliance study to previous studies made by other authors because earlier studies were based on different IAS's that are specific to a certain time period.
Part B: Accounting Practices and Principles of GCC countries
Kingdom of Saudi Arabia
The main driver of economy of KSA is the oil industry which contributes about three quarters of the GDP of the country and it has around 20% of the world's oil reserves. However, due to rapid rise in the population, revenues from oil went down in the 1990's .To push the private sector into economic growth, the government is making attempts to privatize telecommunication and power industries in Saudi Arabia. (http://en.wikipedia.org/wiki/KSA#Economy)
Banks in Saudi Arabia are supervised and regulated by the Saudi Arabian Monetary Agency (SAMA) which is responsible, inter alia, for bringing stabilization and power to the value of the Saudi Riyal (Hussain et al., 2002). Banks in the KSA are required by (SAMA) use the Gregorian dating system and their fiscal year on the last day of December (Hussain et al., 2002).
i) Depreciation of fixed assets:
Banks in KSA consider fixed assets such as equipment, furniture, and fixture and recognize them at the cost for which they were originally purchased for (Hussain et al., 2002). This includes capital expenses that were directly incurred. Fixed assets are recorded net of accumulated depreciation. Furthermore, the depreciation method most frequently used by banks is the straight-line method (Hussain et al., 2002).
ii) Translation of foreign currency:
In KSA banks, if a transaction is made with a foreign currency, it is stated in Saudi riyals at the actual exchange rate that was applicable at the date of the transaction (Hussain et al., 2002). Also, assets and liabilities are translated based on the exchange rate relative to the balance sheet. The realized and unrealized losses or gains are noted down in the income statement under the account of income from major operations except for gains from equity investments which are traced back to equity (Hussain et al., 2002).
Kingdom of Bahrain
The economy of Bahrain is considered one of the leading economies of the Arab region. In an effort to facilitate trading with the United States, the country signed the US-Bahrain Free Trade Agreement in 2004. In Bahrain oil revenues account for thirty percent of the Gross Domestic Product. ( http://en.wikipedia.org/wiki/Bahrain#Economy) .
According to Hussain et al. (2002), the body of authority that holds the power to dictate and regulate the accounting standards of banks in Bahrain is the Bahrain Monetary Agency (BMA).
Furthermore, quarterly financial documents should be prepared by public and local banks (Hussain et al., 2002) .Hussain et al. (2002) also stated that the financial accounts should be certified by an independent auditor under law.
According to Hussain et al. (2002), banks in Bahrain rely on the accrual basis to recognize Interest income but overdue loan that has been unpaid for ninety or more days is not included until cash is received. Accounts that are recognized upon receipt include income from dividends, commissions, and fees (Hussain et al., 2002).
According to Hussain et al. (2002), costs incurred for improvements of leasehold are depreciated equally over the period of the lease while no depreciation is required on freehold land. Moreover, depreciation of other fixed assets is done through straight line depreciation (Hussain et al., 2002).
Sultanate of Oman
The Omani economy has been changed and developed fantastically over time since the beginning of 1967 under the leadership of Sultan Qaboos. The sultanate of Oman aspires to achieve a constant financial economy, contribute the private sectors with the government in the development of the economy. Furthermore, expand the resources of the national income and develop the abilities of the Omani workforce. One of the most important resources the Omani economy is depending on is oil and gas. For example, by the twentieth century; the production of oil raised to become more than 900000 barrels per day and for the gas production it become more than 6.6 million tons yearly. Other resources like mineral resources such as gold, iron, copper, silicon, zinc, and etc. Also, the agriculture is supporting the Omani economy very well. Oman is rich of fish and grains like wheat, barley and corn. It produces around 182,400 tons of fruits and 162,300 tons of vegetables yearly. These were how the Omani economy developed and what the resources were for that. (www.wikipedia.com)
The authority that is responsible for administrating the banks in Oman is called the Central Bank of Oman (CBO) (Hussain et al, 2002). CBO is one of the most competent bank administrator authorities in the Middle East (Hussain and et al, 2002). It controls the banking rules since 1974 as well as considered as a loan supporter (Hussain et al, 2002). CBO control the accounting rules and make decisions in changing the rules (Hussain et al, 2002). Every company and bank in Oman has to use the International Accounting Standard (IAS) as the royal decree point (Hussain et al, 2002).
For example, the goodwill is considered as an assets and it is amortized on a basic system that is over its useful life (Hussain et al, 2002). This duration cannot exceed five years if it is not a longer period of time to clarify and give details in the financial statement (Hussain et al, 2002). Furthermore, goodwill is written- off toward stockholder equity (Hussain et al, 2002).
Fixed assets and depreciation
Fixed assets are accepted at cost that is less accumulated depreciation (Hussain et al, 2002). Depreciation is evaluated when the straight line basis is over the useful life of the assets (Hussain et al, 2002). Calculating depreciation is different from a bank to another, but they are constant with tax authorities and within the following range like for buildings it is from 20 to 25 years; also, for equipment, furniture and fixture it is from 3 to 20 years (Hussain et al, 2002). Furthermore, for motor vehicles are from 3 to 5 years. In general fixed assets are calculated depending on taxation (Hussain et al, 2002).
Investments ( Long and short term)
There are two types of investment. First, long term investments are measured at cost (Hussain et al, 2002). There are fewer conditions for declining in value than the temporary nature (Hussain et al, 2002). In the other hand, the short term investments are measured at lower cost and market value (Hussain et al, 2002).
State of Qatar
a) Country Background
Qatar is a peninsula in the middle of the west coast of the Arabian Gulf and has an area of 11,437 square kilometers. The surface of Qatar consists of a flat plain punctuated by some large depressions in the center and some high hills in the north-east and north-west.
The desert climate of Qatar is characterized by long summers and short winters and little rain in the weather is nice since late October until mid-April. Doha, capital of Qatar, the main city is the center for all ministries and government agencies, diplomatic missions and most of the companies and commercial interests.
Featuring the Doha Corniche, a beautiful beach on the Gulf, where most of the population of Qatar The population of Qatar has about 522 thousand people, according to the general census of population conducted in 1997. (http://www.khayma.com/yousef/abhsite/qatar.htm)
Qatar Central Bank ( QCB ) was established in 08/05/1993, it supervise of all banks and financial transaction of companies and became the administrator is to develop laws and regulations governing business and banking is the issue of determining interest rates and provisions amounts of the debt one of the functions of the Qatar Central Bank (Hussain et al, 2002). According to Hussain et al. (2002), it became the administrator of all action on internal financial activity obliges all national companies to apply IAS.
Allowance for doubtful accounts
There are two kinds of provision:
Special provision: they are precautions that debt is not paid
General provision: they are precautions are being developed by Qatar's central bank is at least 0.2 percent of the total facilities given to the private sector to up to 1 percent at the end of the year. (Hussain et al, 2002)
Fixed assets worth less over time For example, buildings and land prices are less than a cumulative period of 20 years through either equipment and furniture lifetime of 7 years, cars and equipment 5 years old default (Hussain et al, 2002).
United Arab Emirates
Emirates is the third richest country in the world in terms of per capita income with a 16.471 dollars. It Is the fourth largest producer of oil in the world productivity of 2.5 million barrels a day. (http://www.uae-football.org.ae/uae-a.html)
Each of the seven emirates control over their own resources and controlling its own commercial activity, but the basic reliance on oil revenues (DIFC, 2006j). In the past few years the economy has flourished through trade, finance companies and spread of global trade, which led to increased non-oil revenue (Irvine, 2008).
Contains the banking system in the United Arab Emirates from 18 commercial banks, 2 Islamic banks and 27 foreign commercial bank. And 36 branches of commercial banks are licensed and supervised at all of these banks by the Central Bank of the United Arab Emirates (Hussain et al, 2002). The UAE central bank monitor the activities of intermediaries involved in stocks and instruments and also to monitor the commodity markets, financial transactions and real estate markets and the investing companies (Hussain et al, 2002).
Foreign currency translation
Assets and the liabilities to the local currency of the State of United Arab Emirates, UAE dirham, and the process of this conversion price of the daily currency conversion (Hussain et al, 2002). The process of repatriation of earnings or losses to the local currency in the last year (Hussain et al. 2002).
Allowance for doubtful accounts
Banks must put a reserve for each term loans and these reserves are placed in general when it is not pay the debt due within 180 days in this case, the bank must be ready to cover this shortfall, depending on experience and the amount of debt (Hussain et al, 2002). Must be the process of determining interest separately and taken into account the likelihood of realizing the benefits of or potential for losses, and it must be for these interest to the stability of the bank (Hussain et al, 2002) .
Fixed assets worth less over time and according to the method used, and less than this value is cumulative (Hussain et al, 2002). Buildings, for example, less than its value during the period between 20 to 30 years, while there is things life between 3 to 6 years, while the freehold lands not less than its value with the passage of time (Hussain et al, 2002).
From viewing the history of accounting laws and decrees of the GCC countries it is clear that there has been an outstanding effort by governments and regulatory bodies to conform to global accounting standards. It can be said that this effort has been done in the hopes of bringing more reliable and relevant information to financial statement users to help them in making better decisions.
Moreover, proof of this effort can be seen by observing that there has been a great degree of compliance to International Accounting Standards, as presented in this paper. That being said, there still remains a noticeable difference in accounting practices across countries of the GCC and one can say that this difference is justified. After all, each country has its own culture, economy, and unique political environment that demand certain flexibility in adopting accounting standards.