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 2

Financial Reporting Standards in Honduras: Is IFRS/IAS Harmonization

Appropriate for Economic Development?
Word Count: 3,998

Introduction

This paper seeks to analyze whether the International Financial Reporting Standards (henceforth
“IFRS”) are appropriate for the economic development of Honduras insofar as financial
reporting is concerned. Honduras adopted IFRS within its banking and insurance sectors in 2005
and permitted IFRS among small-medium sized enterprises (henceforth “SMEs”) in 2010 (IFRS
– Honduras 2017). The International Accounting Standards Board (or “IASB”), governing body
of the IFRS, encourages all countries—whether developed, emerging or developing—to adopt
their standards, and they have attained the sponsorship of the world’s preeminent international
development agencies, like the World Bank. Per its official website, the core function of the
IFRS is to “bring transparency by enhancing the international comparability and quality of
financial information,” to “strengthen accountability by reducing the information gap” between
economic actors and regulators, and to “contribute to economic efficiency” (IFRS 2017). The
call to replace the Honduran Generally Accepted Accounting Practices (henceforth “GAAP”)
was formalized in 2007 in the World Bank’s Report on the Observance of Standards and Codes
(or “ROSC”), and today, Honduran financial reporting law follows IFRS standards. Nonetheless,
IFRS adoption has not been responsive to Honduras’s most pressing economic development
needs regarding financial reporting, namely in that they do not solve the problem that Honduras
faces with transfer pricing regulation and a lack of resources/enforcement infrastructure to
produce quality financial reports.

Why has Honduras been unable to produce quality financial reports despite adhering to the
advice of international organizations and adopting IFRS? Such questions are what make
Honduras both an interesting and broadly applicable case— the issues that hinder Honduran
advancement may also burden other developing countries that have adopted IFRS.

This paper is organized as follows: first, I will give a brief overview of Honduras’s transition to
IFRS implementation. Secondly, I will offer a critical assessment of the financial reporting issues
that Honduras faces, largely based off of the World Bank ROSC (2007) for Honduras, the
European Commission’s report “Transfer pricing and developing countries,” carried out by
PricewaterhouseCoopers, LLP (henceforth “PwC”), and the International Federation of
Accountants (or “IFAC”) country profile on Honduras. Thirdly, drawing from the work of
accounting and development scholars, I will question whether or not IFRS adoption in Honduras
is either relevant or appropriate for the country in their current state—in other words, are the
IFRS/IAS appropriate for Honduras, given the manner in which they were administered and the
steep development challenges that the country faces? Next, I will review the potential solutions
that accounting scholars have offered and will explain why the best path for Honduras is to
receive assistance from the international community in strengthening its financial reporting
infrastructure and to pursue a stronger voice in international standard setting processes. Finally, I
will offer a concluding summary and remarks, reiterating that until substantive changes are
 3

made, IFRS will remain an insufficient set of standards for Honduras and its economic
development.

A Brief Overview of Honduran IFRS Adoption

Honduran GAAP, the World Bank ROSC and IFRS Adoption

In order to assess whether or not IFRS adoption in Honduras has been appropriate for the
development needs of the country, one must briefly examine the process that led Honduras to
adopt the standards in the first place.

According to the IFAC (2017), the original Honduran financial regulatory framework was
codified in the Commercial Code of 1950, which has since been revised numerous times. In
1996, Honduras formed its own GAAP that were loosely based around the US GAAP (World
Bank 2007). While the Honduran GAAP was suitable for small domestic firms, the World Bank
(2007) criticized the accounting principals as being “significantly less demanding than IFRS”
and formally called for IFRS/IAS adoption (p. 21). In the Honduras ROSC report, the Bank
expressed three accounting shortcomings in the Honduran GAAP that would be mitigated by
IFRS adoption. First, the ROSC reported that the Honduran GAAP was not comprehensive
enough to account for large companies and that it could not recognize certain types of liabilities,
assets and transactions (World Bank 2007). More specifically, the World Bank (2007) reported
that the Honduran GAAP allowed management an inordinate amount of discretion when it came
to measuring financial performance, easily allowing a manager to overstate a company’s value
(for example, companies were not required to list leases, employee benefits or deferred taxes as
liabilities). Second, the Bank took issue with the Honduran GAAP’s reliance on the historical
cost model, explaining that the fair-value model of the IFRS would provide a more “forward
looking approach” (World Bank 2007, p. 21). Lastly, the World Bank ROSC (2007) posited that
the financial statements required under the Honduran GAAP were of a lower quality than those
required under IFRS.

Responding to international suasion, Honduras passed the Law of Accounting and Audit Rules in
2004/2005, which officially adopted the IFRS and IAS and was put into practice in 2012 (PwC
2017). While there is no stock exchange in Honduras, IFRS is required for all banks and
insurance institutions, and as of 2012, all non-bank/insurance entities are required to either
adhere to “full IFRS standards or the IFRS for SMEs standard” (IFRS – Honduras 2017).

The Financial Reporting Challenges in Honduras

The previous section of this report outlined the history of and motives behind Honduran IFRS
adoption; IFRS was seen as a stronger alternative to the preexisting Honduran GAAP, and the
World Bank ROSC explicitly endorsed the standards as a means of attracting FDI and enhancing
the quality of financial reports (World Bank 2007). With the objectives of IFRS adoption
understood, it is essential to review both the longstanding and more recently discovered
problems hampering quality financial reporting and economic development in Honduras.

Pre-ROSC A&A and Broad Development Challenges

 4

As the World Bank’s ROSC for Honduras made clear, there are several severe development
hurtles that must be overcome before Honduras is capable of producing quality financial reports.
Honduras is a small Central American country of about 9 million people that the World Bank
classifies as a lower-middle income country (World Bank 2017). The Honduran economy relies
heavily on remittances from the United States and a narrow range of export commodities,
namely coffee, bananas and textiles (European Commission & PwC 2011). The Honduran
economy, and subsequently its financial reporting standards, is relatively informal and
underdeveloped—in fact, prior to the ROSC, Honduras had no auditing standards in the private
sector (World Bank 2007). The World Bank (2007) further identified a significant want of
technical ability and accounting/auditing training (before 2007, Hondurans only needed a high
school education and no entrance examination to practice as an auditor). This lack of skill was
compounded with an observed “low demand for audit services,” as accountancy as a profession
was not well perceived (World Bank 2007, p. 25). And, perhaps most profoundly challenging,
there was a distinct “lack of interest on the part of the business community for corporate
financial reporting” (World Bank 2007, p. 26). The World Bank (2007) found that business
owners in Honduras were reluctant to increase financial transparency out of fear of tax penalties
and personal safety. The World Bank (2007) ROSC noted that the Honduran business
community, largely comprised of family-owned companies, appeared hesitant to share business
information that could make their firms less competitive. What is more, firm owners feared that
increased transparency could jeopardize their personal safety— Honduras is a notoriously violent
country, with one of the highest murder rates in the world (World Bank 2017). Business owners
were thereby wary that increased financial transparency could inspire kidnappings for ransom
and other crimes, according to the World Bank (2007).

Post-ROSC A&A Challenges

At the behest of the World Bank and the development community, Honduras formally adopted
IFRS/IAS and opened itself to international trade and FDI as a means of economic development
(World Bank 2007). In this regard, the country has succeeded; Honduras is now a member of
nine free trade agreements and has managed to attract more foreign direct investment, and MNEs
account for 24% of the Honduran GDP (European Commission & PwC 2011). Nevertheless, the
integration into the global economy has caused a new set of financial reporting and development
issues for Honduras.

The 2011 report on transfer pricing and development carried out by the European Commission
and PwC sheds light on how Honduras is incapable of reaping the benefits of increased FDI and
MNE operations insofar as taxation is concerned. According to the report, 90% of MNEs in
Honduras operate under some type of tax preference— and while tax incentives are important for
attracting investment, it has augmented the country’s current accounts deficit that now surpasses
$1 billion (European Commission & PwC 2011). The inability of the Honduran government to
properly tax MNEs and within-firm trading —which the European Commission & PwC (2011)
claim comprises 66% of all global trade — is costly. The Honduran Executive Directorate of
Income (or “DEI”) calculates that effective transfer pricing taxation could increase revenues by
EUR 312 million, or a 70% increase in corporate tax revenue (European Commission & PwC
2011). The Honduran government has since passed tax legislation on transfer pricing rules that
 5

are based off of the Organization for Economic Co-operation and Development’s (or “OECD”)
“arm’s length” guidelines (Deloitte 2017). There is, however, not currently any research that
suggests that the rules have benefited Honduras to date, and the Honduran legal code does not
currently have any regulation for controlled foreign companies or for thin capitalization in
regards to transfer pricing (Deloitte 2017). Moreover, there is not sufficient evidence that the
legislation has even been implemented by Honduran authorities; in its country report on transfer
pricing regulation, KPMG (2015) states that Honduras has yet to issue details regarding how the
law is to be carried out and applied. It is discouraging that there have not been studies (or any
evidence, really) that the OECD-based transfer pricing laws have been effective or even applied
at all. In a country where 66% of the population is living in poverty and there are 59 murders per
every 100,000 inhabitants, it is imperative that the government collect as much corporate tax
revenue as possible to invest in development programs (World Bank 2017).

Aside from problems with transfer pricing legislation, Honduras has struggled to substantively
implement the laws that it has passed concerning IFRS and other international standards. The
IFAC (2017) reports that the Accounting and Auditing Standards Technical Board in Honduras
(or “JUNTEC”) lacks the capacity to enforce updates to the IFRS. The IFAC (2017) also cites
deficiencies in international education standards, quality assurance standards, code of ethics
standards and investigation and disciplinary capabilities; although Honduran legislation does
delegate the previously mentioned responsibilities across its bureaucratic network, oftentimes the
precise delegation of responsibility is unclear or it is outright ignored due to institutional
inefficacy (IFAC 2017).

Is the IFRS Appropriate for Honduras’s Economic Development?

Between the structural problems with which Honduras must grapple (such as a lack of regulatory
resources) and the significant foregone revenues lost to transfer pricing, the country clearly
stands to gain from a proper financial reporting regimen. The IFRS has undoubtedly benefited
Honduras in some ways, already—after all, as the World Bank (2007) indicates, the standards
provide a much more comprehensive framework than their simple predecessor, the Honduran
GAAP. Nonetheless, as previously explained, significant obstacles still remain to be resolved
before Honduras is capable of producing a strong financial governance system. Is IFRS the
remedy? The accounting literature is somewhat divided on the issue.

IFRS as a Tool for Developed Countries

Many prominent scholars are critical of international standards in LDCs, accusing the IFRS and
international harmonization movements, more broadly, as being against the interests of
developing countries. Mfandaidza R. Hove (1986) claims that “existing accounting practice in
almost all developing countries was imposed by developed countries initially through
colonialism and then through the operations of transnational corporations, professional
accounting institutes, and the special conditions in economic aid agreements, rather than in
response to societal needs of those countries” (p. 82). He argues that modern day accounting
harmonization was implemented for the benefit of transnational corporations headquartered in
developed countries, with little regard for the needs of LDCs or their economic development
(Hove 1986, p. 84). Hove (1986) further asserts that harmonization as a condition of economic
 6

aid agreements, as promoted by the World Bank and IMF, amounts to coercion, with little
benefit to the developing country (p. 92). Robert Wade (2007) echoes the sentiments of Hove in
his critique of the new, post-Asian-Crisis financial architecture that was forged in a process in
which “the global South had almost no say ” (p. 115). Having attributed the Asian Crisis to a
weakness in the financial system, the G7, World Bank and IMF embarked on a campaign to
“standardize the market” (Wade 2007, p. 116). The result of such efforts is what Wade (2007)
calls an Anglo-American “standards-surveillance-compliance system” that has “the cumulative
effect of redistributing income upwards—to wealthy industrialized countries, the financial sector,
and the top percentile of world income distribution” (p. 116).

The Hove (1986) and Wade (2007) stance on IFRS/IAS adoption in the developing world is not
merely theoretical— Chand and White (2007) provide an empirical analysis to their arguments
as they illustrate how the IFRS/IAS adoption in Fiji failed to promote the public’s interests. In
the case of Honduras, the Hove (1986), Wade (2007), and Chand and White (2007) arguments
prove compelling—the vast tax revenues that Honduras fails to collect from transfer pricing,
even after having adopted IFRS, certainly suggests a preference towards MNE shareholders.

IFRS as a Lofty Ambition

Accounting scholars also have criticized the ability of the IFRS to ameliorate the second problem
confronting Honduras insofar as financial reporting is concerned—a severe lack of resources and
an inability to comply. Carneiro et al. (2017) display their skepticism that Latin American
countries will realistically be able to comply with IFRS due to weak educational infrastructures,
ineffective enforcement systems and competing interests within the economy. Hegarty et al.
(2004) highlight a disjunction between accounting/auditing requirements and many countries’
capacity to comply, more broadly (p. 11). Hegarty et al. (2004) assert, “the application of
international standards requires certain minimum levels of capacity (i.e., appropriately qualified
individuals), which depends on the availability of opportunities for relevant and adequate
education, training and experience” (Hegarty et al. 2004, p. 11). In other words, in Honduras and
other developing countries, there simply are not sufficient human resources for full IFRS
compliance. Walter (2008) supports this notion as he emphasizes the difference between
compliance to and adoption of international standards; although many countries around the world
have subscribed to the IFRS in their legislatures, does it really mean anything if the country isn’t
equipped to comply with the standards to which they’ve subscribed?

As the Honduras ROSC and the IFAC (2017) make clear, Honduras struggles with a deficiency
in resources and inefficient institutions. The want of resources and effective institutions provokes
scholars like Hegarty et al. (2004), Carneiro et al. (2017) and Walter (2008) to call into question
the appropriateness of IFRS/IAS standards in countries like Honduras—why set standards to
which a country cannot comply?

Counterarguments

Though there are many skeptics, others suggest that there are benefits for developing countries
that adopt the IFRS. Gordon et al. (2012) are able to statistically demonstrate that countries that
adopt IFRS/IAS standards see increased inflows of foreign direct investment. Increased access to
 7

FDI is a pivotal economic development strategy for Honduras, the reader will remember, as the
ROSC made clear. Even Hove (1986), an unwavering critic of international accounting
standards, refuses to go so far as to say “that LDCs have not or will not benefit from increased
international trade” (p. 84). Nonetheless, the Gordon et al. (2012) study is subject to criticism;
Lasmin (2012) published a paper that concluded that developing countries did not in fact enjoy
increased FDI as a result of IFRS adoption, directly contradicting the results of the Gordon et al.
(2012) study.

The accounting literature is divided on whether or not IFRS adoption is beneficial for developing
countries. Though accounting scholars have made headway on assessing IFRS adoption in some
developing countries, such as China1, it is difficult to measure the precise impact of IFRS
adoption in Honduras or in comparable Latin American countries—as Carneiro et al. (2017), put
it, there is only a “thin volume of literature on the application of IFRS in Latin America” (p.
183).

Potential Solutions

While some scholars point to the benefits of IFRS adoption in developing countries, the
accounting literature is also rife with criticisms on the matter—clearly, there are stark challenges
to implementation due to a lack of resources and infrastructure in countries like Honduras.
Moreover, some see the IFRS/IAS standardization movement as an Anglo-American attempt to
draw bigger profits to MNEs in developed countries. What, then, are the possible solutions to
reconcile the disconnect between universal accounting/auditing standards and Honduras’s
economic development needs?

The Wade (2007) and Hove (1986) Solution: Involve the Developing Economies in Standard
Setting

One possible course of action supported by Wade (2007) and Hove (1986) is a reconstruction of
the standards that includes greater participation from the global South. Hove (1986) even goes so
far as to suggest that LDCs abandon international reporting standards if their specific needs are
not taken into account during the harmonization process. In the case of Honduras, then, one with
a view sympathetic to Wade (2007) and Hove (1986) might urge the IASB to include transfer
pricing regulation in the IFRS/IAS that is, at least in part, co-authored by representatives from
developing nations. This way, international standard setting would not have such an air of
unilateralism and the developing world would have an opportunity to merge their interests with
those of the developed world.

The Hegarty et al. (2004) Solution: Collectively Improve Domestic Infrastructure

Another course of action is to focus on strengthening the domestic institutions in developing

countries like Honduras in order to make IFRS guidelines more tenable. It is problematic that
current “international accounting and auditing standards implicitly assume the existence of legal,
institutional and policy conditions (“preconditions”) that are often underdeveloped or absent in

1
For further reference, see Ezzamel & Xiao (2015) and Ezzamel et al. (2007), among others.
 8

many countries” like Honduras (Hegarty et al. 2004, p. 15). Accounting pundits like Hegarty et
al. (2004) and Robert Bruce (2011) are in favor of developing countries adopting IFRS/IAS as a
means of economic advancement, yet warn that such goals are contingent upon having first
strengthened the institutions and human capital in developing countries. This argument is
reminiscent of Leuz’s (2010) argument against international standardization, wherein he
emphasizes institutional variation as a major roadblock to successful harmonization. But rather
than resorting to Leuz’s idea for a global player segment (2010, p. 250), Hegarty et al. (2004)
propose that “relevant international organizations… work together to develop a consensus on a
comprehensive framework of principles for the regulation of accounting and auditing and…
support its adoption by the competent national authorities” in developing countries (p. 15). In
other words, in the case of Honduras, Hegarty et al. (2004) propose that the international
community involved in financial regulation congregate and plan a way to strengthen the
Honduran DEI so the country will finally have the domestic institutions necessary to properly
administer audits and tax transfer pricing. Furthermore, the global community could strengthen
the problematic institutions that prevent quality accountancy, such as weak education systems
and inefficacious enforcement bodies, as called for by Carneiro et al. (2017).

The Best Course for Honduras: Strengthen the DEI and institutions in the short-run, join the
discussion in the long-run

So which of those possible courses of action is the most suitable for Honduras and its
harmonization with IFRS? Both of them are necessary—if IFRS/IAS harmonization is to help
Honduras achieve its development goals, Honduras needs to be included in the global decision-
making process regarding standardization; to do so, the international community should dedicate
resources to ensuring that Honduras has a proverbial “voice at the table,” either by sponsoring
their delegates’ travel or by providing training so that their representatives are capable of full
participation and critical engagement at international summits. Honduras also needs to receive
help from the international community in strengthening the DEI and its domestic institutions.
Wade (2007) and Hove (1986) are correct in their critique of global financial standardization—it
is western-centric and does not afford enough voice to developing countries like Honduras. This
is a problem that must be fixed in the long-term; including Honduras and other developing
countries in policymaking forums will not immediately alleviate the myriad problems that they
face regarding financial reporting, but it will perhaps lead to better, more inclusive international
standards in years to come that better meet LDCs needs. For instance, had delegates from
developing countries already been at the table during standard setting functions, the international
community may have been able to produce standards that already included effective transfer
pricing regulation that could have prevented countries like Honduras from missing out on
hundreds of millions of dollars in taxes.

Meanwhile, in the short-run, as Hegarty et al. (2004) suggest, the international community ought
to assemble and find a way in which to strengthen both Honduras’s institutional capacities to
substantively comply with the IFRS and the human resources in the DEI. Luckily, the World
Bank (2007) ROSC conducted a detailed analysis of the institutional shortcomings surrounding
the accounting/auditing profession in Honduras, and there are consequently very clear, simple
guidelines that the international community can follow in order to strengthen Honduran
standards (such as provide funding for the accounting program at the Autonomous University of
 9

Honduras, send consultants to help properly administer transfer pricing regulations, provide
additional training for practicing auditors and accountants, etc.). Both promoting Honduran
inclusion in the international standard setting process and providing Honduras with
institutional/human capital support as they become accustomed to IFRS adoption is crucial for
domestic economic development.

Concluding Remarks

This paper has sought to examine the extent to which the Honduran harmonization with IFRS
standards is able to foster economic development. Throughout the essay, I provided sufficient
theoretical and empirical evidence to assert that, currently, IFRS adoption has not been
conducive to Honduras’s economic development needs insofar as financial reporting is
concerned, namely because Honduras struggles with an underdeveloped financial infrastructure
and because Honduras does not currently administer effective transfer pricing regulation. The
World Bank (2007) has provided the international community with a detailed assessment of
Honduras’s needs regarding financial reporting infrastructure, and the IFRS has been an
important step for the country in codifying formal accounting/auditing standards. However, as
Wade (2007) and Hove (1986) demonstrate, international finance is not governed or legislated in
a manner that is amenable to small, developing countries like Honduras. Moreover, the broader
movement to adopt IFRS standards all but ignores the glaring institutional and human capital
problems in Honduras that prevents proper implementation of international standards. To remedy
this issue, Honduras and the international community should take the work of Wade (2007),
Hove (1986), Hegarty et al. (2004), Carneiro et al. (2017) and Leuz (2010) into account.
Honduras needs assistance form the international financial community in strengthening its
domestic institutions like the DEI if it is to begin utilizing IFRS reporting standards to a
significant capacity. Moreover, the international financial community needs to allow Honduras
and other developing countries to participate in international standard setting; so long as the G7,
World Bank and IMF unilaterally shape the global financial architecture, Honduras and similar
countries will have their interests ignored. While the IFRS is not currently appropriate for
Honduras, there is no need to abandon the push to standardize financial reporting altogether, as
Leuz (2010) suggests. Rather, the best option for Honduras is to receive assistance from the
international community in strengthening its financial reporting infrastructure and to pursue a
stronger voice in international standard setting processes. However, until such a time that said
changes are implemented and domestic institutions/transfer pricing regulations are strengthened,
the IFRS/IAS will remain insufficient for Honduran economic development.
 10

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