ST.

MARY’S UNIVERSITY
FACULTY OF ACCOUNTING AND FINANCE

CHALLENGES AND PROSPECTS OF

TRANSFORMING GAAP TO IFRS; A CASE OF ADDIS
ABABA BOTTLE AND GLASS SHARE COMPANY

BY
PRINCE DEREJE (RAD/0148/2009)
ABDULAZIZ HAYDER (RAD/0110/2009)
MICHAEL YETENAYET (RAD/0143/2009)

ADVISOR - MR. HABTAMU G/MARIAM

FEBRUARY 2019
ADDIS-ABABA
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CHAPTER I- INTRODUCTION
1.1. BACKGROUND OF THE STUDY

Financial reports are the backbones of commerce and investment in the sense that they are the major
inputs to the decision making process of all of the related parties surrounding a certain business. The
main concerns of those decision making groups are understandability and comparability of the
reports. Comparability is an issue specially faced by investors and financers that are engaged in
businesses of different countries. A nation may choose a certain set of accounting standards to be
followed by its companies while other nations prefer different standards.

GAAP and IFRS represent two of the fundamental grounds for accounting standards used by different
countries in the world. Although each country has its own version of GAAP, each GAAP has
substantial similarity with the other. Since 2002, FASB, which has primarily maintained and
developed United States GAAP; and IASB, which prepared the whole literature of the body of IFRS,
have been working toward convergence since 2002. Although this process would have its own
implications to the future of accounting and financial reporting, the main point of focus for this senior
essay is linked to the issues of converting GAAP to IFRS.

Pocket IFRS (2017) defines IFRS as “the IASB’s full set of requirements is called IFRSs or(the IFRS
standards in the IASB’s communications), and comprises the IASs, SICs, IFRSs and IFRICs adopted
or issued by the IASB. All of these individual requirements have equal authority.”

The distinctions of IFRS and GAAP can be hard to identify, but their variations have a huge role in
evaluating a company’s financial health. This includes effects in the company’s internal matters such
as tax base in addition to cross-border investment activity such as investor misinformation and cross-
border transactions. GAAP is more ‘rule based’ and gives more rigorous detailed guidance while
IFRS provides more principle based standards with limited application guidance. Although applying
it to non-profit entities is not forbidden, IFRS is designed for use by profit-oriented entities, while
GAAP is designed for use by both profit-oriented and not-for profit entities, with additional
codification topics that apply specifically to not-for profit entities (KPMG, 2017).

There are also differences between the two reporting grounds regarding: assessment of going
concern; consolidated financial statement preparation; comparative information of different periods;
classifications of separate components of a single transaction; fair value measurement; matters of
consolidation; presentation and classification requirements of financial position and statement of

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profit or loss; valuation of property, plant and equipment; capitalization of some intangible assets;
lease accounting; inventory measurement and cost determination methods; revenue recognition;
employee benefits; and so on.

In Africa, the momentum of IFRS implementation appears to be very slower than other countries of
the globe. Sedzani, (October, 2012) has pointed that one of the biggest challenges in the process of
using IFRS in some countries of Africa is the lack of permission from their governments and other
local governance structures, meaning they are prohibited by law to use IFRS. On the other hand a
major portion of the continent’s nations can’t provide any information on their accounting structure,
which made the researcher assume that the countries probably lack a formal accounting system in
place. According to Efobi, UR, (2013), there are 34 countries in Africa that have adopted, and
publicly announced the adoption of IFRS, and this list has included Ethiopia.

The Ethiopian government has been showing a huge drive for openness to foreign investment. This is
why financial reporting standards of the country have to be headed towards achieving global
uniformity. “IFRS provides international investors with a brand of trust in the quality of financial
reporting.”(AABE, 2015). The accounting system makes the reporting process simple and provides
guide as to what to include and not to include in the financial statement. More than 100 countries
have implemented IFRS and in time all countries are expected to (Addis Chamber, 2016). In addition,
according to the AABE’s strategic plan, IFRS implementation will have a big role in the countries
growth potential by increasing stability, stewardship, accountability and transparency both at
institutional and government level; elevates the general educational level of accountants; and
contributes to the improvement of good governance by reducing corruption.

The road map of IFRS adoption presented by AABE (2015) classifies the total institutions in the
country into three divisions, and it has assigned them different types of reporting grounds and
scheduled adoption dates. According to this classification, small and very small enterprises are
expected to present their financial statements using simple accounting system essentially linked to tax
reporting. The second group includes medium sized and large privately held companies and issuers
on alternative markets, and it states that they are expected to use simplified IFRS. Finally, companies
listed on regulated markets and financial institutions are expected to report using IFRS.

This conversion has been given a regulatory framework under the Financial Reporting Proclamation
No.847/2014, Council of Ministers regulation 332/2014 and other directives issued by AABE. The
IFRS implementation road map of AABE explains that the purpose of these standards is to maintain

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transparency. It has also identified the scope of IFRS conversion to touch almost every aspect of the
company. In addition, it states that implementation of ISAs has to be immediate and no road map is
needed. This research will identify the challenges and prospects of conversion of GAAP to IFRS in
the case company, Addis Ababa Bottle and Glass Share Company.

1.2. BACKGROUND OF THE ORGANIZATION

Addis Ababa Bottle and Glass Share Company was established in 1965 E.C with the ownership of the
government (primarily under the ‘alcohol and beverage’ category in 1967 EC and later under the
Cement Corporation). After the military government of the country was put to an end in 1983 E.C.,
the company went beneath the Privatization and Public Enterprises Supervising Agency and was
made to possess a designated board of directors. Since 2002 E.C., the company became part of the
Bazeto Industrial and Training PLC. It gained the name Addis Ababa Bottle and Glass SC in the year
2004 E.C. along with its re-establishment according to the Ethiopian Commercial Code. Starting July
2007 E.C., a conglomerate of Ethiopian and Chinese investors has started managing the company.

The nature of the products intended to be produced in the company during its establishment can be
described as a glass descended. These products include bottles to be used in beverage companies and
household equipments like tumblers. In the last decades, the tumbler machineries have gone old and
stopped production. Formerly, the furnace of the bottle producing machine had a capacity of
producing 30 tons of glass per day and was with a limited life (rebuilding was required at the end of
each production batch). But after recent design changes the furnace capacity has been upgraded to 33
tons per day.

Currently, the equipments and resources of a single production line of the company have an ideal
capacity of producing 30 tons of glass bottled per day meaning 10230 ton in a year. Nevertheless,
frequent power interruptions and other obstacles have limited the annual production to about 6,598
ton, while the target was 9,795 ton. The company’s supply has not been able to cover the demand it is
expected to. That is why the company ran an expansion project that includes an installation of new
machineries and equipments in the premises of its existing factory.

The total number of employees in the company is 1,212. Of these employees: two hundred sixty six
are permanent male employees; One hundred and thirty eight are permanent female employees (this
makes the sum of the permanent employees in the company 404); the remaining eight hundred eight
employees are composed of 107 administrative employees, 3 marketing and sale employees, 232
production overhead employees and 62 direct laborers.
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1.3. STATEMENT OF THE PROBLEM

One of the literatures regarding IFRS implementation in Ethiopia is the presentation of Dawit (2017)
which notes on that “There should be no doubt that conversion to IFRSs is a huge task and a big
challenge”. It has listed six practical challenges of IFRS. They are: potential knowledge shortfall,
accounting education and training, limited training resources, tax system effect, legal system effect,
and enforcement and compliance mechanism. The IFRS implementation, as a project, is expected to
pass through challenges such as inadequate skills for the project, lack of accountability, improper risk
management, impossible deadlines, resource deprivation, and lack of stakeholder engagement which
were presented as challenges of project management by Villanova University (2011) and Gaurav
(2016).

The IFRS foundation is responsible for developing a single set of high-quality accounting standards
(IFRS foundation). However, if problems such as, lack of proper curriculum as well as text books that
prepares graduates well for enhanced financial reporting requirements; lack of domestic institution
which monitors and enforces continuous professional development; lack of appreciation on the role of
quality of financial reporting by the business community, which were mentioned in ROSC (2007) still
exist during the implementation of IFRS, the intended quality of financial reporting will be
undermined. In addition Loveday (2017,Nigeria) concluded that there is significantly a strong
positive relationship between the auditing quality and financial reporting quality measured by
reliability. However, (AABE,2015) mentioned that audit firms in Ethiopia have low technical
capacity and other resources. This research will address the current reporting quality of AABGSC, on
the ground of IFRS standards.

As researchers with Accounting and Finance background, we are motivated to understand the
emphasis given by Ethiopia to standardize the accounting practice, its challenges and planned
solutions (prospects). The involvement of foreigners in the company made us value the overseas
attractiveness of the company’s business and the need for comparable financial statements. In
addition, although there are a limited number of empirical literatures on the area, none of them gave
special attention to the manufacturing companies of Ethiopia, particularly AABGSC. This research
will, in some degree, fill the gap on IFRS implementation related matters.

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1.4. RESEARCH QUESTIONS

To achieve its general and specific objectives our research raises the following questions:

1. What are the hardships faced in the process of implementing IFRS in AABGSC?
2. What are the influences of the challenges on the reporting quality of AABGSC?
3. What are the measures planned to clear the obstacles of properly using IFRS in AABGSC?
4. What can be understood from the experiences of the IFRS implementation in AABGSC?

1.5. OBJECTIVES OF THE STUDY

1.5.1. General Objective

The General Objective of this research is to identify the challenges and prospects regarding
transformations of GAAP to IFRS in Addis Ababa Bottle and Glass Share Company.

1.5.2. Specific Objectives

This research is designed to achieve the following specific objectives:

 Understanding how well IFRS is implemented in Addis Ababa Bottle and Glass Share
Company.
 Identifying the challenges faced by the IFRS implementation process of Addis Ababa Bottle
and Glass Share Company.
 Finding out about the planned measures to tackle those challenges regarding IFRS
implementation in Addis Ababa Bottle and Glass Share Company, this will guide us to
understand the prospects of conversion of GAAP to IFRS.
 Discovering the role of Addis Ababa Glass and Bottle Share Company in the IFRS
implementation process of the country.

1.6. SIGNIFICANCE OF THE STUDY

This research would be very significant for the management, investors and other stakeholders of the
company by facilitating the challenge identification process of this very important standard
transformation. It will also be useful for other similar companies since it would suggest measures to
smoothen the standard transformation process.

In a broadened sense, it will also aid the country’s goal of achieving a uniform accounting standard
system, and foreign investor demands of comparable financial reports by acting as a reference

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material for all of those in need. The main point that magnifies this importance is the limited amount
of researches done in the area. It will also serve as an empirical evidence for further researches on the
area. Most importantly, the process of this research would hand us (the researchers) with the
important skills to carry out a complete research and a good understanding on the area of IFRS
implementation in Ethiopia which will build up our future career.

1.7. SCOPE OF THE STUDY

The research has been limited in a time frame, regarding research conducting period and the period of
financial statements that will be used as a data source. The amount of time we are given to conduct
this study was decided by the responsible body in the university. According to the writing guideline
provided to us by our Advisor, a two months time is all we have for data collection and analysis; and
to draw recommendation and conclusion. On the other hand, the financial reports and statements of
the company we would use as data sources for this research will be those prepared for the year ending
July7, 2017 and July7, 2018, this is because, according to the IFRS implementation roadmap, the
company was obliged to implement IFRS by July 8, 2017, which means of the two sets of financial
statements chosen as data sources, the first was prepared according to GAAP, and the second was
prepared according to IFRS, allowing us to clearly evaluate the conversion process.

The topic of the research limits us to identify the challenges and prospects of transforming GAAP to
IFRS in Addis Ababa Bottle and Glass Share Company. Therefore, we have limited ourselves to the
premise of AABGSC, and to conduct the research by communicating with all the necessary personnel
of the company which have been very cooperative during our former encounters of the company.

1.8. RESEARCH DESIGN AND METHODOLOGY

1.8.1. Research Design

This research is designed to follow a qualitative research method, particularly case study. According
to Anol (2012), case study (case research) is a way of in depth studying a situation through time
within its natural settings. Some of the unique strengths of this research method according to Anol
(2012) are that it can be used for theory building; it can help derive richer, more contextualized and
more authentic interpretation of the incident of interest; it also helps study the phenomenon of interest
from the perspectives of multiple participants.

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1.8.2. Population and Sampling Technique
1.8.2.1. Population

According to Anol (2012), a population can be defined as all people or items (unit of analysis) with
the characteristics one wishes to study. The population of this research includes the employees of
Addis Ababa Bottle and Glass Share Company, the IFRS implementation advisors to the company,
and AABE.

1.8.2.2. Sampling Technique

According to our informant in the company, the departments in AABGSC that have more exposure to
the process of the conversion of GAAP to IFRS are the Finance and Commerce Department, the
Internal Auditing Department and the Human Resource Department, which makes them our sampling
frame. Each department has 8, 2 and 8 employees working under it respectively. We would also
contact 1 external auditor of the company and 1 AABE personnel in order to get more data to
understand the challenges and prospects of the IFRS implementation progress. Since the sum of these
numbers (20) is easy to be handled by our group we have chosen to use the census sampling
technique.

This method is also extended to all the four financial statements of the company prepared for the year
ending July 7, 2018 and July 8, 2018. Interviews will be conducted to Managers of each department
in the company and a representative of Board of directors.

1.8.3. Data Type and Sources

This research will use both primary and secondary data sources for analysis. Primary data would be
questionnaires and interviews. Prabhat & Meenu (2015) quoted Barr, Davis & Jhonson when defining
questionnaires as “… is a systematic compilation of questions that are submitted to a sampling of
population from which information is desired.”, and quoted vivien Palmar to describe that interview
“…constitutes a social situation between two persons, the psychological process involved requiring
both individuals mutually respond through the social research purpose of the interview call for a
varied response from the two parties concerned.”

Secondary data according Anol (2012), includes industry reports and internal documents such as
demographics of the executive teams (responsible for strategic decisions), financial performance of
firms, publicly available third-party data, data collected by other researchers and government
statistics (generally data that as previously been collected and tabulated by other sources). In addition
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Prabhat & Meenu (2015) quote Kerlinger to define secondary data sources as “… an account or
record of an historical event or circumstance one or more steps removed from an original history.”
Our secondary data sources will be: published and unpublished data sources like books, study works,
works of other researchers on areas of IFRS implementation (for comparison purposes), journals,
articles, and the company’s annual financial reports.

1.8.4. Methods of Data Collection

1.8.4.1. Methods of Primary Data Collection

The primary data for this research will be collected using questionnaires and interviews as described
above. All the personnel of the Finance and Commerce Department, the Human Resource
Department and the Internal Auditing department will be given questionnaires distinctively designed
to understand the challenges arising with respect to each department. On the other hand,
supplementary data is collected from semi-structured interviews with the manager of each department
in the company and a representative of board of directors with the intention of gaining comparable
data and additional information.

1.8.4.1. Methods of Secondary Data Collection

Secondary data is fundamentally collected from the financial reports of the two years; those prepared
for the year ending July 7, 2018 and July 8, 2018. We would also use minutes of meeting of the
management on the IFRS implementation, AABE annual report and advisors progress report as
secondary data sources. In addition, we will read all the published and unpublished articles prepared
by the stakeholders of the GAAP to IFRS conversion process in Ethiopia, review books written about
IFRS, and the works of other researchers will be studied in detail.

1.8.5. Data Analysis Methods

Since the research is designed to follow a qualitative method, we will use the technique of Content
Analysis to discover and describe the meanings of the acquired data. According to Anol (2012);
“Content analysis is the systematic analysis of the content of a text (e.g. who says what, to whom,
why, and to what extent and with what effect) in a quantitative and qualitative manner.” It is also
defined as “an approach to qualify qualitative information by systematically sorting and comparing
items of information in order to summarize them” by USGAO (2013).

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CHAPTER II

REVIEW OF LITERATURE

2.1. Introduction

This section contains the information that we consider are related to our research. It includes review
of theoretical literature which focuses on general facts related to financial reporting and accounting
such as definition and history, the need for regulation, the Ethiopian and African facts. We have also
depicted our conceptual framework after reviewing theoretical inputs that are specifically related to
the subject matter of this research (i.e. Implementation of IFRS) such as, definition of IFRSs,
challenges of implementing the standards, IFRS-1, world acceptance of IFRS and AABE’s IFRS
implementation road map. The section finally includes a summary of the research works of five
researchers related to IFRS implementation, as a review of empirical literature.

2.2. THEORETICAL REVIEW

2.2.1. Definition and History of Financial Reporting

Financial reporting is the disclosure of financial information to various interested parties about
financial performance and financial position of a certain entity over a certain time period. Those
‘interested parties’ may be the current and potential investors, creditors, concerned societies, fund
sources, governments and government agencies. The ultimate final activity of the accounting process
is preparing financial statements, which are the statement of financial position, the statement of profit
or loss and other comprehensive income, the statement of cash flows, the statement of changes in
equity and related Notes. Edupristine(2017), mentioning IASB as a source, also added that “the
objective of financial reporting is to provide information about the financial position, performance
and changes in financial position of an enterprise that is useful to a wide range of users in making
economic decisions” and then listed the specific objectives of the reports to each user which are listed
above as ‘interested parties’.

John (2002) wrote about the history of accounting. He informs us about the long evolution of
accounting systems in ancient and medieval times. He notes that the first royal charters of the
accounting profession were given to the Society of Accountants in Edinburgh more than 150 years
ago, which marks the start of the emergence of the formal profession. In 1904, about 6,000
practitioners carried the title of chartered accountant, and after five decades, in 1957, there were

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38,690 chartered and incorporated accountants who were Scottish, British and Irish. He adds that
there is a certain group that argues that accounting grew purely to respond to the needs of the time
that were caused by environmental and societal changes; and there is another group that advocates the
idea that the development of the accounting science itself drove the evolution of business since it was
only with the tools of more accurate accounting methods that modern commerce managed to get to its
stage.

He (John (2002)) notes that the key ingredients that led to the creation of ancient accounting were:
private property, capital, commerce, credit, writing, money and arithmetic with the necessary
explanations. Although particularly ancient governments strong incentives to keep careful records of
special tax receipts and disbursements, the accounting of the time faced problems with record
keeping, control and verification of financial transactions. He has written about accounting in
Mesopotamia in 3500 B.C., Ancient Egypt, China, Greece and Rome. He mentions that the oldest
surviving accounting record in the English language is the Pipe Roll, or “Great Roll of the
Exchequer,” which shows an annual description of rents, fines and taxes due the King of England,
from 1130-1830 A.D.

We have found out from the same source that the innovative Italians of the Renaissance (14th- 16th
century) are broadly recognized to be the fathers of modern accounting. Luca Pacioli, a true
Renaissance man, who had knowledge of literature, art, mathematics, business and the sciences at the
time, although never claimed to invent the double entry bookkeeping and gave credit to Bendetto
Cortugi for originating the concept, published his fifth book; Summa de Arthimetica, Geometrica,
Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion).

Abbas, Magnus & Graham (2008) wrote that the international body in charge of setting standards
starting 1973 to 2001 was the International Accounting Standards Committee (IASC), which was
basically significant to motivate national accounting standard setters around the globe to improve and
coordinate the standards of each country. The initial set of standards issued by IASC, whose board
consisted of 13 country delegations representing IASC members, focused on developing a set of basic
accounting standards and were criticized for being too broad and containing many options.

The same authors inform us that until 2001, IASC issued 41 standards, which are called International
Accounting Standards (IAS), along with a framework for financial statement preparations and
presentations. Most IASs are still in force while some have been omitted. IASC’s interpretative body
is called Standing Interpretations Committee (SIC) and some of its interpretations still operate. In

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order to increase its independence, legitimacy and the standard setting quality, IASC was replaced by
International Accounting Standards Board (IASB) in 2001. IASB adopted all outstanding IAS issued
by the IASC as its own standards and issued new standards known as IFRS (International Financial
Reporting Standards). The interpretative body of IASB is known as International Financial Reporting
Interpretations Committee (IFRIC).

2.2.2. The Need for a Regulatory Framework

According to Wiley (2018) the first systematized form of accounting regulation developed in
continental Europe in 1673, which introduced the requirement of the annual fair value statement of
financial position by the government with the intention of safeguarding the economy from huge
losses. This system was taken by other states and incorporated into the 1087 Napoleonic Commercial
Code. After 1870, its unification, Germany developed this system by giving more attention to change
from market values to historical cost and systematic depreciation. Mainly in the early 20th century
accounting regulations were used by governments as tax assessment basis when taxing business
income was introduced. The author also wrote that this accounting model serves mainly to control
individual entity and government relationships, assisting regulatory activities such as tax assessment,
limiting dividend payments, protecting the economy by sanctioning financially unsound and
imprudent individual businesses.

The same book tells us that as a result of the 19th century industrial revolution, a second financial
reporting model called the Anglo-Saxon approach was introduced with features which focused more
on the business-investor relationships and information flow to the capital markets. Although taxation
had a little influence on its development and its primary aim is the investor rather than the
government, states still used reporting as a means of regulating economic activity, such as protecting
investors and efficiency of security markets. IFRS serve as examples of the second capital market-
oriented financial reporting systems. In 1973, just after the creation of FASB in the US and
Accounting Standards Committee in the UK, the original standard setter, IASC was formed.
Wiley(2016) has mentioned enabling international capital markets to assess and compare inter-
company performance in a meaningful and efficient way which increases their access to global capital
with a reduced cost as a primary advantage of a single set of global accounting standards. According
to ACCA study text for Diploma in International Financial Reporting (2016), the most important
element to insure relevant and faithfully presented financial information is the regulatory framework,
(i.e. IASB).

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2.2.3. The Current Structure of IASB

According to Abbas, Magnus & Graham (2008) IASB differs from IASC in that it lacks special
relationship with the international accounting profession, and it is rather governed by a group of
trustees of various geographic and functional backgrounds independent of the accounting profession,
its board members are selected based on technical skill and background experience instead of specific
national accountancy bodies or other organizations, and it usually meets each month as opposed to
IASC board which only held meetings four times a year.

Wiley(2018), describes about the current structure of IASB. Its formal structure was formed in 2000,
which included the IFRS foundation as its root. The IFRS trustees are responsible to both raise funds
needed to finance the standard setting, and appoint IASB, IFRIC and IFRS Advisory council
members. In 2009 and 2010, this structure was modified to include the IFRS Foundation Monitoring
Board and SME implementation group respectively.

Monitoring Board
(Capital Market Authorities)

IFRS Foundation (22 Trustees)

(Governance)

IFRS Advisory Council Standard Setting

(Approximately 40 members) International Accounting Standards
Board (IASB) (IFRS/IFRS for SMEs)
IFRS Interpretation Committee
SME Implementation Group
Figure 1. The Current Structure Of IASB (source: Wiley Interpretation
and Application of IFRS standards; 2018 and Pocket IFRS (2017))
The book adds the functions and responsibilities of the different classes of the board as follows:
Monitoring Board ensures that the trustees of IFRS Foundation discharge their responsibilities as
defined by its constitution and approves trustee appointment and reappointment. The IFRS
Foundation is managed by the trustees and reports to the Monitoring Board and has functions of
fundraising, overseeing the standard-setting work and a five-yearly formal, public review of the

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constitution. The IFRS Advisory Council is constituted by user groups, preparers, financial analysts,
academics, auditors, regulators, professional accounting bodies and investor groups. IASB is an
independent body whose only responsibility is establishing IFRSs and approving new interpretations.
IFRSIC, which is comprised largely of technical partners in audit firms has a function of answering
technical queries from constituents about how to interpret IFRS, and filling in the cracks between
different requirements.

IASC’s Objectives, according to the lecture notes of St. Mary’s University prepared for IFRS
trainees, are;

‘To develop a single set of high quality, understandable and enforceable global
accounting standards that require high quality transparent and comparable
information in general purpose financial statements; to promote use and application
of those standards; to work actively with national accounting standard setters to
bring about convergence of national accounting standards with IFRS.” (St. Mary’s
University)

2.2.4. Financial Reporting in Africa

Sedzani (2012), wrote that Africa can be divided into smaller components for accounting purposes
which are known as regional bodies by the International Federation of Accountants (IFAC). The
accounting professions of African countries are governed by registered accounting body in each
country each of which falls within a regional jurisdiction. The regional body would be responsible to
govern all the accounting bodies that fall under it. The regional body that covers the eastern, central
and central part of Africa is known as the Eastern, Central and Southern African Federation of
Accountants (ECSAFA) which includes our country, Ethiopia. The author cited IFAC (2012) to
describe that other countries such as Botswana, The Democratic Republic of Congo, Kenya, Lesotho,
Malawi, Mauritius, Namibia, Rwanda, South Africa, Swaziland, Tanzania, Uganda, Zambia and
Zimbabwe are the regional body’s Members. On the other hand, West African countries can register
to Association of Accountancy Bodies in West Africa (ABWA) whereas; North African countries are
partnered up with Middle East countries to form Middle Eastern North African countries (MENA).
The author also cited ABWA membership (2010) and expressed that Benin, Burkina Faso,
Cameroon, Cote d’Ivoire, Gambia, Guinea, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and
Togo to be ABWA membership.

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The same author depicted that 40% of African countries are ECSFA registered. Of these countries
80% are using IFRS. ECSFA is a registered member of IFAC; this has contributed hugely to the IFRS
implementation success in the region. On the other hand, AABWA, which also is registered with the
International Federation of Accountants, has 25% of African countries under it. Nevertheless, the
status of West African countries on IFRS adoption is limited to 15%, showing that there have been
challenges being faced by the countries of that region. The first ever IFRS conference in Africa was
held in Cape Town in November 2010.

2.2.5 Financial Reporting in Ethiopia

Yitayew (2016) cited Mihret and Bode (2014) and wrote; starting the early 1990s, the government of
Ethiopia undertook economic reforms to enhance the countries achievements on foreign direct
investment. He added that global companies operating in Ethiopia need an IFRS financial reporting
structure in order to get quality and comparable financial reports.

The former accounting and auditing practices have been reviewed by ROSC (2007), which reported
that the commercial code of 1960 made company directors responsible for preparing financial
statements and ensuring that they were audited. However, the provisions of preparing financial
statements didn’t require following any accounting standards. ROSC (2007) adds that although the
Public Enterprises Proclamation 25/1992 necessitates the use of GAAP while keeping the books of
accounts of state-owned enterprises, it doesn’t require the state-owned enterprises to prepare financial
statements according to any defined accounting standards. The income tax proclamation No.
286/2002 stated that taxable business income shall be determined per tax period on the basis of profit
and loss account drawn in compliance with Generally Accepted Accounting Principles but doesn’t
provide definitions to those standards, and GAAP has various interpretations without providing any
definitions.

ROSC (2007) also showed that there were no accounting standards set or adopted in Ethiopia. It also
depicted that there was an insufficient number of accountants in the country and the Ethiopian
Professional Association of Accountants and Auditors (EPAAA) lacks legal backing plus it is not a
member of IFAC. It also expressed that the Office of Auditors General (OFAG) in cooperation with
EPAAA and the Addis Ababa Chamber of Commerce and Sectoral Association (AACCSA) was in
the process of setting up a National Accountants and Auditors Board that would set accounting and
auditing standards for the private sector.

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ROSC (2007) added that Ethiopia didn’t yet have records of litigation that dealt with financial
reporting, and although there are available accountancy programs in universities and colleges that
award Bachelor’s degree in accounting which follows the same curriculum throughout the country,
the curriculum as well as the text books may not prepare graduates well for enhanced financial
reporting requirements which is heightened by the loss of higher educational institutions their well-
qualified instructors to the private sector, NGOs and other countries because of their low pay.
Additionally, the country lacked a locally controlled practical training for its accountants and a
domestic institution which monitors and enforces continuous professional development.

ROSC (2007) notes on that the countries commercial code didn’t include penalties on non
compliance with its accounting and financial reporting requirements and there were capacity
constraints in the regulatory institutions that dealt with accounting and auditing matters. All in all
ROSC (2007) suggested that the country’s Commercial Code needs revision and the perception of
businesses towards financial reported should be changed.

AABE, a statutory body established in terms of the Financial Reporting Proclamation 847/2014, has
presented its five years strategic plan of 2015/16-2020/21 on November 2015. This strategic plan
states that “implementing a high quality International Financial Reporting Standards (IFRS) is
critical to meeting and sustaining Ethiopia’s economic growth potential. IFRS provides international
investors with a brand of trust in the quality of financial reporting”. The Financial Reporting
Proclamation 847/2014 assigned AABE to fulfill the duty of regulating the country’s accountancy
profession and ensuring the development of accounting in the country. The strategic plan of
AABE(2015) included that necessary preparation and planning should begin at least 18 months prior
to the planned adoption date. The IFRS implementation road map which is presented in the strategic
plan includes the preparation of interim and consolidated financial reports based on IFRS. The road
map has also provided the mandatory adoption periods of IFRS for various classes of institutions in
three different phases which will be discussed in detail in the conceptual framework section of this
review of literature.

16
2.3. CONCEPTUAL FRAMEWORK

2.3.1. What are IFRSs?

Willey (2018) expressed that it is the mission of the IFRS foundation and the IASB to develop
International Financial Reporting Standards (IFRS) that convey transparency, accountability and
efficiency to the financial markets around the world. The convergence historically different financial
reporting standards to similar ones is motivated by the need of the same financial information
‘language’ which would facilitate the free flow of capital so that investors can easily, and more
willingly be engaged in overseas investments. Differences in accounting standards would cause what
is sometimes referred to as ‘accounting risk’ which is a major obstacle to encourage investor
confidence. The attempt to convert financial statements prepared using one local GAAP to another
will be tiresome and time-consuming, in addition to unavailable human resources and technical
knowledge to carry out the conversion. The year 2005 marks a new epoch for the international
business performance, and 27 European Union member countries and other countries such as South
Africa, Australia and New Zealand adopted IFRS.

IFRS is the term used to show the whole body of authoritative literature of IASB including: standards
issued by ISAB; International Accounting Standards (IAS) issued by International Accounting
Standards Committee (IASC) – a predecessor of IASB, or those IAS revised by IASB; interpretations
of IFRS and IAS developed by IFRS Interpretations Committee and approved for issue by the IASB,
and interpretations developed by Standing Interpretations Committee (SIC)- a predecessor of IFRS
Interpretations of Committee, and approved by the IASB or the IASC On the other hand US-GAAP,
which was the former ground of Ethiopian accounting reports, is any material that is contained in the
FASB’s Codification and some of the material contained in Securities and Exchange Commission
rules, regulations and Staff guidance as well as other non-authoritative guidance(KPMG, 2017).

As it can be found in Wiley (2018) he formal due process of IASB to set the standards is currently
explained in the IFRS Foundation Due Process Handbook that was issued in February 2013, by the
Due Process Oversight Committee (DPOC). DPOC has duties of regularly and timely reviewing the
standard setting activities of IASB; reviewing and proposing updates to the Due Process Handbook;
reviewing the composition of the IASB’s consultative groups; responding to the correspondence from
third parties about due process matters; monitoring IFRS Advisory council’s effectiveness and
making recommending trustees about the constitutional changes related to committee composition
that are integral to the due process. The steps of the due process (as described in Wiley (2018))
17
include; 1, IASB’s agenda determination, 2. Project Planning, 3. Developing and publishing a
Discussion Paper, 4. Developing and publishing the Exposure Draft, 5. Developing and publishing
the IFRS, 6. Procedures after an IFRS is issued.

There are a total of 24 IAS and 16 IFRS (a total of 40 standards) that are in force now. And they are
presented in the following table.

IAS1 Presentation of Financial Statements

IAS2 Inventories
IAS7 Statement of Cash Flows
IAS8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS10 Events after the Reporting Period
IAS12 Income Taxes
IAS16 Property, Plant and Equipment
IAS19 Employee Benefits
IAS20 Accounting for Government Grants and Disclosure of Government Assistance
IAS21 The Effects of Changes in Foreign Exchange Rates
IAS23 Borrowing Costs
IAS24 Related Party Disclosures
IAS26 Accounting and Reporting by Retirement Benefit Plans
IAS27 Separate Financial Statements
IAS28 Investments in Associates and Joint Ventures
IAS29 Financial Reporting in Hyperinflationary Economies
IAS32 Financial Instruments: Presentation
IAS33 Earnings per Share
IAS34 Interim Financial Reporting
IAS36 Impairment of Assets
IAS37 Provisions, Contingent Liabilities and Contingent Assets
IAS38 Intangible Assets
IAS39 Financial Instruments: Recognition and Measurement
IAS40 Investment Property
IAS41 Agriculture
IFRS1 First Time Adoption of International Financial Reporting Standards
IFRS2 Share-based Payment
IFRS3 Business Combinations
IFRS5 Non-current Assets Held for Sale and Discontinued Operations
IFRS6 Exploration for and Evaluation of Mineral Resources
IFRS7 Financial Instruments: Disclosures
IFRS8 Operating Segments
IFRS9 Financial Instruments
IFRS10 Consolidated Financial Statements
IFRS11 Joint Arrangements
IFRS12 Disclosure of Interests in Other Entities
IFRS13 Fair Value Measurement

18
 IFRS14 Regulatory Deferral Accounts
IFRS15 Revenue from Contracts with Customers
IFRS16 Leases
IFRS17 Insurance Contracts
Table 1: List of IASB standards (Source: the standards)

The conceptual framework issued by IASB has included ‘THE OBECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING’ in its first chapter. It notes that this objective forms the
foundation of the conceptual framework. According to the framework, “The objective of general
purpose financial reporting is to provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.” This is because decisions like buying, selling or holding equity and
debt instruments, and providing funds to the entity depend on the returns/interest payments that the
investors and creditors expect from investing their funds. On the other hand, getting financial
information about the entity’s resources, and claims against it along with efficiency and effectiveness
of its management, is essential in order to assess the entity’s prospects for future net cash inflows.
(IASB, 2010)

AICPA (2010) has listed out the following three benefits of using IFRS rather than a local GAAP;

 Multinational companies may benefit from using common financial reporting systems that
follow IFRS worldwide.
 IFRS may ease financial statement comparability with other companies that use IFRS
worldwide.
 IFRS may facilitate cross-border investments and access to global capital markets.

Teferi and Pasricha (2016) cited IFRS Foundation (2013, p5) and described that there are three steps
that are advised to be followed before adopting the standards. The first step is making policy
decisions by discussing with related parties; the second step is arranging a plan which includes targets
and deadlines; and the final step is distinguishing the resources on hand and what is needed.

2.3.2. IFRS and Audit

The American Institute of Certification of Public Accountants (AICPA) (2010), in its Audit
Committee Brief, emphasized on that “the movement toward adoption of a single set of high-quality,
global accounting standards for use by organizations around the world continues to gather
momentum.” The reasons for the audit committee’s concern were the increasing number of nations

19
and reporting jurisdictions that either require or allow the use of IFRS, and the convergence of US
GAAP with IFRS that is underway. These two reasons have made it important for audit committees
to gain understanding of IFRS, and be ready to ask the company’s management team members some
specific questions to understand the readiness of the management for the possibility that the SEC
might allow or require IFRS. The questions that would be expected to be replied by audit committees
are: whether the audit committee discussed IFRS adoption with company leadership; belief of the
audit committee about the management’s understanding about the effect of IFRS adoption on the
company and the financial reporting process; the audit committee’s possession of an oversight plan to
monitor the IFRS implementation and progress; the impact of IFRS adoption on internal control and
financial statement disclosures; how to understand and question management’s accounting-policy
choices (since IFRS requires more professional judgment than US GAAP); how to communicate the
impact of the company’s transition to IFRS to the board of directors and other stakeholders and how
the audit committee would know whether management education goals for shareholders and analysts
are being met. (AICPA, 2010)

In the case of Ethiopia, AABE (2015) has described the disclosure demanded from audit firms
regarding IFRS adoption. Audit firms are required to present reports regarding the status of the entity
they audited regarding preparation for the adoption of IFRS such as dedicating specific teams and
staff members to prepare the firm for IFRS adoption.

Audit quality is defined by Di Angelo (1981) as “market assessment of the likelihood that the auditor
detects significant distortions of the financial statements of employers of the accounting system.”
There are five theoretical constructs to evaluate audit quality which are mentioned in Giroux and
Jones (2011) as cited by Loveday (2017); they are: auditor type, audit experience, audit fee,
demographics and local government type. Loveday (2017) also cited many other literature sources to
describe the determinants of audit quality. Some of these determinants are, audit firm size, honesty,
knowledge of accounting and auditing standards, auditor independence, knowledge of client business,
audit firm rotation and earnings quality of clients, internal control, firm size, auditor reputation and
auditor’s fees. He also defines financial reporting as “presentation of financial statements in the form
of comprehension by users of financial information” by citing Nwanyanwu (2013). According to the
author’s literature review which cited Nwanyanwu (2013) and Alexander and Britton (1999),
financial reports have objectives of providing relevant, understandable, reliable and complete
information for informed decision making. He then finalizes by concluding that there is a significant
positive relationship between the determinants of audit quality which he grouped into three (as
20
auditor’s independence, technical training and proficiency, engagement performance) and reporting
quality measured by its reliability.

2.3.3. IFRS 1- First Time Adoption of IFRS

We chose to review this standard because the main issue of conversion from GAAP to IFRS is highly
and mostly related to it. The standard was issued in 2003, and since then, it was amended (modified)
to accommodate first time requirements resulting from new or amended standards, such as the
exception added to the retrospective application of IFRS 17. The other minor amendments include
revised IFRS 3, the December 2010 IFRS 1 amendment, IAS 19 issuance, Amendments to IAS1 and
so on. The standard is presented in paragraphs 1-40 (each of which are of equal authority) and
Appendices A-E. (IFRS 1)
The objective of the standard is to ensure that the entity’s first IFRS financial statements, and the
interim financial reports for part of the period covered by those financial statements contain high
quality, transparent and comparable information that provides suitable starting point for accounting in
accordance with IFRSs and that can be generated with lesser cost than benefits. It can be applied
when preparing the first IFRS financial statements (first annual financial statements in which the
entity adopts IFRSs by unreserved and explicit statement in the statements of compliance with IFRS)
and the interim financial reports presented in accordance with IAS 34 for part of the period covered
by the first IFRS financial statements. (ibid)
An entity that hasn’t presented its most recent financial statements fully according IFRS for external
users or that hasn’t explicitly and unreservedly stated compliance with the whole IFRS or that had no
previous financial statements can adopt IFRS and be a first time IFRS adopter. The starting point of
accounting according to IFRS is preparing an opening IFRS statement of financial position (SOFP) at
the date of transition to IFRSs. E.g. the opening financial statement to present first IFRS report on 31
December 20x5 would be that of 1 January 20x4. The accounting policy used in the opening IFRS
SOFP and that in all periods presented in its first IFRS financial statements should be the same. An
entity shall not apply different IFRS versions which were effective at earlier dates. Although there are
exceptions and exemptions, the opening IFRS SOFP would include all assets and liabilities whose
recognition is required by IFRSs, excludes those that are not permitted to be recognized by IFRS,
reclassifies the SOFP in accordance to IFRSs and measures the SOFP items according to IFRS. The
resulting adjustments will be recognized in retained earnings. (ibid)

21
 An entity’s first IFRS financial statements shall include at least three statements of
financial position, two statements of profit or loss and other comprehensive income,
two separate statements of profit or loss (if presented), two statements of cash flows
and two statements of changes in equity and related notes, including comparative
information for all statements presented. (IFRS-1)

2.3.4. IFRS Exposure in the World

Pocket IFRS (2017), under its section of ‘Use of IFRS’ tells us that

“Most jurisdictions have reporting requirements for listed and other types of entity
that include presenting financial statements that are prepared in accordance with a
set of generally accepted accounting principles. IFRS is increasingly that prescribed
set of principles and is used extensively around the world.”

Europe: All EU (European Union), and European Economic Area companies listed on a regulated
market are obliged to use IFRSs when presenting their consolidated financial statements.
Switzerland’s most large companies also use IFRSs although the country is not an EU member. Other
Non –EU companies listed on an EU regulated market must file financial statements prepared using
IFRS as adopted by EU, IFRS issued by IASB or GAAP specified by European Commission as
equivalent to IFRS. Some EU member states also permit use of IFRS by their non listed firms and to
separate financial statements. Some European countries are also using IFRS as their local GAAP.
Each new IFRS, amendments and IFRIC interpretations are subject to endorsement (approval) for use
in Europe. (Pocket IFRS, 2017)

United States: Foreign private issuers are allowed by SEC to report using IFRSs as issued by IASB,
without having to include reconciliation with GAAP since November 2007. Domestic issuers are
required to use US-GAAP, and they can’t use IFRS. (ibid)

Canada: Entities other than SEC issuers and foreign issuers, are required to file their statements in
Canada prepare their financial statements in accordance with Canadian GAAP (i.e. IFRS). SEC
issuers may use US GAAP and foreign issuers (incorporated under foreign laws) can use either of
IFRS; US GAAP (if SEC foreign issuers); principles included in Securities Exchange Act of 1943 or
the foreign jurisdiction’s accounting principles.

Latin America and the Caribbean: almost all of the countries require or permit IFRSs. Argentina
has adopted IFRSs, since 2012 for all listed companies except for banks and insurance companies
22
which continue using domestic standard; Brazil adopted IFRSs for listed entities and banks since
2010; Chile adopted IFRSs for Public Interest Companies in 2012; Mexico adopted IFRSs for all
listed entities other than banks and insurance companies which use Mexican Financial Reporting
Standards. (ibid)

Asia: Listed companies in Japan use Japanese Accounting Standards, IFRS, US GAAP or Japanese
Modified International Standards, with a slight shift to IFRS. Chinese listed companies and financial
institutions are required to apply its national accounting standards which are known as Accounting
Standards for Business Enterprises which are substantially converged with IFRS. Hong Kong and
Korea has adopted IFRS. (ibid)

Australia: Listed companies financial institutions and some other entities are required to apply IFRS
since 2005. (ibid)

Africa: South Africa is the early adopter of IFRS. Other African countries such as Nigeria Zambia
and Kenya have also adopted IFRS. (ibid)

2.3.5. Challenges of Implementing IFRS in Africa

Sedzani (2012) have written about the challenges of implementing IFRS in African countries
separately and in the whole Africa as a collective unit. The countries addressed in the author’s work
were Kenya, South Africa, Nigeria and Sierra Leone. The East African country Kenya, which was
among the first African countries to adopt IFRS faced challenges of adopting IFRS which were
discussed at the United Nations conference such as: educational gap, inability of accountants and
professional bodies to remain side by side with IASB standard issuance and changes and lack of
representation of Kenya in the standard-setting process.

South Africa is presented in Sedzani’s (2012) work as the ‘economic powerhouse of Africa’. The
challenges experienced by South Africa as discussed in the United Nations Conference on Trade and
Development (UNCTAD, 2008) are primarily technical, like; expectation and reality of complexity
around the standards were different, high implementation costs, and confusions around company
performance information.

On the other hand, the challenges faced by Nigeria in the IFRS adoption are also covered in
Sedzani’s (2012) work. Those challenges include, lack of coherence between existing laws and IFRS
at entity and country level; unclear scope of IFRS application; doubtful readiness of relevant
professional organizations in terms of resources needed to ensure competent and continuous support
23
after implementation; absence of accounting firms that can provide clarification; lack of
representation in IASB; No contribution is made to the drafting standards; lack of coordination
between accounting education institutions and professional qualification and regulation requirements;
shortage of expertise in the IFRS field; some IFRS are too complex; lack of economic resources
required for implementation and inconsistency of implementation because of lack of coherence in the
regulatory system.

Africa as a collective unit has challenges that are unique to it. These challenges include; the benefits
of IFRS adoption are not fully known; limited external incentive to encourage the adoption;
inconsistencies because there are diverse methods of adopting IFRS; natural resistance to change; the
time and cost consumed by the adoption make the adoption expensive; multiple official languages
exist in Africa while business language is different,; shortage of professional accountants; lack of
awareness on audit value and lack of professional accountancy organizations and stock exchanges.

2.3.6. AABE’s IFRS Implementation Roadmap and the Benefits, Challenges and
Prospects Presented

AABE (2015) has demonstrated the board’s plan to implement IFRS and also the challenges of IFRS
implementation in Ethiopia. AABE notes in this strategic plan that “conversion to IFRS doesn’t end
with the publication of the first set of IFRS compliant financial statements”. There is an ongoing
change and amendments to the standards that need continuous responses. The benefits of using the
International Financial Reporting Standards that were depicted on the strategic plan include; leading
to a greater transparency; improving financial statement comparability; reducing barriers of cross
border mergers and acquisitions and listings (boosted access of capital markets); better financial
reporting confidence level that would create good relationships with investors and stakeholders;
improved response to changing global commercial practices; reduced cost that would be needed for
reconciliations and restatements for consolidation purposes; focus of IFRS on risk and uncertainty
changes the management’s attention area and it has been found very helpful in the proactive risk
management.

AABE (20015) has stated that it believes that “it will be in the best interest of the nation to adopt
IFRS as issued by the International Accounting Standard Board” in its statement of adoption. It
planned a 3 phase transition over a period of three years for the country’s reporting entities on the
basis of Article 54 (1) of the its founding Proclamation and anchored on the idea that the board and

24
all stakeholders will follow the timelines. The following diagram is a brief presentation of the IFRS
implantation road map of AABE.

The first phase of mandatory IFRS adoption (according to AABE (2015)) is adoption by ““significant
Public Interest Entities- Financial Institutions and Public Enterprises owned By Federal or Regional
Governments”.
”. Those under this phase are recommended to adopt IFRS by July 8, 2006, and the
phase gave a period of 22 for the adoption, which was considered by AABE as sufficient to
effectively transit to IFRS the process being just it will be shown in figure 2, and just as provided in
the review of IFRS-1. “Other Public Interest Entities (ECX member
1. The second phase includes “Other
companies
panies and reporting entities that meet PIE quantitative thresholds) and IPSAs for Charities and
Societies”(AABE
”(AABE (2015)). These entities are expected to mandatorily adopt IFRS and IPSAs by July
8, 2017,, and required to issue IFRS based financial statements for the year ending July 7, 2018
2018. The
third phase comprises the conversion of “Small
“ and Medium-sized
sized Entities
Entities”, whose mandatory
adoption is as at July8, 2018, and requirement to issue IFRS based financial statements is for the year
ending July 7, 2019.

The
he plan (AABE (2015)) has also presented some of the challenges faced by the IFRS
implementation. One of the major challenges expected by AABE (2015) that will be faced by the
implementation process is the lack of in-depth
in depth knowledge of IFRS. The board had proposed to
introduce a nationwide intensive capacity building programme to provide for different needs of the
stakeholders using a three-level
level knowledge approach the levels being Level 1, Basic knowledge;
Level2, Working knowledge; Level3, Thorough (detailed)
(detai knowledge.

2014/15 2015/16 2017/18 2017/18 2018/19

Transition
Transition Date: Other Reporting Date: Rporting
Public Significant Public Reporting Date: Small
Date:
Interest Interest entities Date: Other and
Significant
Entities and Transition Date: Public Medium-
Public
IPSAS for Small and Interest Sized
Iinterest
Entities Charities and Medum-sized Entitiess Entities
Societies Entities

Figure 2: AABE’s IFRS implementation Roadmap

(source: AABE (2015))
(2015)), St. Mary
University’s IFRS training note
25
Significant Public Interest Entities include Financial Institutions and Federal/Regional government
owned Public Enterprises. Other Public Interest Entities are those companies that are either
members of ECX or meet the at least two of the PIE quantitative thresholds of: annual turnover
exceeds Birr 50,000,000; total employees exceed 100 employees; total asset exceeds Birr
100,000,000; total liability exceeds Birr 100,000,000. And those that can’t be grouped under both of
the above classifications will be regarded as other PIEs. (St. Mary’s University)

Tax Law was also addressed by AABE (2015) , in connection with the adoption of IFRS. The
strategic plan marked that “the Tax Law needs to be reformed in order to align with the changes
resulting from the IFRS adoption.” It adds that the rearrangement of the Tax Law should be aligned
with the nationwide accepted accounting standards. But this reformation has raised alarms from
financial statement preparers and professionals that it would cause burden of tax adjustments, and that
a task force will be formed to provide the solutions.

Regulatory requirements are also suggested by AABE (2015) to be ‘reviewed and revised’ in order
to make them in lined with changes that the IFRS adoption would cause. It also planned to form a
task force that to: examine and provide guidance on the regulatory issues and preparation process;
and work closely with relevant regulatory/supervisory parties to clearly identify the regulatory
requirements that deviate from provisions of financial reporting standards to avoid conflict and ensure
credible financial reporting in Ethiopia.

2.3.7. Current Status of IFRS Implementation in Ethiopia

According to Teferi and Pasricha (2016), there are generally two factors that motivate the adoption of
IFRS in Ethiopia, which are internal and external factors. The most motivating internal factor is lack
of accounting standards in the country. Teferi and Pasricha (2016) have added that the most external
pressure comes from lenders and donors, international correspondent organizations, World Bank and
IMF, International Audit firms such as KMPG International and Delloitte. Because of these two
factors, Ethiopia adopted IFRS in December, 2014, according to Proclamation No. 847/2014 with the
objective of:

…to establish a sound, transparent and understandable financial reporting system

applicable to entities in both private and public sectors; to have a uniform financial
reporting law that enhances transparency and accountability by centralizing the
hitherto decentralized financial reporting structures of Ethiopia; to support various
building blocks of the economy and to reduce the risk of financial crisis, corporate
26
 failure and associated negative economic impacts; and to ensure that the provision
of financial information meets internationally recognized reporting standards.
(Teferi and Pasricha, 2016 citing Proclamation No. 847/2014)

Dawit(2017) has assessed the current status of IFRS implementation in Ethiopia. He noted that “the
most obvious and immediate impact of the IFRS in financial reporting has been the adoption of tax
reporting”, and he explains that this is caused by the disregard of IFRS standards to tax since they are
prepared in a way that makes them free from tax considerations. IFRS will lead to a value based
approach rather than a transaction based method. He adds that “the constant goal to move towards the
adoption of international financial reporting standards as the set of globally accepted principles
seems not to be able to keep up with the ever-changing economy.” Although the new income tax
proclamation of 2016 requires taxpayers to use IFRS when preparing financial records and
statements, the Ethiopian Revenue and Customs Authority seems to lag behind in understanding the
accounting rules that are currently in effect, especially those impacting tax revenues.

On the other hand, he has written that the Ethiopian Government has started integrating financial
statements of its companies with the international standards. Some progress has been reached at
concerning creation of awareness about IFRS by using short-term trainings and pushing financial
institutions to start using IFRS.

2.3.7. Project Management

Meri (2008), by citing the Project Management Institute, defines project management as “the
application of knowledge, skills, tools and techniques to project activities to meet project
requirements.” The same author defines project as an activity separate from the normal line of work,
with its own scope and quality which is a non repetitive attempt to alter things in some way within a
certain time and a given amount of budget. Scope refers to the list of activities and functions of the
project and indicates the scale of the required solution, whereas quality is the excellence of the final
outcome and the approach. The GAAP to IFRS conversion process is thus a project. A skill of project
management empowers those working in the IFRS implementation to deliver IFRS based financial
statements and reports in a much effective manner. It will also make the other normal activities of the
concerned entity run very smoothly, and makes the project itself less stressful.

Meri (2008) also wrote about “The Underlying Principles of Project Management”, and she notes
that ignoring these principles greatly diminishes success chances. The principles include; Without a
decent project management the value of everything else done can be negated; Technologies wouldn’t
27
solve conflicts among individuals that are in the same team, people and process proble
problems should be
treated separately; The idea of an activity that would only help a project manager, and that wouldn’t
add value to the whole project team, would be
b very difficult to be realized; Choosing a right project
management tool is nott just an individual’s decision; The communication method used by the project
manager should be effective, in order to get the
the job done he/she must be heard; The most important
job of the project manager is designing the right processes
processes and finding the tools to support them.

2.3.8. Relationships among Variables

 Lack of a legally
 Potential knowledge shortfall THE PRIMARY enforced and capable
 Bypassed (avoided) Preparation regulatory body
Steps (policy→plan→resource)
resource) INDEPENDENT
 Insufficient time for
 Limited resources VARIABLES implementation
 Weak project management  Lack of proper market
 Weak support from management to measure fair value
 Resistance to change at
 Lack of support from
professional
Challenges in the External
accountancy bodies
Implimentation Environment
 Low quality of the
Challenges in AABGSC country’s Education
and training
 high implementation
cost
Proposed  lack of
Solutions implementation
(Prospects) guidance
 IT related challenges
 Low audit quality

QUALITY OF IFRS BASED

THE ULTIMATE
FINANCIAL STATEMENTS
DEPENDENT VARIABLE

Figure 3. Our Research’s Conceptual Framework

28
2.3. REVIEW OF EMPIRICAL LITERATURE

2.3.1. Shana (India,2018)

The researcher studied the benefits and challenges of the convergence of IFRS in India. The study
introduced India as one of the emerging economies in the world, which is in need of more Foreign
Direct Investment which is the main motivational aspect of the country that made it look for a way to
integrate its financial reporting with the rest of the global economy. The study emphasizes on that
IFRS has an objective of speaking one accounting language all over the world and an easy way of
comparability of financial statements prepared in two or more different countries. It describes that in
the country, Accounting Standard Board of India which is constituted under the Institute of Chartered
Accountants of India, sets and publishes the standards in tune with IAS. Although India can’t adapt
IFRS due to legal constraints, the Indian Accounting Standards are IFRS converged.

The study took exploring the current IFRS convergence in India along with its benefits and
challenges; examining IFRS in the Indian context and analyzing the impact on Indian corporate as its
objectives. It states that Adopting IFRS is has both a challenging and rewarding future. Most
investors, financial statement preparers agreed on IFRS improves financial statement quality and
would have a positive impact on the country’s financial reporting, such as improvement of financial
information quality, consistency, reliability, comparability and transparency, which would benefit
investors customers and other stakeholders. The challenges of implementing IFRS as presented in the
research include: Difference in GAAP and IFRS (differences are wide and deep); Training and
Development (lack of academic knowledge in IFRS); Legal and Regulatory Considerations (which,
as opposed to IFRS’ recognition tend to override other laws and regulations); Fair value
measurement (which is a base to the IFRS measurement of the majority of items in the financial
statements); Financial reporting system (the standards issued by the Institutes of Chartered
Accountants of India need to be amended to suit IFRS requirements); Taxation (Indian tax laws do
not recognize the accounting standards) Change in IT systems (which is supposed to produce robust
and consistent data for reporting).

Shana (2018) concludes that it must be emphasized on that convergence to a single set of globally
accepted high quality standards is in the best interest of the public since it contributes to efficient
capital flows within countries across the globe. Although the challenges of IFRS implementation are
great the rewards are potentially greater.

29
2.3.2 Odo (Nigeria,2018)

Odo (2018) studied the challenges and proposed solutions of IFRS adoption in Nigeria. The purpose
of the paper was to assess the IFRS adoption in Nigeria, identify the inherent challenges and suggest
mechanisms to be rewarded of the waited for benefits of the adoption. The method used in the
research was review and trend analytical approach to discover that the IFRS adoption made the
financial statement presentation better, since it was discovered that Nigeria gained a lot from adopting
IFRS.

The study explains that the adoption in Nigeria is focused on gaining an improved accounting quality
through uniform standards for financial reporting. Although the described benefits of IFRS are
similar to that in Shana’s (2018) research, we have found some interesting challenges raised in Odo’s
(2018) research. Economy is presented in the paper as a significant obstacle to IFRS
implementations, adding that some governments may be unwilling to give up control over processes
with real economic effects to an international body. The second challenge presented in the paper was
Politics, whose effect is presented to be directly derivable from the effect of economic factors in
accounting regulations, and explained by citing Stinger (1971) that said “governments are made up of
individuals who are self-interested and will introduce regulations more likely to lead to their
reelection.” Another challenge presented in the study is cultural differences, which were described to
be differences in accounting reporting culture, language, business tradition, work skill and ethics.
Some skills transferred from Anglo-American countries, whose accounting models have been known
to influence international accounting standards, to developing countries may be dysfunctional
because of irrelevance in the receiving country’s context. The other interesting challenge of the IFRS
implementation in that Odo (2018) presented is that caused by External Auditors.

While the IFRS skill base and capacity building efforts of the big audit firms (who
are credited to have participated in setting up IFRS) adequately march the demands
of IFRS, the same cannot be presumed for local Nigerian external auditors who
understandably lack sufficient international exposure and the financial capacity to
fund extensive training and retraining for themselves and their staff on the reporting
demands of IFRS.( Odo (2018))

The research then presents the way forward to an effective IFRS implementation. It states that careful
planning and widened public education, allocation of resources, legal and regulatory support system

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and intuitional support are essential. And it added that the four year period given to convert from
GAAP to IFRS was not enough.

2.3.3. Nader & Robert (Kenya;2014)

Nader & Robert (2014) researched on the issues challenges and lessons for IFRS adoption in Kenya
and other adopters. Their research paper informs us that Kenya set a road map of IFRS adoption from
January, 2005. The motivating factors for this adoption were “globalization, increased border-listing,
attraction of foreign investment and aids, and other institutional factors.” The benefits of IFRS
mentioned in this research are those found in Odo (2018) and Shana (2018) and other benefits pointed
out in our paper.

The challenges raised in this paper are “IASB funding, staffing and governance structure, consistent
adoption”; “Dominance of the developed countries and Political lobbying” (the researchers argue
that developed countries want to dominate the IASB structure and process of standard setting, which
affects developing countries negatively); “Consistent adoption, application and regulatory law”
(they mention that different versions of IFRS that are inconsistent with that of IASB are being
applied); “Compliance issues and enforcement mechanisms” (although companies claim that their
financial statements comply IFRS, there is a variation in the level of applying the standards);
“Cultural and structural changes in the various institutions in a country” (political, legal, economic
and cultural reforms in IFRS adopting countries).

At the end the researchers conclude that IFRS adoption needs adequate preparation and suggest that
careful planning, extensive public education and resource allocation with legal and regulatory support
are essential for effective IFRS implementation; there needs to be an effective communicating system
that would disclose changes in reporting requirement for the informing users; enough resources must
be made available in order to aid the IFRS implementation process; ongoing trainings need to be
given to auditors, regulators, analysts and others is necessary; Kenyan regulatory bodies like CBN,
ICAN, FIRS, SEC and NSE should work together to plan an awareness program on the importance of
IFRS implementation; independent supervisory bodies should be strengthened; the system developed
to implement the standards should consider interests of stakeholders; IFRS needs sufficient legal
backing, because the law always prevails; professional accounting bodies should support the
implementation process; IFRS should be integrated with the university accounting education.

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2.3.4. Firdawok (Ethiopia;2017)

Firdawok (2017), as a partial fulfillment for the requirements of the degree of Master of Science in
Accounting and Finance, conducted a study on the challenges and prospects of International Financial
Reporting Standards (IFRS) implementation in Ethiopia. He starts by describing the overall situation
of Ethiopia as the second-most populated country in Sub-Saharan Africa, and one of the world’s
poorest countries. He then mentions the devotion of the government to accelerate the progress of the
country to poverty reduction and the need for the accountability of the government to its citizens.

The research tells that “nationally supported IFRS will increase stability, stewardship, accountability
and transparency both at an institutional and government level.” The researcher has presented the
less attention given to performing studies on the area of IFRS implementation in developing countries
as a motivation for conducting the research and also as limitation of his study. The objectives of the
study were identifying the challenges, the factors affecting, and the general prospects for IFRS
implementation in Ethiopia.

The researcher used mixed research approach in order to ‘neutralize’ the limitations of applying a
single approach. He then showed the hypothesis of the study which were “There is a relationship
between Institutional readiness and successful implementation of IFRS”; “There is a relationship
between Enforcement mechanism and successful implementation of IFRS” ; “there is a relationship
between the availability of the required skill and successful implementation of IFRS.”

The researcher used questionnaires and the summarized results were that: most respondents showed
that the capacity to Enforce IFRS would be main challenge to the transformation; the implementation
is costly, complicated and burdensome; more focus needs to be given to institutional readiness; “the
more comprehensive the approach to conversion, the more respondents tend to agree with the factors
influencing the transition”; and that the difficulty to understand IFRS well as well us lack of
implementation guidance and uniform interpretation are also key technical challenges.

2.3.5. Aytenew (Ethiopia; 2018)

Aytenew(2018) studied the challenges of IFRS implementation in Ethiopia as a partial fulfillment for
the requirements of the degree of Master of Science in Accounting and Finance. His paper starts by
discussing the extent to which globalization is affecting each country in the world, and that
multinational companies seek foreign opportunities to invest in. Nevertheless, the researcher

32
continues, different business language (accounting) in different countries makes it difficult to
compare the investment opportunities in different countries.

In the statement of problem, the researcher included variations of the conclusions of conclusions and
results which is applicable to some companies or countries and lists out challenges that have been
addressed in the previous sections of our empirical review. The objectives were studying the process,
investigating the efficiency and understanding the challenges of IFRS implementation. Time and
finance constraints were the limits of the research.

Similar to Firdawok’s (2017) research, this research used the mixed method research approach.
Primary data (through questionnaires and interviews) and secondary data (documentary evidences)
were collected from IFRS implementation team members of 12 private banks who were selected
purposively.

Analysis were made using descriptive statistics and the final conclusions were that the major
challenges of implementing IFRS were weak corporate governance; the low quality of the country’s
education and training; lack of support from professional accountancy bodies; weak enforcements of
regulatory body; inadequacy of transition period; improper planning; lack of a transparent market
information; high implementation cost and weak support from the management.

2.3.6 Gap in Existing Literature

The primary gap that is identified from our empirical evidences is that although both Firdawok (2017)
and Aytenew (2018) conducted a research that aimed to find the challenges of implementing
International Financial Reporting Standards, Firdawok (2017) used wide-ranging responses from
different selected personnel that included: finance officers, Auditors, Accounting teachers and
Accountants, while Aytenew (2018) focused only on the banking sector which is a Significant Public
Interest Entity. Both of them haven’t specifically addressed other Public Interest Entities like our case
company, and Small and Medium Entities.

On the other hand, although both of the above mentioned researchers addressed the challenges of the
implementation of IFRS they both haven’t taken into account the challenges regarding the intended
outcome of the implementation such as not being able to attain an intended quality of financial
reporting and failure to be able to substantially standardize the financial reporting trends of the
country.

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