ADDIS ABABA UNIVERSITY

Accounting Practice in Ethiopia

(In Case of BIB S.C. and OIB S.C.
GROUP C

Group Members: -
Ser. No. Group Member’s Name ID Number
1 Daniel Girma GSR/2007/06
2 Fekadu Abdissa GSR/2014/06
3 Goshu Girma GSR/2017/06
4 Merga Ademe GSR/2026/06

Course Title: - Financial and Managerial Accounting

Instructor’s Name: - Dr. P. Laxmikantham
 Contents

I. Background
 An Overview of Accounting Practice
II. Empirical Analysis
 In case of OIB & BIB
III. Conclusion and Recommendation
1. Background

 Main objectives
 Tracing accounting practice trend in Ethiopia
during the three epochs,
• Pre 1974
• 1974 – 1991
• Post 1991
 The applications of IFRS in Ethiopia
Background cont…

 The accounting practice in Ethiopia appears to exhibit

distinct patterns during the three epochs
 Pre 1974: - free market economy
 1974 through to 1991: - command economy
 1991 onwards: -Backed to free market economy
1.1. Pre 1974

Kinfu(1990) argues that the keeping of records existed

in ancient Ethiopia as early as the 3rd century A.D.
during the Axumite Kingdom of ancient Ethiopia.
The keeping of formal records of government activities
started in the 1905 during Emperor Menelik.
Prior to 1974, Ethiopia was a feudal society under
transformation to capitalism (Tesema 2003).
Foreign investors were major participants in the
private sector as.
Pre 1974 cont…

Modern financial accounting in the private sector

started in Ethiopia in 1905 with establishment of the
Bank of Abyssinia which was administered by British
financial system.
As a result, British accounting terminology and
financial reporting requirements were mostly used.
Pre 1974 cont…

 Some of proclamation and directives Developed

during this period are:-
 Ministry of Finance directives in 1942-first
substantial development during this period.
 Commercial Code of Ethiopia 1960,
 The Audit Commission Proclamation of 1944 and
others.
Pre 1974 cont…

Other development was the start of public

accounting in 1940:-
 Significant developments in 1960s: -
o Commercial code of Ethiopia
• Contains accounting and external auditing
provisions,
• Still serve as the legal basis for financial
reporting and external audit of companies.
 Proclamation number 199/1961 in 1961: -
o The establishment of the Office of the Auditor
General (OAG)
1. 2. Derg Regime: 1974 – 1991

 Proclaimed a centrally planned economic policy,

 Nationalization of all private enterprises and replaced

them by state-owned enterprises
 International public accounting firms in Ethiopia,
i.e. Price Waterhouse Peat and Co and Mann Judd
& Co., were closed
1974 – 1991 cont…
 The development of accounting appears to have been
held back in Ethiopia,
 However ,
 Proclamation 126/1977
• Formation of the Audit Service Corporation
(ASC), currently undertakes external audit of
public enterprises.
 Even though the period is said to be held back
accounting practice, limited achievements were
made.
1.3. Post 1991

The country shifted back to a free-market economic

system,
The free-market system has been taken as one of the
signals of the hope for a better future for the
accounting profession (Argaw 2002),
Government has been working to improve the
financial infrastructure of the country (ROSC,2007)
Post 1991 cont…
 Major issues concerning accounting standards in
Ethiopia conducted by WB and IMF in 2007 (ROSC)”,

 There is no requirement in the commercial Code to

comply with accounting standards ,
 Ethiopia does not have a quality assurance program
for auditors ,
 The country has not yet experienced litigation/legal
action/ on financial reporting,
 Absence of an authoritative body for accounting
which can guide and dictate the implementation of
IFRS
 etc.
Post 1991 cont…

 Major achievements
 EPAAA has been re activated and three other
professional associations,
 The Ethiopian Accounting Finance Association
(EAFA),
 The Ethiopian chapter of the Institute of Internal
Auditors (IIA), and
 The Accounting Society in Ethiopia (ASE) has been
established.
1.4. The Application of IFRS in Ethiopia

 Objectives of the Topics are:-

 To see Ethiopia’s progress towards adoption of
IFRS,
 Explain what problems are going to be solved after
the draft proclamation shall be approved
concerning Reports of Financial statements in the
country,
The Application of IFRS…
 So far there is no particular accounting standard in
Ethiopia (ROSC,2007)
 But, recently issued a draft proclamation called
“Financial Report Proclamation of Ethiopia”
 Obliges “public interest entities” to follow IFRS in
their financial reporting which includes: -
• IFRS issued by IASB or its successor;
• IFRS for SMEs issued by IASB or its successor and;
• International Public Sector Accounting Standard
(IPSAS) issued by the IPSASB or its successor.
Application of IFRS…
 Authoritative body for accounting
 National Accounting and Auditing Board of Ethiopia
(NAABE)
 Draft proclamation article 13, the objectives of the
Board shall be to:
 Promote high quality reporting of financial and non-
financial information by public interest entities;
 Promote the highest professional standards among
auditors and accountants;
 Enhance the creditability of financial reporting;
 Improve the quality of accounting and auditing
services;
Application of IFRS…

 After approval and publication of the draft

proclamation
 Problems associated with standardization and
regulatory organ will be solved.
 Standards of financial reporting will be issued,
 Every reporting entities adhere to the issued
standards
 Empirical Analysis

BIB S.C. and OIB S.C.

2. Empirical Analysis: -OIB S.C and BIB S.C.

 The objectives of analysis:-

 To reveal accounting practices of respective
companies and
 Compare and contrast accounting policies used by
the two bank industries,
 However, before discussing their accounting
practices, we will try to look an overview of both
companies.
2.1. An Overview of OIB S.C
 OIB is private owned commercial bank. It was established
 In accordance with the pertinent laws, regulations and
the 1960 Commercial Code of Ethiopia and Monetary
and Banking Proclamation No. 592/2008.
 Obtained banking license on September 18, 2008
 When established
• Authorized capital = Birr 1.5 Billion
• Subscribed capital = Birr 279.2 Million
• Paid-up capital = Birr 91.2 Million
 Began operation
• On October 25, 2008
• At Dembel City Centre
An Overview of OIB S.C cont…
 Currently
 It has 61 branches all over the country
 Its Paid-up capital rose to Birr 150 million as at June
30, 2013.
 Deliver services like
• Credit facilities, deposit accounts, local transfer,
international banking and other related banking
services.
• Most recently, first private bank to implement
interest free banking
2.2. An Overview of BIB S.C
 Uniquely established as the largest number of shareholders’
bank- 11,000 shareholders
 BIB was inaugurated
 October 10, 2009
 When established
• Subscribed capital = Birr 308 Million
• Paid-up capital = Birr 156Million
 Currently
 It has 46 branches all over the country
 Its subscribed and paid-up capital rose to Birr 375 million and
Birr 308 million, respectively, as at June 30, 2013.
 Deliver services like
• Credit facilities, deposit accounts, local transfer,
international banking and other related banking services.
2.3. Financial Reporting Practice
 Financial reporting standard
 OIB- Used International Standard of Auditing
 BUB- Used General Accepted Auditing Standard
 Financial Statements
 Heading: - Company name, name of financial
statement and reporting date
 Balance sheet Statement
• Used asset part at the top and followed by
liability and equity parts of the company,
consecutively.
• Asset: - grouped into current and plant assets
Financial Reporting Practice cont…
• Liability: - classified into customers deposits an
other liabilities
• Equity parts: - divided into three categories:
share capital, legal reserve and retained earnings.
 Income (Profit/Loss) Statement
• OIB used single-step income statement
reporting format.
• BIB used a multiple income statement reporting
format
• Notes of account: - Less and more
Financial Reporting Practice cont…
 Cash flow Statement
• Three parts: cash flow from operational
activities, investment activities and financial
activities
• OIB bisects the increments alone and transfers
the balance for the year
• BIB puts all together under one column and
come down to the balance
 Statement of Change in Shareholders’ Equity
• Auditors of BIB included in the financial report.
But , to the contrary, audit report of OIB has not.
Financial Reporting Practice cont…
 Important Notes to the account (Disclosure)
• Disclosure principle is based on personal
judgment.
• However, should be disclosed
• Significant accounting policies
• Any change which have material effect on the
report
• Lots of similarities persisted, but has some
variations
• Presented from Excel
Financial Reporting Practice cont…
 Accounting Policies
 Similarities
 Fixed assets
‐ Acquisition cost less accumulated depreciation.
‐ Depreciation- straight line basis
‐ Used similar rates for respective assets.
 Deferred charges
‐ Amortized on the straight-line method for expected useful life of
5 years.
 Interest on loans and advances are recorded when earned.
 Interest income on non-performing loans (NPL) is accounted for
on cash basis of accounting.
 Foreign currencies denominated transactions are converted into
Birr at the prevailing rates of exchange and realized foreign
exchange gains or losses are reflected in the profit and loss
account.
Financial Reporting Practice cont…
 Differences
 For OIB, foreign currencies on hand and
correspondent banks balances at the balance sheet
date are translated at the average rates of buying and
selling rates for notes and transactions respectively.
Whereas, for BIB, Year–end balances of foreign
currencies on hand and with correspondent banks
are converted into Birr at mid exchange rates ruling
at the balance sheet date.
 Stocks are valued using FIFO costing base for OIB.
3. Summary and Recommendations
3.1. Summary
Ethiopia has long years of accounting history. However, accounting practice
were not developed.
As the economy of the country passes different epochs, the development of
accounting practice also experienced differently
The country has no specific guidelines that enforces the entities to practice
the IFRS and this resulted in the different practices of accounting in
different entities
The NBE also does not have specific guide lines that enforce the banking
industries to practice the IFRS accordingly.
The country has adopting IFRS and draft financial reporting proclamation is
underway. When approved and publicized, problems related with variation
in reporting standards will hopefully eliminated.
The two banks, within the same country and governed by the same rules and
regulations, employed two different reporting standards which yield
different outputs. This is resulted from absence of single standards which
govern them.
3. Summary and Recommendations
3.2. Recommendations
The government of Ethiopia should provide enough budgets for
development infrastructure accounting practice ,
The NBE should develop guide lines for banking industries towards
practicing International Financial Reporting Standards,
The draft proclamation should be approved and issued as soon as
possible,
Professional auditors should be encouraged, trained and licensed by
appropriate organ.
Entities in the country and banking industry should practice
accounting standard rather than simply put the guide lines on the
shelf,
Exchanging good practice with outside countries which have good
accounting practice.
Undertaking financial reporting reforms.
Any question?
Thank you!!