ASSESSMENT OF FINANCIAL REPORTING PRACTICE OF ABYSSINIA

BANK IN LIGHT OF IFRS PRINCIPLES (CASE STUDY ON HAWASSA

BRANCH).

FURRA COLLEGE HAWASSA CAMPUS

SCHOOL OF UNDERGRADUATE STUDIES

BY: SAMUEL SENBETO

ID: - 029/10

ADVISOR: - FIREW BEKELE (PH.D FELLOW)

THIS SENIOR RESEARCH PAPER SUBMTTED TO DEPARTMENT

ACCOUNTING AND FINANCE IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR BACHELOR OF ARTS (B.A) DEGREE IN
ACCOUNTING AND FINANCE

JULY, 2020

FURRA, SIDAMA, ETHIOPIA

i
ASSESSMENT OF FINANCIAL REPORTING PRACTICE OF ABYSSINIA
BANK IN LIGHT OF IFRS PRINCIPLES (CASE STUDY ON HAWASSA
BRANCH).

A RESEARCH PAPER SUBMITTED TO DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR BACHELOR OF ARTS (B.A) DEGREE IN
ACCOUNTING AND FINANCE

BY: - SAMUEL SENBETO

ADVISOR: - FIREWBEKELE (PHD FELLOW)

FURRA, SIDAMA, ETHIOPIA

JULY, 2020

ii
Contents
ACKNOWLEDGEMENT.........................................................................................................................................III
LIST OF TABLES......................................................................................................................................................IV
ABBREVIATIONS......................................................................................................................................................V
ABSTRACT................................................................................................................................................................VI
INTRODUCTION.........................................................................................................................................................1
1.1. BACKGROUND OF THE STUDY....................................................................................................................1
1.2 STATMENT OF THE PROBLEM......................................................................................................................3
1.3. RESEARCH QUESTIONS.................................................................................................................................4
1.4. OBJECTIVE OF THE STUDY...........................................................................................................................5
1.4.1. GENERAL OBJECTIVE.............................................................................................................................5
1.4.2. SPECIFIC OBJECTIVES...........................................................................................................................5
1.5. SIGNIFICANCES OF THE STUDY..................................................................................................................5
1.6 SCOPE OF THE STUDY.................................................................................................................................6
1.7 LIMITATION OF THE STUDY......................................................................................................................6
1.8. ORGANIZATION (STRUCTURE) OF THE PAPER.......................................................................................6
CHAPTER TWO..........................................................................................................................................................8
2 REVIEW OF RELATED LITERATURE.............................................................................................................8
2.1. THEORETICAL STUDIES...............................................................................................................................8
2.1.1. Objective of Financial Reporting...............................................................................................................9
2.1.2. Qualitative Characteristics of Accounting Information............................................................................10
2.1.3. Fundamental Quality-Faithful Representation..........................................................................................11
2.1.4. Basic Elements of Financial Reporting.....................................................................................................12
2.1.5. Recognition and Measurement Concepts..................................................................................................13
2.1.6. Basic Principles of Accounting.................................................................................................................14
2.2. EMPIRICAL STUDIES...........................................................................................................................................15
2.2.1. The Concept of IFRS.................................................................................................................................16
2.2.2. Major Requirements of IFRS.....................................................................................................................17
2.2.3. Accrual Basis of Accounting......................................................................................................................19
2.2.4. FREQUENCY OF REPORTING...............................................................................................................19
2.2.5. Challenges of Adopting IFRS....................................................................................................................21
2.2.6. Benefit of Adopting IFRS...........................................................................................................................22
2.2.7. Standardization of Accounting and Financial Reporting..........................................................................24
CHAPTER THREE....................................................................................................................................................28
3. RESEARCH METHODOLOGY..........................................................................................................................28
3.1. DESCRIPTION OF THE STUDY AREA.......................................................................................................28
3.2. RESEARCH DESIGN.......................................................................................................................................29
3.3. DATA SOURCES AND TYPES.....................................................................................................................29
3.4. METHOD OF DATA COLLECTION..............................................................................................................29
3.5.. STUDY TARGET POPULATION..................................................................................................................29

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 The target population to conduct this study was sample taken from the employees of the
Abyssinian bank Piassa branch..............................................................................................29
3.6 SAMPLING TECHNIQUE AND SAMPLE SIZE DETERMINATION..........................................................29
3.7. METHOD OF DATA ANALYSIS..................................................................................................................30
CHAPTER FOUR.......................................................................................................................................................31
4. DATA PRESENTATION, ANALYSIS AND DISCUSSION.............................................................................31
4.1. INTRODUCTION............................................................................................................................................31
4.2. PERSONAL INFORMATIONS.......................................................................................................................32
4.3. THE OVERALL PRESENTATION OF FINANCIAL STATEMENT OF ABYSSINIA BANK...................33
4.3.1. FAIR PRESENTATION AND COMPLIANCE WITH IFRS......................................................................33
4.3.2.. Complete Set of Financial Statement (Including Comparative Information)...........................................35
4.3.3.. CONSISTENCY OF PRESENTATION.....................................................................................................36
4.4.. MEASUREMENT OF ASSETS AND LIABILITIES.....................................................................................37
4.4.1.. PROPERTY, PLANT AND EQUIPMENT (PPE), INTANGIBLE ASSETS AND INVESTMENT
PROPERTY..........................................................................................................................................................37
4.4.2.. MEASUREMENT OF ASSETS AND LIABILITIES..................................................................................38
4.4.3.. PROPERTY, PLANT AND EQUIPMENT (PPE), INTANGIBLE ASSETS AND INVESTMENT
PROPERTY..........................................................................................................................................................38
4.4.4.. FINANCIAL ASSETS................................................................................................................................39
4.4.5.. FINANCIAL LIABILITIES........................................................................................................................40
4.4.6.. EQUITY INSTRUMENTS.........................................................................................................................41
4.5.. RECOGNITION OF REVENUES, EXPENSES, GAIN AND LOSSE..........................................................42
4.5.1.. REVENUE.................................................................................................................................................42
4.5.2.. GAIN AND LOSSES.................................................................................................................................44
4.6..TES TO THE FINANCIAL STATEMENT (DISCLOSURE).........................................................................47
4.6.1.. DOMICILE AND COUNTRY OF INCORPORATION.............................................................................47
4.6.2.. COMPLIANCE WITH IFRS.....................................................................................................................48
4.6.3.. ACCOUNTING POLICIES.......................................................................................................................48
4.6.4.. LINE ITEMS IN THE FINANCIAL STATEMENT THAT REQUIRE SUPPORTIVE INFORMATION...49
4.6.5.. RELATED PARTY DISCLOSURES..........................................................................................................49
4.6.6.. MATURITY OF ASSETS AND LIABILITIES...........................................................................................50
CHAPTER 5................................................................................................................................................................51
5.. SUMMARY AND RECOMMEDATIONS.........................................................................................................51
5.1.. INTRODUCTION..........................................................................................................................................51
5.2.. SUMMARY OF FINDING AND CONCLUSION.........................................................................................51
5.3.. RECOMMENDATIONS.................................................................................................................................54
REFERENCES............................................................................................................................................................56
APPENDIX:-RESEARCH QUESTIONNAIRE......................................................................................................57

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 ACKNOWLEDGEMENT

First of all, I would like to thank the almighty God for his miraculous time to let me accomplish
everything I start and also for His help to go through every event successfully up to this minute. I
convey my deepest thanks to my Teacher and advisor, Firew Bekele (PhD Fellow) who taught
me three courses such as Business Communication, Entrepreneurship and Small Business
Management and Business Research Methods that equipped me to gain enough knowledge for,
my future career and my day to day life. Thus, I thank him for his genuine and energetic advice
encouragement, suggestion; comments, advice insight and guidance to plan for the future. I hope
I gained sufficient support and encouragement from him for future to accomplish my research
essay according to my senior research proposal.

LIST OF TABLES
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 Table 4.1 Socio- demographic characteristic of the respondents …………..…………….....42
 Table 4.2 Educational status ……….……………………………………………..………....43
 Table 4.3 work experiences of the respondents……………………………………………. 43
 Table 4.4.The fair presentation of financial statement in conformity with IFR…………..... 44
 Table 4.5.Going concern of the entities ……………………………………………………..44
 Table 4.6 The presentation of complete set of financial statement ………………………....45
 Table 4.7 consistency of presentation………………………………………………………..46
 Table 4.8.Measurement of PPE, intangible assets and investment property…………….......48
 Table 4.9 Measurement method is applied in the company ………………………………..49
 Table4.10.The measurement of financial assets …………………………………………….50
 Table 4.12Measurement methods fixed assets, investment property and intangible asset….51
 Table 4.13The measurement of equity instruments………………………………………… 51
 Table 4.14.Recognition of revenue (interest income and fees and commission income)……53
 Table 4.15 time of interest income is recognized……………………………………………53
 Table 4.16 Times of fees and commission income is recognized…………………………...54
 Table 4.17.The recognition of gain and losses……………………………………………....54
 Table 4.18 interest expense is recognized…………………………………………………....55
 Table 4.19 loss from dealing in foreign currencies is recognized………………………..….55
 Table 4.20 salaries and benefits of employees is recognized……………………………..…56
 Table4.21depreciation, amortization and insurance expense is recognized…………………56
 Table 4.22 administrative and general expenses is recognized……………………………...56
 Table 4.23.Disclosure of domicile and other information……………………………..…….57
 Table 4.24 company disclose supporting information to line item in financial statement…..58
 Table 4.25.Disclosure of supportive information to line item in the financial statement……58
 Table 4.26 company discloses detailed information for related party transaction in notes to
the financial statement ………………………………………………………………….…...59
 Table 4.27.Disclosure of maturity of assets and liabilities…………………………..….…...60

ABBREVIATIONS
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EU European Union

GAAP General Accepted Accounting Standard

IAS International Accounting Standard

IASB International Accounting Standards Board

IASC International Accounting Standard Committee

IFRIC International Financial Reprting Interpretation Committee

IFRS International Financial Reporting Standard

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 ABSTRACT

This research paper was Financial Reporting practice of Abyssinia Bank in Light of IFRS
version 2015 (Case Study on Hawassa Piazza Branch). The aim of the research was to achieve
specific objectives and recommend for the problems identified. To conduct the research both
primary and secondary sources of data was used. The primary data collected through
questionnaires and interviews .The secondary data obtained from accounting manuals of the
organization and others document .The data processed, analyzed and interpreted in a way that
help the organization represent the finding

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 CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

An external financial report includes financial statement (i.e. Statement of financial position,
statement of financial performance, statement of cash flow and statement of owner equity) within
the main body of financial report. It also includes note to financial statement and supplementary
information as part of fiscal year financial report. External financial report is useful to make
investment and credit decision and it is useful to assess cash flow prospects and show
information about enterprise resource, claim to those resources and change in them. In order the
financial statements to be sound it has to be made in accordance to a well-organized standards or
guidelines. The objective of financial reporting is to provide financial information about the
reporting entity that is useful for present and potential entity investors, lenders and other
creditors in making their decision. To meet this objective, qualitative characteristic of accounting
information must be maintained and also financial statement should provide information about
an entity: asset, liabilities, equity, income and expenses including gain and losses, contribution
by and distribution to owners, cash flow and note to financial statement. To implement the basic
purpose of financial reporting, business entities must have guidelines or standard that gives
general framework for the preparation and presentation of financial statement. In this study
researcher wanted to assess financial reports of the bank whether they are prepare and present in
accordance to the requirements of IFRS.

The move towards adopting unified and higher quality accounting standards across the globe
started fully in 1980s and was catalyzed by stake holders in advanced economies in the year
2001 with establishments of the international accounting standard board (IASB). IFRS stands for
International Financial Reporting Standards and they are standards for reporting financial results
and are applicable to general purpose financial statements and other financial reporting of all
profit oriented entities. IFRS are set of accounting standards developed by the international
accounting standards board (IASB) that is becoming the global standards for the preparation and

1
presentation of public companies financial statement. Currently, there are thirteen IFRSs and 29
IASs that are used to drive businesses globally. In the same vein, there are 15 interpretations
under the new IFRS and 11 under the old IAS. All these are expected to guide firms in the
preparation of financial statements. IFRS were established in order to have a common
accounting language. So, business and accounts can be understood from company to company
and country to country. The goal of IFRS is to provide a global frame work for how public
companies prepare and disclose their financial statements. IFRS provide general guidance for the
preparation of financial statements, rather than setting rules for industry specific reporting.
(http://whatis.techtarget.comdefinition of IFRS)

The National Bank of Ethiopia has already required the banks to prepare their financial
statements in accordance with IFRS starting from 2015 onwards. In 2011 Ministry of Finance
and Economic Development (MOFED) issued a draft proclamation called Financial Reporting
Proclamation of Ethiopia to provide for the financial reporting of Ethiopia. The proclamation
requires reporting entities in Ethiopia to follow IFRS. In the year 2012 one research study has
been conducted on the Adoption of International Financial Reporting Standards (IFRS) in
Ethiopia. The study has been carried out on IFRS adoption analyzing the data from companies
and institutions which have already adopted IFRS as reporting standard. The results of the study
show that IFRS adoption in Ethiopia will result in a number of important benefits to a wide range
of stakeholders. High cost of adopting, the complex nature, lack of proper instructions from
regulatory bodies for implementing IFRS, as well as IFRSs emphasis on fair value accounting,
are listed among the most important challenges of IFRS adoption. The study also find that with
the exception of government policy the other four variables which are professional bodies,
capital market, educational level and company size significantly influence the adoption of IFRS
in Ethiopia. The above study focused on the benefits, challenges and Factors that could explain
the adoption of IFRS in Ethiopia and also there are other areas of study related to the issues of
IFRS since IFRS is a broader area of scope of accounting. Example: the issue of disclosure and
compliance with IFRS is one area of study (FikruFantahun, 2012). This study therefore, is an
attempt to contribute to the existing knowledge in evaluating compliance level of Ethiopian
private Banks with the provisions of International Financial Reporting Standard (IFRS). Given
that there is a national reporting standard, which is adopted in the year 2015 in Ethiopia, the

2
research will investigate the extent to which Abyssinia bank financial statements meets the
requirements of IFRS taking the case of Abyssinia bank in Ethiopia.

1.2 STATMENT OF THE PROBLEM

Adoption of International Financial Reporting Standards is becoming trend among countries
because of the wide array of advantages it provides for countries and multinational companies.
As of February, 2012 approximately 120 nations and reporting jurisdictions permit or require
IFRS for domestic listed companies of which 90 countries have fully conformed with IFRS as
promulgated by the IASB and included a statement acknowledging such conformity in audit
reports (AICPA, 2012). Numerous empirical studies have been conducted on IFRS adoption and
implementation, challenges and benefits and related issues in developed and industrialized
countries and there are also some studies which have been conducted on IFRS adoption in
developing countries including Ethiopia. Some of them are presented below:

Robyn and Graeme(2009) With the adoption of the IAS Regulation, requiring all EU listed
companies to prepare their consolidated accounts in conformity with IFRS, EU publicly listed
companies are facing many challenges, including fair value measurements to be considered to a
greater extent. According to Jermakowicz (2004) the adoption of IFRS will increase
comparability of consolidated accounts as well as levels of transparency for many companies,
e.g. through expanded segment disclosures, reporting unfunded pension obligations and the
recognition of derivatives on balance sheets at fair value. According to Jermakowicz and
Gornik-Tomaszewski (2006) IFRS are not only relevant to external parties but are useful to
management decision making as well. Caramanis and Papadakis (2008) found that accounting
information provided by financial statements prepared according to IFRS is reliable, relevant,
understandable and comparable. In general, they believe that the quality of financial information
has improved as a consequence of the introduction of IFRS. Jermakowicz et al. (2007) examine
the challenges and benefits, including value relevance, of the adoption of IFRS by DAX-30
companies in Germany based on a questionnaire sent to company executives. They find that
most companies agree that implementing IFRS should improve the comparability of financial
statements while the complex nature, high cost of adopting and lack of guidance for
implementing IFRS, as well as increased volatility of earnings after adopting IFRS, are listed
among the most important challenges of conversion to IFRS. Iyoha and Faboyede (2011)

3
identified ethical environment and the ability to protect qualified and competent employees from
being poached by other companies as main challenges facing Nigerian companies. The study
also shows that the benefits of ease of using one consistent reporting standard in subsidiaries
from different countries will accrue to companies while investors will benefit, amongst others,
more confidence in the information presented in financial statements which they can understand
and use. For policy makers (management), the adoption of IFRS will create better access to the
global capital markets and a higher standard of financial disclosure for national regulatory
bodies. Similarly, other stakeholders would benefit from overall better reporting and information
on new and different aspects of the business. According to SaniSaidu, Umar Dauda(2014)
Nigerian banking industry complied (semi-strongly) with the requirements of IFRS-framework
but, the exercise is still faced with some challenges which include: lack of in-depth IFRS
knowledge from the preparers of the financial reports. FikruFantahun(2012) study on IFRS
adoption, benefits of IFRS for Ethiopia, challenges faced by the stakeholders in the process of
adoption of IFRS, and the factors that affect the adoption.

Most of the above studies have been carried out on IFRS adoption, implementation, importance
and challenges and key benefits analyzing the data from member countries of European Union.
Comparatively fewer numbers of studies have been carried out on data from other countries.
Until now, as per knowledge of the researcher there is a no sufficient empirical research
conducted particularly on private banks on the implementation of IFRS that has been conducted
in Ethiopia. This study is therefore motivated because of the absence of sufficient studies in the
area of assessment of IFRS implementation practice that has been conducted in Ethiopia.
Abyssinia bank is one of the earliest and private in Ethiopia. In this regard this study aims to
assess the extent to which the financial reporting of private bank particularly Abyssinia bank in
meets the requirements of international financial reporting standards.

1.3. RESEARCH QUESTIONS.

1.3.1 To what extent the overall presentation of financial statement of Abyssinia bank
consistent with IFRS requirement?

1.3.2 To what extent measurement of asset and liability of Abyssinia bank in accordance to IFRS
requirement?

4
1.3.3 To what extent Revenue recognition and Expense recognition of adhere Abyssinia bank to
IFRS requirement?

1.3.4 How Do the financial reports of assume the Abyssinia bank basic assumption of IFRS that
underlay the financial accounting structure?

1.4. OBJECTIVE OF THE STUDY

1.4.1. GENERAL OBJECTIVE

The main purpose of the study is to evaluate external financial reporting practice of Abyssinia
bank in light of international financial reporting standards (IFRS) version 2015.

1.4.2. SPECIFIC OBJECTIVES

To accomplish general objective of the study, the following specific objectives are developed
and stated below:

 To evaluate whether the overall presentation of financial statement of Abyssinia bank

consistent with IFRS requirement.
 To evaluate whether measurement of asset and liability of Abyssinia bank in accordance
to IFRS requirement.
 To evaluate whether Revenue recognition and Expense recognition of Abyssinia bank
adhere to IFRS requirement.
 To assess whether the financial reports of Abyssinia bank assume the basic assumption of
IFRS that underlay the financial accounting structure.

1.5. SIGNIFICANCES OF THE STUDY

Since external financial reports of banks contain important information, the data included in
financial statements have great economic consequence to users. To make useful financial reports
of banks to financial users, reports of banks has to be made in accordance with a well-organized
standards or guidelines that make financial statement comparable, understandable, reliable and
relevant. The clear financial of the bank helps investors, creditors to rely on the company.

The study on assessment financial reports of bank in accordance with IFRS is believed to
provide a chance of broadening the skills of evaluating how external financial reports of bank is
agreeable and consistent with a standard (i.e. IFRS). The study is also very important for external

5
users such as for investors, government authority, creditors as well as internal users (I.e.
management of the company) of accounting information and is also using for future successors
or researchers whom they want to study around this area; they can use this study as a secondary
data or reference material. In addition, the study will support the researcher to secure BA degree
in accounting and finance.

1.6 SCOPE OF THE STUDY

The study focused on Abyssinia bank at Hawassa city Hawassa branch. The study of assessment
of financial reports of Abyssinia bank in light of IFRS Principles didn’t not focus on all aspects
of bank’s problem; it is dealing with how external financial reporting of bank is consistent and
agreeable with the standard. The study includes audited financial statement of the organization
(bank) for the last years and analyses the current reporting condition. The result of the study was
based on the data collected from employees and personnel and from the analysis of financial
statement of the organization (i.e. bank).

1.7 LIMITATION OF THE STUDY

In doing the study the researcher was handicapped by different challenges. In addition, absence
of sufficient previous work in the area of the study, which could have been a great help to the
researcher was the constraint to the researcher in doing the study. In addition, the researcher
constrained by those variables, they have significant impact on the final finding of the research
work. In addition to this the effect of the pandemic disease called corona became great obstacle
and headache for the researcher to carryout research activity accordingly.

1.8. ORGANIZATION (STRUCTURE) OF THE PAPER

The study organized in such way that it is to provide coherent flow of ideas to the basic findings.
So, the study classified into four chapters.

The first chapter dealt with the overall identification of the problem, significance of the study,
the extent to which the study will be undertaken and the methodology that was used in attaining
the major findings.

The second chapter outlined the review of related literature about the subject matter under the
study.

6
The third chapter comprised the methods of data analysis and presentation of the collected data
from the bank.

The fourth chapter provided results and discussions conclusion and recommendation in attempt
to give suggestion and recommendation for the problem identified. The summary of results
which are extracted from the analysis and interpretation of the collected data in chapter three was
presented in this chapter.

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 CHAPTER TWO

2 REVIEW OF RELATED LITERATURE

2.1. THEORETICAL STUDIES

The increasing growth in cross-border financial transactions, international trade, and
investments; which unavoidably involves the preparation and presentation of accounting reports.
With the increasing globalization of the marketplace, international investors need access to
financial information based on harmonized accounting standards and procedures. These reports
are useful across various national borders and have brought about the development of
International Accounting Standard (IAS) which was first published in 1975 by the International
Accounting Standards Committee (IASC). Since then, the process for setting international
accounting standards has undergone substantial evolution, culminating in the 2001 restructuring
of the IASC into the International Accounting Standard Board (IASB). International Financial
Reporting Standards (IFRSs) are accounting standards developed by the International
Accounting Standards Board (IASB). Many countries have adopted the IFRS as their official
domestic accounting standards. Each country adopting IFRS undergoes a transition process in
the year of adoption. This process may be fairly disruptive for users of financial statements as
accounting treatments of similar items may vary, and impair comparability and trend analysis.
The IFRSs provide provision to remove allowable accounting alternatives (that existed in most
countries under their respective local GAAPs) and requires accounting measurements that better
reflect a firm‟s economic position and performance (Taibat and Adikwu, 2018)

Financial accounting is the process that culminates in the preparation of financial reports on the
enterprise for use by both internal and external parties. Users of these financial reports include
investors, creditors, managers, and union and government agencies. Financial statements are the
principal means through which a company communicates its financial information to those
outside it. These statements provide a companys history quantified in money terms. The financial
reports most frequently provided are statement of financial position, statement of financial
performance, statement of cash flows, statement of owners or stockholders equity and notes to
the financial statement (Kieso and Weygandt, 2011).

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A. Statement of financial position

Financial position provides a historical summary of asset, liabilities and equity as of specific
date. It provides clear and valuable information to decision makers and it helps creditor to decide
their claim will be satisfied in timely manner and for owners involving their claims on the
companys asset.

B. Statement of financial performance

Financial performance also called profit or loss statements. It is a summary of revenue and
expenses and gain and losses of a business entity for specific period of time. The investment and
business community use this report to determine profitability, investment value and credit
worthiness.

C. Statement of cash flows

It is a summary of cash receipts and payments with regard to operating activities, investing
activities and financing activities of a business entity.

D. Statement of owners or stockholders equity

It is a summary of changes in owners’ equity of the firm that have occurred during specific
period of time. In addition note are integral parts of each financial statement. Some financial
information is better provided, or can be provided only by means of financial reporting other
than financial statement. Examples include the presidents’ letter or supplementary schedules in
the corporate annual reports, prospectuses, reports filed with government agencies, news
releases, managements forecast, and social or environmental impact statements. Companies may
need to provide such information because of authoritative pronouncements, regulatory rule, or
custom. They may supply it because management wishes to disclose it voluntarily.

2.1.1. Objective of Financial Reporting

The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and other
creditors in making decision in their capacity as capital providers. Information that is decision-

9
useful to capital providers may also be useful to other users of financial reporting, who are not
capital providers.

Generally, objectives of financial are reporting are to provide:

Information that is useful in investment and credit decision.

Information that is useful in assessing cash flow prospects; and

Information about enterprise resource, claim to those resources and change in them. (Kieso and
Weygandt,1998)

Users of these financial reports need relevant, reliable, comparable and understandable
information. To develop this type of information, accountants should use a standard or guideline
(for this study, IFRS) that guides financial accounting and reporting.

2.1.2. Qualitative Characteristics of Accounting Information

How does a company choose an acceptable accounting method, the amount and the types of
information to disclose, and the format in which to present it? The answer is by determining
which alternative provides the most useful information for decision making purpose (decision
usefulness). The IASB identified the qualitative characteristics of accounting information that
distinguish better( more useful) information from inferior(less useful) information for decision
making purposes.( Kieso and Weygandt,2011)

Qualitative characteristics are either fundamental or enhancing characteristics depending on how

they affect the decision usefulness of the information.

Fundamental Quality

Relevance and faithful representation are the two fundamental qualities of accounting
information useful for decision making and they are discussed below.

Relevance

Relevance is one of the two fundamental qualities that make accounting information useful for
decision making. To be relevant, accounting information must be capable of making a difference

10
in a decision. Information with no bearing on a decision is irrelevant. Financial information is
capable of making a difference when it has predictive value, confirmatory value, or both.

A. Predictive Value

Financial information has predictive value if it has value as an input to predictive process used
by investors to form their own expectations about the future.

B. Confirmatory Value

Relevant information also helps users confirm or correct prior expectation; it has confirmatory
value.

2.1.3. Fundamental Quality-Faithful Representation

Faithful representation means that the numbers and descriptions match what really existed or
happened. To be faithful representation, information must be complete, neutral, and free of
material error.

A. Completeness

It means that all the information that is necessary for faithful representation is provided.

B. NEUTRALITY

It means that a company cannot select information to favor one set of interested parties over
another.

C. Free From Error

An information item that is free from error will be a more accurate (faithful) representation of
financial item.

Enhancing Quality

Enhancing qualitative characteristics are complementary to the fundamental qualitative

characteristics. These characteristics distinguish more useful information from less useful

11
information. Enhancing characteristics are comparability, verifiability, timeliness and
understandability.

A. Comparability

Information that is measured and reported in a manner for different companies is considered
comparable.

B. Consistency

Another type of comparability, consistency is present when a company applies the same
accounting treatment to similar events, from period to period.

C. Verifiability

It occurs when independent measures, using the same methods, obtain similar results.

D. Timeliness

If accounting information is to be able of affecting decision, the information must be timely or

available at the decision is to be made. Timeliness alone cannot make information relevant, but
information that is not timely is not relevant.

E. Understandability

It is the quality information that lets reasonably informed users see its significance.
Understandability is enhanced when information is classified, characterized, and presented
clearly and concisely.

2.1.4. Basic Elements of Financial Reporting

Definitions of financial statements are important, because they help in determining how a
transaction or other economic event should be accounted for and reported in financial statements.
(LannyChasteen, 1998)

The elements directly related to the measurement of financial position are assets, liabilities and
equity. (Kieso and Weygandt,1998)

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These are defined as follow:

Asset: a resource controlled by the entity as the results of past events and from which future
economic benefits are expected to flow to the entity.

Liability: a present obligation of the entity arising from past events and the settlement of which is
expected to result in an outflow from the entity resources embodying economic benefits.

Equity: The residual interests in the assets of the entity after deducting all its liabilities.

The elements directly related to the measurement of financial performance are revenue,
expenses, gain and losses. These are defined as follow:

Revenue: revenue are periodic inflows of asset or settlements of liabilities, or both, as the results
of the delivery or production of goods, rendering of services , or other earning activities that
constitute the entitys major or primary operation.

Expenses: expenses are the periodic use of assets or incurring of liabilities, or both, as the results
of the delivery or production of goods, rendering of services or other earning activities that
constitute the entitys major or primary operation.

Gain: gains are increases in equity or net asset as the results of peripheral or inceditial transaction
by an entity.

Losses: losses are decrease in equity or net assets in arising from peripheral or inceditial
transaction by an entity.

Other elements of financial reporting are investment by owner, distribution to owner,

comprehensive income and note disclosures (foot note to financial statement).

2.1.5. Recognition and Measurement Concepts

Basic Assumptions

Five basic assumptions underlie the financial accounting structure: economic entity, going
concern, monetary unit, periodicity and accrual basis. (Kieso and Weygandt, 2011)

A. Economic Entity Assumption

13
It states that economic entity can be identified with a particular unit of accountability. In other
words, a company keeps its activity separate and distinct from its owners and any other business
unit.

B. Going Concern Assumption

It states that the company will have a long life.

C. Monetary Unit Assumption

It means that money is the common denominator of economic activity and provides an
appropriate basis for accounting measurement and analysis.

D. Periodicity Assumption

It implies that a company can divide its economic activities into artificial time periods. These
time periods vary, but the most common are monthly, quarterly, and yearly.

E. Accrual Basis of Accounting

Companies prepare financial statements using the accrual basis of accounting. Accrual basis of
accounting means that transactions that change a companys financial statements are recorded in
the period in which the event occurs.

2.1.6. Basic Principles of Accounting

We generally use four basic principles of accounting to record and to report transactions:
measurement, revenue recognition, expenses recognition and full disclosure. (Kieso and
Weygandt, 1998)

A. Measurement Principle

IFRS requires that companies account for and report many assets and liabilities on the basis of
acquisition price. This is often referred to as the historical cost principle.

14
B. Revenue Recognition Principle

It indicates that revenue is to be recognized when it is probable that future economic benefits will
flow to the company and reliable measurement of the amount of revenue is possible.

C. Expense Recognition Principle

It also called matching principle and states that “let the expense follow the revenue”. That is, by
matching efforts (expenses) with accomplishment (revenue).

D. Full Disclosure Principle

In deciding what information to report, companies follow the general practice of providing
information that is of sufficient importance to Influence the judgment and decision of informed
users.

The objective of financial reporting is to provide financial information about the reporting entity
that is useful for present and potential entity investors, lenders and other creditors in making their
decision. So, in order to attain purpose of financial reporting, qualitative characteristics of
accounting information must be maintained and all elements of financial statement must be
included in financial reports. To implement the basic purpose of financial reporting, business
entities must have a guideline or a standard to maintain a book of accounts. In this study
international financial reporting standards (IFRS) used as a guidelines or a bench mark for
accountants to compile financial statement. Certainly, if business entities follow what is stated in
standards, they will maintain quality information and includes necessary financial statement
elements. Therefore, the basic objective of financial reporting is attained.

2.2. Empirical Studies

International Financial Reporting Standards (IFRS)

Definition of IFRS

The move towards adopting unified and higher quality accounting standards across the globe
started fully in 1980s and was catalyzed by stake holders in advanced economies in the year
2001 with establishments of the international accounting standard board (IASB). IFRS are a set

15
of international accounting standards stating how particular types of transaction and other events
should be reported in financial statement. IFRS specify exactly how accountants must maintain
and report their accounts. IFRS were established in order to have a common accounting
language. So, business and accounts can be understood from company to company and country
to country. International financial reporting standards (IFRS) are set of accounting standards
developed by the international accounting standards board (IASB) that is becoming the global
standards for the preparation and presentation of public companies financial statement. The goal
of IFRS is to provide a global frame work for how public companies prepare and disclose their
financial statements. IFRS provide general guidance for the preparation of financial statements,
rather than setting rules for industry specific reporting.

IFRS are designed as a common global language for business affairs so that companys accounts
are understandable and comparable across international boundaries. They are a consequence of
growing international shareholding and trade and are particularly important for companies that
have dealing in several countries. They are the rules to be followed by accountants to maintain
book of accounts which are comparable, understandable, reliable and relevant as per the users
internal and external. “In the absence of a standard or an interpretation that specifically applies
to a transaction, management must use its judgments in developing and applying an accounting
policy that results in information that is relevant and reliable. In making that judgment IAS 8.11
requires management to consider the definition, recognition criteria, and measurement concepts
for asset, liabilities, income and expenses in the IFRS framework”. (Definition of IFRS,
IFRS.com)

2.2.1. The Concept of IFRS

IFRS stands for International Financial Reporting Standards and they are standards for reporting
financial results and are applicable to general purpose financial statements and other financial
reporting of all profit oriented entities. The term IFRS comprises IFRS issued by IASB; IAS
issued by IASC; and interpretations issued by the Standing Interpretations Committee (SIC) and
the International Financial Reporting Interpretations Committee (IFRIC) of the IASB (Hoyle B.,
et al., 2009, Baker E. et al., 2009 and Larsen E. 2008).

16
Alistair (2010 cited in Ojeka and Mukoro, 2011) defined International Financial Reporting
Standards (IFRS) as

A series of accounting pronouncements published by the International Accounting Standards

Board (IASB) to help preparers of financial statements, throughout the world, produce and
present high quality, transparent and comparable financial information.

Since 2001 International Financial Reporting Standards (IFRS) are being developed and
approved by the International Accounting Standards Board (IASB). The IASB is a stand-alone,
privately funded accounting standard setting body established to develop global standards for
financial reporting. It is the successor to the International Accounting Standards Committee
(IASC), which was created in 1973 to develop International Accounting Standards (IAS). Based
in London the IASB assumed accounting standard setting responsibilities from the IASC in 2001
(Hoyle B., et al., 2009, Baker E. et al., 2009 and Larsen E. 2008).

One of the basic features of IFRS is that it is a principle based standard and seeks to avoid a rule
based mentality (Hlacuc et. al., 2009). Instead, the application of IFRS requires exercise of
judgment by the preparer and the auditor in applying principles of accounting on the basis of the
economic substance of transactions. The IASB framework establishes a general requirement to
account for transactions in accordance with their substance, rather than only their legal form.
This principle comes through very vividly in many IFRS. The ISAB intends not to permit
choices in accounting treatment, as its objective is to require like transactions and events to be
accounted for and reported in a like way, and unlike transactions and events to be accounted for
differently.

According to IASB (2009), the IASB achieves its objectives primarily by developing and
publishing IFRS and promoting the use of those standards in general purpose financial
statements and other financial reporting. Other financial reporting comprises information
provided outside financial statements that assists in the interpretation of a complete set of
financial statements or improves users to make efficient economic decisions. The term “financial
reporting” encompasses general purpose financial statements plus other financial reporting.

IFRS set out recognition, measurement, presentation and disclosure requirements dealing with
transactions and other events and conditions that are important in general purpose financial

17
statements. They may also set out such requirements for transactions, events and conditions that
arise mainly in specific industries. IFRS are based on the Framework, which addresses the
concepts underlying the information presented in general purpose financial statements. The
objective of the Framework is to facilitate the consistent and logical formulation of IFRS. It also
provides a basis for the use of judgment in resolving accounting issues (IASB, 2009).

2.2.2. Major Requirements of IFRS

Full Set of Financial Information

IFRS requires full disclosure of information. This referred to as full disclosure principle-states
that in deciding what information to report, companies follow the general practice of providing
information that is of sufficient importance to influence the judgment and decision of informed
users. IFRS required including a statement of financial position as of specific date, statement of
financial performance for specific period of time, statement of cash flow and statement of change
in equity for specific period of time within the main body of financial statement.

Financial statements are the structured means of communicating financial information. An item
that meets the definition of an element should be recognized if; (a) It is probable that any future
economic benefit associated with the item will flow to or from the entity; and (b) The item has a
cost or value that can be measured with reliability.

In addition to financial statement, IFRS required to include note to the financial statement and
supplementary information as part of financial report. The notes to financial statements generally
amplify or explain the items presented in the main body of financial statements. If the main body
of financial statement gives an incomplete picture of the performance and position of the
company, the note should provide the addition information needed. Information in the note does
not have to be quantifiable, nor does it needed to qualify as an element. Note can be partially or
totally narrative. Example of notes includes description of the accounting policies and methods
used in measuring the elements reported in the statements, explanation of uncertainties and
contingencies and so on. Supplementary may include details or amounts that present a different
perspective from that adopted in the financial statement. It may be quantifiable information that
is high in relevance but low in reliability (Kieso and Weygandt, 2011). Supplementary

18
information may also include managements explanation of financial information and its
discussion of significance of that information.

Going Concern

IFRS required presenting financial statements on a going concern basis unless management
either intends to liquidate the entity or to cease trading. This requirement of IFRS better
explained by going concern assumption. Going concern assumption states that the company will
have a long life. This assumption has significance implications. The cost principle would be of
limited usefulness if we assume eventual liquidation. Under a liquidation approach, for example,
accompany would better states asset values at affair value than at acquisition cost. Depreciation
and amortization policies are justifiable appropriate only if we assume permanence to the
company. If a company adopts the liquidation approach the current and non-current classification
of assets and liabilities, loses much of its significance (Kieso and Weygandt, 2011)

2.2.3. Accrual Basis of Accounting

An entity shall recognize items as assets, liabilities, equity, income and expenses when they
satisfy the definition and recognition criteria for those elements in the framework of IFRS. (free
encyclopedia)

IFRS required companies should prepare financial statements using accrual basis of accounting.
Accrual basis of accounting means that transactions that changes companys financial statements
are recorded in the periods in which the event occur. Under accrual basis of accounting,
companies recognize revenue when earned (revenue recognition principle) regardless of the
receipts of cash. Likewise, under accrual basis of accounting, companies recognize expenses
when incurred (the expenses recognition principle) rather than when paid. (Mosich, 1989)

An alternative to accrual basis of accounting is cash basis of accounting. Under cash basis of
accounting, companies record revenue only when cash is received. They record expenses only
when cash is paid. The cash basis of accounting is prohibited under IFRS. Why because it does
not record revenue according revenue recognition principle and it does not record expenses
according to expenses recognition principle. (Kieso and Weygandt, 2011)

19
2.2.4. FREQUENCY OF REPORTING

IFRS requires that at least annually a complete set of financial information is presented;
however, listed companies (public companies) generally also publish interim financial statement
(for which the accounting is fully IFRS compliant) for which the presentation is in accordance
with IAS34 interim financial reporting. (Free encyclopedia)

To measures the result of the companys activity accurately, we would need to wait until it
liquidates. Decision makers, however, cannot wait that long for such information. Users need to
know a companys performance and economic status on a timely basis so that they can evaluate
and compare companies, and take appropriate action. Therefore, companies must report
information periodically. The periodicity (or time period) assumption implies that a company can
divide its economic activities into artificial time periods. These time period vary. But the most
common are monthly, quarterly, and yearly. (Kieso and Weygandt, 1998)

Comparative Information

IFRS requires entities to present comparative information in respect of the preceding period for
all amounts reported in the current periods financial statements. In addition comparative
information shall also provide for narrative and descriptive information if it is relevant to
understanding the current periods financial statement. (Wikipedia).

Consistency of Presentation

IFRS requires that the presentation and classification of items in the financial statements is
retained from one period to the next. This requirement of IFRS is supported by one of the
enhancing quality accounting information so called consistency. Consistency is present when a
company applies the same accounting treatment to similar events, from period to period. When
the same methods of accounting system are used by an entity is considered in its use of
accounting standards. The idea of consistency does not mean, However, that companies cannot
switch from one accounting methods to another. A company can change methods, but it must
first demonstrate that the newly adopted method is preferable to the old one. If approved, the
company must then disclose the nature and effect of the accounting changes, as well as the
justification for it in the financial statements for the period in which it made the change. When a

20
change in accounting principle occurs, the auditor generally refers to it in an explanatory
paragraph of the audit report. (Kieso and Weygandt, 1998)

Measurement Principle

IFRS requires that companies account for and report may assets and liabilities on the basis of
acquisition price. This is often referred to as the historical cost principle. Cost has an important
advantage over other valuations. It is generally thought to be a faithful representation of the
amount paid for a given item.

Another principle of measurement is fair value principle. Fair value is defined to as “the amount
for which an asset could be exchanged, a liability settled, or an equity instrument granted could
be exchanged, between knowledgeable, willing parties in the arms length transaction”. Fair
value is therefore a market based measures. IFRS has increasingly called for use of fair value
measurement in the financial statement. Fair value information may be more useful than
historical for certain types of assets and liabilities and in certain industries. The IASB has also
taken the additional step of giving companies the option to use fair value (referred to as the fair
value option) as basis for measurement of financial asset and financial liabilities. The board
considers fair value more relevant than historical cost in these situations because it reflects the
current cash equivalent value of financial instruments. As the result companies now have the
option to record fair value in their accounts for most financial instrument including such items as
receivable, investments, debt securities and financial liabilities. At the initial acquisition,
historical cost equals fair value. In subsequent period, as market and economic conditions
change, historical cost and fair value diverge. Thus, fair value measures or estimate often provide
more relevant information about the expected cash flows related to asset or liability. (Kieso and
Weygandt, 2011)

2.2.5. Challenges of Adopting IFRS

Accounting Professionals across the world have listed various benefits of adopting IFRS. In spite
of these benefits, adoption of IFRS is a difficult task and has many challenges. For example
Iyoha and Faboyede (2011) identified ethical environment and the ability to protect qualified and
competent employees from being poached by other companies as main challenges facing

21
Nigerian companies. Wong (2004) said that education and training are considered as major
challenges militating against the adoption of IFRS.

As evidenced by the global experience, convergence with IFRS would have significant
challenges common to all countries and companies. Additionally, there are also certain specific
challenges that are unique to particular countries (Robyn and Graeme, 2009). With the adoption
of the IAS Regulation, requiring all EU listed companies to prepare their consolidated accounts
in conformity with IFRS, EU publicly listed companies are facing many challenges, including
fair value measurements to be considered to a greater extent (Jermakowicz ,2004; Alexander,
2003). IFRS would also present a challenge by way of more complex financial reporting
requirements and resultant increase in costs; and availability of resources with expertise in IFRS.
Similarly from an overall perspective, amendments to regulatory requirements and tax laws
would be required; and impact on IT systems and compensation structures would need to be
evaluated (Apostolos et al., 2010; Jermakowicz, 2004; Alexander, 2003).

Jermakowicz et al. (2007) examine the challenges and benefits, including value relevance, of the
adoption of IFRS by DAX-30 companies in Germany based on a questionnaire sent to company
executives. They find that most companies agree that implementing IFRS should improve the
comparability of financial statements while the complex nature, high cost of adopting and lack of
guidance for implementing IFRS, as well as increased volatility of earnings after adopting IFRS,
are listed among the most important challenges of conversion to IFRS.

The main challenge in the process of adopting IFRS include significant cost of adoption of IFRS,
need for training, the complex nature of some of the IASB‟s standards and the lack of adequate
implementation guidance. This lack of guidance creates risks for different local or national
interpretations of IFRS and increases the risk for manipulation in interpretation of financial
statements.

Other key challenges include increased volatility of earnings, tax driven nature of previous
standards and problem with IFRS‟s use of fair value accounting. IFRS‟s use of fair value
accounting instead of historical cost is considered as a challenge because some conditions in
developing countries like Ethiopia are not favorable for implementing fair value accounting such
as achieving observable market prices and accurate estimates of liquid market prices due to less

22
perfect market liquidity. Generally, high cost of adopting, the complex nature, lack of proper
instructions from regulatory bodies for implementing IFRS, as well as IFRSs emphasis on fair
value accounting, are listed among the most important challenges of IFRS adoption.
(FikruFantahun, 2012).

2.2.6. Benefit of Adopting IFRS

Focus on Investors

One of the significant advantages of IFRS compared to GAAP is its focus on investors in the
following ways:

The first factor is that IFRS promise more accurate, timely and comprehensive financial
statement information that is relevant to the national standards. And the information provided by
financial statements prepared under IFRS tends to be more understandable for investors as they
can understand the financial statement without the necessity of other sources which makes
investors more informed.

This also helps new or small investors by making the reporting standards simpler and better
quality as it puts small and new investors in the same position with other professional investors
as it was impossible under the previous reporting standards. This also helps to reduce the risk for
new or small investors while trading as professional investors cannot take advantage due to the
simple to understand nature of financial statements.

Due to harmonization and standardization of reporting standards under IFRS, the investors do
not need to pay for processing and adjusting the financial statements to be able to understand
them, thus eliminating the fees of analysts. Therefore, IFRS reduces the cost for investors.

Reducing international differences in reporting standards by applying IFRS, in a sense removes a

cross border takeovers and acquisitions by investors.

Based on information mentioned above, it can be assumed that because higher information
quality reduces both the risk to investors from buying and owning shares and the risk to less
informed investors due to wrong selection due to lack of understanding, it should lead to

23
reduction in firms cost of equity capital. This on one hand should increase the share prices, and
on the other should make new investments by firms more attractive.

Loss Recognition Timeliness

Recognizing the loss immediately is one of the key features of IFRS as it is not only the benefit
for the investors, but also for the lender and other stakeholders within the company. The
increased transparency and loss recognition of IFRS usually increases the efficiency of
contracting between companies and their management, which also enhances the corporate
governance. With increased transparency as promised by IFRS, the lenders also benefit from
IFRS as it makes it compulsory for the companies recognize the loss immediately. This timelier
loss recognition of IFRS, triggers the issues as when the companies face economic losses, it will
be known to the stakeholders of other potential investors. Timelier loss recognition also enables
the company review its book values of assets and liabilities, earnings, equity.

Comparability

The convergence to IFRS has improved the comparability of financial statements in the
European Union. This has been achieved through having the same reporting standard under a
single market, the European Union. As all companies, preparing their consolidated financial
statements, have been reporting undergone reporting standard have improved the comparability
not only for investors, but also all stakeholders who use the financial statements. Another reason
that has contributed to the overall success of the IFRS adoption has been due to the transition
period, as more than 8000 listed companies in the EU adopted it in the same year. However,
there has been an argument about the lack of efficiency and comparability of IFRS. The
following is the arguments against the lack of comparability and consistency of IFRS: Due to the
strong national identity of IFRS reports, as the main effects of IFRS has been on how companies
recognize, measure and disclose items. And the companies have adopted an approach which
minimized the changes from previous national standards which reduced the ability to compare
the financial statements across an industry.

The extensive judgment has been required under IFRS due to the absence of industry related
guidance which created gaps and inconsistencies in the IFRS reporting standards. And this is
another reason for the lack of comparability and inconsistency

24
And companies are not confident that the IFRS is adequate for the purposes of communicating
their performance to the financial markets, as GAAP reporting standards tended to be more
detailed which could provide more detailed information

Another factor that shows the lack of comparability and inconsistency is because the IFRS
reporting standards are more complicated than the national accounting standards (UK), therefore,
it may become a process of following the complex mechanism but does not necessarily promote
the performance of the companies.

2.2.7. Standardization of Accounting and Financial Reporting

The most mentioned factor about the advantages of IFRS has been the standardization of
financial reporting which eventually improves the comparability of financial statements in major
financial markets. This also removes the trade barrier, as this was one of the key factors as why
the European Union has been trying to adopt single reporting standards.

Improved Consistency and Transparency of Financial Reporting

This factor can also be mentioned as one of the crucial advantages of converting to IFRS as it
makes the European Union member countries to be consistent not only on macroeconomic
aspects, but also on financial reporting which improves relationship between investors and
companies among member countries.

Better Access to Foreign Capital Markets and Investments

As thousands of companies in Europe and other joining countries across the world has already
created a huge base for IFRS adoption, it also improves the companies to access to financial
markets by having the financial statements prepared under one reporting standards. One of the
main reasons for converting from previously used GAAP to new IFRS was for improving
comparability in international financial markets, thus increasing the focus on investors. And this
has been mainly achieved and still going to be achieved as more and more countries around the
world have been converting to IFRS from their national reporting standards as mentioned during
the interview.

25
Improved Comparability of Financial Information With Global Competitors

The comparability of financial statements under IFRS will be improved only if the adoption of
IFRS expands including more countries. However, the comparability of financial statements get
worse if the same country uses two different sets of reporting standards, thus IFRS and national
reporting standards.

Due to the gap between the market and book values, the local stock market gets adversely
affected when the IFRS is applied in line with other national reporting standards. Moreover,
there has been no significant achievement in terms of usefulness and improved comparability of
financial statements in the short term which is mainly due to the fact that the IFRS reporting
standards is fairly new as a reporting standard and the harmonization has not fully been achieved
yet by all EU member countries. And it is hoped that the usefulness and improved comparability
of IFRS may be achieved in the medium-long term. In order to assure the comparability of
financial statements, all companies should follow the same rules by adopting IFRS. Private and
small and medium sized, unconsolidated statements can be prepared under IFRS which further
improves the comparability and consistency of financial statements. And eventually, the
adoption of IFRS by all countries around the world gives even more increased usefulness and
comparability of financial statements.

Relevance

And the relevance of the IFRS can be mentioned as a substantial advantage due to the following
reasons:

The new IFRS reflects on economic substance more than legal form. This helps the companies
and other stakeholders to have true and fair view of the company’s transactions.

The way IFRS reflects to gains and losses in a timely manner puts IFRS in a more reliable and
credible position than the GAAP in terms of reporting standards

The balance sheets prepared under IFRS tends to be more useful due to its layout and the
consistency, and the level of complexity compared to GAAP that tended to be more detailed

26
The manipulation by managers by creating hidden reserves is not allowed any more under new
IFRS, so less manipulative and more shareholders oriented

Moreover, other benefits as mentioned during the interview are cost saving with new IFRS
especially for multinational corporations. However, before companies can start enjoying the cost
savings, they have to spend considerable amount of money as a transitional costs. (Study on
benefits and challenge of adopting IFRS in European Union)

 According to FikruFantahun finding, the introduction of IFRS in Ethiopia will result in a

number of important benefits for a wide range of stakeholders. The benefits of effective and
efficient financial reporting will accrue to companies. Since similar economic transactions are
accounted for similarly by eliminating different methods of accounting for the same transactions,
adoption of IFRS leads to improved comparability and reliability of financial statements.
Adoption of IFRS has also the benefit of more transparent financial statements to companies
which in turn reduce the agency problem between management and shareholders as increased
transparency causes managers to act more in the interests of the shareholders. Adoption of IFRS
would also significantly reduce cost of capital of firms through lower cost of information,
reduction in bad earnings management, greater marketability of shares, and reduced information
asymmetry. Investors will benefit, amongst others, more confidence in the information presented
in financial statements which they can understand and use. For management, the adoption of
IFRS will create improved management information for decision making and enables better risk
management. Similarly, other stakeholders such as regulatory bodies and accounting
professionals would benefit from improved regulatory oversight and greater credibility and
improved economic prospects for the accounting profession. (FikruFantahun, 2012)

27
 CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. DESCRIPTION OF THE STUDY AREA

The present-day Bank of Abyssinia was established on February 15, 1996 (90 years to the day
after the first but defunct private bank was established in 1906 during Emperor Menelik II) in
accordance with 1960 Ethiopian commercial code and the Licensing and Supervision of Banking
Business Proclamation No. 84/1994. Bank of Abyssinia started its operation with an authorized
and paid up capital of Birr 50 million, and Birr 17.8 million respectively, and with only 131
shareholders and 32 staff. Currently, BOA has 4,101 staff, 527,383 account holders, 1,732
shareholders and Authorized and paid up capital of Birr 1.5 billion and Birr 1.1 billion,
respectively, a total deposit balance of Birr 12.79 Billion and a total loans and advances of Birr
8.2 billion. Bank of Abyssinia, which started banking services with only one branch in 1996, has
181 domestic branch networks, of which 88 branches are in Addis Ababa and the remaining 93
are established in bankable towns all over the country. There are also certain branches in
Hawassa city administration. And the research will be conducted at HawassaPiassa branch.

Vision, Mission and Value of Abyssinia Bank

Vision

To be the bank of choice for customers, employees and shareholders.

Mission

To provide customer-focused financial services through competent, motivated employees and

modern technology in order to maximize value to all stakeholders.

Values

Putting Customers First

 Committed to Excellence
 Being Honest and Accountable
 Working together as a Team
 Caring for our community

28
3.2. RESEARCH DESIGN

In this study descriptive research method used to evaluate and describe the financial reports of
Abyssinia bank in light of international financial reporting standards (IFRS). The necessary and
relevant data collected to accomplish major objective of the study.

3.3. DATA SOURCES AND TYPES

To make the study more fruitful both primary and secondary data source used for the study. The
study depended on primary and secondary data source (i.e. company records, published financial
statements and unpublished reports of sampled banks). Why because the nature of the study
permit to do so. The primary data used to address issues which were not answered by secondary
data. The collected data presented both qualitative and quantitative data types.

3.4. TOOLS OF DATA COLLECTION

The researcher collected primary data through questionnaires and interviews. Since this method
of data collection made the analysis and interpretation of data more understandable and valid.
The primary data collected from employees and personnel of the bank, specifically those who are
working in account and finance department. For secondary data, document review will be an
appropriate method of data collection. That is, review of external financial reports of Abyssinia
bank, books and other published and unpublished documents that are collected from Abyssinia
bank finance and documentation department.

3.5..STUDY TARGET POPULATION

The target population to conduct this study was all employees of the Abyssinian bank Hawassa
branch.

3.6 SAMPLING TECHNIQUE AND SAMPLE SIZE DETERMINATION

The study used Abyssinia bank Piassa employees as a representation of sample taken from the
bank in Hawassa city. There were different ways of sampling. Because of the data for the
organization (bank) was easily accessible. To collect the data for means of gathering valid
information, and to conduct the study by less complication and less expensive, the target
population of the study were employees of Abyssinia bank in HawasaPiassa branch. Because of
the total population are nine in number, the researcher conducted census sampling technique.

29
 3.7. METHOD OF DATA ANALYSIS
The data analysis as parts of the paper devoted to analyses and interprets the collected data. Data
was analyzed and interpreted to attain the main purpose of the study after the researcher
collected necessary and relevant data for the study. The researcher used descriptive analysis to
process and analyses the collected data. The collected data analyzed and processed based on the
requirements of international financial reporting standard. Moreover, the financial statement of
the Abyssinia bank evaluated and described based on specific objective of the study which was
listed under objective of the study as specific objective.

30
 CHAPTERFOUR

4. DATA PRESENTATION, ANALYSIS AND DISCUSSION

4.1. INTRODUCTION
The government of Ethiopia has expressed an initiative to integrate its financial statements with
international standards. Intention of the government to adopt IFRS is manifested by the issued
proclamation (proclamation No847/2014) called Financial reporting Proclamation which obliges
public interest entities to follow IFRS in their financial reporting. In this regard Ethiopia has
officially adopted IFRS since 2015.IFRS have been implemented in Ethiopia by certain
institutions such as banks before the official adoptions of IFRS by Ethiopia due to the greater
benefits it has compared to the associated problems. But those institutions which have been
implemented IFRS in preparing their financial reports are not applying all the standards. In other
words there is a serious compliance problem with IFRS in Ethiopia (FikiruFantahun, 2012)

The Presentation of financial statements complying IFRS is of immense importance to the users
of financial statement because it enhances the degree and scope of usefulness of accounting
information. IFRS facilitate effective and efficient financial reporting which benefit companies.
Since similar economic transactions are accounted for similarly by eliminating different methods
of accounting for the same transactions, adoption of IFRS leads to improved comparability and
reliability of financial statements. Adoption of IFRS has also the benefit of more transparent
financial statements to companies which in turn reduce the agency problem between
management and shareholders as increased transparency causes managers to act more in the
interests of the shareholders. Adoption of IFRS would also significantly reduce cost of capital of
firms through lower cost of information, reduction in bad earnings management, greater
marketability of shares, and reduced information asymmetry. Investors will benefit, amongst
others, more confidence in the information presented in financial statements which they can
understand and use. For management, the adoption of IFRS will create improved management
information for decision making and enables better risk management.

31
The study aims to evaluate the financial reporting practice of Abyssinia bank in light of IFRS. In
this study descriptive research method used to describe the financial reports Abyssinia bank in
light of international financial reporting standards (IFRS). The necessary and relevant data for
the study was collected in order to accomplish the major objective of the study. The primary data
was collected through questionnaires that were prepared by the researcher and also the secondary
data gathered by reviewing the annual reports or documents of the bank. In this chapter data
collected from primary source and annual financial report of the bank analyzed and interpreted
on the basis of the requirements of International financial reporting standard (IFRS). Thus, data
collected from the interview of personnel through interview questionnaires and reviews of
documents are interpreted quantitatively and qualitatively. To accomplish general objective of
the study, the study intends to achieve the following issues with regard to IFRS requirement:
evaluate whether the overall presentation of financial statement of Abyssinia bank consistent
with IFRS requirement, evaluate whether measurement of asset and liability of Abyssinia bank in
accordance to IFRS requirement, evaluate whether Revenue recognition and Expense recognition
of Abyssinia bank adhere to IFRS requirement and assess whether the financial reports of
Abyssinia bank assume the basic assumption of IFRS that underlay the financial accounting
structure.

4.2. PERSONAL INFORMATIONS

Table 4.1 Socio- demographic characteristic of the respondents

Sex Number Percentage %

Female 4 44.4%
Male 5 55.5%
Total 9 100%
.Source: - From questionnaires

As observed from the above table from the total respondents of 8 employees of Abyssinia Bank
S.C 5 (55.5) were male and the rest 4(44.4%) are female. This data indicate that the majority of
the respondents as well as employees of the company were male; this could be due to the
existing in the labor market.

Table 4.2 Educational status

32
 Educational status Number Percentage
Diploma - -
Degree 6 67%
Maters and above 3 33%
Total 8 100%
. Source: - From questionnaires, 2020

As it have seen from the above table of the total respondents of 9 employees of Abyssinia bank S.C at
piassa Branch, 6(67%) have degree status, 3(33%) of them have masters. This data indicate that most of
employees of Abyssinia bank S.C employees were graduates.

Table 4.3 work experiences of the respondents

Work experience Number Percentage

Below 2 years 2 22.2
2-6 years 4 44.4%
6-10 years 2 22.2%
10-20 1 11.1%
Above 20 - -
Total 9 100%
Source: from questionnaires

The above table shows the work experience of respondents working in the company and it shows
that from the total employees of respondents 4(44.4%) worked from 2-6 Years, 2(22.2%) has
work experience in the range of 6-10 years, 2(22.2) work experience below 2 years and 1(11.1%)
respondent has a work experience range from10-20 years.

The current positions of the respondents were:-junior officers, administrative assistants, business
banking officers, senior operation officers and business operation officers.

4.3. THE OVERALL PRESENTATION OF FINANCIAL STATEMENT OF ABYSSINIA

BANK

4.3.1. FAIR PRESENTATION AND COMPLIANCE WITH IFRS

The financial statements must "present fairly" the financial position, financial performance and
cash flows of an entity. Fair presentation requires the faithful representation of the effects of
transactions, other events, and conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in the Conceptual Framework of IFRS

33
for Financial Reporting. The application of IFRS, with additional disclosure when necessary, is
presumed to result in financial statements that achieve a fair presentation.

Table 4.4.The fair presentation of financial statement in conformity with IFRS.

No Item type Response rate in no Response rate in %

Yes No Yes No
1 Financial statements are presented fairly in conformity 9 0 100 0
with IFRS.

Total 9 100%
Source: Questionnaires results, primary source

In Abyssinia bank, 100% of the respondents believe the financial statement of their company
fairly presented in conformity with IFRS. In the annual report of the bank the external auditor
assure that the company financial statement presented fairly in conformity with IFRS. In this
regard Abyssinia bank meets the requirement as per IAS 1.

The Conceptual Framework notes that financial statements are normally prepared assuming the entity is a
going concern and will continue in operation for the foreseeable future.

If management has significant concerns about the entity's ability to continue as a going concern,
the uncertainties must be disclosed. If management concludes that the entity is not a going
concern, the financial statements should not be prepared on a going concern basis, in which case
IAS 1 requires a series of disclosures.

Table 4.5.Going concern of the entities

No Item type Response rate in no Response rate in %

Yes No Yes No
2 Financial statements are prepared on going concern 9 0 100 0
basis

Total 9 100%
Source: Questionnaires results, primary source

Respondents in Abyssinia bank, 100% of respondents respond that the bank financial statements
are prepared on going concern basis. That means nothing is disclosed in notes to the financial
statement in the annual report by management of the entities about the uncertainties about the
entity's ability to continue as a going concern. Therefore, bank compliance level is 100% with
the requirement as per IAS1.

34
4.3.2.. Complete Set of Financial Statement (Including Comparative Information)
IFRS requires companies have to present a complete set of financial statement
(including comparative information) at least annually.
Components of financial statements
A complete set of financial statements includes: [IAS 1.10]
1. A statement of financial position (balance sheet) at the end of the period.
2. A statement of profit or loss and other comprehensive income for the period (presented
as a single statement, or by presenting the profit or loss section in a separate statement
of profit or loss, immediately followed by a statement presenting comprehensive
income beginning with profit or loss)
3. A statement of changes in equity for the period
4. A statement of cash flows for the period
5. Notes, comprising a summary of significant accounting policies and other explanatory
notes
6. Comparative information prescribed by the standard.

Table 4.6The presentation of complete set of financial statement (including

comparative information
No Item type Response rate in no Response rate in %
Yes No Yes No
3 Presentation of a complete set of financial statement. 9 0 100% 0

Total 9 - 100% -
4 Presentation of comparative information 6 3 67% 33%
Total 9 100%

5 Presentation and classification of items in financial 6 3 67% 33%

statements are retained from period to period.

Total 9 100%
Source: Questionnaires results, secondary sources.

In Abyssinia bank, 100% of respondents replied their company presents a complete set of
financial statement. So, the bank has met this requirement as required by IAS 1.
Comparative information

35
In Abyssinia bank, 67% of the respondents respond that their companies present comparative
information in each period annual report. In addition, as per the annual report/ document, bank
has presented comparative information in respect of the previous period for all amount
reported in the current reporting period.

4.3.3.. CONSISTENCY OF PRESENTATION

The presentation and classification of items in the financial statements shall be retained from one
period to the next unless a change is justified either by a change in circumstances or a
requirement of a new IFRS [IAS 1.45]. Respondents of Abyssinia bank, 67% of the respondents
replied presentation and classification of items in their company financial statement is consistent
with IFRS requirements.

Table 4.7Consistency of Presentation

No Item type Response rate in no Response rate in %

Yes No Yes No
6 Are presentation and classification of items in 9 0 100% 0
your company financial statement retained
from period to period
Total 9 - 100% -
7 Do you believe that the structure and content of 6 3 77% 23%
financial position of your company meet the
requirement of IFRS?
Total 9 100%
8 Do you believe that the structure and content of profit 6 3 67% 33%
or loss statement of your company meets the
requirement of IFRS?

Total
9 Do you believe that the structure and content 9 - 100% -
of statement of cash flow of your company
meet the requirement of IFRS?
Total 100%
10 Do you believe that the structure and content of 9 - 100% -
statement of changes in equity of your company meet
the requirement of IFRS?
Total 9 100%

Source: Questionnaires, primary source 2020)

Abyssinia bank, 100% of the respondents respond that financial statements are clearly
identifiable from other information of the annual report/document. The financial statements are
presented separately from other information in the same published annual document and each
financial statement and the note to the financial statement are also presented separately.
36
As displayed in the table above Abyssinia bank, 77% respondents do not believe the structure
and content of financial position of their companies meet the requirement of IFRS and 33% of
respondents argue that the structure and content of financial position of their companies doesn’t
meet the requirement of IFRS. As displayed in the abovetable 67% respondents Abyssinia bank
believe that the structure and content of profit or loss statement of your company meets the
requirement of IFRS and the rest 33% argue.

In Abyssinia bank, 100% of the respondents are t sure about structure and content of cash flow
statement of their companies meet the requirement of IFRS and 100% respondentsof Abyssinia
bank believe that the structure and content of statement of changes in equity of your company
meet the requirement of IFRS.

4.4..MEASUREMENT OF ASSETS AND LIABILITIES

Financial statements include descriptions and amounts for items that fit the definitions of
elements of financial statements and that meet the recognition criteria. Measurement is the
process of determining which amounts to present on the face of each financial statement (and in
some case in notes to financial statements). The term measures refer to those amounts presented
on the face of each financial statement.

4.4.1.. PROPERTY, PLANT AND EQUIPMENT (PPE), INTANGIBLE ASSETS AND

INVESTMENT PROPERTY

Property, Plant and Equipment, Intangible Assets and Investment Property should be measured at
historical cost under the requirement of IFRS. Historical cost is the amount of cash or cash
equivalents paid or the fair value of the other consideration given to acquire an asset at the time
of its acquisition or construction, or, when applicable, the amount attributed to that asset when
initially recognized

4.4.2.. MEASUREMENT OF ASSETS AND LIABILITIES

Financial statements include descriptions and amounts for items that fit the definitions of
elements of financial statements and that meet the recognition criteria. Measurement is the

37
process of determining which amounts to present on the face of each financial statement (and in
some case in notes to financial statements). The term measures refer to those amounts presented
on the face of each financial statement.

4.4.3.. PROPERTY, PLANT AND EQUIPMENT (PPE), INTANGIBLE ASSETS AND

INVESTMENT PROPERTY

Property, Plant and Equipment, Intangible Assets and Investment Property should be measured at
historical cost under the requirement of IFRS. Historical cost is the amount of cash or cash
equivalents paid or the fair value of the other consideration given to acquire an asset at the time
of its acquisition or construction, or, when applicable, the amount attributed to that asset when
initially recognized

Table 4.8.Measurement of PPE, intangible assets and investment property

No Item type Response rate in no Response rate in %
Yes No Yes No
1 Historical cost is used to measure fixed assets, 9 0 100 0
investment property and intangible asset.

Total 9 100%

Source: Questionnaires results, primary source (2016)

As shown in above the table, 100% of the respondents of Abyssinia bank replied historical cost
is applied in their companies to measure fixed assets, investment property and intangible asset.
All three sampled banks measurement method for property, plant and equipment, intangible
assets and investment property comply the requirement of IFRS.

4.4.4.. FINANCIAL ASSETS

IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classi- those
measured at amortized cost and those at fair value. Financial assets that should be measured a
fair value are financial assets held for trading (e.g. derivatives and short term investment) and

38
available for sale financial assets. Financial assets that have to be measured at amortized cost
using the effective interest method are loan and advances and receivables and held to maturity
investments

Table 4.9Measurement method is applied in the company

No Item type Response rate in no Response rate in %

Historical Fair Other Histori Fair Oth
cost value method cal value er
s cost met
hod
s
2 Which measurement method is 9 - - 100 - -
applied in your company to
measure fixed assets, investment
property and intangible asset?
Total 9 100%

Source: Questionnaires results, primary source

Property, Plant and Equipment, Intangible Assets and Investment Property should be measured at
historical cost under the requirement of IFRS. Historical cost is the amount of cash or cash
equivalents paid or the fair value of the other consideration given to acquire an asset at the time
of its acquisition or construction, or, when applicable, the amount attributed to that asset when
initially recognized

As shown in above the table, 100% of the respondents of Abyssinia bank replied historical cost
is applied in their companies to measure fixed assets, investment property and intangible asset.
The bank measurement method for property, plant and equipment, intangible assets and
investment property comply the requirement of IFRS.

Table4.10.The measurement of financial assets

No Item type Response rate in no Response rate in %

Historical Fair Oth Histori Fair Oth
cost value er cal val er
met cost ue met

39
 hods hod
s
3 Which measurement method is applied in 9 0 100 0
your company to measure financial assets
such as loan and notes receivable,
advances, NBE Bill, cash and deposit
with other bank?

Total 9 100%
Source: Questionnaires results, primary source

As displayed in table above, 100% respondents of bank replied historical cost (not fair value) is
applied in their companies to measure financial assets. As per the notes to the financial statement
of sampled banks, all sampled banks measure loans, advances and receivable at amortized cost
using the effective interest method. Abyssinia bank disclosed financial assets and financial
liabilities are stated at amortized cost.

4.4.5.. FINANCIALLIABILITIES

IFRS 9 also divided financial liabilities into two mea cat Fair value through profit or loss
(FVTPL) and amortized cost. Financial liabilities held for trading are measured at FVTPL, and
all other financial liabilities are measured at amortized cost including customer deposit and
borrowing unless the fair value option is applied.

Table 4.11.Measurement of financial liabilities

No Item type Response rate in no Response rate in %

Histori Fair Other Histo Fair Othe
cal cost valu meth rical val r
e ods cost ue meth

40
 ods
4 Which measurement method is applied in 9 0 100 0
your company to measure financial
liabilities such as demand and time
deposit, letter of credit and notes payable
Total 9 100%
Source: Questionnaires results, primary source

As shown in above table, 100% respondents of bank respond historical cost (not fair value) is
applied in their company to measure financial liabilities. As per the notes to the financial
statement, Abyssinia bank disclosed measurement method for financial liabilities in compliance
with the requirement of IFRS. Therefore, the measurement methods of bank for financial
liabilities are consistent with the requirement of IFRS as per notes to the financial statement.

4.4.6.. EQUITY INSTRUMENTS

All equity in are to be measured at fair value in the statement of financial position, with value
changes recognized in profit or loss, except for those equity in for which the entity has elected to
present value changes in 'other income.

Table4.12measurement methods to measure fixed assets, investment property and

intangible asset

No Item type Response rate in no Response rate in %

Historical Fair Other Historic Fair Othe
cost value meth al cost valu r
ods e meth
ods

5 Which measurement method is applied in your 9 0 100 0

company to measure fixed assets, investment
property and intangible asset?
Total 9 100%

Source: Questionnaires results, primary source

As shown in table above, 100% respondents of bank replied historical cost is applied in their
companies to measure equity instruments. The measurement bases of equity instruments of all
sampled banks are not consistent with IFRS measurement basis for equity instrument.

41
 All equity in are to be measured at fair value in the statement of financial position, with value
changes recognized in profit or loss, except for those equity in for which the entity has elected to
present value changes in 'other income.

Table 4.13The measurement of equity instruments

No Item type Response rate in no Response rate in %

Historic Fair Oth Histori Fair Oth
al cost value er cal val er
met cost ue met
hods hod
s
6 Which measurement method is applied in 9 0 100 0
your company to measure equity
instrument such equity investment?
Total 9 100%
Source: Questionnaires results, primary source

As shown in table above, 100% respondents of sampled banks replied historical cost is applied in
their companies to measure equity instruments. The measurement bases of equity instruments of
all sampled banks are not consistent with IFRS measurement basis for equity instrument.

4.5..RECOGNITION OF REVENUES, EXPENSES, GAIN AND LOSSE

4.5.1.. REVENUE

IFRS requires company should prepare financial statements using the accrual basis of
accounting. Accrual basis of accounting means that transactions that change a company financial
statement are recorded in the period in which the event occurs. The revenue recognition principle
indicates that revenue is recognized when it is probable that the economic benefit will flow to the
company and the benefit can be measured reliably. banks as a service giving organization, they
should recognize revenue from service provided when service have been performed and they
should also recognize revenue from permitting others to use enterprise asset such as interest as
time passes. As a general rule, accrual basis of accounting should be followed by companies to
recognize their income and revenue.

Table 4.14.Recognition of revenue (interest income and fees and commission income)

No Item type Response rate in no Response rate in %

42
 Accrual cash Oth Histori Fair Oth
basis of basis er cal val er
accounti of met cost ue met
ng acco hods hod
untin s
g
1 Which basis of accounting is currently 6 3 67% 33%
used by your organization to recognize
revenue and expense??
Total 9 100%
Source: Questionnaires results, primary source

In Abyssinia bank, 67% of respondents replied accrual basis of accounting is used by their
companies to recognize revenue and expense where as 33%of respondents replied the bank use
cash basis of accounting. Therefore, basis of accounting of Abyssinia a bank is consistent with
the requirement of IFRS.

Table 4.15 time ofinterest income is recognized

No Item type Response rate in no Response rate in %

Accrual cash Oth Histori Fair Oth
basis of basis er cal val er
accounti of met cost ue met
ng acco hods hod
untin s
g
2 When interest income is recognized? 9 - - 100% - -
Total 9 100%
Source: Questionnaires results, primary source

As displayed in table above, 100% of respondents of Abyssinia bank replied interest income is
recognized when interest is accrued. Furthermore, as disclosed in notes to the financial statement
under accounting policy heading, interest income in the income statement is recognized on
accrual basis of accounting. Interest income is recognized in the period in

Table 4.16 Times offees and commission income is recognized

No Item type Response rate in no Response rate in %

Accrual cash Oth Histori Fair Oth
basis of basis er cal val er
accounti of met cost ue met
ng acco hods hod

43
 untin s
g
3 When fees and commission income is 9 - - 100% - -
recognized?
Total 9 100%
Source: Questionnaires results, primary source

As displayed in the above table, 100% respondents of Abyssinia bank respond fees and
commission income are recognized when service is rendered to a customer. As disclosed in notes
to the financial statement under accounting policy heading, fees and commission income are
recognized as income when the services are provided to customers. Thus, the revenue
recognition criteria of Abyssinia bank meet the requirement of IFRS.

4.5.2.. GAIN AND LOSSES

Under accrual basis of accounting, gain and losses are recognized in the accounting period in
which they occur as the results of transaction and other events and circumstances.

Table 4.17.The recognition of gain and losses

No Item type Response rate in no Response rate in %

On When other Any On When Any
transactio income is other transact other othe
n date recognized way, ion date income r
please is way
recogni
zed
4 When gain from dealing in 9 - - 100% - -
foreign currencies is
recognized
Total 9 100%
Source: Questionnaires results, primary source

As displayed in table above, all respondents of Abyssinia bank respond that gain and loss from
dealing in foreign currencies are recognized on transaction date. The recognition criteria of gain
and losses of Abyssinia bank comply with the requirement of IFRS.

Table 4.18 interest expense is recognized

No Item type Response rate in no Response rate in %

44
 When when When when
interest interest is interest interest is
is paid accrued. is paid accrued.
5 When interest expense is recognized 9 100%
Total 9 100%
Source: Questionnaires results, primary source

As shown in the above table, 100%respondents of Abyssinia bank believe interest expense is recognized
when interest is accrued. In addition, as per the note to the financial statement, interest expense in the
income statement is recognized on accrual basis of accounting. Interest expense is recognized in the
period in which it is incurred.

Table 4.19 loss from dealing in foreign currencies is recognized

No Item type Response rate in no Response rate in %

On Any other On Any other
transacti way transac way
on date tion
date
6 When loss from dealing in foreign 9 100%
currencies is recognized
Total 9 100%
Source: Questionnaires results, primary source

As displayed in table above, all respondents of Abyssinia bank respond that gain and loss from
dealing in foreign currencies are recognized on transaction date. The recognition criteria of gain
and losses of bank comply with the requirement of IFRS.

Table 4.20 salaries and benefits of employees is recognized

No Item type Response rate in no Response rate in %

when when when when
paid employee paid employee
rendered rendered
service service
7 How and when salaries and benefits of 9 - 100% -
employees is recognized

45
 Total 9 100%
Source: Questionnaires results, primary source

As shown in table above, 100% respondents of Abyssinia bank replied salaries and benefit of employee
are recognized when employee rendered service to the company. Therefore, the recognition criteria of
interest and salaries expense of Abyssinia bank has complied with the requirement of IFRS.

Table 4.21depreciation expense, amortization expense and insurance expense is recognized

No Item type Response rate in no Response rate in %

Systematic and Any Systematic and Any
rational allocation other rational other
way allocation way

8 How and when depreciation expense, 9 - 100% -

amortization expense and insurance expense
is recognized.
Total 9 100%

Source: Questionnaires results, primary source

As shown table above, 100% respondent of Abyssinia bank replied depreciation expense,
amortization expense and insurance expense are recognized using systematic and rational
allocation. Bank has complied with the requirement of IFRS.

Table 4.22 administrative and general expenses is recognized

No Item type Response rate in no Response rate in %

In the period Any In the period Any
they are they are incurred
incurred
9 When the following administrative and 9 - 100% -
general expenses is recognized. Such as
46
 advertising and publicity, electricity and
water, repair and maintain ace, stationary
and printing etc
Total 9 100%
Source: Questionnaires results, primary source

As displayed in the above table, 100% respondents of Abyssinia bank believes administrative
and general expense such as advertising and publicity, electricity and water, repair and
maintenance, stationary and printing are recognized in the period they are incurred. Thus, the
recognition criteria of general and administrative expense of Abyssinia bank comply with the
requirement of IFRS.

4.6..TES TO THE FINANCIAL STATEMENT (DISCLOSURE)

4.6.1.. DOMICILE AND COUNTRY OF INCORPORATION

IAS 1 requires disclosure of the domicile, legal form of the enterprise and its country of
incorporation.

Table 4.23.Disclosure of domicile and other information

No Item type Response rate in no Response rate in %

Yes No Yes No
1 Does your company disclosed statements that describe 9 0 100 0
compliance with IFRS in notes to the financial
statement?
Total 9 100%
Source: Questionnaires results, primary source

As shown in the above table, all respondents of bank clearly agree on their company disclose
statement. As per notes to the financial statement in the annual report this information is
disclosed. Bank has complied with this requirement by provide all necessary information as per
the requirement of IAS 1.

4.6.2.. COMPLIANCE WITH IFRS

IAS 1 requires an entity whose financial statements comply with IFRS has to make an explicit
and unreserved statement of such compliance in the notes. Financial statements cannot be
described as complying with IFRSs unless they comply with all the requirements of IFRSs

47
(which includes International Financial Reporting Standards, International Accounting
Standards, and IFRIC Interpretations and SIC Interpretations)[IAS 1.16].

Table 4.23.Disclosure of statements that describe compliance with IFRS.

No Item type Response rate in no Response rate in %

Yes No Yes No
2 Does your company disclose the measurement 9 0 100 0
basis used in preparing financial Statements
as well as all other significant accounting
policies used by your company in notes to the
financial statement?
Total 9 100%
Source: Questionnaires results, primary source
As displayed in table above Abyssinia bank, all respondents believe that their companies
disclosed statements that describe compliance with IFRS in notes to the financial statement. As
per notes to financial statement, bank complies with this requirement by making an explicit
statement that describes compliance with IFRS. But as per the standard requirement still it has
not meet all the requirement of IFRS. So, it is advisable not to disclose this compliance statement
in notes to the financial statement since it is not complied with all the requirement of IFRS.

4.6.3.. ACCOUNTING POLICIES

IAS 1 requires disclosure of both disclose the measurement basis used in preparing financial
Statements as well as all other significant accounting policies used by your company in notes to
the financial statement. The measurement basis used in preparing financial Statements as well as
all other significant accounting policies used by the company that would be relevant to an
understanding of financial statements.

Table 4.24company disclose supporting information to line item in financial statement

No Item type Response rate in no Response rate in %

Yes No Yes No
3 Does your company disclose supporting 9 0 100 0
information to line item in financial statement
(i.e. those requiring disclosure) in notes to the
financial statement?
Total 9 100%
Source: Questionnaires results, primary source

48
As displayed in table above, 100% respondents of a Abyssinia bank clearly agree on their
company disclose the measurement basis used in preparing financial Statements as well as all
other significant accounting policies used by their companies in notes to the financial statement.

4.6.4.. LINE ITEMS IN THE FINANCIAL STATEMENT THAT REQUIRE

SUPPORTIVE INFORMATION

IFRS requires supporting information for items presented on the face of the statement of
financial position (balance sheet), statement(s) of profit or loss and other comprehensive income,
statement of changes in equity and statement of cash flows, in the order in which each statement
and each line item is presented.

Table 4.25.Disclosure of supportive information to line item in the financial statement

No Item type Response rate in no Response rate in %

Yes No Yes No
3 Does your company disclose detailed 5 4 56% 44%
information for property, plant, equipment in
notes to the financial statement?
Total 9 100%
Source: Questionnaires results, primary source
In Abyssinia bank, 56% of the respondents replied that their company disclose supportive
information to line item in the financial statement and 44% responded their company doesn’t
disclose supportive information to line item in the financial statement. But bank met this
requirement as per the requirement of IAS 1.

4.6.5.. RELATED PARTY DISCLOSURES

As per the notes to the financial statement of all sampled banks in their annual reports,
disclosure is made with regard to related party and related party transaction in notes to the
financial statement. Related party transactions: IAS 24 provides that if there have been
transactions between related parties, then disclosures must be made on the nature of the related
party relationships, the types and elements of transactions entered into so as to ensure better
understanding of financial statements
Table 4.26 company discloses detailed information for related party transaction in
notes to the financial statement?

49
 No Item type Response rate in no Response rate in %
Yes No Yes No
4 Does your company disclose detailed 3 6 33% 67%
information for related party transaction in
notes to the financial statement?
Total 9 100%
Source: Questionnaires results, primary source
As shown in table above Abyssinia bank, one respondent (33%) replied that their company
discloses detailed information for related party. As per notes to the financial statements all three
sampled banks disclosed necessary information for related party transaction. Therefore, all
sampled banks comply with requirement of IFRS as per IAS 24. But in case of Abyssinia bank,
financial reports may be compiled by parties outside of it.

4.6.6.. MATURITY OF ASSETS AND LIABILITIES

IAS 30 requires the bank should provide an analysis of assets and liabilities into relevant
maturity groupings based on the remaining period from the balance sheet date to the contractual
maturity date

Table 4.27.Disclosure of maturity of assets and liabilities

No Item type Response rate in no Response rate in %

Yes No Yes No
4 Does your company disclose information 6 3 67% 33%
about maturity of assets and liabilities in notes
to the financial statement?
Total 9 100%

Source: Questionnaires results, primary source

Abyssinia bank, 67% of respondents agreed on disclosure of information about maturity of assets
and liabilities. Abyssinia bank has not yet complied with this requirement. The result shows the
banks complied with requirement. So, financial statements may be prepared by parties outside of
the organization.

50
 CHAPTER 5

5..SUMMARY AND RECOMMEDATIONS

5.1..INTRODUCTION
Presentation of financial statements complying IFRS is of immense importance to the users of
financial statement because it enhances the degree and scope of usefulness of accounting
51
information. It is now becoming increasingly evident that existence of properly functioning
banking system facilitates the development process in many important ways. Proper accounting
and reporting contribute positively on proper functioning of banks. That’s why the International
financial reporting Standards (IFRS) is developed to give standardized reporting aspects for
business organization. The study used document analysis (annual reports, directives, and other
documents), and self-administered questionnaire to finance officers and accountants.
Questionnaires were analyzed and interpreted both qualitatively and quantitatively and document
reviews were interpreted qualitatively. The results of the study are discussed by triangulating the
questionnaire result and document review results. The discussion attempted to accomplish the
main objectives of the study and answer the research questions. The compliance level of
Abyssinia bank financial statement presentation to IFRS requirement, measurement of asset and
liabilities, recognition of revenue and expenses of bank evaluated based IFRS requirement, the
measurement and recognition criteria of provision and contingencies and the disclosure of
necessary and relevant information in notes to the financial statement as per IFRS requirement
has been evaluated in the previous chapter (chapter 3). This chapter presents conclusions and
possible recommendations. It has two parts; the first part presents conclusions of the study. The
second part presents possible recommendations.

5.2..SUMMARY OF FINDING AND CONCLUSION

The study evaluated the financial reporting practice of banks in light of IFRS with particular
reference to banks which adopted this standard. This paper investigated a wide array of issues
related to financial reporting practice of bank with particular reference to private banks which
already started reporting using this international standard.

The financial statement of Abyssinia bank is presented fairly in conformity with IFRS.
Transactions, other events, and conditions of the bank are fairly presented in accordance with the
definitions and recognition criteria for assets, liabilities, income and expenses set out in
the conceptual framework of IFRS for financial reporting.

The Bank presents a complete set of financial statement (including comparative information) at
least annually as per IFRS requirement. They present important components of financial
statement such as statement of financial position, statement of profit or loss and other

52
comprehensive income, statement of changes in equity, statement of cash flows and notes,
comprising a summary of significant accounting policies and other explanatory notes with
related comparative information.

All three sampled banks financial statement presentation and classification of items in the
financial statement are consistent. They have consistently applied the accounting policies used in
the previous year. That means, financial reports are prepared on historical cost basis, uses double
entry bookkeeping system, uses accrual basis of accounting and report under the guideline of
IFRS.

The financial statements of all sampled banks are presented separately from other information in
the same published annual report/ document and each financial statement and the note to the
financial statement are also presented separately. IFRS apply only to financial statements and it
is therefore important that users are able to distinguish information prepared using IFRS from all
other information presented in the annual reports that while useful to users is not subject to the
requirements of IFRS. As per the annual report, the format and content of financial position
(balance sheet) of all sampled banks comply the requirement of IFRS. But this statement (i.e.
financial position) may be prepared by other parties outside of the companies. Since all
respondents do not believe the structure and content of financial position of their companies meet
the requirement of IFRS.

All three sampled banks used historical cost to measure property, plant and equipment,
intangible assets and investment property, which is the requirement of IFRS. The measurement
methods of Abyssinia and bank for financial assets have not met the requirement of IFRS, which
is fair value thorough profit or loss. The measurement methods of all bank for financial liabilities
are consistent with the requirement of IFRS, which are fair values through profit or loss and
amortized cost The measurement methods of all sampled bank for equity instrument have not
met the requirement of IFRS, which is fair value.

The bank recognizes interest income when interest is accrued. Interest income in the income
statement is recognized on accrual basis of accounting. Interest income is recognized in the
period in which it is earned. All sampled banks recognize fees and commission income when
service is rendered to a customer. Fees and commission income are recognized as income when
the services are provided to customers.
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The bank recognizes interest and salaries expense in the income statement on accrual basis of
accounting. Interest expense is recognized in the period in which it is incurred. A salaries
expense is recognized when employee rendered service to the companies. All sampled banks
recognize administrative and general expense such as advertising and publicity, electricity and
water, repair and maintenance, stationary and printing in the period they are incurred.
Depreciation expense, amortization expense and insurance expense are recognized using
systematic and rational allocation in case of all sampled banks. All sampled banks recognize
gain and loss from dealing in foreign currencies on transaction date

Abyssinia bank failed to disclose the measurement and recognition criteria of provision and
contingent liabilities.

All sampled banks disclose information relevant to users in notes to the financial statement. But
still there are areas which are non- compliance with IFRS disclosure requirement. Abyssinia
bank, was observed that they failed to disclose information about losses on loans and advances,
Assets pledged as security, Concentrations of Assets and Liabilities, employment benefit and the
Accounting Policies used even when the circumstances were such that disclosure was warranted.
These areas included policies regarding to measurement and recognition of provision,
measurement of contingent liabilities, components of Cash and cash equivalents, leases,
dividend, taxation, legal reserve and Judgments in applying accounting policies. All sampled
three banks have been disclosed compliance statement with the requirement of IFRS. But such
statement is required when they complied with all the requirement of IFRS. The result of the
study shows that Abyssinia bank was failed to disclose information about maturity of assets and
liabilities in notes to the financial statement. It was observed that all sampled banks have not
disclosed information about general banking risks and fair value of each class of financial assets
and liabilities in the footnote disclosure.

5.3..RECOMMENDATIONS

Based on the finding of this paper, areas of compliance and non-compliance with IFRS
requirements are identified. The degree of compliance of the bank is not bad but bank have not
yet complied hundred percent the requirement of IFRS. Therefore, the researcher forwards the
following recommendations to enable banks to improve its financial reporting practice in

54
accordance to IFRS requirement for all the parties concerned. So, the recommendation is to
have a fair picture of the organization as the banks play a significant role in the development of
our country, they should comply with all the requirements guided by the nationally and
internationally recognized standards.
1. The bank discloses compliance statement with requirement of IFRS. It better off if they are
not disclosing such statements until it fully meet all the requirements of IFRS.
2. Abyssinia bank ought to include other comprehensive income in the income statement (profit
or loss statement) or they have to present it separately and they should also incorporate other
comprehensive income in statement of change in equity in order to provide users with better
information.
3. Abyssinia bank should follow fair value thorough profit or loss instead of historical cost to
measure financial assets in order to agree and consistent with the requirement of IFRS
4. Abyssinia bank has to follow fair value instead of historical cost to measure equity
instruments such as equity investment in another company in order to agree and consistent
with the requirement of IFRS.
5. Abyssinia bank have to disclose information about losses on loans and advances, Assets
pledged as security, Concentrations of Assets and Liabilities, employment benefit and the
Accounting Policies such as policies regarding to measurement and recognition of provision,
measurement of contingent liabilities, components of Cash and cash equivalents, leases,
dividend, taxation, legal reserve and Judgments in applying accounting policies.
6. The bank should disclose information about general banking risks and fair value of each class
of financial assets and liabilities in the notes to the financial statement.
7. Abyssinia bank has to disclose information about maturity of assets and liabilities in notes to
the financial statement so as to meet the requirement of IFRS.

5.4 RECOMMENDATIONS FOR FURTHER STUDIES

The International Financial Reporting Standards (IFRS) principles are a broader scope of
accounting which cannot be dealt with in its entirety in one study alone. This study focused on
the evaluation of external financial reporting practice of Abyssinia bank in light of IFRS.
However, it would be highly appropriate for future research to be conducted on the issue of
disclosure and compliance with IFRS by widening scope of the study or by taking cases in other

55
industry. This would comprise the detailed application of the adopted standards and how well
companies in Ethiopia apply these standards. Thus, the researcher advocates more studies to be
conducted in the financial reporting domain.

REFERENCES/BIBLIOGRAPHY
 Abyssinia bank, Annual report (2014 and 2015)

 Abyssinia bank, Annual report (2014 and 2015)

 AICPA, Www.IFRS.com: IFRS FAQs. AICPA/ Www.IFRS.com-International Financial
Reporting Standards Resources, Web. Retrieved, 12Feb. 2012
http://ifrs.com/ifrs_faqs.html
 Ernst & Young (2007) IFRS: observations on the implementation of IFRS.
 http://whatis.techtarget.comdefinition of IFRS

56
  Kieso and Weygandt, Intermediate accounting (2011), IFRS edition.

 Mosich A.M, Intermediate accounting, 6th edition.1989, McGraw Hill.

 Kieso and Weygandt, Intermediate accounting (2010), IFRS edition.

 LannyChesten, Intermediate Accounting, 6th edition, 1998, McGraw Hill.

 Fees and Warren, Principle of Accounting, 16th edition.

 Kieso and Weygandt, Intermediate Accounting, 9th edition, 1998, John and Sons Inc.

 Proclamation no 847/2014, financial reporting proclamation

 Government of Ethiopia (1960), Commercial Code of Ethiopia, NegaritGazeta, Addis Ababa

 Hoyle B., Schaefer E., and Doupnik S. (2009) Advanced Accounting, 9th edition, McGraw Hill

 TaibatAdebukolaAtoyebi and Adikwu Joseph Simon(2018), Journal of Accounting, Finance &

Auditing studies, The impact of International Financial Reporting Standards(IFRSs) Adoption on
Financial Reporting Practice in the Nigerian Banking Sector

7. APPENDIX:-RESEARCHQUESTIONNAIRE
FURRA COLLEGE HAWASSA CAMPUS

DEPARTMENT OF ACCOUNTING AND FINANCE

Dear sir/madam

The aim of this interview questionnaire is to gather information regarding the implementation of
IFRS in the Abyssinia bank financial reporting practice. The questionnaire will be distributed to
employees, finance officer and manager of the bank. The information you provide in response to

57
the items in the questionnaire will be used as part of the data needed for a study on assessment of
financial reporting practice of Abyssinia bank in light of IFRS.

I would like to assure you that the information you provide will be accessible to the reference.
Your involvement is regarded as a great input to the quality of the research results.

PART I

1. Gender: A) Male B) Female

2. Academic level: A) Diploma B) Bachelors degree C) Masters degree
3. Work experience: A) below 2 years B) 2-6 years B) 6-10 years C) 10-20 year’s D) 20- above
4. Current position in your organization__________________________________.

PART II: Questions regarding to overall presentation of financial statement of your

Company. Please kindly tick (√) your answer in the space provided below or responds by
writing if required.

5. Do you believe that the financial statement of your company presented fairly in conformity
with IFRS? A) Yes B) No
6. Do you believe that the financial statement of your company prepared on going concern
basis? A) Yes B) No
7. Can we clearly identify the financial statement of your company from other information in
the same published annual report or document? A) Yes B) No
8. Does your company present a complete set of financial statement at least annually?
A) Yes B) No
9. Does your company present comparative information in respect of the previous period for all
amount reported in the current reporting period. A) Yes B) No
10. Are presentation and classification of items in your company financial statement retained
from period to period? A) Yes B) No
11. Do you believe that the structure and content of financial position of your company meet the
requirement of IFRS? A) Yes B) No
12. Do you believe that the structure and content of profit or loss statement of your company
meets the requirement of IFRS? A) Yes B) No

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13. Do you believe that the structure and content of statement of cash flow of your company
meet the requirement of IFRS? A) Yes B) No
14. Do you believe that the structure and content of statement of changes in equity of your
company meet the requirement of IFRS? A) Yes B) No

PART III: Questions regarding to measurement of assets and liabilities in your company.
Please kindly tick (√) your answers in the space provided below or respond by writing if
required.

15. Which measurement method is applied in your company to measure fixed assets, investment
property and intangible asset? A) Historical cost B) Fair value C) Other methods
16. Which measurement method is applied in your company to measure financial assets such as
loan and notes receivable, advances, NBE Bill, cash and deposit with other bank?
A) Historical cost B) Fair value C) Other methods
17. Which measurement method is applied in your company to measure financial liabilities such
as demand and time deposit, letter of credit and notes payable?
A) Historical cost B) Fair value C) Other methods
18. Which measurement method is applied in your company to measure fixed assets, investment
property and intangible asset?A) Historical costB) Fair value C) Other methods
19. Which measurement method is applied in your company to measure equity instrument such
equity investment? A) Historical costB) Fair valueC) Other methods

PART IV: Questions regarding to recognition of revenue and expense in your company.
Please circle your letter of choice or respond by writing if required.

20. Which basis of accounting is currently used by your organization to recognize revenue and
expense? (A) Accrual basis of accounting (B) cash basis of accounting (C) Other basis of
accounting
21. When interest income is recognized?
(A)When interest is collected (B) when interest is accrued
22. When fees and commission income is recognized?
(A) when collected (B) When service is rendered to a customer?
23. When gain from dealing in foreign currencies is recognized

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 (A) On transaction date (B) When other income is recognized C) Any other way, please
specify_________________________
24. When interest expense is recognized. (A) When interest is paid (B) when interest is
accrued.
25. When loss from dealing in foreign currencies is recognized.

(A) On transaction date (B) Any other way, please specify________________

26. How and when salaries and benefits of employees is recognized.

(A) when paid (B) when employee rendered service?

27. How and when depreciation expense, amortization expense and insurance expense is
recognized. A. Systematic and rational allocation B. Any other way__________________
28. When the following administrative and general expenses is recognized. Such as advertising
and publicity, electricity and water, repair and maintain ace, stationary and printing etc. A. In
the period they are incurred B) Any _______________.
29. Does your company disclosed statements that describe compliance with IFRS in notes to the
financial statement? A) Yes B) No
30. . Does your company disclose the measurement basis used in preparing financial Statements
as well as all other significant accounting policies used by your company in notes to the
financial statement? A) Yes B) No
31. Does your company disclose supporting information to line item in financial statement (i.e.
those requiring disclosure) in notes to the financial statement? A) Yes B) No
32. Does your company disclose detailed information for property, plant, equipment in notes to
the financial statement? A) Yes B) No
33. Does your company disclose detailed information for related party transaction in notes to the
financial statement? A) Yes B) No
34. Does your company disclose information about maturity of assets and liabilities in notes to
the financial statement? (Yes B) No

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THANK YOU FOR YOUR COLLABORATION!

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