1 Financial Reporting Regulations Development and the Need of IAS 1921 - 2002 Dr. Mohammad Al-Shiab [email protected].

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Financial Reporting Financial Reporting Regulations Development Regulations Development

and the Need of IASand the Need of IAS1921 - 20021921 - 2002

Dr. Mohammad Al-Shiab

[email protected]

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SignificanceSignificance

The amount of information disclosed by companies depends on:

• The economy level of development.• The legislation in force.• The development of the accounting

profession.• The existence of a sophisticated financial

market.

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The purpose of this paper to explore the role of legislation, the profession and the Jordanian financial market in shaping and influencing the current financial reporting practices of public shareholding companies.

Purpose

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Structure

• Companies Acts.

• Income Tax Law.

• Amman Stock Exchange Law (ASE).

• Accounting Profession.

• Conclusion.

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Companies Act No.12 of 1964 Companies Act No.12 of 1964

• Considered as the first piece of Jordanian legislation.• Contains general disclosure requirements.• True and fair balance sheet is to be prepared.• Two types of companies identified: partnership and

limited shareholding companies.• Emphasis on the provision of information by public

and private shareholding companies.• Provided detailed and specified procedures that must

be followed by an auditor.

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• No mention of any specific disclosure requirements with regard to the contents of financial statements.

• Required companies to prepare financial statements in accordance with Generally Accepted Accounting Principles (GAAP), which was not clearly specified.

• Provided for a limited range of types of companies that could be established.

Some of the Act 1964 LimitationsSome of the Act 1964 Limitations

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As a result of:• The increase in the number of corporations.• The establishment of the new stock exchange

in 1978.• The emergence of the first accounting

professional body in the country.

The Temporary Companies Act No. 1 of 1989 was then placed.

DevelopmentsDevelopments

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Companies Act No.1 of 1989Companies Act No.1 of 1989

• Provided detailed and specified procedures that must be followed by an auditor.

• Provided for a wider range of types of companies that could be established.

• Emphasised the prohibition of insider trading.

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• Publishing the stockholding position of dependents was not required.

• No provisions regarding consolidated financial statements and such statements were not legally required.

• Does not contain any provisions relating to investment funds.

• No legal requirement that a statement of changes in financial position and cash flow statement must be published as a part of the annual report.

Some of the Act 1989Some of the Act 1989 Limitations Limitations

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• Financial statements to be prepared in accordance with GAAP which was not clearly identified (e.g. the Act does not provide any regulations for depreciation and inventory valuation).

• There are no legal requirements, therefore, as to the form or content of financial statements for both public and private shareholding companies.

• Joint ventures between foreign and Jordanian firms not mentioned.

Some of the Act 1989Some of the Act 1989 Limitations Limitations - Cont.- Cont.

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DevelopmentsDevelopments

• The first Gulf war occurred in 1991.• The blockade of Iraq since 1991 considered as

the biggest trade partner.• The end of financial aid from the Arabian Gulf

countries.• The return of thousands of Jordanian workers

from the Gulf countries as a result of the War.• The peace agreement with Israel on 6th of October

1994.

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Building an independent economy by:• Attracting foreigners to invest in Jordan through the

application of a free market economic strategy.• Providing new regulations, such as:

the Investment Promotion Law (1995). Securities Law (No.23 of 1997). Companies Act (No.22 of 1997). Central Bank has removed all obstacles relating to

importing or transferring foreign currency abroad.

Developments - Cont.Developments - Cont.

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Companies Act No.22 of 1997Companies Act No.22 of 1997

• Deals with foreign companies and mutual funds in Jordan.

• Deals with holding companies, requiring a holding company to prepare a consolidated balance sheet and income statement annually, in addition to the disclosure otherwise required in accordance with the requirements of IAS.

• Deals with joint investment projects, provisions for associated companies, joint venture investment companies (e.g. their establishment and their capital structure).

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• In 1982, with the advancement in Jordan’s economy, Temporary Income Tax No. 34 of 1982 was issued, which adopted the principle of “self assessment” as a basis for income estimation.

• Series of amendments to the Income Tax No.34 of 1982 occurred when Law No. 14 of 1995 was published.

• It seems that companies use the regulations provided by the Income Tax Law concerning depreciation and inventory valuation.

The Income Tax LawThe Income Tax Law

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• Following the Income Tax law is not a matter of choice for reporting purposes.

• Had very limited requirements concerning income measurement and asset valuation methods.

• The law has not mentioned how many years should the amount of depreciation when it is not covered by the gross income be carried forward.

Some of the Law 1995 Some of the Law 1995 LimitationsLimitations

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• Stands against adopting fully the IAS. For example, Copyright, patents, establishment costs should be depreciated over a five-year period. Any impairment in value, moreover, was not deductible for tax purposes, however; IAS 38, however, allows companies to

depreciate intangible assets costs over twenty years as a maximum.

Impairment is deductible for tax calculation purpose according to IAS 12.

Some of the Law 1995 Some of the Law 1995 Limitations – Cont.Limitations – Cont.

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• There is a difference between the income tax estimated by companies and that estimated by the tax department could be attributed to the method of treating:The amortisation of establishment.Entertainment expenses.Travel expenses.Carried losses.Donations and the treatment of provisions and

reserves.The recoverable debt.

Some of the Law 1995 Some of the Law 1995 Limitations – Cont.Limitations – Cont.

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Amman Stock Exchange (ASE)Amman Stock Exchange (ASE) Law No.31 of 1976

• The AFM Law No.31 of 1976 disclosure requirements were greater than those of the Companies Act No.12 of 1964.

• The law asked listed companies to disclose any information about their performance.

• Companies wishing to issue securities had to prepare a prospectus containing all information necessary to investors.

• Companies had to inform the market of any information influencing security prices.

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AFM Law No.31 of 1976 – Cont.

• Any member of the Board of Directors required to provide the market with a statement showing the shares or bonds he (they) owned in the company and a statement of any changes in his (their) ownership.

• Public shareholding companies are required to keep records of shareholders, containing names, shares number, and transfers of shares.

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Some of the Law 1976 Some of the Law 1976 LimitationsLimitations

• Was only concerned with shareholders and investors.

• Did not require the specific information normally deemed relevant for an efficient market, due to:Small amount of activities in the market.Attract a large number of listed companies.The lack of a computerised system.

• Few requirements were concerned more about the prevention of insider trading than in companies’ Acts.

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AFM Law No.1 1990AFM Law No.1 1990• The 1976 Law was amended by the enactment of

the AFM Law No.1 1990.• The following are the weaknesses in the operation

and regulation of this body: There is no specification of the type and the

time of the required financial information. Does not contain any provisions relating to

investment funds. Stock prices sometimes did not reflect a fair

value, as a result of the small volume of trading.

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Securities Law No. 23 of 1997Securities Law No. 23 of 1997

• The name for the financial market has been changed from Amman Financial Market (AFM) to Amman Stock Exchange (ASE) and new securities law was issued in May 1997.

• Securities Law No. 23 of 1997 established four independent entities:The Securities and Exchange Commission (SEC).The Stock Exchange.The Central Securities Depository (CSD).The Professional Committee.

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ASE Law 1997ASE Law 1997• Provides:

The legal framework for disclosure in the financial services companies, investment companies and mutual funds.

Accounting, auditing and performance evaluation standards.

Standards, requirements and tasks for qualified auditors.

Asked companies to submit annual and semi-annual reports and statements containing the balance sheet, the profit and loss account, and the cash flow statement.

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• The auditing profession has been deeply influenced by British rules and principles since the twenties and thirties.

• In the last years the American auditing bases and principles have affected the auditing profession and its legislations in Jordan.

Accounting ProfessionAccounting Profession

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Accounting Auditing Profession Accounting Auditing Profession Law No.10 of 1961Law No.10 of 1961

• Specified the conditions to practise the auditing profession. But it can be said:Entry was not subject to professional examinations.There were no official pronouncements on general

accounting principles, auditing standards or professional ethics that govern the audit profession.

It was mainly concerned only with the audit profession in the private sector.

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Accounting Auditing Profession Accounting Auditing Profession Law No.32 Law No.32 of 1985of 1985

• Provided:The establishment of the first accounting

profession in the country, namely the Jordanian Association of Certified Public Accounting (JACPA).

Regulated the audit profession and made membership of the association compulsory.

The Accountants Auditors Classification Regulation.

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The Auditors Association Regulation.The establishment of the Council of the

Auditing Profession exercised the authority of licensing and classifying auditors.

Called for the establishment of the Jordanian Auditors Society.

Accounting Auditing Profession Accounting Auditing Profession Law No.32 Law No.32 of 1985of 1985 – Cont. – Cont.

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Jordanian Association of Certified Jordanian Association of Certified Public Accounting (JACPA)Public Accounting (JACPA)

• The main objectives are: Develop the competence and independence of its

members. Develop accounting and auditing standards that

could best meet the needs of the country.• Has not developed or formulated any national

standards, or even defined GAAP.• Adopted the IAS, in 1989, in the hope that such

standards would replace the GAAP, which never been clearly defined.

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The Needs for IASsThe Needs for IASs• As stated by the Chairman of the Board of the JACPA

over the period 1993-1997:“Setting national standards will isolate us from the rest of the

world. Consequently, we must use IAS…. It would be a waste of time and effort to set national standards that would discourage foreigners from considering investing in the country”.

• JACPA did not have the power to impose IAS on companies or on its members until 1997 when Companies Act No.22 of 1997, Securities Law No.23 of 1997 have given more recognition, consideration, authority and power to JACPA.

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ConclusionConclusion

• Jordan has suffered from the lack of experience in developing national GAAP.

• Shortage of financial and manpower resources.

• Lack of legal procedures for financial disclosure.

• Since 1988 Jordan is one of the IASCs member developing countries has experienced significant economic changes.

• IAS as an appropriate alternative to bridge the gap and avoid paying an expensive price for developing a national GAAP.

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• Adopting the IASs would enable the accounting profession in Jordan to concentrate on more fundamental matters such as:Disclosure of financial information.Poor internal control.Lack of management accounting concepts.Incomplete and inaccurate late records.Lack of comparability of financial

statements, financial analysis and research.

ConclusionConclusion - Cont. - Cont.

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QuestionsQuestions