The adoption of FIRS is aimed at:
Ethiopia is one of the countries currently supposed to implement IFRS. The most obvious and immediate impact of the IFRS in financial reporting has been the adoption of tax reporting.
IFRS are developed without regard to their appropriateness for tax purposes, in the belief that accounting values shall be free from tax considerations. Therefore, their increasing relevance within the national accounting systems raised the question of how IFRS can be matched with tax rules.
For instance, a movement towards IFRS means that corporate income will now be taxed based on a value based approach rather than transaction based. However, the constant goal to move towards the adoption of international financial reporting standards as the set of globally accepted principals seems to not be able to keep up with the ever-changing economy.
On the other hand, shall IFRS be used as a tax base across the globe, it raises many accounting concerns. Since there are differences between IFRS and Generally Accepted Accounting Principles GAAP accounting for taxable earnings and profits, foreign source income, investments in subsidiaries, and computation of permanent and temporary differences, once book accounting methods Adoption of ifrs in financial institution changed, the impact on tax accounting methods requires consideration.
For example, a book and tax methods are currently the same. If IFRS changes the book treatment, what will happen to the existing tax method; how would it be possible to continue using historical tax methods; should it mean, tax conforms to book methods; will a request for a change in accounting method be necessary; and Which method is acceptable for tax purposes?
The answers to these questions will have a major impact on the preparation of tax report. These questions still unanswered in the Ethiopian finance and tax system in line the current effort to the implementation of IFRS in the country. The Ethiopian government has taken the initiative to integrate the financial statements of its companies with international standards.
This is declared in the Financial Report Proclamation of Ethiopia issued in requiring companies including banks to follow IFRS in their financial statement presentation. As a result, some progress has been achieved regarding awareness creation in the IFRS through short-term training, and in pushing the financial institutions to start implementing the standards.
On the other hand, there are still huge challenges, especially in applying the standards. The problems can be attributed to the high cost of translating them into practice, a complexity of financial reporting, lack of implementation guidance, and lack of availability of competent specialists.
Resistance to change and lack of capacity of the board regarding qualified human resources and proper infrastructure are also among the challenges. Among all the challenges that business organisations and practitioners in Ethiopia mention is that the immediate impact of adopting tax reporting into the IFRS in financial reporting is not clear.
Is the new financial reporting standard a permissible tax accounting method? Is the new book method preferable for tax reporting purposes? Will there be modifications in the computation of permanent and temporary differences?
How will reporting by IFRS affect the computation of taxable earnings and profits, foreign source income, and investments in subsidiaries? In most countries financial reporting is regulated by domestic accounting standards or by GAAP or by IFRS and tax administration is regulated by federal and state laws, under the control of tax authorities.
The new income tax proclamation of requires taxpayers to use IFRS to keep records and prepare financial reports. While the trend is calling for regulators to keep updating themselves to the ever changing financial reporting and prepare the tax environment for a smooth transition to IFRS, many of the major companies in Ethiopia are using GAAP, and ERCA is comfortable with what is familiar.
Since the previous tax laws of the country are deeply interrelated with GAAP, the Authority ought to publish specific guidelines on tax treatments in line with each IFRS standard, especially where there are deviations.
To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.Canadian financial institutions enhances accounting reporting quality. To do so, as demanded each time the IFRS were implemented in respective countries, this research.
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