International Accounting Standards and Selected Middle
East Stock Exchanges
Besalet Basoglu and Ahmed Goma
Manhattan College
Email:
bbasoglu@manhattan.edu
Agoma@manhattan.edu
JEL Classifications: G1, M4, O5
Keywords: Middle East Stock Exchanges,
International Accounting Standards, GAAP, IASC
1. International Accounting
Standards and Selected Middle East Stock Exchanges
In
an effort to generate comparable and reliable accounting information to help
investors, creditors and others, each country has developed its own national
financial accounting standards. These standards reflect the culture, history,
and the characteristics of accounting problems facing that country. In some countries, the professional bodies formulate
the financial accounting standards, while in many others governments and
regulators establish these standards. As a result, much of the 20th
century had witnessed a high degree of variation in the international
accounting practices. International accounting diversity was one of the topics
discussed in the tenth International Congress of Accountants in 1972.
Accounting bodies of some countries attending the meeting were concerned in
reducing the degree of variation in international accounting practices. As a
result, in 1973, the International Accounting Standards Committee (IASC) was
formed. The founders of this Committee included accounting bodies from
Australia, Canada, France, Japan, Mexico, Netherlands, West Germany, the United
States, United Kingdom and Ireland.
Harmonization of accounting standards around the world was one of the
main objectives of this Committee. Harmonization can be defined as the process
of reducing the degree of variation in international accounting practices.
Once
established, the IASC started the process of developing the International
Accounting Standards (IASs). The first
exposure draft and the first international accounting standard appeared in
1974. In its early years the IASC concentrated on the development of the
international accounting standards. The Committee had issued 13 International
Accounting Standards between 1974 and 1979. However there was little success,
if any, with respect to the harmonization goal because of lack of enforcement.
The IASC was a private organization and its members included accounting bodies
from various countries. Adoption of International Accounting Standards by
different countries was not enforceable by this Committee. Even though the
member bodies pledged to cooperate with the IASC, the accounting standard
setting bodies of most countries did not adopt these standards during the early
years. The two main reasons for this were:
(a)
International
Accounting Standards were not comprehensive enough, and
(b)
International
Accounting Standards were very flexible. They provided alternative options to
accountants to deal with one accounting issue.
During later years the IASC addressed these issues. In 1987 the Comparability Project was undertaken to reduce the number of options allowed by the International Accounting Standards. In 1993, the project was completed and ten of the revised standards were approved.
The
International Organization of Securities Exchange Commissions (IOSCO) had been
pressuring the IASC to develop a comprehensive set of Core Standards. In 1995, the IASC and the IOSCO’s Technical
Committee reached an agreement on a work plan for a set of forty Core
Standards. Upon successful completion of these standards, IOSCO agreed to
endorse IASs in all global markets. The IASC completed the development of these
forty Core Standards by 1999. Recently
IASC experienced a structural change similar to the structure of Financial
Accounting Standards Board (FASB) of the United States. In March 2000, a new IASC constitution was
approved and the name of the international standard setting body was changed to
International Accounting Standards Board (IASB). The new board (IASB) reports
to IASC Foundation and assumed its duties in April 2001.
This
paper provides a brief history of international accounting standards and makes
a modest attempt to evaluate the adoption of International Accounting Standards
for listing purposes by the selected Middle East securities markets. The
remainder of this paper is organized as follows: The first section discusses
the need for establishing IASs. The second Section outlines the need for IASs
in the global securities exchange markets, while the third section discusses
this issue for some selected Middle East securities exchanges. The fourth section contains concluding
remarks.
2. The Need for International
Accounting Standards
As
we start the new millennium, international economic activity along with other
international activities has been increasing at a very rapid rate.
International trade, capital movements between countries, international
investment, number of multinational firms, and international bond and equity
offerings exhibited a huge growth over the last decade. Table I shows
International Equity Offerings made by companies from five geographic regions
for years 1995 and 1999. As observed, the
value of equity offerings for the total market increased from $57,725 million to $151,887 million. This
represents an increase of almost three times.
The volumes of activity for North America, Europe, and Asia-Pacific are
more notable. The volumes of activity
for Latin America and Africa-Middle East regions are low when compared to the
other three regions. This is normal because most of the multinational companies
which engage in equity offerings are headquartered in more developed countries. These companies are continuously seeking
higher returns and growth and less costly financing. In their quest for higher returns and cheaper financing, they
have to consider international alternatives. In order to evaluate these
alternatives intelligently they need reliable and comparable information. Dealing with accounting diversity and the
requirements of different national accounting standards was a major and costly
problem for these companies. If all
countries of the world employ the same accounting standards, such as
international accounting standards, multinational companies stand to gain
tremendously.
Another interest group, who could benefit from the global harmonization of accounting principles, is the international investor. With the arrival of high-tech computers and information age massive amounts of international financial information is available on the Internet. More and more institutional and individual investors are interested in making international investments.
Other groups, which may be interested in universal harmonization of accounting principles, include international filer companies, international accounting firms, international intergovernmental organizations, governments and regulating bodies, and financial markets. A short discussion of these groups is as follows:
A.
Some
companies listed in the large stock exchanges are not multinationals but they
are interested in raising additional funds and trading securities with
favorable terms. However, the
regulating bodies of stock exchanges, such as the Securities Exchange
Commission (SEC) in the USA, place restrictive filing requirements. Usually
they require financial statements to be prepared according to the domestic
financial reporting standards. Adoption
of the IASs would remove such restrictions.
B.
International
accounting firms constitute another group.
They provide auditing and consulting services in many countries. In order to perform these services, they
must possess expertise in the area of domestic financial accounting principles
and the related laws. Development of
this expertise is very costly to these firms and global harmonization of
accounting principles would likely to reduce these costs substantially.
C.
International intergovernmental
organizations, such as United Nations (UN), European Union (EU), and the
Organization for Economic Cooperation and Development (OECD), are also
interested in obtaining comparable financial information. These organizations
need to evaluate projects, extend credits and make other decisions about the
different nations of the world.
Worldwide accounting principles would produce comparable financial
information needed by these organizations.
D.
Many
developing countries as well as the Eastern European countries did not
experience the problems of developed countries and their domestic accounting
standards are not very comprehensive.
If the governments and/or accounting regulating bodies of these
countries adopt international accounting standards as their national standards
they can not only have a comprehensive set of standards but also may have
easier access to international financing sources.
E.
International
accounting standards can be very important for the development of global
financial markets, especially for stock exchanges. This will be discussed in more detail in the next section.
INSERT TABLE 1 HERE
3. International Accounting
Standards and Global Securities Exchange Markets
The
increase in international financing activity and the availability of massive
amounts of global financial information through the Internet have caused some
large stock exchanges to become internationalized. Table II shows the number of domestic and foreign listed
companies in the Stock Exchanges of the countries where there are at least 100
foreign listed companies. United
Kingdom, NYSE and Nasdaq of USA have more than 400 foreign listed
companies. Stock Exchanges of Germany
and Luxembourg include more than 200 foreign listed companies. The last column
shows the number of foreign companies as a percentage of total listed
companies. In the Luxembourg Stock
Exchange 80% of total companies are foreign listed companies. These markets are on the way to becoming
truly global markets.
Internationalization of stock exchanges can receive a boost if all stock
exchanges require financial statements prepared according to International
Accounting Standards. This is why the
International Organization of Securities Commissions (IOSCO) is so interested
in the international accounting standards and has pressured the IASC to
undertake the Core Standards Project.
After the completion of Core Standards by the IASC, the IOSCO began the
assessment of these standards. Eventually the IOSCO completed the evaluation
and recommended that its members should permit the incoming multinational issuers
to use 30 of these standards. This endorsement by IOSCO was a turning point in
support of the IASC’s activities. As a
result, more and more stock exchanges are expected to accept the financial
statements that are prepared according to IASs for filing purposes. In fact with the exception of United States
all the countries listed in Table II have permitted the foreign companies to
use IAS financial statements for listing purposes. In the United States the
Securities and Exchange Commission (SEC) requires that the foreign companies
must provide reconciliation to U.S. financial accounting standards if they
submit IAS financial statements for listing purposes.
The countries listed in Table II are highly developed western countries. Obviously this is not a coincidence. The stock exchanges of less developed countries have a lower number of foreign listed companies. Most of these countries need to attract foreign capital in order to increase the rate of their development. The remaining parts of this paper will discuss the use of international accounting standards in the stock exchanges of the Middle Eastern countries. Most of these countries are developing nations and they are faced with many economic problems. Allowing IAS financial statements for filing purposes may provide a boost to the securities exchanges of these countries in attracting foreign companies.
INSERT TABLE II HERE
4. International Accounting
Standards and Middle East Countries
The
Middle Eastern countries have many similarities as well as some important
differences. Countries like Egypt and Turkey have developing economies and are
in need of capital accumulation whereas oil rich countries such as Saudi Arabia
and Kuwait have enough capital to invest in foreign markets. In either case
these countries need to develop their stock markets and the use of the
International Accounting Standards can help them in this regard.
To
conduct this study we used the data compiled by International Accounting
Standards Committee, currently called International Accounting Standards Board
(IASB) [1]. We used the IASB data,
which have some shortcomings. The data for some countries seemed to be quite up
to date while other countries were not. We sought information on whether the
accounting bodies of the countries are members of the International Federation
of Accountants (IFAC), on how accounting principles (standards) are determined,
and about the acceptability of international accounting standards for listing
purposes in the stock markets. In
addition we tried to obtain data about the number of domestic as well as the
number of foreign companies listed in these stock exchanges. For this purpose we also utilized the data
collected by International Federation of Stock Exchanges (recently changed its
name to World Federation of Stock Exchanges).
For some countries we were able to obtain data on all of these items,
while for some other countries information was available on certain items only. We were not able to obtain any information
for few countries. That is why the title of this paper includes the term
“selected stock exchanges.”
Table
III shows a summary of the information available for the Middle East
countries. The first column indicates
whether the country’s accounting body is a member of the IFAC or not. The second column shows the acceptability of
international accounting standards in the stock exchanges. The third column presents information about
the accounting principles (standards) applicable within the country. The fourth and fifth columns indicate the
number of listed domestic companies and foreign companies, respectively. The
countries for which we were not able to obtain any information include Algeria,
Oman, Qatar and United Arab Emirates. For Iraq, Libya and Sudan only IFAC membership
information was available. For Egypt, Israel, Kuwait and Turkey we were able to
find information on all five items we inquired. The remaining countries listed in Table III missed at least one
item of information. On the critical
item of acceptability of international accounting standards (column two) we
were able to find data about Egypt, Iran, Israel, Jordan, Kuwait and
Turkey. In addition, the information
about accounting principles applicable in Syria and Tunisia indicates that they
are similar to international accounting standards. The data on the number of listed domestic and foreign companies
can be used as an indicator of the size and also the degree of
internationalization of these stock exchanges.
INSERT TABLE III HERE
In Table IV we classified the countries according to the acceptability of IAS financial statements for stock exchange listing purposes. The first column shows the counties in which both domestic and foreign companies are allowed to use IAS financial statements. Egypt, Jordan and Kuwait fall into this category. The second column indicates the countries in which only foreign companies can use IAS statements for listing purposes while domestic companies are required to follow their national accounting standards. Turkey is the only country that falls under this category. The third column shows the countries in which IAS financial statements are not allowed. Iran and Israel are the two countries in this group.
INSERT TABLE IV HERE
The
following is a short discussion of stock exchanges and accounting principles
for Table IV countries:
A.
The Countries in Which Both Domestic and Foreign Companies Follow IAS
EGYPT: Egyptian Accounting Standards have been prepared to comply with
International Accounting Standards except for certain minor differences to
adopt to Egyptian economic environment. Therefore all companies listed on the
Cairo Stock Exchange must follow IAS. Table III shows that there were 1075
domestic companies listed in the stock exchange. This number is the highest
among the Table III countries. However the stock exchange had only one listed
foreign company.
JORDAN: All companies, both domestic and foreign, listed in the Amman
Stock Exchange must follow IASs. The Amman Stock exchange included 163 domestic
companies and zero foreign companies.
KUWAIT: Kuwait adopted international accounting standards as national
standards.
Therefore,
all companies may follow IAS for listing purposes. Kuwait Stock Exchange
Included
77 domestic and 9 foreign listed companies. The number of foreign listed
companies is highest among Table III countries.
B. The Countries in Which Only Foreign Companies May Follow IAS:
TURKEY: Foreign companies may follow IAS or US GAAP or UK GAAP for filing
purposes in the Istanbul Stock Exchange. Foreign companies may also follow
their national GAAP with reconciliation to IAS. Domestic companies must follow
Turkish national GAAP. The Capital Market Board issues Turkish accounting
standards
and
in most cases they are similar to IAS. The Istanbul Stock Exchange included 315
domestic companies and one foreign listed company.
C.
The Countries in Which IAS are not allowed:
IRAN: All companies, domestic and foreign, must follow Iranian
accounting principles.
Iranian
Stock Exchange had 285 domestic companies and no foreign listed company.
ISRAEL: All companies, domestic and foreign, listed in the Tel Aviv Stock
Exchange are required to follow Israeli accounting standards. The Israel
Accounting Standards Board issues Israeli accounting standards and they are in
line with U.S. GAAP. There were 664 domestic companies and one foreign listed
company in the Tel Aviv Stock Exchange.
5. Conclusion
The
Middle-East countries to a large extent have welcomed the International
Accounting Standards. Some countries consider
these standards as a replacement for their domestic standards, while others
accept IAS financial statements from foreign companies for listing purposes in
the stock exchanges. A few countries
require even the domestic listed companies to follow IASs. The national standards of some countries are
either based on or similar to IASs even though they may not have adopted IASs.
Only two Middle East countries, Iran and Israel, showed reluctance to the use
of IASs. The number of listed companies for the majority
of the Middle East Stock Exchanges is small as compared to the stock exchanges
of the Western countries. The number of
foreign listed companies in most of these stock exchanges is negligible, which
means that the degree of internationalization is very low or nonexistent. However, in the opinion of the authors, the
experiment is in the early stage to draw a conclusion and it is expected that
the adoption of the International Accounting Standards may attract foreign
companies in the future.
ENDNOTE
[1] In order to update the data we sent e-mails to the securities exchange markets of the Middle Eastern countries. However in most cases we did not receive any response from these stock exchanges.
Choi,
F.D.S., Frost, C.A, and Meek, G.K., International
Accounting, Prentice-Hall, Fourth Edition, 2002.
International
Accounting Standards Board: IAS around the world, how IAS are being used, www.iasb.org.uk, 2001.
The
World Federation of Stock Exchanges Web Site: www.fibv.com
Nobes,
C.W. and Parker, R., Comparative
International Accounting, Prentice-Hall, Sixth Edition, 2000.
TABLE I
(Sales of Securities Outside
of the Domestic Market)
Millions of Dollars
|
Geographic
Region |
1995 |
1999 |
|
North
America |
11,307 |
23,963 |
|
Europe |
31,526 |
82,809 |
|
Africa-
Middle East |
1,779 |
3,174 |
|
Asia
– Pacific |
12,235 |
41,219 |
|
Latin
America |
878 |
721 |
|
Total
Market |
57,725 |
151,887 |
Source: Choi, Frost and Meek, International Accounting, Prentice-Hall, Fourth Edition, 2002, page
2
(As of December 31, 2000)
|
Countries |
Number of Companies |
Foreign
Companies |
||
|
|
Total |
Domestic |
Foreign |
As
a Percent of Total |
|
United
Kingdom |
2,929 |
2,603 |
501 |
17.1 |
|
NYSE-
USA |
2,468 |
2,035 |
433 |
17.5 |
|
Nasdaq-
USA |
4,726 |
4,239 |
487 |
10.3 |
|
Germany |
989 |
744 |
245 |
24.8 |
|
Luxembourg |
270 |
54 |
216 |
80.0 |
|
France |
1,185 |
1,021 |
164 |
13.8 |
|
Switzerland |
416 |
252 |
164 |
39.4 |
|
Netherlands |
392 |
234 |
158 |
40.3 |
|
Belgium |
265 |
161 |
104 |
39.2 |
Source:
Choi, Frost and Meek, International
Accounting, Prentice-Hall, Fourth Edition, 2002, page 10.
Stock Exchanges and International
Accounting Standards
Middle-East
Countries
Country
|
IFAC
Member |
International
Accounting Standards |
Accounting
Principles |
#
Listed Domestics Companies |
#
Listed Foreign Companies |
|
Algeria |
No info
|
No
information |
No
information |
No
info |
No
info |
|
Bahrain |
Yes
|
No
Information |
Banks
are required to conform to IAS |
36 |
5 |
|
Egypt |
Yes |
All
companies listed in Cairo stock exchange must follow IAS |
Same
as IAS except minor differences |
1075 |
1 |
|
Iran |
Yes |
All
companies follow Iranian Accounting Standards |
No
information |
285 |
0 |
|
Iraq |
Yes |
No
information |
No
information |
No
info |
No
info |
|
Israel |
Yes |
Companies
follow Israel’s Accounting Standards |
Accounting
Standards are in line with US GAAP.
Long-term objective to harmonize Israel’s GAAP with IAS |
664 |
1 |
|
Jordan |
Yes |
All
listed companies are required to follow IAS |
No
information |
163 |
0 |
|
Kuwait |
Yes |
All
listed companies are required to follow IAS |
IAS
are adopted as national standards with explanatory materials added |
77 |
9 |
|
Lebanon |
Yes |
No
information |
No
information |
12 |
0 |
|
Libya |
Yes
|
No
information |
No
information |
No
info |
No
info |
|
Morocco |
No
info |
No
info |
No
info |
53 |
0 |
|
Palestine |
No
info |
No
information |
No
information |
25 |
0 |
|
Oman |
No
info |
No
information |
No
information |
No
info |
No
info |
|
Qatar |
No
info |
No
information |
No
information |
No
info |
No
info |
|
Saudi
Arabia |
Yes |
No
information |
Accounting
standards are established by Ministry of Finance |
No
info |
No
info |
Country
|
IFAC
Member |
International
Accounting Standards |
Accounting
Principles |
#
Listed Domestics Companies |
#
Listed Foreign Companies |
|
Sudan |
Yes |
No
information |
No
information |
No
info |
No
info |
|
Syria |
Yes |
No
information |
Association
of Syrian Certified Accountants establishes accounting Standards. They are based on IAS. |
No
info |
No
info |
|
Tunisia |
Yes |
No
information |
Accounting
Standards are adopted by Ministry of Finance and are similar to IAS. Some foreign companies are allowed to use
their national GAAP or IAS. |
No
info |
No
info |
|
Turkey |
Yes |
Companies
can follow IAS, or US, or UK GAAP.
Foreign companies may follow their national GAAP but with reconciliation
to IAS. |
All
banks and financial institutions are required to follow IAS, beginning
January 1999. |
315 |
1 |
|
United
Arab Emirates |
No
info |
No
information |
No
information |
No
info |
No
info |
Sources:
International Accounting Standards Board Internet Site: www.iasb.org.uk
Acceptability of International
Accounting Standards in the Stock
Exchanges Of Selected Middle
East Countries
|
Domestic and Foreign Companies
May Follow IAS |
Only Foreign Companies May
Follow IAS |
IAS Statements Not Allowed |
|
Egypt |
Turkey |
Iran |
|
Jordan |
|
Israel |
|
Kuwait |
|
|
Source:
International Accounting Standards Board Internet Site: www.iasb.org.uk