International Accounting Standards Harmonisation: The Case o f Iran Privatisation

International Accounting Standards Harmonisation: The

Case o f Iran Privatisation

JamaI Roudaki

Lincoln University', N ew Zealand

A bstract

Accounting standards harmonisation literature shows that from the beginning of the twenty first century IASs and IFRSs are receiving increasing attention from professional accounting

authorities of developed and developing countries more than ever before. Consequently number of countries chose to join the IAS u s e r s h a v e i n c r e a s e d d r a m a t i c a l l y in r e c e n t y e a r s . T h e

Iranian Accounting Standards Board achieves harmonisation with IASs and IFRSs while government using some efforts to develop local stock market as means of privatisation. T e h r a n S t o c k E x c h a n g e w h i c h is i n v o l v e d in t h e t h i r d w a v e of country privatisation required companies to prepare their financial reports using National Accounting Standards. These standards are in harmony with IASs and IFRs as they

objective of this

a r e d e v e l o p e d b a s e d o n t h e s a m e p r o c e d u r e o f I A S B ’s “ d u e process”. In the same way, proposed projects of Iran Accounting Standards Boards aim to develop conceptual framework in order to establish a platform for standard s e t t i n g . D u e t o r e c e n t d e v e l o p m e n t i n p r i v a t i s a t i o n in

relation to internationally harmonised national accounting

a n d a u d i t i n g s t a n d a r d s t h e s t a n d a r d s e t t i n g i n I r a n is in t h e state of flex national and international wise.

Key words: International Standards Harmonisation, International Accounting Standards, Privatisation and accounting standards, Iran Accounting Standards

Introduction Accounting standard setting literature has focused on the institutional

a p p r o a c h in s t a n d a r d s s e t t i n g o f d e v e l o p e d c o u n t r i e s o f N o r t h A m e r i c a , W e s t e r n Europe, South East Asia and Oceania, In this regard developing countries are neglected (Fritz and Lammle, 2003). While many developing countries such as Iran have started privatization as an approach for further economic development with the help of foreign investment, thus setting internationally harmonised

accounting standard become an important issue for them. Because of this need, from 2000 and 2001 when IFAC and International Accounting Standard

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70 Privatisation a n d Evolution o f Standard Setting in Iran

Committee (IASC) has been restructured respectively, some developing

c o u n t r i e s h a v e a d o p t e d , s u b s t i t u t e d o r t o o k r e m e d i a l s t e p s in h a r m o n i z a t i o n with the International Financial Reporting Standards (IFRSs) and International

A c c o u n t i n g S t a n d a r d s ( I A S s ) . In t h i s r e g a r d I r a n h a s a u n i q u e s t a n d p o i n t . U n l i k e s o m e d e v e l o p i n g c o u n t r i e s I r a n is n o t p a r t i c i p a t i n g in s t a n d a r d s e t t i n g committee while indirectly using IASs and IFRSs for preparing, reporting and auditing purposes.

This article focuses on the Iranian standards harmonisation with International

A c c o u n t i n g S t a n d a r d s in r e l a t i o n t o p r i v a t i s a t i o n in t h e s t a t u a r y c o n t e x t . I t w a s in r e c e n t y e a r s t h a t I r a n i a n a u t h o r i t i e s t a k e c u r a t i v e s t e p s t o r e g u l a t e f i n a n c i a l r e p o r t i n g in o n e h a n d a n d p r i v a t i z e g o v e r n m e n t o w n e d c o m p a n i e s in t h e o t h e r hand. Among Middle East countries Iran has a matchless position. Regulatory environment of Iran has history of more than 50 years from the first Tax Law of

1955 and Commercial Codes of 1953. Based on these two laws few attempts have been made to develop domestic accounting profession and help to develop

a set of national accounting standards, while other developing Middle East countries have not started regulatory in accounting as early as Iran. Moreover, T e h r a n S t o c k E x c h a n g e ( T S E ) w h i c h h a s b e e n e s t a b l i s h e d in 1 9 6 7 w a s m o s t l y

i n v o l v e d in e q u i t y m a r k e t f o r m o r e t h a n a d e c a d e u p t o 1 9 7 9 ( K h o d a d o u s t ,

1 9 7 5 ) . T r a d i t i o n a l l y , T S E h a s n o i n f l u e n c e o n a c c o u n t i n g s t a n d a r d s e t t i n g in t h e country from the time of establishment to 1979 when it became inactive due to t h e I s l a m i c R e v o l u t i o n . T h i s t r e n d s e e m s c o n t i n u e d w h e n T S E ’s a c t i v i t i e s r e s u m e d i n 1 9 8 0 s . N o n e t h e l e s s , i n t h e n e w p r i v a t i s a t i o n w a v e o f 2 0 0 6 T S E is considered as the sole market for selling government owned shares while requiring listed companies to use accounting standards in financial reporting. This condition tends to increase demand for internationally harmonised accounting standards.

T h e r e m i n d e r o f t h i s p a p e r i s o r g a n i s e d a s f o l l o w s . S e c t i o n o n e is a b a c k g r o u n d of the international accounting standard harmonisation. The argument will continue under sub-heading of harmonisation argument to focus on how Iranian standard board achieve international harmonisation. To complete this discussion professional, statutory and privatisation needs of standard setting environment of Iran will be covered in sections three, four and five respectively. Conclusions and recommendations are presented at the end.

In ternation al H arm on isation Background

As early as 1960s international accounting standard harmonisation was topic of many accounting papers (Kraayenhof 1960, Stamp 1972, Gary 1984, Perera, 1989 and Gary 1988, Saudagran and Diga, 2000 and Chamisa, 2000).

Some of accounting scholars believed that due to cultural and economic systems differences

of developed

around the world,

i n t e r n a t i o n a l h a r m o n i s a t i o n is n o t p o s s i b l e w h i l e t h e s e s t a n d a r d s a r e b a s i c a l l y w e s t e r n b a s e d ( P e r e r a , 1 9 8 9 , H o v e 1 9 8 9 a n d S a u d a g r a n a n d D i g a , 2 0 0 0 ) . In t h e contrary, some other scholars such as Baydoun and Willett (1995) raise the

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q u e s t i o n e d o f w h a t a s p e c t s o f a c c o u n t i n g s y s t e m is r e l a t e d t o c u l t u r a l v a l u e s that tend to resists international harmonisation. Many scholars advocated that

international harmonisation

disclosure and enhance

i n t e r n a t i o n a l c o m p a r a b i l i t y in i n t e r n a t i o n a l s t o c k m a r k e t ( K i r b y , 2 0 0 1 , B a r t h , e t al, 1999, Gigler, Hughes and Rayburn, 1994). Relationship between using international accounting standards and economic

d e v e l o p m e n t w a s t o p i c o f m a n y r e s e a r c h e s in d e v e l o p i n g c o u n t r i e s . I n t h i s regard, Larson (1993a) investigated the role of economic growth and usage of

I A S s in 3 5 A f r i c a n c o u n t r i e s . H i s e m p i r i c a l r e s e a r c h s h o w s t h a t s t a t i s t i c a l l y t h e r a t e o f e c o n o m i c g r o w t h is s i g n i f i c a n t l y h i g h e r f o r t h o s e A f r i c a n c o u n t r i e s t h a t

a d o p t a n d m o d 'f y i n t e r n a t i o n a l a c c o u n t i n g s t a n d a r d s in c o m p a r i n g t o o t h e r s t h a t

d o n o t a d o p t t h e s e s t a n d a r d s ( L a r s o n 1 9 9 3 a ) . S i m i l a r l y , in a n o t h e r e m p i r i c a l research Larson (1993b) shows that stock market development and economic growth of a sample of 30 developing countries positively react with adoption of IASs. He also concluded that developing countries that do not adopt the IASs

usually had fairly sophisticated accounting systems (Larson, 1993b). In many

c a s e s t h e s e a c c o u n t i n g s y s t e m s a r e in t h e l i n e o f c o l o n i a l o r i n f l u e n t i a l developed countries. However, at the beginning of 21

century professional accounting world

witnesses an incredible development in international harmonisation, while the

a r g u m e n t o f p r o a n d a g a i n s t i n t e r n a t i o n a l s t a n d a r d s h a r m o n i s a t i o n s t i l l is v a l i d . The dramatically change in international accounting standards harmonisation take place when in 1973 the International Accounting Standards Committee (IASC) v/as established and the first four courtiers (i.e. UK, US, Canada and Australia) joined the ISAC. For twenty years (1970-1990) these four countries

h a v e a t t e m p t e d t o d e v e l o p n e w a c c o u n t i n g s t a n d a r d s in h a r m o n y w i t h I A S C ( S t r e e t , e t a l , 1 9 9 8 ) . T h i s t r e n d w a s c o n t i n u e d u n t i l 2 0 0 1 w h e n I A S C is restructured as the International Accounting Standards Board (IASB) to produce more accounting standards that can be used by all nations around the world. Year 2001 was a remarkable year due to support that IASB received from national standard setting bodies of many countries around the world (Alferson, 2002). Up to the time of restructured, IASC was able to produce 41 accounting standards to the end its era (i.e. 2001). These standards were “more principle based rather than rules based” using general principle concepts such as r e c o g n i t i o n , m e a s u r e m e n t a n d r e p o r t i n g r e q u i r e m e n t s ( A l f e r s o n , e t a l , 2 0 0 5 ) . In

the last decade of twentieth century, the global pressure was for more suitable

a c c o u n t i n g s t a n d a r d s . T h u s in 1 9 9 0 s t h e G 7 M i n i s t e r s c a l l e d u p o n r e s t r u c t u r e o f IASC to IASB (Alferson, et al, 2005). Accordingly, IASB was established as an independent worldwide standard setter gain support of governments, accounting

professional associations, securities commissions and standard setting boards of many countries around the world (Radebaugh, et al, 2006). Nonetheless, two forces push the accounting standards setting boards of countries to adopt or harmonised with IASs and IFRSs. The global capital market expansion and growth of multinational companies was most motivation for international

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72 Privatisation a n d Evolution o f Standard Setting in Iran

harmonisation (Saudagaran 1997, Choi and Mueller 1992 and Jahangir Ali, 2005).

To the end of 2006, the international standard harmonisation have a great achievement that, Australia and European Union, from 2005 have adopted and New Zealand from 2007 will adopt the IAS, while other countries such as Japan, Korea and Iran have developed some national accounting standards s i m i l a r t o I A S s a n d I F R S s . M a n y c o u n t r i e s a r o u n d t h e w o r l d a r e in t h e p r o c e s s

of providing conditions

Accounting Standards. Alfredson et all (2005) research reveal that up to 2005 about 127 countries were u s i n g I F R S s . I n a l l o f t h e s e c o u n t r i e s a n a c t i v c s t o c k m a r k e t is e x i s t e d e x c e p t o n e . A s t h e ) e x p l a i n e d , s i x t y s e v e n c o u n t r i e s r e q u i r e d I F R S s f o r a !! d o m e s t i c listed companies and 20 other countries required some listed companies such as banks to use IFRSs for financial reporting. In the contrary, 37 countries did not permit IFRSs to be used by companies, although later some of these countries

a d o p t n a t i o n a l a c c o u n t i n g s t a n d a r d s in h a r m o n y w i t h i n t e r n a t i o n a l a c c o u n t i n g standards (Alfredson et all, 2005). Table (1) shows the status of international

a c c o u n t i n g s t a n d a r d s h a r m o n i s a t i o n in s o m e o f t h e s e 3 7 c o u n t r i e s . F r o m l i s t e d

c o u n t r i e s in t a b l e ( 1 ) o n l y C h i n a r e q u i r e d s o m e d o m e s t i c l i s t e d c o m p a n i e s t o use IFRSs others did not permit IFRSs to be used since they have national accounting standards in force. Iran should be added to table (1) as a countiy not permitted domestic firms use IASs or IFRSs while a set of formal national accounting standards are in force. In the next section of this paper we will see how Iran joins international harmonisation in standards setting.

T able -1: In tern ation al H arm onization Status o f Som e C ountries with

N ation al A ccou n tin g Standards (not perm it IF R S s to be used)

C ou n try N am e International H arm on isation Status

India Some efforts to use International Accounting Standards Argentina

made to eliminate

differences with IFRSs.

Malaysia From 32 national standards 26 are the same as corresponds IFRSs

Mexico A b o u t 7 0 % o f n a t i o n a l s t a n d a r d s a r e in li n e o f th e International Standards

China

Adopt IFRSs from 2006

Indonesia Working to harmonise national standards with IFRSs. Thailand

21 of IASs are the same as Thai accounting standards. European Union

F r o m 2 0 0 5 r e q u i r e d c o u n t r y m e m b e r s to u s e I F R S s . S o f a r Poland, The Netherlands, Sweden, Switzerland, France and

Italy made IFRSs mandatory.

Philippine A f t e r 1 9 9 0 m a k e s o m e r e f e r e n c e to I A S s . Singapore

Some IASs considered to be not relevant S o u rc e : R a d e b a u h g , 2 0 0 6 , I A S B w e b site , 2 0 0 6 , A lfr e d s o n , e t a ll, a n d S o u d a g r a n a n d D ig a , 2 0 0 0 .

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H arm onisation A rgu m en t

In standard setting, Iran Auditing Organisation (IAO) uses the same procedure as the International accounting standard board. Eight steps of due process of the IASB are exactly following by the IAO. From 1994 to 1996 many accounting guidelines booklet have been published by this government organisation.

translation of International Accounting Standards, were not formal accounting standards approved by the IAO’s board but used as a bases of developing National Accounting Standards ( N A S s ) . H o w e v e r , in 1 9 9 9 t h e f i r s t d r a f t o f N A S s w a s a p p r o v e d b y t h e I A O standard committee board, recommended to be used for two years as trial p e r i o d . S o m e o f t h e N A S s r e v i s e d in 2 0 0 0 t o a c h i e v e m o r e i n t e r n a t i o n a l harmonisation, then the trailed NASs announced as compulsory standards. To

the end of 2006, 28 NASs gain approval from the IAO board. These standards can be classified into three groups of 1) similar to IASs, 2) similar but with differences from IASs and 3) with no IASs equivalent. The first group includes

18 national accounting standards (NASs) similar to IASs. These standards are p r e s e n t e d a l o n g w i t h d a t e o f e f f e c t i v e s in t a b l e ( 2 ) . T h e s e c o n d g r o u p is e i g h t N A S s w h i c h a r e d e f i n e d d i f f e r e n t l y f r o m I A S s p r e s e n t e d in t a b l e ( 3 ) . T h e l a s t t w o N A S s ( t h i r d g r o u p ) w h i c h h a v e n o e q u i v a l e n t I A S s a r e i n c l u d e d in t a b l e ( 4 ) . I t i s w o r t h t o s a y t h a t o n e o f t h e l a t e s t D i s c u s s i o n P a p e r o f I A S B is r e l a t e d to Insurance Contracts which is one the late 2006 approved NASs in Iran included in table (4).

Table “2; Sim ilar Iranian National A ccounting Standards (NASs) and IASs

I N AS

Subject

IAS

E ffective D ate

1 Presentation of Financial Statements 1 2001 3 Revenue

18 2001 4 Accounting for Contingencies

10 2001 5 Accounting for Events After the Balance

10 2000 Revised Sheet Date

2006 6 Reporting Financial Performance

8 2001 7 Accounting for Research & Development

38 2001 Costs 8 Accounting For Inventories

2 2001 9 Accounting for Long-term Contracts

11 2001 11 Accounting for Tangible Fixed Assets

16 2001 12 Related Party Disclosures

24 2001 13 Accounting for Borrowing Costs

23 2001 14 Presentation of Current Assets & Current

1 2001 Liabilities 17 Accounting for Intangible Assets

38 2001 19 Business Combinations

22 2000 Revised 2006 21 Accounting for Leases

17 2001 22 Interim Financial Reporting

34 2001 23 Accounting for Joint Ventures

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74 Privatisation and Evolution o f Standard Setting in Iran

27 Retirement Benefit Plans 26 2005 S o u rc e : I A O W e b s ite , 2 0 0 6 .

A s it is a p p e a r s f r o m t a b l e ( 3 ) , e i g h t N A S s a r e d i f f e r e n t l y d e f i n e f r o m t h e e q u i v a l e n t I A S s . D u e t o t h e s o c i o - e c o n o m i c e n v i r o n m e n t o f I r a n , in classification of cash and cash equivalent when preparing cash flow statement

c a s h e q u i v a l e n t h a s b e e n e x c l u d e d f r o m t h e d e f i n i t i o n o f c a s h b y N A S 2 in comparing to IAS 7. In this standard return on investment and servicing of finance and income tax activities have been separated from major classification in t h e c a s h

because of statutory r e q u i r e m e n t s , N A S 1 0 s e t d i f f e r e n t r e q u i r e m e n t s t h a n I A S 2 0 in t r e a t m e n t o f

flow statement.

the other hand,

g o v e r n m e n t g r a n t s . A c c o r d i n g t o N A S 10 i f a s p e c i a l c o n d i t i o n is a t t a c h e d to government grant by regulation thus have to be followed. In evaluation of non monetary assets received in a government grant, again statutory requirements s h o u l d - b e f o l l o w e d i f i t d o e s n o t r e s u l t in r e f l e c t i n g t h e g r a n t e d a s s e t s in m o r e

than its fair value at the time of transfer. These requirements are clearly differ from IAS 20.

NAS 15 set different requirements for investment. The IAO accounting standard board believes that the most popular financial instruments in Iran are s h a r e s a n d o p t i o n s w h i l e f i n a n c i a l i n s t r u m e n t s s u c h a s f u t u r e a n d f o r w a r d is n o t in use, thus in Accounting for Investment Standard either fair value or cost measurement are permitted. NAS 16 have included many changes in comparing w i t h I A S 2 1 d u e t o h u g e f l u c t u a t i o n i n f o r e i g n c u r r e n c y t r a n s l a t i o n in I r a n . T h e

f i r s t d i f f e r e n c e i s r e l a t e d t o g o v e r n m e n t e n t i t i e s , a n y d i f f e r e n c e s in f o r e i g n

c u r r e n c y a s s e t s a n d l i a b i l i t i e s o f t h e s e e n t i t i e s s h o u l d b e i n c l u d e d in a r e s e r v e account. At the end of accounting period this account can be closed to Profit and Loss Summery Account and thus reported in the comprehensive income statement. The other differences are includes foreign currency exchange rate fluctuation related to a) monetary items b) liabilities arises in hedge transactions

c) disposal of foreign entity. These items should be recognised as equity and presented at the comprehensive income statement until the disposal of the investment when the differences should be closed to accumulated Loss and Gain Account.

NAS 18 is the same as IAS 27 with the exception of the requirements related to treatment of debit balance of the minority interest account. According to IAS 27 such debit balance should be allocated against the majority interest

e x c e p t t c t h e e x t e n d t h a t it h a s a n y c o m m e r c i a l o r l e g a l o b l i g a t i o n s t o p r o v i d e

f i n a n c e t o c o v e r t h e l o s s e s . T h i s r e q u i r e m e n t is n o t c o n s i d e r e d r e l e v a n t t o t h e socio-economic of the country thus not recommended by NAS 18

A c c o r d i n g t o N A S 2 0 ( A c c o u n t i n g f o r I n v e s t m e n t s in A s s o c i a t e s ) w h e n investor does not prepare consolidated financial statement, the equity method should be used for presentation of associate’s interest. This can be done either by preparing a total financial statement or explanatory disclosure notes, these requirements are not followed exactly by NAS 20. NAS 25 has excluded the application of the primary and secondary format that recommended by IAS 14.

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S t a n d a r d b o a r d o f I r a n b e l i e v e s t h a t s i n c e t h e r e is n o a c t i v e m a r k e t f o r biological products assets thus recommendation of IAS 41 about measuring

a g r i c u l t u r a l a s s e t s is n o t a p p l i c a b l e in I r a n a n d s h o u l d b e t r e a t e d a s t a n g i b l e assets (NAS 11) and cost method should be used. According to NAS 26 government grants related to biological productive assets should be recognised

a t f a i r v a l u e l e s s c o s t s e s t i m a t e d o n d i s p o s a l w h i c h is t h e s a m e a s r e q u i r e m e n t s of NAS 1 1 (Accounting for Tangible Fixed Assets). Nonetheless, at the time of gathering data for this paper, revised copies of two standards of Accounting for Tangible Fixed Assets (ANS 11) and Accounting for Intangible Assets (ANS

17) are out inviting professional comments until mid and late 2006 respectively.

Table 3: Iranian N ation al A ccounting Standards (NA S) and IAS w ith

_____ _________________ D ifferent R equirem ent________ ______________

E ffective NAS

Subject

IAS

D ate

2 Cash Flow Statements

A c c o u n t i n g f o r I n v e s tm e n t s in 2006 S u b s id i a r i e s

20 A c c o u n t i n g f o r I n v e s tm e n t s in A s s o c i a te s

25 Segment Reporting

41 2005 S o u rc e : I A O W e b s ite , 2 0 0 6 .

26 Agriculture

T able 4: Iranian N ational A ccounting Standards (NAS) W ith no IAS

____________________________ E quivalent_________ ___________________ NAS

Subject

E ffective D ate

24 F in a n c i a l R e p o r t i n g b y D e v e l o p m e n t S ta g e 2002

E n ti tie s

28 G e n e r a l I n s u r a n c e A c tiv it ie s 2007

Source: IAO W ebsite, 2 006

l A O ’s d e v e l o p m e n t p r o j e c t s s h o w s t h a t a c c o u n t i n g s t a n d a r d s b o a r d is in t h e xstage of developing fundamental rules for accounting and auditing standards

while considering international harmonisation. Table (5) presents list of 9 proposed projects of Iran accounting standards board. Among proposed p r o j e c t s , a m e n d m e n t s o f N A S s a n d f i n a n c i a l r e p o r t i n g f r a m e w o r k w h i c h a r e in accordance with IASs are considered as important. Proposed projects of table 5 are milestone

in Iran

accounting and

auditing standards harmonisation

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76 Privatisation and Evolution o f Standard Setting in Iran

i n t e r n a t i o n a l l y . I A O is c o n s i d e r i n g t o w o r k o n i m p a i r m e n t a s s e t s , f i n a n c i a l instruments and accounting for oil and gas. These projects will increase the level of international harmonisation to high standard.

T able 5: A ccounting S tan dards P roposed Projects Proposed P roject

1 Accounting for Life Insurance Activities

"*s. '■ " "

2 A m e n d m e n t s o f A c c o u n t i n g S t a n d a r d s a c c o r d i n g t o c h a n g e s in I n t e r n a t i o n a l Accounting Standards

3 Standards Interpretation

4 Accounting for activities relating to Property Sales and Development

5 Impairment Assets

6 Financial Instruments

7 Accounting for Oil and Gas

8 Amendment of the Financial Reporting Framework

9 Entities going into Liquidation S o u rc e : I A O W e b s ite , 2.006

In developing National Auditing Standards, 22 out of 33 developed standards are the same as International Auditing Assurance Standards Board (IAASB) s t a n d a r d s a n d 11 o t h e r s i n c l u d e s o m e d i f f e r e n c e s d u e t o c u l t u r a l a n d s o c i o

economic of the country. Auditing standards setting board of IAO anticipated developing new standards in harmony with international standards. Table (6) presents list of 6 proposed projects of Iran auditing standards board. Interestingly this is the first time that auditing standards board planned to work on conceptual framework, following its international compartment, IASB.

T ab le 6: A uditing S tan dards P rop osed Projects P roposed P roject

1 K n o w l e d g e o f t h e B u s i n e s s a n d I ts E n v i r o n m e n t a n d R i s k A s s e s s m e n t s o f Material Alternations

2 C o n s i d e r a t i o n o f E n v i r o n m e n t a l M a t t e r s in t h e A u d i t o f F i n a n c i a l S t a t e m e n t s 3 Audit Considerations relating to Entities Using Service Organizations 4 Conceptual Framework 5 Objective and General Principles Governing an Audit of Financial

Statements 6 Audit Procedures for Risks Estimated

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The International Journal o f Accounting and Business Society 77

From the organisational chart perspective, five out of 9 members of the board are IAO’s Board of Executive and Board of Governors, two representatives

from IACPA, one from Organisation of Stock Exchange Brokers and one

i n d u s t r y r e p r e s e n t a t i v e . A s it i s e x p l a i n e d e a r l i e r , s t a n d a r d s b o a r d o f I A O is u s i n g t h e s a m e d u e p r o c e s s a s J A S B in d e v e l o p i n g a c c o u n t i n g a n d a u d i t i n g standards. Figure (1) shows standards setting process and the related responsible sub-committee or authority within IAO.

Figure 1: Iran Audit O r g a n is a tio n ’s Due Process Standards Setting and Related

Authorities

Process Responsible Authority

Deciding on the Subjects The Accounting Standard Setting Committee

Researching the Subject Advisors of Standard Setting Department and Advisory Group within IAO

Deciding on necessity of a The Accounting Standard standard development

Setting Committee

Developing the preliminary Standard Setting Department draft

Advisory Group within IAO

Development of Standard Draft

The Accounting Standard Setting Committee

Publishing for Public Standard Setting Comments

Department of IA O

Development of Final Draft The Accounting Standard Setting Committee

Review and Approval of Board of Executive and Final Text

Board of Governors Vol. 13, No. 2 / Agustus 2005

78 Privatisation a n d Evolution o f Standard Setting in Iran

S o u rc e : IA O W e b s ite , 2 0 0 6 .

P rofessional N eeds

I n m a n y d e v e l o p i n g c o u n t r i e s ( D C s ) a c c o u n t i n g p r o f e s s i o n is u n d e r pressure

in the absence of comprehensive

of producing

In most cases the “International Accounting Standards (IASs) are not legally recommended or professional accountants are reluctant to use them due to the fact that local user of financial information are not familiar with these standards. In these countries IASs should be somehow adjusted to local environment before gaining support from financial reports users including government before they can be used as standards for financial reporting preparation and auditing purposes.

set of accounting standards

locally.

Review of accounting standard setting literature shows that professional accountants of most DCs use the accounting standards of the country that they r e c e i v e d t h e i r a c c o u n t i n g e d u c a t i o n . C o n s e q u e n t l y , it is e x p e c t e d t h a t w i t h i n a

country more than one set of standards utilize for a period of time. As an example Iran like some other developing countries, has experienced using the USA and the UK accounting standards for more than half a century (Roudaki, 2006). As the first UK educated accountants return to country by 1944 they continue to push for the idea of establishing a society in the direction of UK

chartered accountants (Khodadoust

Clearly they follow the UK accounting standards in their professional careers. Although the proposed society never comes to existence but they succeed to establish an accounting profession with the cooperation of US gradates in 1972. From this time Iran accounting profession witnesses Anglo-American accounting standards. Depend on the client and the auditor UK or US accounting standards were used to

prepare financial reports or providing auditors’ opinions. Likewise the Big 8

a u d i t i n g c o m p a n i e s w e r e a c t i v e i n I r a n f o r m o r e t h a n a d e c a d e in 1 9 7 0 s (Molkaraee, 2005). UP to 1979, the time of Islamic Revolution, all efforts for

e s t a b l i s h m e n t o f a n a c c o u n t i n g s o c i e t y h a v e b e e n f a i l e d e x c e p t o n e w h i c h is s t i l l

f u n c t i o n i n g ( R o u d a k i , 2 0 0 6 ) . W h e n t h e a c c o u n t i n g p r o f e s s i o n f a l l i n t o c r i s e s in the years after 1980 the Iranian legislators realise that they have no choice to pay more attention to standard setting process. In this regard establishment of Iran Audit Organisation (IAO) was the initial and significant step by government. Among many duties of the IAO was development of national accounting and auditing standards (IAO website, 2005). IAO do nothing, but

translating the international accounting standards for more than a decade. During this time almost all of the International Accounting and Auditing Standards translated into Persian (Farsi) to be accessible for local accountants

a n d a u d i t o r s t o u s e t h e m o n v o l u n t a r y b a s i s b u t n o t in f o r m a l c o m m i t m e n t s . A t t h e b e g i n n i n g o f e a c h p u b l i s h e d t r a n s l a t i o n I A O m e n t i o n e d t h a t , t h i s is o n l y translation and not the official opinion of the standard setting committee of the organisation. At least 18 and 19 translated pamphlet of accounting and auditing

standards respectively was the product of the first 10 years of establishment of the IAO. In fact, IAO encouraged auditors' member to use translated standards

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The International Journal o f Accounting and Business Society

as a guide for auditing financial reports of government and semi-government companies. We have to take into consideration that after the Islamic Revolution of 1979 about 95% of Iran’s economy was run by government due to

nationalisation of the Royal and related to Royal Family companies and institutes (Roudaki, 2006). It seems that auditors member of the IAO have no

choice to use translated international accounting and auditing standards without referencing to them directly and formally. Accordingly, since there was no formal set of accounting standards accountant continue to use the standards r e c o m m e n d e d b y r e l a t e d a u d i t o r in p r e p a r i n g f i n a n c i a l s t a t e m e n t s . T h i s t r e n d w a s c o n t i n u e d in t h e l a s t d e c a d e o f 2 0 th c e n t u r y .

The Sole Article of 1993 authorised government to use auditing and accounting services of qualified professional individuals as official auditors of public and private companies. The implicit aim of this article was to speed up standard setting process and involve more qualified accountants to audit government and semi-government companies under umbrella of the IAO. Accordingly the 1993 Article provides legal support for establishment of a

domestic powerful accounting society under indirect government control. However, it takes two years (up to 1995) that the Board of Ministers approved the Qualification and Requirement Codes of Choosing Certified Public Accountants to be member of “official accountant society”. Subsequently after another two years the Ministry of Financial Affaires prepare the constitution of the Iranian Certified Public Accountants (IACPA) as the first government

indirect controlled accounting body. Due to professional needs of accounting and auditing profession, IAO was reorganised in 2003 by law to be able to cooperate with AICPA in developing new accounting standards and allowed to use services of individual private auditors. By the end of 2005, number of approved National Accounting and Auditing Standards were 37 and 33 respectively. As the number of these standards are increasing financial reporting

g a i n i n g c r e d i t a b l e r e g u l a t o r y s t a t u s w h i l e in h a r m o n y w i t h I n t e r n a t i o n a l

A c c o u n t i n g S t a n d a r d s w h i c h is e x p l a i n e d in t h e p r e v i o u s s e c t i o n . T h i s facilitated the stock market more freedom to interact with international finical market. In the same time government use some efforts through its financial

instruments to encourage investment by international and local private investors with the hope of promoting economic development. In this regard, privatisation can be considered as an expected outcome of all of these efforts. Iranian

g o v e r n m e n t a m b i t i o n s o f i n v o l v i n g p r i v a t e s e c t o r a n d f o r e i g n i n v e s t o r s in providing public services utilised the development of national accounting and

a u d i t i n g s t a n d a r d s in h a r m o n y w i t h I A S s a n d I F R S s .

Statutory N eeds

Based on Article 44 of Islamic Republic of Iran Constitution, national economy has three sectors as state (government), cooperative (united production

a n d d i s t r i b u t i o n c o m p a n i e s a n d e n t e r p r i s e s in u r b a n a n d r u r a l a r e a s ) , a n d p r i v a t e (Islamic republic of Iran Constitution, 1980). According to this article:

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80 Privatisation a n d Evolution o f Standard Setting in Iran

“The state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams and large-scale irrigation networks, radio and television, post, telegraph and telephone services,

aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the State” (IR Iran Constitution, 1980).

Traditionally the implicit suggestion of this article suggested that government

c o u l d p r i v a t i s e l a r g e c o m p a n i e s w h i c h a r e n o t d i r e c t l y i n v o l v e d in t h e a b o v e activities. In 1989 for the first time after the Islamic Revolution, privatization draws attention of Iranian law makers. The sub-article 32 of the First National Economic Development Plan was considering separation of the government’s authoritative

responsibilities, thus suggesting privatization of companies providing nonessential public services. The main objective of the sub-article was to create of an economic balance in government o r g a n i z a t i o n s a n d p r i v a t e s e c t o r a f t e r t h e r e v o l u t i o n a r y n a t i o n a l i s a t i o n m a d e it heavy government economy. Thus based of this sub-article all government s t o c k s s h o u l d b e t r a n s f e r r e d t o i n d i v i d u a l p r i v a t e s h a r e h o l d e r s ( E t t e l a 'a t -

Aftemoon Daily, Jan 27, 2001). This sub-article did not reach to its goals due to the inappropriate implementation by government and lack of stock market

involvement. P r i v a t i z a t i o n h a s b e e n a m o n g g o v e r n m e n t ’s g o a l s a s e a r l y a s b e g i n n i n g of 90s, due to criticism of inefficient and ineffective government managers. In an effort to create effective and efficient environment for attracting local stray capitals toward the manufacturing sector some efforts was made in 90s to promote privatisation. As a new development to the dilemma, at the begging of

1992 parliament established an organization to value, pricing and transfer 33 percent of government companies’ stocks to blue-collar workers. In addition, according to 1998 and 1999 budget bills a committee headed by the President

and including the Minister of Economy and Finance, the Governor of the Central

Budget Organization, three parliamentarians were formed to conclude privatization process to the end of 2000 (Ettela'at- Afternoon Daily, Jan 27, 2001). As the Third 5-years Economic

Bank, the

a n d D e v e l o p m e n t P l a n s t a r t e d in 2 0 0 1 p r i v a t i z a t i o n w a s n o t c o m p l e t e y e t . T h i s plan, under supervision of the same committee as above, developed guidelines for appointing organizations that would be charged with drawing up policies, p r o c e d u r e a n d i m p l e m e n t a t i o n in s e l l i n g g o v e r n m e n t o w n e d c o m p a n i e s to r e l a t e d e m p l o y e e ( E t t e l a 'a t - A f t e r n o o n D a i l y , J a n 2 7 , 2 0 0 1 ) . T o s p e e d u p p r i v a t i z a t i o n t h e o r g a n i z a t i o n in c h a r g e p r o v i d e s l o a n s a n d f u n d s f o r t h e

employee of privatized industries. As a result, more than 648 billion Rials (equal to US$ 720 million) shares from 180 manufacturing units have been transferred to

including foodstuff, pharmaceutical, developing chemicals, textiles, home appliances, entertainment.

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The International Journal o f Accounting a nd Business Society

v e h i c l e s a n d n o n - m e t a l l i c m i n i n g ( E t t e l a 'a t - A f t e r n o o n D a i l y , J a n 2 7 , 2 0 0 1 ) .

H o w e v e r , d u r i n g 1 5 y e a r s f r o m 1 9 9 1 r a t e o f g r o w t h in t h e s e c o m p a n i e s w a s

c o n s i d e r a b l e h i g h . T h e y h a v e b e e n i n v e s t e d 3 9 t i m e s o f s o l d c a p i t a l in privatization process into the companies (Khabar, Morning Daily, July 6, 2006). Since only 30 percent of government owned companies have been privatized,

this means that the government sector have been increased instead of decline.

A s it is e x p l a i n e d e a r l i e r T S E w a s n o t i n v o l v e d in t h i s w a v e o f p r i v a t i s a t i o n , t h u s g o v e r n m e n t c r i t i c i z e d o f c o n s p i r a c y a n d c o r r u p t i o n in s e l l i n g t h e s h a r e s . U n d o u b t e d l y d u e t o t h e a b s e n c e o f n a t i o n a l a c c o u n t i n g s t a n d a r d s in financial reporting and not involvement of TSE individual investors have no bases for evaluation while have not incentive or access to privatised government shares. Thus this wave of privatisation was concluded without any sensitive r e s u l t s f o r g o v e r n m e n t in d e c r e a s i n g s i z e o r s p e e d u p e c o n o m i c d e v e l o p m e n t .

This forced government to refer to the legislators to help with providing a solid base for privatisation. The Sole Article of 1993 which required government to

use auditing and accounting services of qualified professional individuals was a the most important move from legislators’ side.

After development of considerable accounting and auditing standards, in July 2006 the Supreme Leader announced a new privatization policy to be implemented. Unlike the first wave of privatization in the new wave TSE assigned to take main part in selling the government stocks. Government should sell off 80 percent of its shares in banking, mining, industrial, and transport companies through TSE

(IRNA, Iran Daily, July 3, 2006).

Government ambitions for swift economic development and increasing criticise that describe government as an ineffective and inefficient manager of nationalised companies are basic reasons that built a solid foundation for s t a t u t o r y n e e d s o f p r i v a t i s a t i o n t h u s i n t e r n a t i o n a l h a r m o n i s a t i o n in a c c o u n t i n g standards. The external and internal economic forces and financial market r e q u i r e m e n t s m a k e it c l e a r f o r t h e a u t h o r i t i e s t h a t c o u n t r y n e e d s a s e t

a c c o u n t i n g s t a n d a r d s in h a r m o n y w i t h I A S s a n d I F R S s .

Privatisation N eeds

T h r e e w ra v e s o f p r i v a t i z a t i o n h a s b e e n s t o r m e d t h e e c o n o m y w h i c h o n l y t h e t h i r d o n e is u n d e r w a y w i t h i n a n a c c o u n t i n g s t a n d a r d e n v i r o n m e n t . B e f o r e

International Accounting Standards Harmonisation: The Case o f Iran Privatisation