Implementation of International Financial Reporting Standards: Its Practices,Challenges and Prospects: The Case of Commercial Banks in Ethiopia

Abstract

The aim of this study is to examine challenges, prospects and factors that affect the implementation of International Financial Reporting Standards at the commercial banks in Ethiopia. The study adopted a concurrent mixed research approach. Data were collected through questionnaire and interview. Descriptive and econometric analysis was used for the quantitative data, and data from interview were analysed through narration. Based on the descriptive analysis, all banks have practiced the International Financial Reporting Standards (IFRS) highly. Beside this, the lack of guidance and consulting services, high cost of training and consulting services, the complexity nature of most standards and the shortage of time set by the regulatory bodies are among the most important challenges. The international comparability, transparency and quality of the financial reporting system are among the prospects to implement IFRS. In addition, the result of stepwise multiple regression analysis also reveals that information technology system, attitude and perceived ease of use have highly contributed for the implementation of IFRS at commercial banks in Ethiopia. Based on the findings, the study recommends that the government, commercial banks and other concerned bodies in the country should care for the successful implementation of IFRS.

Keywords

Implementation of IFRS challenge determinant factors commercial banks

Background of the Study

In the present era of globalisation and liberalisation, the world has become an economic village (Gupta et al., 2017; Mesay, 2009). Due to this, it is now possible to have a business person from one country who can do business in another part of the world. As a result of globalization, there is a shrinking of globe, where the increasing unity of the world economic order through reduction of barriers to international trade, such as tariffs, import quotas, and export fees (Islam et al., 2019). Globalisation has caused numerous companies expanding their operations into other nations. Therefore, rapid globalisation, cross-border transactions, international mergers and acquisitions, foreign investors and existence of multinational corporations build a strong case for harmonisation of accounting practices worldwide (Borhade et al., 2018). The accounting system as a ‘Language of Business’ needs to ensure a high degree of standardisation, quality of information and full disclosure of transaction (Alistair, 2010).

It is essential to understand international accounting convergence. Specifically, International Financial Reporting Standards (IFRS), which is a set of international accounting standards, state how certain transactions and events should be reported in the financial statements (Gina et al., 2016). IFRS is a single set of high-quality, understandable standards for the general purpose of financial reporting which are principles-based that gives flexibility and encourages professional judgement in contrast to the rules-based approach (US GAAP), that is, follows specific accounting rules. Scholars have argued that the globalisation of IFRS will give a common language to financial statements prepared in different parts of the world (Ramesha, 2016). IFRS is a modern financial reporting system practiced in over 135 countries at this time (Samson, 2017).

According to the United Nations Conference on Trade and Development (UNCTAD, 2005), the process of implementation of IFRS started in the year 2000 at the European Council meeting held on 23–24 March 2000. In June 2002, the European Parliament and the Council approved the regulation, which required publicly traded companies on European regulated markets to use the IFRS as the basis for presenting their consolidated financial statements for fiscal years beginning on 1 January 2005 (Senyigit, 2012). IFRS have been drawing greater attention ever since the European Union adoption. Certain other countries have announced their intention to follow IFRS from future dates.

Since Ethiopia is not an exception of this world, it has undergone on the way to implement IFRS starting from 2014 with full dedication (Abel, 2017). Like other developing countries such as Nigeria, Benin, Burkina Faso, Botswana, The Democratic Republic of Congo, Cote d’Ivoire, Kenya, Togo, Tanzania, Uganda, Zambia, Korean, Bangladesh and Libya, Ethiopia has adopted and implemented IFRSs as their basis for financial reporting (Gina et al., 2016). This helps to attract foreign direct investment (FDI) because investors perceive that there may be an internationally accepted report that gives flexibility and reduction of the cost of doing business, and enhances across-the-border trading facilities.

Abat (2017) stated that proclamation No. 847/2014 has been issued by Ethiopian Federal Democratic Republic Council of Peoples representatives which permitted that the preparation and presentation of financial reports should be on the basis of internationally accepted standards. With regard to IFRS in Ethiopia, Samson (2017) asserted that the Commercial Bank of Ethiopia (CBE) has adopted and engaged in the implementation process with the help of Accounting & Audit Board of Ethiopia (AABE). As Samson wrote, the CBE has become the first financial firm to adopt and implement the IFRS, a year ahead of a deadline set by authorities for the federal regulatory board. It is also required that all commercial banks, insurance firms and public enterprises have to obey the IFRS with a deadline set for 2018. In line of this, there are many studies in the area of adoption and implementation of IFRS globally. These studies were mainly focused on the opportunities, benefits and challenge of adopting and implementing IFRS (Bendovschi, 2016; Eyob, 2017; Faraj & El-Firjani, 2014; Fikru, 2012; Gina et al., 2016), but this study investigates the challenges and prospects of the IFRS implementation and identifies some key issues or factors that may influence the implementation of IFRS in commercial banks in Ethiopia because CBE is an institution which starts to implement IFRS for the first time in Ethiopia voluntarily.

Objectives of the Study

The objective of this study is

to explore the practical challenges that hinders the implementation of IFRS at commercial banks in Ethiopia;

to identify the prospects of the IFRS implementation at commercial banks in Ethiopia;

to examine the factors (organisational, individual, technical and legal) those will influence the implementation of IFRS at commercial banks.

Review of Related Literature

The Evolution of Accounting Standards

Standards reduce the variation in accounting practice and introduce a degree of uniformity into the financial reporting (Romic, 2016). According to the Center for Audit Quality (2009) accounting standards around the world have evolved over centuries of business and capital market development. In this process, accounting standards historically were designed to meet the needs of each nation’s capital markets. Those standards that were found to work well in the legal, cultural, political and economic context of each nation became the ‘generally accepted accounting principles’ (GAAP) for that particular jurisdiction. Naturally, different norms in each nation led to have different GAAPs.

In order to create a uniform global system for financial reporting, the IASB was formed to serve as the global accounting standard-setting body. In 2001, the IASB promulgated the first iteration of IFRS, offering the possibility of a single set of high-quality accounting standards that could be used by all nations.

Overview of International Financial Reporting Standards

In an increasingly interconnected global economy, many market participants are considering the question of whether it is possible or desirable to move towards a more uniform global ‘language’ for financial reporting (Borhade et al., 2018). The proponents of this idea argue that a uniform set of global accounting standards, supported by strong governance, independent standard setting and a sound regulatory framework could benefit investors and businesses similarly (Raoand, 2015). Others suggest that trying to establish a uniform set of global standards would run the risk of overlooking the unique economic, political, cultural, legal and regulatory realities that exist in different nations and regions.

In 2001, the International Accounting Standards Board (IASB) adopted the first iteration of IFRS to serve as a possible pathway for establishing uniform global accounting standards. Since then, IFRS has been adopted or become accepted in over 100 countries.

IFRS is a set of accounting standards, developed by the IASB, which is becoming the global standard for the preparation of financial statements (Collings, 2013). The IASB develops IFRSs with the objective of achieving comparable financial reporting across countries (Chand et al., 2008). IFRS comprises of IAS (41), IFRSs (18), the Standing Interpretation Committee Statements (11) and the International Financial Reporting Issues Committee Statement (18) (Akhidime, 2011).

Legal and Regulatory Framework of Financial Reporting System

According to CPA (2017), the regulatory framework ensures that the general purpose financial reporting produces relevant and reliable information and therefore meets the needs of shareholders, lenders and other users. The regulatory framework consists of accounting rules and company law. The IASB develops and issues IFRS. As IFRS have no jurisdiction, and the IASB has no authority to impose accounting standards, individual countries draw up their own accounting regulations. In practice, national governments often adopt IFRS and then adapt them to operate together with local laws and regulations as necessary. Regulation of companies and their published financial information can vary significantly in different countries around the world. There are many reasons for these differences. In some cases, it is due to differences in company structures, local culture and ownership patterns of companies.

Background to the Ethiopian Financial Reporting System

Even though there is an indicator to use GAAP, neither of the international standards are officially adopted in Ethiopia (ROSC, 2007). The Ethiopian Income Tax Proclamation No. 979/2008, Article 20 sub-article states that taxable business income shall be determined per tax period on the basis of the profit and loss account, or income statement, which shall be drawn in compliance with financial reporting standards. The Banking business proclamation no. 592/2008, Article 23 states that the National Bank may direct banks to prepare financial statements in accordance with international financial statements standards.

Accordingly, the Federal Democratic Republic of Ethiopia (FDRE) House of People’s Representatives proclaimed Financial Reporting Proclamation No. 847/2014. Part 3, chapter 1, sub-article 5 of this proclamation states that the applicable financial reporting standards to be used when preparing financial statements shall be IFRS.

The Financial Reporting Proclamation No. 847/2014 was the founding of the AABE. According to part two, section 4 of this proclamation, the Board means the AABE is to be established by the regulation to be issued by the Council of Ministers. The board has the power to issue standards and directives relating to financial reporting and auditing and ensure compliance. In response to this proclamation, the FDRE Council of Ministers issued regulation no. 332/2014 for the establishment and determination of the procedure of the AABE.

Hence, as per Article 5 as read with Article 54 of the Financial Reporting Proclamation, the Board hereby adopt the IFRS issued by the International Accounting Standard Board (IASB). It requires banks, insurance firms and public enterprises to comply with the IFRS with a deadline set for 2018. Other entities, including public institutions and small and medium enterprises, must comply with the standard in the next three years.

IFRS Implementation Progress in Ethiopia

According to Teferi (2016), the first organisations that adopt and implement voluntarily were CBE, Construction and Business Bank, Ethiopian Insurance Corporation and Ethiopian Airlines. They started to use IFRS in their financial reporting for the first time in 2002/2003 with no national or regional law that required companies to adopt and implement IFRS in Ethiopia.

In 2008, Article 23 of the Proclamation to provide for Banking Business (Proclamation No. 592/2008) specifies that ‘the National Bank may direct banks to prepare financial statements in accordance with the international statements’ standards, whether their designation changes or they are replaced, from time to time’. This indicates that the Ethiopian Government was not officially announced to adopt IFRS at the national level. Similarly, after four years, Article 26(1) of the Proclamation to provide for Insurance Business, that is, Proclamation No. 746/2012 specified ‘the National Bank may direct insurers to prepare financial reports in accordance with international reporting standards, regardless of the change’. According to Teferi (2014), at the end of 2014, 18 organisations started to adopt and implement preparing their financial statements in accordance with IFRS. Generally, the progress is divided into three phases.

Phase 1: Significant Public Interest Entities

According to AABE (2015), the financial institutions and public enterprises owned by Federal or Regional Governments have been required to issue IFRS-based financial statements for the year ending 7 July 2017. 8 July 2016 is recommended as the date for adoption of IFRS for all financial institutions and large public enterprises such as commercial banks and insurances. The choice of 8 July 2016 is anchored on the need to give sufficient period (22 months) over which to effectively transit to IFRS. Therefore, the mandatory reporting date for these reporting entities shall be 7 July 2017.

Phase 2: Other Public Interest Entities (ECX Member Companies and Reporting Entities that Meet Public Interest Entities [PIE] Quantitative Thresholds) and IPSAS for Charities and Societies

All other public interest entities (Ethiopian Commodity Exchange, ECX, member companies and reporting entities that meet the qualitative thresholds for PIE) and charities or aid organisations and societies or associations are expected to mandatorily adopt IFRS and IPSAS (for charities and societies), for statutory purposes, by 8 July 2017. This means that all other public interest entities and charities and societies in Ethiopia will statutorily be required to issue IFRS and IPSAs-based financial statements respectively for the year ending 7 July 7 2018.

Phase 3: Small- and Medium-sized Entities

IFRS for Small and Medium-sized Entities (SMEs) shall mandatorily be adopted at 8 July 2018. This means that all SMEs in Ethiopia will statutorily be required to issue IFRS-based financial statements for the year ending 7 July 2019. Entities that do not meet the IFRS for SME’s criteria will be encouraged to report using either the Small and Medium-sized Entities Guidelines on

Accounting Level 3 issued by the UNCTAD, or the Guide for Micro-Sized Entities Applying IFRS for SMEs (2009) issued by the IASB. However, such additional disclosure should at least include the following.

Empirical Evidence

Prospects of Implementing IFRS

According to Kumar (2014), a consistent, comparable and understandable financial information is vital for the business world. Implementation of IFRS can greatly contribute to the efforts to build global financial reporting infrastructure. Nowadays, cross-border investments, interdependence on trade, increase of business complexities, global financial crisis, global slowdown and mobility of capital and people across the globe are significantly influencing the world economy. Therefore, there is a need to harmonise the financial reporting system.

Ethiopia is one of the emerging economics in the world. For the economic development, FDI is needed to facilitate the investment climate, it wants to integrate its financial reporting with rest of the economies of the globe, so that investors from outside will understand the financial results and financial positions of the companies.

Enhancing the implementation of IFRS is the general perception that IFRS enhances accounting information comparability, relevance, reliability, transparency and uniform measurement and valuation of accounting assets and liabilities and wider scope of acceptance around the world (White & Ryan, 2007, cited in Edeigba and Amenkhienan, 2017). In addition to this, accounting professionals having expertise in these standards would also get global recognition. Having quality and consistent financial reporting is another opportunity for the implementation of IFRS.

Benefits of Implementing IFRS

A major potential benefit from the global move towards IFRS is an increase in accounting comparability (Joanne et al., n.d.). Empirical studies indicated that IFRS improved the relevance of accounting information (Lantto, 2007). Schadewitz and Vieru (2007) argued that earnings of entities were increased due to the implementation of IFRS. The research revealed that the return on assets (ROA) was significantly higher under IFRS than local GAAP with the greater increase occurring in those firms with lower levels of ROA under local GAAP.

In increasingly competitive markets, IFRS allows a company to benchmark itself against its peers throughout the world, and allows investors and others to compare the company’s performance with competitors globally. To attract foreign investors, implementing IFRS is one gate towards benefit.

The studies revealed that most of the investors, auditors and other users of financial statements were agreed that IFRS would improve the quality of financial statements and the implementation of IFRS was the positive development for financial reporting (Ahmad & Khan, 2010). Patange (2012) disclosed the benefits and challenges associated with the IFRS convergence process. The study showed that there would be various benefits due to IFRS reporting such as easy access to international capital markets, lower cost of capital, increase in brand value, avoidance of multiple reporting, reflecting true value and transparency in reporting.

Having a global set of the high-quality financial reporting system which is in line with the required IFRS reporting standard will help developing countries such as Ethiopia to attract funding agencies or donors and FDIs in the country’s development activity.

Challenges of Implementing IFRS

According to UNCTAD (2006), the shortage of personnel with technical expertise in IFRS, less availability of training materials at reasonable prices, national language and technical complexity of IFRS, etc., were the major challenges and obstacles which a country need to overcome for better implementation of IFRS. Jermakowic (2004) examined the benefits and challenges of the adoption of IFRS and the level of understanding and experience with IFRS. The results of the survey revealed that the BEL-20 companies were implementing the new accounting regime which is not widely known and understood. This study indicated that the task of implementing IFRS and maintaining different accounting systems for individual and consolidated accounts is complex and costly (Jermakowicz & Tomaszewski, 2006).

Patange (2012) revealed the benefits and challenges associated with IFRS convergence process. The study showed that there are various challenges such as shortage of skilled resources, huge cost, acceptance by tax authorities, managing market expectations and investor relationships, performance indicators and mergers/acquisitions etc. associated with IFRS conversion.

The lack of IFRS implementation guidance, sufficient sector-adopted regulations, and the difficulty in applying fair value concept are considered major challenges to IFRS implementation in Turkey (Balsariand Varan, 2014). According to Ball et al. (2000), the IFRS implementation challenges include: timely interpretation of standards, continuous amendment to IFRS, accounting knowledge and expertise possessed by financial statement users, preparers, auditors and regulators, and managerial incentive. Moreover, according to Mesay (2009), increased dependence on outside expertise (consultants), lack of qualified professionals and staff training (development) costs were the prominent challenges for the implementation of IFRS.

Factors Affecting the Implementation of IFRS

Wong (2004) sought to explore those issues that affect the adoption and implementation of IFRS. This report suggested that to achieve international convergence, action is necessary at all points along the information supply chain that delivers financial reporting. This report revealed that national professional accounting bodies and educational institutions could make awareness among participants and people; consequently, training programme should involve individuals at all levels of the entity and should continue after the initial transition of IFRS.

Ojha and Tandon (2012) analysed the impact of a new accounting system on Indian banks. The results revealed that the employment of skilled resources and lack of proper trained staff were big problems for the banks. The study suggested that banks should make a plan to run their IFRS conversion project with assistance from an external consultant on specific issues.Generally, from the literature part discussed above, it is possible to group those factors into three dimensions: the organizational, individual and technical factors.

Organisational Factors

The organisational factors which influence the IFRS implementation encompass the management support, institutional leadership and institutional-wide IFRS implementation strategy and company size. The management support refers to the degree to which an individual believes that the management is committed to the successful implementation and use of these global financial reporting standards (Venkatesh & Bala, 2008). According to Venkatesh and Bala (2008), the presence of organisational support, particularly in the context of complex systems, can reduce anxiety associated with system use. Organisations can provide support in various forms such as facilitating in/off-the job training, hiring adequate and skilled human resources or outside expertise or consultants, having powerful company size, providing the implementation guidance and providing incentives and rewarding mechanisms.

Training should be conducted before and after implementation since it leads to greater user acceptance (Venkatesh & Bala, 2008). A significant challenge for the accounting profession is the availability of professionals with sufficient education and experience. Lack of training facilities and academic courses on IFRS will also create challenge in Ethiopia. There is a need to impart education and training on IFRS and its application. The researchers argued that all stakeholders in the organisation should be trained and IFRS should be introduced as a full time subject (Yadav & Sharma, 2012). The findings of Weaver and Woods (2015) showed that the problems faced in implementation include lack of education and training, securing executive-level support, identifying and responding to the wider business-related implications of the transition and issues with capturing the necessary information for reporting under IFRS.

According to Faraj and El-Firjani (2014), several challenges to the process of implementing the IASs/IFRS in preparing financial statements were highlighted, these include the lack of training programmes, the lack of inclusion in the accounting curriculum of the IASs, the consequent lack of awareness among preparers of the financial statements, etc.

According to Venkatesh and Bala (2008), company size (small, medium and large) is another critical factor which can influence the implementation of IFRS. This refers to facilitating the suitable environment for the IFRS implementation team, having large number of implementation team, etc. The size should be taken into account. Implementation of IFRS in small entities will be costly. For example, big companies have more financial means to undertake the IFRS transition effectively and efficiently. This again relates that organisations have more possibilities to educate or provide trainings to their employees and to hire large number of the implementation team or to hire qualified consultants.

Individual Factors

Individual factors encompass the individual characteristics, perception, attitude and commitment. Individual characteristics have been found to influence IFRS adoption and implementation. According to Grunwald (2002), variables such as potential implementer traits: risk aversion, gender, potential implementer usage style, personal confidence, motivation, experience, self-efficacy and academic discipline and age might influence the implementation of IFRSs.

Perception is the way in which something is regarded, understood or interpreted. Accountants’ or financial preparers’ and financial managers’ perception play an important role in the acceptance or the rejection of the IFRS implementation (Marian et al., 2013).

Individual commitment is the state or quality of being dedicated to a cause, activity, etc. It is a willingness to give time, knowledge, skill and energy to implement IFRS for the success of the organisation (Venkatesh & Bala, 2008). Government, management and individual commitment are vital for the successful implementation of IFRS. Thus, the implementation of IFRS in banks needs commitment, positive perception, motivation and good traits for all stakeholders which are directly related to the issue.

According to Venkatesh and Bala (2008), attitude is an individual’s inclined state of mind regarding doing something and it is hastened through a responsive expression towards a person, place, thing or event (the attitude object) which in turn influences the individual’s thought and action. It is an evaluation of an attitude object, ranging from extremely negative to extremely positive. The individuals’ attitude towards the adoption and the implementation of IFRS might greatly influence its implementation. The attitude from the banks and also from the preparers of financial statements is one of the challenges for implementing the new accounting standards (Wei, 2008).

Technical Factors

The technical factors include perceived ease of use, language, IS infrastructure or system upgrade (Venkatesh & Bala, 2008). The perceived ease of use is the extent to which a person believes that using a technology or a system will be free from great effort.

In this age, sound information and communication technology infrastructure plays a key role in successful delivery of quality financial information on time and for making sound decision.

Summary and Gap in the Review of Related Literature

Creswell (2009) called this Deficiencies in Past Literature. This may exist because all topics or issues could not be investigated by other researchers. The literature may need to be replicated or repeated to see if the same findings hold, given new samples of people or new sites for study; or the voice of underrepresented groups has not been heard in the published literature. As mentioned above, there are various factors that influence the implementation of IFRS. Most researchers might have considered these factors before as a challenge, but to see the extent how much these challenges influence, it is possible to consider them as a factor. For the purpose of this study, these might be grouped into three factors: organisational factors, individual factors and technical factors. In addition to these factors, this study tries to examine one of the legal factors—tax regulation as a gap. Therefore, for the purpose of this study, the factors which might influence the implementation of IFRS could be: perceived ease of use, outside expertise or consulting service, company size, training, attitude, IS infrastructure and the tax regulation. Perceived ease of use, tax regulation and IT infrastructure can be considered as gaps which were not touch by other researchers in the case of commercial banks in Ethiopia.

This study examined the effect of tax regulation as an additional factor that influences the implementation of IFRS at commercial banks of Ethiopia. From the empirical evidence, the IFRS convergence would affect most of the items in the financial statements and consequently the tax liabilities would also undergo a change (Faraj & El-Firjani, 2014; Raoand Malyadri, 2015). Thus, the taxation laws should address the treatment of tax liabilities arising on convergence from GAAP to IFRS.

In the literature review part of this study, besides the theoretical perspective of IFRS, it is tried to identify the real challenges, prospects and factors affecting the actual implementation of IFRS which were identified by different researchers (Jermakowic, 2004; Patange, 2012; UNCTAD, 2006). But virtually no articles or very few were conducted in the actual implementation of IFRS at the commercial banks in Ethiopia. Most researches did not reveal the actual hindrances faced during the IFRS implementation.

Therefore, this study makes an attempt to bridge these gaps and elaborates the impacts of the major factors in association with the implementation of IFRS at commercial banks in Ethiopia.

Hypotheses Development

Creswell (2009) defined hypotheses as hypotheses are predictions the researcher makes about the expected relationships among variables. It is a tentative statement which indicates the relationship between dependent and independent variables (Sekaran, 2003). They are numeric estimates of population values based on data collected from samples. Hypothesis is a formal statement of an unproven proposition that is empirically testable. In this study, to answer a specific question which indicates the factors affecting the implementation of IFRS at commercial banks in Ethiopia, it is necessary to formulate hypotheses. Thus, the hypotheses are formulated as follows.

H1: Perceived ease of use has a positive and significant effect on the implementation of IFRS.

H2: Adequate training has a positive and significant effect on the implementation of IFRS.

H3: Attitude towards the IFRS has a positive and significant effect on the implementation of IFRS.

H4: IT system has positive and significant effects on the implementation of IFRS.

H5: Tax regulations have positive and significant effect on the implementation of IFRS.

H6: Company size has a positive and significant effect on the implementation of IFRS.

H7: Consulting service has a positive and significant effect on the implementation of IFRS.

Materials and Methods

To address the objectives of the study, the descriptive and exploratory research design involving both quantitative and qualitative approaches was employed.

Sample Size

The objective of this study was to assess the practices, challenges and prospects of the implementation of IFRS at commercial banks in Ethiopia. All available commercial banks in Ethiopia (private and public) at the head office were taken which are located in Addis Ababa, Ethiopia for this study. This is because IFRS has been implemented at the head office level at this time. There is 1 public commercial bank (CBE) and 16 private commercial banks (National Bank of Ethiopia, 2018). The participants of this study were all the accountants, auditors, financial managers and IFRS project team of each bank at the head office level. Therefore, the sampling technique was a comprehensive sampling. In addition to these, the AABE was included under the target population of the study.

Data Collection

A blend of primary and secondary data was used. Data were collected using different techniques and tools. The primary data were collected through questionnaire, that is, with 5-point Likert scale (1 for strongly disagree and 5 for strongly agree) and interview. The questionnaire covered various issues such as practices, challenges, prospects and factors affecting the implementation of IFRS. Together with this, the secondary data were collected by reviewing the financial statements which were prepared on the basis of IFRS; books, directives that are related to the implementation of IFRS and proclamations, regulations and policies that deal with financial reporting issues in Ethiopia.

Data Analysis

Data generated from different sources using different techniques were organised into quantitative and qualitative themes. The data that have been collected through questionnaire were grouped, organised and analysed with quantitative data analysis techniques. Frequency, percentage, correlation, mean, standard deviation and stepwise multiple linear regression analysis were used. Data having qualitative nature were mainly analysed using narration and explanations based on the contests of available data set.

Model specification for econometric analysis:

\begin{matrix} Imp_I F R S_{i} = β 0 + β 1 P E U_{i} + β 2 C S_{i} + β 3 T R_{i} + \\ β 4 T A R_{i} + β 5 C S Z_{i} + β 6 A T T_{i} + \\ β 7 I T S_{i} + u i \end{matrix}

Here,

Dependent variable: Imp_IFRS = of Implementation IFRS

Independent variables:

PEUi = Perceived ease of use TRi =Training

CSi = Experts consultation service TAXi = Tax regulations

CSZi = Company size ATTi = Attitude

ITSi = Information technology System

ui = random error in prediction, that is variance that cannot be accurately predicted by the model

β0, β1, …, β6 are coefficients of the respective variables which affect the result of the dependent variable

Results and Discussion

Descriptive analysis: the researcher is used descriptive statistics to analyse the background information of participants such as educational level and years of experience.

Table 1 shows the educational level distribution of the participants who completed the questionnaire. Of the 58 participants who completed the questionnaire, 39 (67.2%) of the participants were bachelor degree holders and 17 (29.3%) of the respondents have master’s degree. Only one (1.7%) of the respondents was in the lower education level compare to the remaining respondents. This shows that the education level of the respondents to get adequate data for the research is good and becomes more reliable.

Table 1.

Education Level of the Respondents

Educational Level	Frequency	%
Diploma	1	1.7
Bachelor’s degree	39	67.2
Master’s degree	17	29.3
Others	1	1.7
Total	58	100.0

Source: SPSS output.

Table 2 portrays the experience of distribution of the participants who filled the questionnaire. As it is shown in the table, the majority of the participants 74% have greater than 7 years working experience, while 26% of the participants have working experience of less than 7 years. This indicates that the participants of the study are relatively well experienced and eligible to get the required data that increase the reliability of the data.

Table 2.

Working Experience of the Respondents

Years of Experience	Frequency	%
1–2 years	3	5.2
3–4 years	6	10.3
5–6 years	6	10.3
>7 years	43	74.1
Total	58	100.0

Source: SPSS output.

The Reliability of the Instruments

Based on the data collected from the pilot study, the researcher checked the reliability of the instruments. There are different ways to check or improve the reliability of the instrument, such as performing pilot study, increasing the number of items, calculating the Cronbach’s alpha, etc. Thus, the researcher tried to perform these techniques.

The reliability of the instrument measures the internal consistency for the instruments (Pallant, 2013). This was done by using Cronbach’s alpha. After the data were collected from respondents, the collected data were entered into Statistical Package for Social Science (SPSS-20) to make it ready for the reliability test. The reliability statistics was calculated by using Cronbach’s Alpha and the result was shown in Table 3.

Table 3.

Test for Reliability

Cronbach’s Alpha	Cronbach’s Alpha Based on Standardised Items	Number of Items
0.855	0.870	79

Source: SPSS output.

According to George and Mallery (2003), if the Cronbach’s alpha greater than 0.90, then the instrument is excellent; if it is greater than 0.80, then it is good and if it is greater than 0.70, it is at an acceptable level. Thus, based on the result of the statistics, the data collecting instruments were good since it was 0.855 or 86% reliable.

According to Table 4, most respondents agreed that their bank has given more attention for the application of IFRS (91.4%, the sum of agree and strongly agree). This indicated that currently the great attention has been given for the IFRS implementation. Accountants have also agreed that they prepared financial statements in compliance with IFRS at their bank (86.2%), auditors have audited financial statements in compliance with IFRS at the bank (88.0%) and most banks have fully completed the transition from National Financial Reporting System or GAAP to IFRS (74.1%). On the other hand, most respondents were agreed that the support of government bodies in the implementation of IFRS at their bank was very minimal (44.8% disagree). Moreover, regulators and all the bank’s staff role in the practice of IFRS is on average (44.8% and 39.7% average, respectively). Therefore, it is possible to conclude that IFRS is practiced at most banks as the majority of the respondents are agreed.

Table 4.

The Participants’ Response on Extent of IFRS Practiced at the Commercial Banks in Ethiopia

Key Items	Count	Level of Agreement					Total	Missing
Key Items	Count	1	2	3	4	5	Total	Missing
The bank has given attention for the application of IFRS	F	0	2	3	27	26	58	–
The bank has given attention for the application of IFRS	%	0	3.4	5.2	46.6	44.8	100	–
The government bodies have supported the bank for the implementation of the IFRS	F	1	26	11	20	0	58	–
	%	1.7	44.8	19.0	34.5	0	100	–
The bank manager has ensured that the financial statements are prepared in compliance with IFRS	F	0	2	5	29	22	58	–
	%	0	3.4	8.6	50.0	37.9	100	–
Accountants have prepared financial statements in compliance with IFRS at the bank	F	0	1	7	35	15	58	–
	%	0	1.7	12.1	60.3	25.9	100	–
Auditors have audited financial statements in compliance with IFRS at the bank	F	0	1	6	36	15	58	–
	%	0	1.7	10.3	62.1	25.9	100	–
Regulators have implemented efficient monitoring system of regulatory compliance of IFRS at the bank	F	4	19	26	5	3	57	1
	%	6.9	32.8	44.8	8.6	5.2	98.3	1.7
The bank has fully completed the transition from National Reporting System to IFRS	F	0	3	12	25	18	58	–
	%	0	5.2	20.7	43.1	31.0	100	–
All the bank staff members have played a great role for the implementation of IFRS	F	4	12	23	18	1	58	–
	%	6.9	20.7	39.7	31.0	1.7	100	–

Source: SPSS outputs.

Note. Key: [1] = strongly disagree, [2] = disagree, [3] = average, [4] = agree and [5] = strongly agree.

To triangulate how IFRS is practiced, the researcher tried to collect qualitative data using interview and different respondents have given different responses and it was presented as follows.

The IFRS team and the management at the bank were giving more attention for the application and the practice of IFRS. They gave their time and effort for the success of the IFRS implementation. Management commitment to a successful implementation process is crucial throughout the implementation period and thereafter. On the contrary, the support and contribution from the government and the regulatory bodies were weak. These bodies should facilitate the infrastructure to comply the standards. Beside these ideas, there were shortages of integration or coordination among different stakeholders.

Moreover, to triangulate how IFRS is practiced, various documents have been reviewed. Most banks present the last-year financial statements. These financial statements were prepared in line or in compliance with those IFRSs. From the quantitative and qualitative analysis result, it is possible to conclude that the successful implementation of IFRS is highly practiced at commercial banks, but still it needs extensive and ongoing support from the government, financial officers or managers and other regulatory bodies.

Table 5 shows the aggregate challenges at the implementation of IFRS. The overall result of each challenge is ranked by using their average result. As we can see from the result, challenges related cost of the implementation (mean = 3.89) accounted to the bigger challenge for the implementation of IFRS at commercial banks in Ethiopia. To implement IFRS for the first time, it demands trained professionals who directly operated the system, consult the operators and the officials, well-concerned regulators and the software itself. All the above-mentioned issues enforce the bank to incur huge cost and considered as the major challenges for the implementation of IFRS at commercial banks in Ethiopia. Challenges related to the guidance and counselling service also accounted for great challenge next to cost of implementation. The standard deviation for all items is less than 1.00. This shows that respondents’ perceptions were closer to each other.

Table 5.

Summary of Descriptive Statistics for Challenges Face to the Implementation of IFRS

Items	N	Mean	Std. Dev.	Rank
1. Cost-related challenges
Implementation of IFRS has required high training cost	58	4.0517	0.88699	2nd
Cost of IFRS consultants is very expensive	58	4.2069	0.81129	1st
Implementation of IFRS has required high regulatory cost	58	3.9655	0.81576	3rd
Implementation of IFRS has required new expensive software	58	3.3448	1.17804	4th
Overall result for cost-related challenges	58	3.8922	0.64255	1st
2. Guidance and consulting services related challenges
There is lack of regulatory guideline for startup implementation of IFRS	58	3.2759	1.02243	5th
IFRS need more guideline for its application after inception	58	4.2241	0.62248	1st
There is a shortage of internal IFRS Experts for consulting	58	4.0000	0.74927	2nd
There is a shortage of guideline manual at bank level	58	3.9138	0.82259	3rd
There is a need to hire external IFRS consultants	58	3.8793	0.93804	4th
Overall result for guidance and consulting services related challenges	58	3.8586	0.58184	2nd
3. Timeline/period related challenges
Shortage of time for IFRS implementation in relation to the roadmap	58	3.5690	0.90053	4th
The preparation of financial statements under IFRS is time consuming	58	3.7931	0.85345	1st
Insufficient preparatory period for converging with IFRS	58	3.6034	0.89716	3rd
There is lack of adequate time period for transition to IFRS	58	3.5517	0.95830	5th
Overall result for timeline/period related challenges	58	3.6293	0.65113	4th
4. Complexity-related challenges
The implementation of IFRS increased the work or burden of accountants and auditors	58	3.8621	0.78245	3rd
IFRS has increased complexities in preparing financial Statements thereby increased the risk of errors and omissions	58	3.5000	0.95971	4th
There is language translation and understanding difficulty in IFRSs	58	3.1897	0.90722	5th
IFRS requires the disclosure of too much information	58	3.9138	0.84364	2nd
Fair value measurement is really difficult to apply	58	3.9828	1.03435	1st
Overall result for complexity related challenges	58	3.6897	0.71321	3rd

Source: SPSS output.

At the same time, the qualitative data concerning the challenges of the IFRS implementation at commercial banks in Ethiopia were collected through open-ended questions and interview. From these qualitative data, it is possible to assure that IFRS was implemented at all commercial banks with lots of challenges except one bank (i.e., Enat International bank). As a result, the following responses were gathered from the financial managers or management bodies, accountants and auditors.

Financial manager ‘A’ …To implement IFRS effectively, shortage of financial resource to develop guideline, to train staffs, to have expertise from abroad as well from home, to have the software itself in general, lack of adequate infrastructure together with the above mentioned issues were the main challenges which influences the implementation of IFRS at commercial banks in Ethiopia.

In addition to the above idea, AABE’s supervisor ‘X’ added some idea about the challenges like

Incompatibility of the existing IT System with IFRS, the higher cost of implementation (for training, external consultant, system upgrade and others) were the main challenges for the implementation of IFRS.

Accountant ‘M’ also responded that

IFRS required banks to provide financial statement for at least one prior year’s data, getting or collecting those data to meet the needs of IFRS makes it more complex and cumbersome. The lack of data was the singular biggest challenge to financial institutions transiting to IFRS. Moreover, preparation of IFRS financial statements is a huge task.

By using an open-ended question, the researcher tried to raise a question ‘which specific IFRS standard was challenging during the implementation of IFRS?’ From the response, it was possible to understand that IFRS 9 (Financial Instrument Recognition and measurement) was the most challenging IFRS standard. The determination of impairment for financial instruments was a key area of challenge for a number of banking entities transiting to IFRS. In addition to this standard, IFRS 13 (Fair value measurement), IAS 36 (Impairments of Assets) and IAS 16 (Property, Plant and Equipment) were also the challenging standards at the commercial banks in Ethiopia. This indicated that the nature of some standards by themselves was become difficult to implement IFRS. According to Minxia Gang’s opinion sited by Wei (2008), the understanding and interpretation of the new accounting standards was the great challenge. The results obtained from the quantitative analysis and qualitative data were triangulated to each other.

Table 6 portrays the descriptive statistics of the prospects for implementing IFRS at commercial banks in Ethiopia. Many respondents (with the mean response of 4.50, Ranked 1 believe that implementation of IFRS increased the international comparability of financial statements and the mean response of 4.48 (Ranked 2) revealed that the implementation of IFRS would increase the transparency of financial statements. Others also believed that the implementation of IFRS would help in bringing quality in financial reporting (mean response of 4.45, Ranked 3). As one can see from the result, the mean response of all items is above 4.00 and the standard deviation for all items is less than 1.00. This shows that the prospects for implementing IFRS by banks are very high and respondents’ perceptions were closer to each other, respectively.

Table 6.

Descriptive Statistics Result for the Prospects at Commercial Banks in Ethiopia in Implementing IFRS

Items	N	Min.	Max.	Mean	Std. Dev.	Rank
Implementation of IFRS would help in bringing quality in financial reporting	58	3.00	5.00	4.4483	0.56731	3rd
Implementation of IFRS will increase the international comparability of financial statements	58	4.00	5.00	4.5000	0.50437	1st
Implementation of IFRS will increase the transparency of Financial statements	58	3.00	5.00	4.4828	0.53775	2nd
Implementation of IFRS will increase the relevance of accounting information for decision making	58	2.00	5.00	4.4138	0.59337	5th
IFRS standards will provide better access to global capital markets	58	2.00	5.00	4.2586	0.73890	8th
IFRS standards will bring reduction in the cost of capital leading to overall economic growth	58	3.00	5.00	4.0345	0.74846	12th
IFRS Standards would enhance a cross-border acquisitions	58	3.00	5.00	4.2241	0.72652	10th
IFRS standards would promote the global recognition of accounting professionals	58	3.00	5.00	4.4310	0.59566	4th
IFRS has resulted in improvements to the quality and consistency of financial reporting at banks	58	3.00	5.00	4.4138	0.56303	5th
IFRS enables improved economic prospect for the accounting profession	58	2.00	5.00	4.1897	0.68715	11th
IFRS enhance value of information with different aspect of business	58	3.00	5.00	4.3103	0.53662	7th
Implementation of IFRS strengthen the professional accountancy in Ethiopia	58	3.00	5.00	4.3621	0.51973	6th

Source: SPSS output.

Multicollinearity occurs when independent variables in a regression model are correlated. This correlation is a problem because independent variables should be independent (Hinton et al., 2004). If the degree of correlation between variables is high enough, it can cause problems when you fit the model and interpret the results. Based on this assumption, predictor variables are not too highly correlated with one another. For this assumption to be met, one could check the variance inflation factor (VIF) scores to be well below 10, and tolerance scores to be above 0 (Keith, 2006; Pallant, 2013). As can be seen in Table 7, all the VIF values are below 10 and the tolerance scores are above zero. Therefore, there is no strong correlation between independent variables.

Table 7.

Assumption Test (Multicollinearity Statistics Table)

	ITS	TR	CSZ	Att	PEU	Tax	CS
Tolerance	0.714	0.706	0.695	0.687	0.765	0.918	0.937
VIF	1.400	1.416	1.440	1.456	1.306	1.090	1.067

Source: SPSS output.

Regression Analysis

As shown in Table 8, a total of seven independent variables are tested in this study. The regression analysis revealed that training (β = 0.236, t = 4.260 and p < .05), attitude (β = 0.345, t = 4.825 and p < .05), IT system (β = 0.318, t = 4.549 and p < .05), PEU (β = 0.138, t = 3.903 and p < .05) have statistically positive and significant effect on the implementation of IFRS. But tax regulation (β = 0.55, t = 1.316 and p > .05), consulting service (β = -0.17, t = -0.449 and p > .05) and company size (β = 0.084, t = 1.956 and p > .05). Therefore, the alternative hypothesis formulated for these four variables: those are perceived ease of use, adequate training, attitude and IT system have been accepted and for the rest three those are tax regulations, company size and consulting service hypotheses, there is no supportive result to accept.

Table 8.

Multiple Linear Regression Analysis of Seven Predictors Variables on the Implementation of IFRS at Commercial Banks in Ethiopia

Variables	Unstandardised Coefficients		Standardised Coefficients	T	Sig.
Variables	B	Std. Error	Beta
(Constant)	0.429		0.294	1.458	0.151
ITS	0.120	0.026	0.318	4.549	0.000
TR	0.236	0.055	0.311	4.260	0.000
CSZ	–0.017	0.039	–0.029	–0.449	0.655
Att	0.234	0.049	0.345	4.825	0.000
PEU	0.138	0.035	0.264	3.903	0.000
Tax	0.055	0.042	0.083	1.316	0.194
CS	0.084	0.043	0.130	1.956	0.056

Source: SPSS output.

Conclusion and Recommendation

The information demand of global economy makes the IFRS implementation as an important aspect to address the issues concerning preparation, dissemination and reporting of financial information throughout the world. As it was summarised in the previous sections, data collected from different sources were analysed using both quantitative and qualitative techniques. Based on the findings from the analysis, it was possible to conclude that costs for training and consulting services were very critical challenge that should be considered together with complexity of IFRSs, fair value measurement. Beside this, IFRS requires the disclosure of too much information. In relation to timeline, even though most banks started to implement the IFRS early at the time given on the IFRS Roadmap of Ethiopia, it really took a long time to produce a one-year financial report, since its financial statements preparation was very time consuming. In general, complexity of IFRSs, inadequate training of staff, cost of implementation and information technology infrastructure contribute as the major challenges upon the IFRS implementation. On the other side, the prospects for implementing IFRS by banks are very high. The result of multiple linear regression also indicated that among the seven incorporated variables: training, attitude, perceived ease of use and IT infrastructure affect the implementation of IFRS at commercial banks in Ethiopia.

Based on the findings of this study, the following recommendations were forwarded, that is, by considering prospects for implementing IFRS the government and concerned regulatory bodies like AABE should have to implement efficient monitoring system, providing training by external experts and others, planned to have experience sharing with some outshine performers of IFRS implementation and also universities should incorporate the issue of IFRS in their curriculum.

Footnotes

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

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