Accounting Challenges Faced by Businesses - Research Proposal Example

Research proposal: Financial And Accounting Challenges Faced By Businesses From Emerging Markets In Meeting International Accounting Standards: With Special Reference To Companies In Azerbaijan. Background: In the year 2005 it was observed that companies in many countries started adopting International Financial Reporting Standard (IFRS). Countries like South Africa, Australia, and New Zealand etc were among the first to adopt IFRS. The countries of The European Union (EU) are now required to follow IFRS. Emerging economies like China, Azerbaijan etc. adopted IFRS. China had given January 2007 as deadline for implementing IFRS. Gradually all the countries in the world will adopt the financial reporting standard. USA and Canada are also getting prepared for the adoption (Barry and Jermakowicz, 2010, pp.1-2). Many businesses which are not required to adopt IFRS and are not publicly held are still implementing IFRS in their accounting. This is because a common standard of accounting followed all over the world will facilitate free flow of capital. If an investor of UAS, for example, wants to invest in a company in China he will need to examine the financial statement of the company. If the company prepares its financial statement using same methods as that is followed in the investor’s country it will be easier for the investor to understand the financial position of the company. Therefore using an international standard like IFRS for preparing financial statements will win investors confidence (Barry and Jermakowicz, 2010, pp. 2). However adoption of IFRS is not totally hassle free. Companies going through the transition from old methods to IFRS specified methods face many challenges. It will be seen later in this work that there are many challenges which an entity face in adopting a new standard of accounting and financial report preparation. Emerging economies like China nd Azerbaijan have also implemented IFRS partially of wholly. But companies of these countries have faced or still facing problems caused by the transition from old system to the new system. The government of Azerbaijan had given a deadline of January 2008 to its Public Interest Entities for implementing IFRS in their accounting. The small enterprises of the country required to implement National Accounting Standard, which is formulated based on the principles of IFRS, before January 2006 (Republic of Azerbaijan Accounting Law, 2004 Article 8,9,10 and 17). Therefore, to find out the challenges faced by businesses in emerging economies, studies on companies in Azerbaijan will be helpful. There are many companies in Azerbaijan which already have converted to new system, but there are still some companies which are yet to implement the new standard. This makes the country an interesting place for this study. Preliminary Review of the Literature: In the conversion process from old accounting system to the new accounting system in Azerbaijan, different parties related to accounting, auditing and reporting face some problems. A report prepared by Yev (2009) has discussed these problems in details. The cost involved in adopting IFRS or IAS or the NAS in accounting is considerable one. Companies must bear the cost of training of their accounting personnel. The introduction of the IFRS in the accounting system could result in change in the financial position of the company. The financial position of a company determined by following the previous accounting system and the financial position determined by the new accounting system might differ as a result of change in procedures, roles and obligations. This will result in volatility and difficulties in decision making. The complex nature of IFRS standard could be a problem too. Another problem that accounting personnel face is: the new standard demand change in thinking. The new reporting is not just about bookkeeping and reporting; it involves thinking and judgments of the accountants. Companies have to do a separate accounting for tax accounting because IFRS or IAS and tax rule follow different policies (Yev, 2009 pp.66-67). While investigating the challenges to ‘implementation of fair value accounting in emerging markets’ He, Wong and Young (2009) found out some important effects of IFRS adoption in Chinese accounting standard. They found out that the adoption of IFRS based China Accounting Standard does not improve, if not reduce, earning quality (He, Wong, and Young, March 2009). Reports on impact of IFRS on Romanian SMEs have made the following observation. The Romanian entities would gain from the implementation of IFRS. There would be a better financial communication in terms of quality of reported accounting information, uniformity, clarity, intelligibility and comparability (Veronica and Ionel, Jul2010, p. 327). Earnest and Young conducted a survey in 2006 to evaluate the implication and impact of the conversion from old system to IFRS system in South Africa. The survey found out the challenges the companies face are greater complexity, extra cost, ‘poor understanding of reasoning behind transition’ and possibility of confusion (UNCTAD, 2008 pp. 47-48). Many companies under transition had to take the help from external auditors or consultants. Companies had to provide training to their existing staff. The existing Information and Communication Technology (ICT) used by the companies seemed to be inadequate; improvement became necessary. Companies required more than one year for the transition. Therefore it is clear that the transition from old system to new IFRS is costly in terms of time and money (UNCTAD, 2008 pp.48-49). The impact of the transition on the accounting result is mixed one. Many agreed that the change had resulted in more meaningful information for stake holders. In terms of bottom line, 66% of the companies surveyed reported adverse effect on profit; while other 34% reported a positive effect on the profit (UNCTAD, 2008 p.48). Nikoomaram and Fathi (2010) conducted a research on impact of implementation of accounting standard on accounting quality in Iran. They compared companies’ performance over another five years period before implementation of Iranian Accounting Standard and over 5 years after the implementation. The findings revel that the quality measure, earning persistence is not influenced significantly by the transition. Another quality measure, Earning Response Coefficient (ERC) did not increase. However the quality measure, prediction error is significantly decreased in the new accounting regime (Nikoomaram and Fathi, November, 2010, pp. 420-422). The Institute of Chartered Accountants of Pakistan has prepared a report titled ‘Challenges and Successes in Implementing International Standards: Achieving Convergence to IFRSs and ISAs’. The report pointed out some specific challenges faced by the Pakistani businesses especially the accounting professionals. They seem to have problem in ‘understanding the meaning of International Convergence’. The translation of international standards is not easy for them. They found the international standards complex and their structure are new to them. Medium and small-sized entities and accounting firms will face tougher problems. There is a shortage of people with adequate knowledge for adopting new accounting standard (The Institute of Chartered Accountants of Pakistan 2006, p.13). A recommendation note issued by the Russian Corporate Governance Roundtable includes some of the main challenge faced by the Russian businesses. It says that there is a basic difference in ‘definitions and concepts of the old Russian accounting and IFRS methods. IFRS emphasizes on ‘substance over form’ while the traditional Russian accounting follows a ‘form over substance’ approach. This basic difference in approach is a challenge in adopting IFRS accounting (Russian Corporate Governance Roundtable, nd, p.4) The works reviewed so far have pointed out some challenges faced by entities adopting or already adopted different standards of accounting. While the studies on China and Iran dealt with challenges faced by the two countries in adopting new accounting standards (not IFRS), the other studies dealt with the challenges faced by entities in countries like Azerbaijan, Russia, South Africa, Romania and Pakistan in adopting IFRS. Clearly the countries considered here are all emerging economies. The above studies have considered financial data and opinions from numerous entities. They are not focused on a single company. Therefore there is a need for focused study on a single company. A well-established company in Azerbaijan which have implemented IFRS long ago and another well-established company of the same country which is in the process of implementing IFRS will be the subject of this study. Research Questions (Aims) and Objectives: The area of this study is the challenges faced by different entities in implementing International Financial Reporting Standard. The literature review above has pointed out some findings (the challenges the entities face and some benefits, or lack of it, of implementing new accounting standard) made by previous researches on this subject. The gap in research is also pointed out. This study will consider the two companies - State Oil Company of Azerbaijan Republic (SOCAR) of Azerbaijan and ‘Azerbaijan Railways’ Limited (ADY) of the same country. The first company has implemented IRFS few years back; while the second company is implementing it this year (2013) (Ismayilov, 13 January, 2013). This research aims to find out the answers of the following questions: A) Research Questions: 1. What are the challenges did that State Oil Company of Azerbaijan Republic face during the implementation of International Financial Reporting Standard? 2. What benefit did they get from the implementation of International Financial Reporting Standard? 3. Are the efforts/costs needed to overcome the challenges fully compensated by the benefits of the implementation? 4. What are the challenges that Azerbaijan Railways Limited presently facing in implementation of International Financial Reporting Standard? 5. Are the challenges faced by both of them similar? B) Research Objectives: 1. To find out the challenges faced by State Oil Company of Azerbaijan Republic during the implementing of International Financial Reporting Standard. 2. To find out the key benefits they get from the implementation of International Financial Reporting Standard. 3. To find out if the benefits good enough to take the trouble of implementing IFRS. 4. To find out the challenges that Azerbaijan Railways Limited presently facing in implementing of International Financial Reporting Standard. 5. To compare the challenges faced in the past and challenges facing now. Research Plan: This research will involve analysis and interpretation of data and information from the two Azerbaijan companies to get the answers of the above research questions and to achieve the above objectives. The research design will be such a way that it will be able to accomplish the objectives. The data and information necessary for this study must be collected using suitable methods. The collected data should be properly presented and analyzed in order to get the answers of the research questions. A) Research Design: The purpose of the research is finding out the relevant data on implementation of IFRS in accounting in the two companies of Republic of Azerbaijan. The data collected will be presented and analyzed such a way that it will be able to provide the information required for the research. Here, the required information is about some facts related to implementation of IFRS in accounting. Therefore, this research is descriptive in nature. This study will require two types of data: quantitative and qualitative; and will involve data from both primary secondary data sources. The data from primary source will be mainly qualitative in nature and will require meaningful interpretation by suitable qualitative analysis. The data from secondary sources will be quantitative and will require simple statistical tools for analysis and interpretation. The qualitative data will be collected from the finance and accounting staffs of both the companies. The data from the staffs of State Oil Company of Azerbaijan Republic will be used to find the answers of what were the challenges the company faced during the implementation of the IFRS. This data will also help showing the benefits of implementing IFRS, if any. The data from the staffs of Azerbaijan Railways will be used to find out what are the problem companies currently facing. Expert sampling method will be used to select respondents. Financial statements of State Oil Company of Azerbaijan Republic for a period of five years before the implementation of IFRS and five years after the implementation will be collected. The figures in the financial statements before the implementation will be compared with the figures contained in the statements after the implementation. This will show a picture of loss or benefit experienced by SOCAR as a result of implementation of IFRS. B) Data collection: This research will collect data from the finance staffs two companies. 31 finance staffs of each company of different ranks and sections will be selected. Random sampling will not be possible because of lack of information about the staffs of the companies. However the Human Resource (HR) department of the companies should be contacted for lists of their finance department employees. Requests should me made for inclusion of designations and e-mail addresses of the employees along with the names in the lists. Finance officers and accountants of higher ranks will be selected for the email interview. The number of employees chosen for the email interview should be around 50, as all the officers and accountants chosen might not be able to send back answers. Emails containing questionnaire and instructions would be sent to selected officers. The officers will answer the questions according to the instructions sent and will send the answers. A time limit of sending answers will also be mentioned in the mail containing questionnaire. From the responses 31 responses must be chosen for the study, as that is the sample size. The selection of respondents from lists and the final selection of responses from the answer-mails should be such a way that they must properly represent the senior finance officers and accountants from different sections of the companies. Therefore the sampling method followed in this research could be said to be ‘expert sampling’. The secondary data will be required for the quantitative analysis. This data will be collected from the published financial reports and statements of State Oil Company of Azerbaijan Republic; which are freely available on the company website. For this research purpose financial statements of Azerbaijan Railways will not be required. C) Data Analysis: Qualitative analysis of the data will be performed on the data collected from the staffs of the both the companies. Responses of each question will be classified and summarized. Some simple statistical tools, like average, percentage, bar charts etc. could be use for this purpose. This will show what the main challenges each company faced or are facing. This will also show the main benefits of the implementation of IFRS. Then, main challenges of both the companies will be placed side by side. This will help pointing out any difference in nature of challenges of the past and the present. Help of experts might be necessary for quantitative analysis of the data. The financial data of SOCAR will be analyzed using simple statistical method. Balance sheets, profit-loss statements, etc will provide the necessary data. The data from the period before implementation of IFRS and the period after that will be compared. Figures like profit or loss, earning per share and different cost figures will be compared. This will give an idea about loss made or gain achieved in terms of money as a result of implementation of IFRS. D) Limitations: There are some limitations of this study. Proper sampling will not be possible as the companies are situated in a different country. One must depend on the willingness of the staffs of the companies for required information. Focus group or depth interviews are more suitable methods of data collection for this type of qualitative research. But that will not be possible in this case. This research might not be able to give the picture of the whole country as there are only two companies considered. Further research comprising many entities of the Republic of Azerbaijan should be conducted by forming collaboration with the research scholars of the country. Ethical Considerations: Ethical guidelines provided by BES Ethics Guidelines will be followed throughout this research work. All interview questionnaires will include a consent form where the respondents will give their consent for participation in the study. There will a declaration in all the questionnaires that personal information of the respondents will be protected from public access. Timetable: A convenient timetable for this research is given below.   Tasks Involved week1 2 3 4 5 6 7 8 9 10 11 12 1 Literature Review                         2 Questionnaire Design                         3 Data Collection                         4 Data presentation and analysis                         5 Preparation of primary draft                         6 preparation of final report                         References: 1. Barry, J. E. and Jermakowicz, E. K. (2010) WILEY Interpretation and Application of International Financial Reporting Standards 2010. New Jersy: John Wiley & Sons. 2. He, X.; Wong, T. J. and Young, D. (March 2009). Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from IFRS Adoption in China. Paper from University of Finance and Economics and The Chinese University of Hong Kong. Accessed on May 5, 2013. Available at < https://tippie.uiowa.edu/accounting/mcgladrey/pdf/wong_tj.pdf> 3. Ismayilov, T. E. (13 January, 2013) Azerbaijan Railways pass to int’l accounting standards. Trend. Accessed on May 5, 2013. Available at < http://en.trend.az/capital/business/2107471.html> 4. Nikoomaram, H. and Fathi, Z. (November, 2010). The Impact of Accounting Standards on Financial Reporting Quality: Evidence from Iran. International Journal Of Academic Research. Vol. 2. No. 6. P419-422. 5. Republic of Azerbaijan Accounting Law (2004). An Unofficial Translation. Accessed on May 5, 2013. Available at < http://www.iasplus.com/en/binary/country/azerbaijanlaw.pdf> 6. Russian Corporate Governance Roundtable. (nd.) Implementing International Financial Reporting Standards (IFRS) In Russia: 25 Recommendations To Facilitate The Transition to IFRS. Accessed on May 5, 2013. Available at < http://www.icap.org.pk/mies/mies2.pdf> 7. The Institute of Chartered Accountants of Pakistan (2006). Challenges and Successes in Implementing International Standards: Achieving Convergence to IFRSs and ISAs. Accessed on May 5, 2013. Available at < http://www.icap.org.pk/mies/mies2.pdf> 8. UNCTAD (2008) International Accounting and Reporting Issues: 2007 Review. United Nations Publications. 9. Veronica, G and Ionel, B. (Jul2010). IAS/IFRS Standards for SMEs and the Impact on the Romanian Accounting System.  International Journal of Academic Research.  Vol. 2 No. 4, p323-328. 10. Yev, E. M. (2009). The Application of IAS/IFRS in Azerbaijan, a Comparative Approach. The Graduate School of Social Sciences Of Middle East Technical University. Accessed on May 5, 2013. Available at Read More