Development and Classification Accounting - Essay Example

Development and ification Accounting due: Table of Contents Table of Contents 2 Introduction 3 Taxation 3 Source of Finance 6 The legal system 7 Level of economic development 8 Inflation 10 Culture and accounting values relationship 11 Fair presentation vs. legal compliance accounting 12 Political and economic ties between Qatar and United States 13 Conclusion 13 Appendix 1 14 Appendix 2 15 References 16 Introduction Accounting is a procedure of recognising, calculating and communicating the business performance to concerned people in order to make decisions (Rajasekaran & Lalitha, 2011). This paper will discuss the development and classification of accounting between Qatar and USA accounting, grounded on the concept of international accounting. In addition, the paper will include economic and political ties, taxation and source of finance and legal system. Moreover, it will look at the culture and the accounting values relationship and the degree of economic development. International accounting is a sub-division of accounting that concentrates on the translation and recording of foreign executions, presentation and preparation of consolidated financial communications. In addition, international accounting presents foreign financial reporting in line with international auditing and GAAP activities. The advantages of international accounting include attaining uniformity in accounting activities in various states, mobilise global resources, and attracting foreign investors. Other advantages include professionalism in account training, incorporating transparency and ethics into accounting applications. Nevertheless, international accounting face the challenges of perceptual varying, socioeconomic, cultural, technological and political variations in countries (Mohapatra, 2012). Taxation In Qatar Law No.11 of 1993, covers the tax system and filling process. The law states that any business activities conducted in Qatar is subject to tax. An ‘activity’ implies any trade, profession, service, occupation, and implementation of business or a contract with an aim of getting profit. Income tax is charged on companies and partnership running in Qatar, regardless of their way of operation, either in collaboration or through the branches. On the other hand, Law No.9 of 1989, states that Gulf Co-operation Council States nationals are treated as Qatari citizens in terms of income tax charges. Consequently, foreign companies possessed by Gulf nationals are not influenced by income tax in Qatar. The case is the same for Qatari owned businesses, they are not subject to income tax. In addition, there are no social insurance, personal and other legal taxes on wages and salaries (International Business Publications, 2012). In Qatar, the tax administration has the authority to examine the taxpayer’s records and books that are stored in the country. These accounting records and books should be preserved for a minimum of five years from the date of the yearly tax announcement that is recorded by the tax administration. All business organisations with annual profit or capital of more than QR 100,000 are required to provide audited financial records to reinforce the tax declaration. The financial records are supposed to be approved by a practising accountant in Qatar who is submitted to the Ministry of Finance, Economy and Commerce. Tax in Qatar is determined through calculations that are same with either American or British practice on the grounds of profits revealed by auditing, financial records, modified for tax depreciation and any articles prohibited by Income Tax Department. From a general perspective, any gains on capital generated through sale of business assets and interests are categorised as ordinary income. Income consists of the total sum of the profits and gains produced by performing activities in Qatar. A business entity should announce the sum of installation and supply contract. The full value of engineering and installation services provided outside Qatar is recorded as a cost in the income statement that is reinforced with valid documented verification. All costs incurred in the process of earning taxable income is referred to as a deductible. These deductibles comprise of rent, labour cost, salaries, and interest expense (International Business Publications, 2012). (See appendix 1 for an example of a financial statement of an organisation in Qatar). In the United States, income tax affects domestic and foreign corporations as established by Treasury Regulations of 1996. The Treasury Regulations are also known as ‘check-the-box’ regulations. The compliance and administrative costs make up the operating expenditure of the tax system. Under the Treasury regulations, the bodies recognised as corporations by the domestic level are those that are incorporated under insurance companies and state corporate law. From the perspective of foreign corporations, they include entities under the laws of different countries that are categorised as corporations (Mcdaniel, Ault & Repetti, 2005). Corporations are exposed to graduated tax rates for the first taxable income of $100,000. The tax rates are as follows; first $50,000 is 15 percent, the next $25,000 is 25 percent, next $9,025,000 is 34 percent and above $10 million is 35 percent (Mcdaniel, Ault & Repetti, 2005). These corporate tax rates are implemented on taxable income where it begins with calculating taxable income in gross income. In this tax system, there is no distinction between categories of income. Special deductions include necessary and ordinary costs accumulated during business or trade such as advertising and wages. Other deductibles include capital cost incurred by companies involved in gas and oil development and drilling. Organisations can recover asset expenses through depreciation law. The depreciation law permits accelerated rates of depreciation for particular assets. In addition, the 2004 Act allows domestic manufacturers to enjoy a deductible that is lesser of three percent of income produced from lease or sale of the products (Mcdaniel, Ault & Repetti, 2005). (See appendix 2 for a financial statement of a United States corporation). Source of Finance The main source of finance in Qatar is banks as a result of lack of Governmental finance programs. There has been an establishment of two Islamic banks in the recent years. The financing offered by Qatar International Islamic Bank and Qatar Islamic Bank, caters for projects and products in Qatar and various Islamic states (International Business Publications 2012, p.199). From the point of view of insurance discipline, Qatar gas eleven companies that operate in the country. Out of the eleven companies, seven are owned by foreigners. Qatar Insurance Company controls the Government Insurance activities and has the lion’s share on the market. There is just one U.S. Company that provides an insurance cover against the risk of war and convertibility in Phase 1 development of the North gas field. The U.S. Export-Import bank engages in the finance package of the Ras Laffan Liquefied Natural Gas Company. Other U.S. organisations interested in financing issues, go through Exim Bank. Other financiers include Japanese Development Bank and different private Japanese banks. These Japanese banks, finance Qatar’s Liquefied Natural Gas industry (International Business Publications 2012, p. 199). In addition, Qatar Financial Centre, an establishment of the Qatar government serves as a central point to attract international financial services. Another purpose of Qatar Financial Centre is to create a market for financial services in the country. It aims to give access to over$ 140 billion of investment over the coming five years in Qatar (Organisation for Economic Co-operation and Development, 2010). In the United States, one source of finance is foreign companies investing in new factories based in the country. On the other hand, the overseas entities may give finance through buying companies in the United States at a higher rate than the United States firms investing out of the country. This kind of investment is categorised as ‘direct investment’ where inflows deduct outflows. Another source of finance is from financial institutions and individuals out of the country. They provide finance through purchase of United States’ government bonds, depositing money in banks and buying shares from companies based in the nation. In addition, another source of finance is from overseas governments who stock foreign exchange reserves in government Treasury bills and bonds (Glyn, 2007). The legal system Since 2009, Qatar became a member of the Global Forum on Transparency and Exchange of information for Tax purposes. The legal system in Qatar is composed of a civil law. The ranking of the laws is as follows the constitution, laws, decrees and ministerial decisions. The Qatar Financial Centre implements its independent legal regime. In the country, the income tax uses a territorial system that only applies to income generated from business operations. The commercial companies’ law dictates the operation and formation of corporate partnerships and organisations. A part of the commercial law put requirements on traders that include the keeping of accounts. Private foundations and associations are ruled by certain statutes (Organisation for Economic Co-operation and Development, 2010). The Qatar Financial Centre (QFC) has its independent legal system that is rooted in common Law. The laws implemented under the QFC Law covers various subjects such as anti-money laundering, companies, partnerships, taxation, trusts and employment. Other areas covered by QFC Law include arbitration, insolvency, financial services and contracts (Organisation for Economic Co-operation and Development, 2010). The Qatar Central Bank play the role of controlling monetary policy and exchange rates. In addition, Qatar Central Bank manages its reserves in foreign assets, circulation and issuance of local currencies. It performs in a regulatory capacity in regard to non-QFC financial and banking services sectors in Qatar. The regulatory functions include supervision, licencing and disciplining financial organisations running broader economic society (Oxford Business Group, 2012). There are two main forms of accounting systems that is micro-based and macro-based. The government plays a crucial role in shaping the process in the macro-based accounting system than in the micro-based system. The United States adopts the micro-based accounting system that depends on legislated necessities which are more transparent (Menipaz & Menipaz, 2011). The United States, accounting is performed according to Financial Accounting Standards Board policies. This accounting body is responsible for developing recommendations, principles and standards that impact on accounting practice. It also has a role in the procedure of auditing and accounting profession supervision and internationalisation. The Securities and Exchange Commission is a significant entity in American Accounting Association and plays the role of safeguarding investors from potential manipulations of the stock market (McGee, 2007). Level of economic development The economy in Qatar has rapidly changed to earn it a high rank in the fastest developing economies in the world. The nominal gross domestic product (GDP) maturity was approximated by QNB at 24.8% in 2004. Qatar is estimated to have grown at a rate of 29.1% in the year 2005 and the anticipated future development at 19.2% in 2006. One of the factors that push the economy to grow at a fast rate is the enlarging Natural Gas sector that results in economic diversification. In addition, the natural gas gives the momentum for the formation of the economy. In addition, the evolution of projects to export and generate natural gas as LNG, GTL, piped gas and investments in fertilizer and petrochemical industries and expanded the revenue base. The share of gas and oil sector make up 60% of the entire GDP and there is expectation that the percentage will increase to reach more than 66%. Qatar is one of the wealthiest countries in the world. This is in regard to per capita income having reached a high of $36.105 in 2004 and expected to attain a mark of $45,085 in 2005 (Ibp, 2004). The economic development of the United States can be examined by the long-term performance of its economy. The actual per capita GDP grew by a factor of ten from $3340 in the year 1870 to $33,330 in 2000. The enlarging per capita GDP is equal to a rate of 1.8% per year. At this performance, the United States was ranked second highest in the world as per capita GDP in 2000 (Barro & Sala-i-Martin, 2004). It is noted that the increase of United States GDP is dependent on the growth of the labour force that relies on the increase in population. The figure below is grounded in U.S. Congressional Budget Office data. The actual GDP recorded in 1996 in dollars is represented by a wavy line. On the other hand, the ‘Real Potential GDP’ is represented by the smooth line that is the degree of actual GDP achievable at full labour. Fig. 1 Source: Barro, R. J., & Sala-i-Martin, X. (2004). Economic growth. Cambridge, Mass: MIT Press. Inflation Inflation in Qatar occurred in the year 2007 and 2008, where the average CPI inflation was at 15 percent. It was as a result of real estate growth and infrastructure bottlenecks. The macroeconomic forces of inflation that existed in 2005and 2008 include; rising government current expenditure, population growth, credit enlargement and depreciation of the nominal effectual exchange rate. These factors remain up to now but are predicted to remain for a short term (International Monetary Fund, 2013). Drivers of inflation in Qatar between 2000 and 2017 are represented in the figure below. Fig. 2 Source: International Monetary Fund. (2013). Qatar: 2012 Article IV consultation. Washington, D.C: International Monetary Fund. As written by the Department of Labour in the United States, US$1,000 in 1996 had a buying power of US$1,248.89 in 2006. It is an indication that in a period of ten years there was an inflation in the United States of an estimated rate of 2.84% annually. Compared to other nations in the world, it is a low rate inflation. Despite the existing macroeconomic conditions, the United States has sustained a very low inflation rate. It has been able to maintain the low inflation rates because of a huge movement of foreign capital investments in the country. In addition, the nation has an efficient and intelligent monetary policies and monitoring of interest rates by the Federal government (Andrade, 2007). In addition, a significant foreign debt is retained overseas that offsets the U.S. deficit that increases the US dollar value. The surplus of credit services in the market influences the prices of commodities to the extent that many people can buy them. As a result an upward pressure on the market prices is felt because of the high demand. The chances of these elements persisting in the near future are high such that the inflation rates of the next three decades can be predicted. The predictions are based on the buying dollar of US$1,000 from 1996 onwards. Fig. 3 1996 2006 2016 2026 2036 PP of US$ 1 1.284 1.649683 2.118193 2.71976 Source: Andrade, J. A. S. L. (2007). USA 2030: Predictions. Georgetown, Guyana: Astemari Publishers Assuming the inflation rates in this period are constant, then a commodity costing US$1,284 in 2006 will be priced at US$2,719 in 2036 (Andrade, 2007). Culture and accounting values relationship The Hofstede Gray theory (1988), states that there are four different value perspectives of accounting subculture that is associated with societal values. The societal values include secrecy versus transparency, uniformity versus flexibility, professionalism versus statutory control, and conservatism versus optimism (Montesinos & Vela, 2002). According to Hofstede Gray theory, the United States has a society that holds strong democratic values and a tradition of public trade stock corporations. It supports the financial reporting that concentrates on the information needs of equity and investors in the capital market. It is in contrast to Qatar, where financing is traditionally related to state funding and large banks. The accounting value as indicated by Hofstede four cultural dimensions for Qatar is uniformity. It is because the country is at high level in regard to power distance and uncertainty avoidance. Consequently, it ranks low from the perspective of individualism (Montesinos & Vela, 2002). Fair presentation vs. legal compliance accounting In the United States, the text of audit reports is codified by the American Institute of Certified Public Accountants since 1939. These codes are stated in the (SAS) Statement of Auditing Standards No.69. SAS argues that the audited financial statements present fairly the organisations’ financial position, cash flows, and outcomes of activities in compliance with common acceptable accounting concepts. In addition, SAS suggest that fairness is not an independent idea and should implemented within the structure of common acceptable accounting theories. Moreover, SAS recommends that implementation of GAAP results in a fair presentation of a financial position. Furthermore, the SAS states that there is an exception in compliance with the rules. The exception explains that an accountant should not communicate an unqualified judgement if a financial report has material deviation from GAAP unless in uncommon situations (Véron, Galichon & Autret, 2006). Article 12 of the Qatar Financial Centre regulations forbid corporations within its mandate to run unknown accounts in false names. Nevertheless, the regulations do have particular provisions to prevent ‘relevant person’ to maintain various accounts (International Monetary Fund, 2013). The fair value accounting in Qatar is implemented through the (IASB) International Accounting Standard Board and (FSAB) Financial Accounting Board. The two bodies provides various interpretations and standards to guide the application of fair value accounting (Oxford Business Group, 2008). Political and economic ties between Qatar and United States The relationship between Qatar and United States is cordial and growing. These relations are strengthened through frequent senior-level deliberations in Washington and Doha. The two countries collaborate on regional diplomatic resourcefulness and enjoy massive economic links in the particular hydrocarbon sector. In addition, they unite to maximise security in the Gulf (Global Investment and Business Center, Inc. Staff, & Ibp, 2000). From a political perspective, the United States and Qatar collaborate in economic and military to stand against Iraqi’s invasion of Kuwait. In addition, the United States has earned favour from Qatar as a suitable security partner because of action Desert Storm and engaging Desert Shield. As a result, the two countries has signed a contract that allows the United States to gain access to Qatari bases, and future cooperation in military activities (International Business Publications, 2012). Conclusion All in all, the United States and Qatari taxation system follows rules and regulations of respective countries. However, the Qatari financing practices is conducted through British or USA accounting guidelines. A unique feature of the Qatar taxing system is that it does not impose charges on their citizens which makes it different from the United States. Appendix 1 Source: KPMG Qatar. (2012). AAOIFI Illustrative Consolidated Financial Statements for Islamic Banks. Retrieved May 11, 2015, from http://www.qcb.gov.qa/English/Legislation/Instructions/Documents/BankInstructions/2013/13-131.pdf Appendix 2 Source: AICPA. (n.d.). Illustrative Financial Statements Prepared Using the Financial Reporting Framework for Small- and Medium-Entities. Retrieved May 12, 2015, from http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/DownloadableDocuments/FRF-SME/FRFforSMEs_Illustrative_Financial_Statements.pdf References AICPA. (n.d.). Illustrative Financial Statements Prepared Using the Financial Reporting Framework for Small- and Medium-Entities. Retrieved May 12, 2015, from http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/DownloadableDocuments/FRF-SME/FRFforSMEs_Illustrative_Financial_Statements.pdf Andrade, J. A. S. L. (2007). USA 2030: Predictions. Georgetown, Guyana: Astemari Publishers Barro, R. J., & Sala-i-Martin, X. (2004). Economic growth. Cambridge, Mass: MIT Press. Glyn, A. (2007). Capitalism unleashed: finance, globalization, and welfare. Oxford, University Press. Global Investment and Business Center, Inc. Staff, & Ibp Usa. (2000). Qatar Business Opportunity Yearbook Volume 139 of Global Business Opportunity Yearbooks Library (Illustrated ed.). Intl Business Publications. 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