IFRS Adoption in Azerbaijan

Abstract

Convergence to the international accounting standards has been driven by the changes in the ways businesses are formed and the way they carry out their activities. Increased complexities in corporate frameworks, the flow of information, sharing of responsibilities all coupled with undue lust for profits by managers and higher income by auditors have led to a situation that had reflected a grim view of the accounting profession. It was imperative that for governments and regulators across the globe to put back some dignity into the profession and remove ambiguities that allow managers and those responsible for checking the accounting and reporting to manipulate. IASB has been the leading regulatory body that has been responsible for setting accounting and auditing principles and guidelines that will be acceptable to all member countries.

Over the years many countries have become members of IASB and have either adopted completely or some of the IFRS / IAS to bring up the standards of accounting and reporting in their corporate sectors. Azerbaijan being part of the previous Soviet regime had accounting practices that were mainly aimed at serving the needs of statistical and tax authorities. However, over the years the country’s accounting regulatory body has increased its efforts to move towards IFRS / IAS for accounting and reporting by the Azerbaijani corporate sector. Azerbaijani banks which are an important part of the corporate sector have been approached in this study to obtain their views and opinions on the adoption process and difficulties they are facing in the transition process. This study results in useful findings regarding the transition process to the adoption of IFRS that will become compulsory by the year 2011 in member countries.

Introduction

Background to Context

Globalization is possible only when economies from all over the world can communicate in the same financial language. To ensure this feasibility, in 2001 the International Accounting Standards Committee (IASC) took out International Financial Reporting Standards (IFRS). IFRS introduced accounting standards which will be followed throughout the world thus assuring uniformity in accounting language globally (Epstein and Jermakowicz 2008). In reality, efforts were being made to implement international accounting standards all over the world since 1963 by International Accounting Standard Board (IASB). But since the importance of having the same financial reporting techniques were not effectively highlighted to other countries the board’s efforts were quite futile. However, due to continuous accounting fraudulent activities in the U.S and other countries, the Board of the International Accounting Standards Committee (IASC) took over the old IASB and took out more rigid rules which persuaded other countries to adopt similar patterns of accounting. Since then, due to successful strategies adopted by IASC today more than a hundred countries have accepted International Accounting Standards (Epstein and Jermakowicz 2008).

The only reason why International Accounting Standards has not been applied all over the world is because of the existence of U.S GAAP. Many of the countries that have been loyal followers of U.S. GAAP show hesitancy in following IAS because they believe U.S. GAAP accounting rules to be the golden rules. However, with time this assumption has proved to be wrong because from 2001 to 2005 eight of the ten countries that were still using GAAP reported accounting scandals (Nisbett and Sheikh 2007). With the U.S. falling into recession, it did not come as a surprise that most corporate accounting scandals were seen in some of the U.S. renowned firms and companies. Some other countries that experienced accounting scandals were the United Kingdom, Australia, Italy, and India. These scandals arose because of acts of misconduct by trusted executive employees of famous public corporations. Some of their malicious acts revolved around misusing the funds for their benefits, overstating revenues and the value of the company’s assets, or understating the expenses or prevailing liabilities.

The biggest scandal yet seen in the global accounting world is no doubt the Enron accounting scandal in 2001 which eventually did not only became the reason for the company’s downfall and the dissolution of its accounting firm Arthur Andersen. The downfall of both the companies was a big blow to the financial world because Enron was considered as the blue-chip stock and Arthur Anderson was the world’s largest accounting firm (Healy and Krishna 2003). The Enron scandal made the corporate world realize the importance of having similar ways of financial reporting. Since International Accounting Standards Committee during this period was busy with their corporate legal matters U.S. congress took charge and took out the Sarbanes-Oxley Act of 2002 (Cohen, Aiyesha and Lys 2005). However, with time SOX was greatly criticized by many public figures especially when it failed to detect the fraudulent accounting activities happening in Waste Management, WorldCom, Tyco International and AIG. Not only this it was also estimated that application of SOX rules and regulations resulted in higher costs for top 500 companies of around $5.5 billion on average in the year 2004 (Cervantes 2008).

In 2003, IASC became active again and took out their first IFRS which was adopted by the U.K. instantly. The same year IFRS was translated into many of the European languages and steps were taken to implement its applications in EU listed companies.

Since the first publication, IFRS has been growing tremendously. Today nearly 7000 companies from European Union are using the principles of IFRS. They annually submit their financial statement in the same language explained in IFRS. At least a hundred more countries such as Hong Kong, Japan, New Zealand and South Africa now also handle their accounts according to the global financial reporting standards. Every major economy plans to converge to the ways of IFRS. For instance, China decided to give the list of its companies that would adopt a standard of IFRS in 2007 (Epstein and Jermakowicz 2008).

The major hindrance that remains incomplete adoption of IFRS is the generally accepted accounting principles better known as GAAP. To eradicate the differences existing between U.S GAAP and IFRS an International Accounting Standard Board was set up in London which works closely with US Financial Accounting Standards Board to convert US GAAP into IFRS. Together they formed a Group of 20 leaders in which they called several of the international accounting bodies on one platform so they can attain the objective of the standard on an immediate basis. By 2011 the convergence project is estimated to be completed which will allow many of the world’s renowned companies will be able to apply IFRS methodologies easily (AICPA 2010).

It is not only the accounting fraud that motivated IASB to quicken the process of bringing the economy of the entire globe on one accounting platform but ever since the financial crisis has hit the world many of the economists are hopeful IFRS will act as a successful tool in bringing the economies of many countries out of recession. US Security and Exchange Commission is particularly in great favor of IFRS and has demanded all the public limited companies in the U.S to report only in international accounting standards by the year 2014. It is believed that with IFRS the cross-border investment will increase greatly helping the investors and thus reducing the operational costs greatly (AICPA 2010).

IFRS also offers a lot of hope to both the underdeveloped countries and the countries that were hit hard during the financial crisis especially to the CIS countries. It has been estimated that the financial crisis has hit the CIS countries the most and now that they have learned the lesson, they are more than willing to switch to IFRS so that they can also enjoy the benefits. All the CIS countries were following the Russian accounting standards which were meant to meet the needs of tax authorities. The biggest loophole in the Russian accounting standard was that it ignored the stakeholder’s interest, rising inflation and depended greatly upon Russian legislation which deeply wounded the entire CIS economy. After realizing the errors in Russia’s accounting sector Russia immediately took steps to rectify themselves by introducing IFRS into their economy (OECD 2005). Although Russia claimed to adopt IFRS in 1998 it was never truly implemented therefore in 2008 International Congress of Accountants and Auditors was held 2008 in which relevant steps should be taken to convert Russian standard accounting ways into IFRS all over the CIS economy were deeply discussed. Since then, transition to International Accounting Standards (IAS) in post-Soviet states is being done (Shvyrkov 2008). States such as Azerbaijan are now also seriously considering bringing transparency in their accounting standards. In 2004, the government of Azerbaijan introduced the Accounting Reform Plan which declared the implementation of IFRS in all profit and non-profit organizations, especially in banks since they are the main financial institutions of the economy (Mustafayev 2009).

While on one hand, the government of Azerbaijan is keen to adopt IFRS methodologies because it will create uniformity in all the sectors existing in the economy on the other hand they are facing difficulty in becoming successful because the transition is not only a costly process but it greatly demands the thinking of the accountant personnel to change which seems slightly impossible as the people of Azerbaijan are used to following the Russian accounting standards (Mustafayev 2009). This research aims to study the necessity of IFRS in Azerbaijan and specifically focus on banking operations. It discusses the drawbacks existing in the accounting system prevailing in Azerbaijan and steps taken by the government to introduce IFRS policies and procedures.

The later part of the report highlights the after-effects of the implementation of IFRS. Since there is a lack of literature on IFRS implementation in CIS countries especially in Azerbaijan this study proves to be highly interesting and informative to its readers.

Objective

The objective of this research is to carry out a contemporary study of the transition to International Accounting Standards (IAS) in post-Soviet states using a case study of Azerbaijani Banks in IFRS adoption.

Project Aim and its Significance

The project aim of this study is to evaluate the transition process in one of the post-Soviet states that have been recently part of the convergence process of accounting standards. Prior to the initiation of this transition, Azerbaijan has been strictly following the accounting standards and practices of the Soviet Union however as the country gained its independence in 1991 and its corporate sector gained its momentum the regulatory body of the accounting profession is the Association of Certified Accountants of Azerbaijan (ACAAz) has joined hands with IASB to converge the National Accounting Standards to IFRS / IAS in 1995.

The current study focuses on acquiring opinions and experiences of Azerbaijani banks that have already adopted IFRS / IASs in their accounting and reporting. Different phases of adoption have been addressed through the implementation of primary research through which the present research would draw important conclusions regarding the success of Azerbaijani banks in adopting new standards and procedures set out by IASB making them abreast with the international companies that have embarked on the same philosophy of increasing the quality and value of the information they produced for shareholders. This research is an important step towards bridging the gap that exists in the current literature regarding the transition process in post-Soviet states and thus it could be considered as a useful set of information for those who are interested in the progress of the accounting profession in this region.

Research Hypothesis

The focus of this research is to evaluate a case of transition to international accounting standards by accounting regulatory body in Azerbaijan and evaluate the following research hypothesis in the light of information collected from different sources:

The transition of the Azerbaijan accounting system to international accounting systems has been a successful one and banks are benefiting from this new change.

Research Questions

The research focuses on different areas of investigation to find suitable answers for the following questions:

1. What were the major differences between Azerbaijan’s previous accounting practices and those implemented by IASB?
2. What approach did ACAAz use for a smooth transition to IFRS and were banks part of the planning and adoption process?
3. What difficulties did Azerbaijani banks face in adopting IFRS in their accounting and reporting?
4. What benefits did Azerbaijani banks achieve from implementing international accounting standards?

Structure of Report

The present report is organized as per the following sections:

• Chapter 1 Introduction: Provides detailed background to the present study to form a basis for the research objectives, project aim and research hypothesis. The research questions are also laid out that would help in achieving these goals.
• Chapter 2 Literature Review: Describes and analyse literature related to the history leading to the formulation of IASB and implementation of IFRS in members countries. It also provides a detailed account of the progress that has been made in Azerbaijan regarding the existing studies.
• Chapter 3 Research Methodology: Sets out the literature on existing research methodologies to derive the adopted research methodology for the present study. It also provides limitations associated with the chosen methodology.
• Chapter 4 Findings: Provides findings from the research conducted in this study and surmises important information that forms the basis of useful conclusions regarding the transition process in Azerbaijan.
• Chapter 5 Conclusions: Includes important conclusions from the study related to the different phases of the adoption process investigated and provide supporting arguments concerning acceptance or rejection of the research hypothesis. It also includes recommendations for further improvement in the accounting systems of Azerbaijan and also for future possible studies.

Literature Review

After the mandatory adoption of International Financial Reporting Standards (IFRS) in the European countries, the use of IFRS is becoming more popular in the rest of the world. All the major economies in the country have either already adopted the use of IFRS or will adopt it shortly. This chapter talks about IFRS, its history, and implementation in detail. The chapter includes a detailed discussion on the advantages and disadvantages of implementing IFRS in countries outside Europe, especially in the post-Soviet states. The chapter also includes a comparison between US-GAAP and IFRS, along with the problems faced by the banks globally under IFRS. In the end, the chapter includes a detailed discussion on Azerbaijan and IFRS.

IFRS/IAS – Institutional Framework

The International Accounting Standards are a set of accounting standards followed globally which were established by the International Accounting Standards Board (IASB) and the International Accounting Standards Committee (IASC). The countries which have adopted these standards require that all the companies in that country follow the standards of accounting mentioned in the IAS when making their financial statements (ICAEW 2010). The lack of reliability of financial reports can fend off foreign capital, making it necessary for an economy to develop certain standards of financial reporting. IAS has been developed to cope with this very problem and has been adopted by many transition economies to make their corporate financial statements more credible (Preobragenskaya and McGee 2003). Around a hundred countries have adopted the use of IFRS for their financial reporting purposes and the number is expected to increase with time (IAS Plus 2010). According to Wolk, Frances, and Tearney, the harmonization of the international financial accounting standards can prove to be extremely beneficial for the developing countries because it gives them a set of well-prepared standards and also because it provides the best-accepted quality there is in the world of accounting framework and its principles (Wolk, Frances and Tearney 1989).

The six main organizations that made the globalization and harmonization of the international accounting standards include the International Accounting Standards Board [IASB]; International Organization of Securities Commissions [IOSCO]; International Federation of Accountants {IFAC]; Commission of the European Union [EU]; United Nationals Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting [ISAR]; and Organization of Economic Cooperation and Development Working Group on Accounting Standards [OECD Working Group] (Al-Omrani 2010).

Background

The accounting culture of today cannot be understood completely unless some knowledge is developed about its history and the changes it has been through, as Littelton explained in 1966, “Accounting is, in part what it now is because of what it has once been” (Pajunen 2007 p.3). Many thoughts and concepts of accounting have been diffused together with time and have made the accounting culture what it is today (Carnegie and Napier 2002). Because of the many variations found in the practices of different firms around the world in their financial reporting, many firms faced problems in the preparation, consolidation, interpretation, and auditing of their financial statements (Al-Omrani 2010). It took the government officials, business leaders, and professional accountants many years to come up with a solution to develop accounting standards that could be accepted globally (Martinez-Diaz 2005).

The International Accounting Standards Committee was established in 1973, based in London, which later came to be known as the International Standards Accounting Board (IASB) in 2001 (Martinez-Diaz 2005). The IASC has released a set of standards from 1973 to 2000, formerly known as International Accounting Standards (IAS) and currently referred to as International Financial Reporting Standards (IFRS), in a numerical order starting with IAS1 and ending with IAS 41 (ICAEW 2010). Initially, IASC was made up of members from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States of America (Kinkela, Harris and Malidretos 2010). The main function of IASC was to promulgate accounting standards and to provide technical advice on multinational accounting issues (Kinkela, Harris and Malidretos 2010), but the committee did not have much influence, even in the United Kingdom, and only assisted countries to establish their standards of accounting.

It was not until 2000, that the whole structure of IASC was changed and the committee was replaced by the International Accounting Standards Board (IASB) and its cause was the increasing need for additional accounting standards in the world economies (IASB 2010). The purpose of IASB was to establish standards that could be applied to the modern transactional requirements and to promote global harmonization of accounting principles (Kinkela, Harris and Malidretos 2010). The world’s stock market regulators selected the IFRS model to set standards based on private authority, functional representation, and technical expertise, making IASB standards effective in the financial reporting of some of the world’s largest corporations in the biggest markets of the world (Martinez-Diaz 2005). IFRS became much more popular and accepted in 2005 when the European Union made it mandatory for all EU-based companies to follow these standards (Epstein 2009). The IAS series released by IASC was replaced by the IFRS series issued by IASB, which was published as a bound volume of consolidated standards, now known as the Red Book (ICAEW 2010).

Implementation of IFRS and associated problem

It is expected that by 2012, the number of countries that require or allow the implementation of IFRS will reach 150 because they are likely to have trouble attracting investment (UNCTAD 2007). The harmonization of the financial accounting standards has raised many issues. Even though many countries have announced that they would like to officially adopt the IFRS, they are reluctant to do so without their say to modify the accounting rules to make them more applicable in the business of their own countries (Thukral 2010). Another issue that arises in the implementation of IFRS is that of small and medium-sized enterprises (SME’s) and whether it is required for them to apply these rules or not (UNCTAD 2007). Another problem with the implementation of the international standards is that at times in certain situations; these rules may only be relevant to the emerging markets and may have nothing to do with the developed markets, leading to unintended results (Phuvanatnaranubala 2005). Wallace and Briston (1993), expressing their concern over the relevance of IFRS to developing and transitional countries, write:

“The biggest problem developing countries have been that of too many foreign experts marketing half-baked solutions to problems that neither they nor the recipient nations understand. Donor agencies should collaborate more closely with the recipient country to ensure that their assistance is delivered only following the national accounting development plans” (p.216).

Korean companies have started noticing some transition issues after announcing that it will adopt the IFRS completely from 2011 and are now concerned about the inconsistencies which are present in the domestic regulations and the IFRS along with the planning, preparing, and resources that they will need to bring change (PWC 2010). The most recent example illustrating the wish of each country to amend the financial accounting rules according to their own need is that of Japan. Tokyo announced in February this year, its desire to adapt to the IFRS but it wants to be more involved in the writing of the rule so it can be associated with the Japanese business practices (Sano and Hirata 2010). On the governing board of IASB, five seats are taken by the Europeans, four are taken by the United States, and one represents Japan (Thukral 2010). The governing board reflects that it is not representing global economies but is rather focused on the US and European countries. Japan’s concern regarding its representation in the board cannot be ignored. Also, the board does not include members from other major Asia-pacific countries like China, India, Australia, etc, making these countries reluctant in the application of IFRS.

But they have no choice but to adopt the international standards framed by the developed market since these developed markets are the ones that function as financial centres that provide money (Phuvanatnaranubala 2005). Developing and transitional countries are under pressure by the major international donors and money lenders, such as World Bank [WB] and International Monetary Fund [IMF] to allow the use or make it mandatory for the companies in their countries to adopt the IFRS rules (Points and Cunningham 1998). They believe that the harmonization of financial accounting rules will help gain the confidence of investors and key shareholders (Kholeif 2008). Preiato (2009) states that the people who support the adoption of IFRS believe that the “benefits will flow from expanded financial statement disclosures, improved measurement and recognition practices and the narrowing of differences in company reporting which arise when a variety of national GAAP is used” (p.3). It is important that all the governments and regulatory bodies adopting IFRS consider all the advantages and disadvantages of its implementation to be able to make better decisions and assess the relevance of IFRS to their own national needs (Tyrall, Woodward and Rakhimbekova 2007).

Sucher and Alexcander concluded in their study in 2002, that in the implementation of IFRS in Russia and the Czech Republic, the companies had to deal with some specific issues such as the lack of training of the accountants, their unfamiliar attitude towards IFRS, and their lack of complaisance with IFRS, especially in groups accounts and substance over form (Sucher and Alexander 2002). They also pointed out that certain IFRS were very complex, and problems were being faced in the estimation and application of the fair values in the accounts of the company (Sucher and Alexander 2002). Studies reveal that even though the activities to promote and develop international financial auditing standards have increased over the past few years, many differences are still present among the countries to a great extent and so they have developed enforcement bodies and systems to establish applications that can be compared with IFRS (Zeff 2007). The implementation, however, does not always bring forth negative results.

Advantages of IFRS

Studies have confirmed that the voluntary implementation of IFRS in Austria, Germany, and Switzerland, has resulted in better financial statement disclosures, allowing the analysts to develop a better understanding of the strategies of the firms along with their prospects and accounting practices, improving the quality of their forecasts (Daske and Gebhardt 2006). The implementation of IFRS has also helped many countries, which are still in the process of development, gain legitimacy and acknowledgement (Al-Omrani 2010). In simple words, the advantages of harmonization of IFRS include fast national improvement of quality and status of the financial reporting; reduction in the cost of setting up standards of national accounting; and increase in the efficiency in both the markets, national and international, through “the provision of more understandable, reliable, and the comparable financial statement” (Al-Omrani 2010 p.35). Another advantage of IFRS is that it provides facilities to the decision-makers by giving a more accurate, detailed, and timely statement on the financial information; reducing international differences and increasing comparability; reducing the work of investors, eliminating the cost of the decision-making process; and IFRS also reduces the investor and information risks (Ball 2006).

Cross-border Investments and IFRS

Claims are often made by the regulators and professionals that the global adoption of IFRS will lead to a better cross-border investment and will increase the capital allocation efficiency (McCreevy 2005). In a study conducted in 2009, by Beneish, Miller, and Yohn, this claim was tested. First, they examined whether adopting IFRS improves the quality of financial reporting by individual firms, and then they evaluated whether these improved standards have any influence on the home-bias and cross border investment (Beneish, Miller and Yohn 2009). In a study conducted by Daske, Hail, Leuz, and Verdi, they found that making the European countries which made it mandatory to implement the IFRS ended up with increased liquidity for individual firms and a decreased information irregularity (Daske, Hail, et al. 2008). Similar results were found in other studies, like Horton, Serafeim, and Serafeim concluded that mandatory adoption of IFRS in the European countries resulted in improvement in firms (Horton, Serafeim and Serafeim 2008). Beneish, Miller, and Yohn concluded that even though many studies prove that the mandatory adoption of IFRS in European countries resulted in better performance of firms and provides a better “information environment” (Beneish, Miller and Yohn 2009 p.6), none of them proves the claim made by the SEC and EU regulators that its adoption will bring in greater investments flow in these countries (McCreevy 2005).

Covrig, DeFond, and Hung found that the companies that adopt international accounting standards have increased foreign ownership (Covrig, DeFond and Hung 2007), and the companies that willingly adopt accounting standards which are similar to the standards followed in the U.S., have an increased U.S. ownership (Bradshaw, Bushee and Miller 2004). It can be concluded from the available studies that a single set of accounting standards adopted globally could increase the comparability along with cross-border investments. Since investors prefer firms that implement standards of higher quality, the adoption of IFRS could increase foreign investments in a firm since its implementation does result in a better quality of financial reporting.

Implementation of IFRS in Banks

Many banks have reported problems implementing IFRS in their firms. One of the most common problems faced by banks is that of loans. It was reported that IFRS was a barrier in giving out all kinds of loans, including nonaccrual and caused an impairment loss (Deutsche Bank 2010). IFRS introduced IAS 39, Financial Instruments: Recognition and Measurement, to provide impairment guidance for such loans (IAS Plus 2010). Other areas in which banks face problems under IFRS include risk management, systems processes, and products. IAS 39, however, has been much criticized for its complexity which makes its implementation very difficult (Ernst and Young 2010). Because of its complex nature, the G-20 leaders decided in April 2009, to replace the IAS 39 with IFRS 9 by the end of the year 2010 (Ernst and Young 2010).

Fair Value Accounting: IAS 39

The International Accounting Standards Committee issued IAS 39: Financial Instruments: Recognition and Measurement in 2000, as an important part of the accounting standards to be implemented (Miolo 2000). The fair value accounting introduced in the IFRS is based on the SFAS 157 used by FASB (Yong 2010). The main purpose of this standard was to increase the use of fair value accounting for all the financial assets and liabilities by measuring, recognizing, and identifying any extra information for companies (Miolo 2000). The Fair Value Option was amended on June 16, 2005, which limits “the ability for an entity to designate any financial asset or financial liability as at fair value through profit or loss” (IAS Plus 2005 p.1).

The purpose of the original Fair Value Accounting standard was to recognize a “financial asset or a financial liability on its balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument” and to “remove a financial liability (or a part of financial liability) from its balance sheet when, and only when, it is extinguished” (IASC Foundation 2010 p.1). The purpose of the amendment made in June 2005 is to prevent any inappropriate use of this option without limiting its key benefits (IAS Plus 2005). It is important that the implementation of IAS 39 be planned because it has an impact on many other functional areas along with accounting, for instance, derivatives, loans and receivables, financial assets and liabilities held for trading, and financial assets available for sale (Miolo 2000).

IFRS and U.S. GAAP

Many efforts have been made in recent years by the Securities and Exchange Commission (SEC) in the convergence of the IFRS and the US based Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB), a private sector for establishing financial accounting standards in the United States, and the IASB have been working together for years to achieve their long-term plan to converge the IFRS and GAAP and the completion of this plan has been accelerated after 2007, when the SEC decided to accept the IFRS for foreign filers, without any reconciliation with U.S. GAAP (Kinkela, Harris and Malidretos 2010). The convergence of GAAP with IFRS is expected to be completed by 2011 along with its adoption in the US companies (IASB 2010). This convergence proposal of IFRS and GAAP will be an important step forward to the global harmonization in the financial reporting and will replace the IAS 18 Revenues, IAS 11 Construction Contracts, etc (FASB 2010). They made their intentions of converging the IFRS and GAAP public in the “Norwalk Agreement” in 2002 and even updated this agreement in 2008 to speed up the process (Ernst and Young 2009). This agreement requires that the difference between GAAP and IFRS be eliminated by taking into consideration the principles stated in the IFRS and by accepting these standards by approving and applying them both nationally and internationally (Kaya 2004).

The task, however, remains difficult because there are more differences between the two standards than similarities. The definitions given in the GAAP of property, plant, and equipment is quite similar to the ones given in IAS 16 Property, Plant, and Equipment, along with similarities in the recognition criteria, changes and error correction, capitalization of Interest, etc, significant differences are also present in the same areas (Ernst and Young 2009). Another barrier in the transition from the US GAAP to IFRS is that of costs which the companies will have to face in educating financial statement readers, learning new standards, and developing new formats of reporting leaving operating units unconvinced to introduce the cultural and information technology change in their organizations (Business Finance 2008).

Both the boards, FASB and IASB, are currently practising their approaches to the financial instruments but are expected to merge by the end of this year and will continue their joint IFRS-U.S. GAAP convergence effort will be completed by June 2011 (Lamoreaux and Nilson 2010). The adoption of the IFRS in the U.S. has been much supported by the American Institute of Certified Public Accountants (AICPA) and even called for a timeline of three to five years to transit to these standards in the given period (Kinkela, Harris and Malidretos 2010). The convergence of US GAAP to IFRS is still under process with the help of Congress, the SEC, and FASB and is expected to result “simultaneously in a reduction of differences between existing standards and an increase in their quality” (FASB 1998). The main reason for the adoption of IFRS lies in the fact that the uniformity of the high-quality accounting standards will make the process more transparent and easier to compare, resulting in a better quality of financial reporting and an improvement in the performance of the capital markets (Preiato 2009). Preiato also suggests that the firms which have adopted the IFRS make fewer analysts’ errors along with a lower dispersion when enforcement is present (Preiato 2009).

Christian Leuz concluded in his report that the implementation of IFRS in the U.S is not likely to have any significant effect on the quality of financial reporting and macroeconomics of the country since a high-quality set of accounting standards already is already being followed providing “strong incentives for transparent reporting” (Leuz 2010). Leuz also reported that the change in the standards might lead to undesirable results, promoting discretion in reporting rather than guidance, along with the pressures, such as litigation system, that IFRS will have to face hindering international comparability (Leuz 2010).

The Soviet Union and IFRS in CIS Countries

The Commonwealth of Independent States is the post-soviet countries such as Armenia, Azerbaijan, Russia, Ukraine, Uzbekistan, etc. It was very challenging for the post-Soviet states to survive as independent states mainly because of the traditional security problems, which were of military nature, and untraditional security issues, such as economic global and regional competition, that these countries were facing (Libman 2006). During the Soviet Union governance, the main purpose of accounting was to conform to the rules and requirements of the statistical and tax authorities, and no one was answerable for their performance and quality of financial reporting to the banks or investors (Mustafayev 2009). In the Soviet Union, enterprises, organized production, established plans and targets, and established wage levels were all founded by the central government (Liberman and Eidinov 1995). Since all the costs and prices were determined by the central government, there was no existing economic content in the accounting system (Mustafayev 2009). The performance of the firm in the Soviet Union was assessed based on their duties toward the central government (Pecker 1932).

The economic changes in the post-Soviet states mainly began in the late 1990s and early 2000s, when there was a “wave of economic institutional reforms” (Libman 2006, p.3). After the collapse of the Soviet Union, Audit has become one of the successful businesses of the post-Soviet countries, especially Russia (Mennicken 2010). The procedure of introducing IFRS in a firm is completely different in the post-Soviet states compared to the Western countries. For instance, in the U.S. or U.K, auditing standards are not the starting point but the result of the development and professionalization of auditing (Campbell 1985). However, in the post-Soviet states, like Russia, the international auditing standards are introduced in an “environment where market-oriented auditing is only in its initial phase of development” (Mennicken 2008, p.388).

In Russia, IFRS was introduced in the banking sector during Vladimir Putin’s second term as president (Libman 2006). As a result, Russia’s auditing business has grown by about 60 per cent in terms of revenue, reaching a total of 37 billion Rubles in 2007 (Mennicken 2010). The use of IFRS was gradually introduced in Russia and the process of eliminating the dissimilarities between the IFRS and the Russian GAAP has been very slow (Financial Standards Foundation 2010). Another country that has adopted the use of IFRS in its firms in Kazakhstan. Foreign direct investments have played a key role in the development of Kazakhstan since its independence (OECD 2001). In Kazakhstan, foreign investors were given the top priority unlike other post-Soviet states like Russia, and legal rights were provided to the investors, such as the Investment Act (1994), Act of Governmental Support of Direct Investments (1997), and Investment Funds Act (1997), along with an early introduction of IFRS in the country which attracted many foreign investors (Libman 2006). Studies have revealed that all the post-Soviet states face the same kind of problems and benefits in the application of IFRS, like the increase in the amount of Foreign Direct Investments (FDI) in Russia, Ukraine, and Kazakhstan after the implementation of IFRS (Mustafayev 2009).

Accounting in Azerbaijan

Being a part of the Soviet Union, Azerbaijan was required to comply with its rules and regulations. After the collapse of the Soviet Union, foreign investment was much required by Azerbaijan to maintain private property and to establish joint-stock companies (Mustafayev 2009). The need for a new accounting system significantly increased in the country since the accounting standards of the Soviet Union, which were being applied in the early years, did not comply with the standards required in the world, which was a barrier for the foreign investors. Azerbaijan, as a newly independent state, was not ready to develop its new accounting system (Derek 1995). Azerbaijan then applied the strategy used by post-Soviet Russia i.e., to gradually develop financial accounting standards for the state. As a result, the Accounting Law of Azerbaijan Republic was passed in 1995, the purpose of which was to develop new policies and procedures of accounting (Azerbaijan 1995). The main idea behind the introduction of this law was to steadily introduce an accounting system to the economy and interested parties, who were not prepared to suddenly adopt the market-economy accounting system (Derek 1995).

Differences between IFRS and Azerbaijan GAAP

There are a lot of differences between the Azerbaijan GAAP and IFRS mainly because the Azerbaijan GAAP is a product of the Soviet Accounting system which was only concerned with the preparation and presentation of the financial statements to the central government (Mustafayev 2009). The main differences between IFRS and Azerbaijan GAAP are present in the IAS 38, in accounting for intangible assets; their definition, recognition, initial and subsequent measurement, amortizations, and disclosure requirements (Mustafayev 2009).

Implementation

The main objective of the government of Azerbaijan is to introduce the IFRS in the accounting system and to fully comply with these standards, while the Accounting Law of 1995 is still applied until the IFRS are completely adopted (Mustafayev 2009). Many efforts are being made by the Azerbaijan government to support the introduction and implementation of IFRS in the region. The Accounting Law of Azerbaijan Republic was passed in 2004, according to which the government regulation of accounting is required to establish and apply the National Accounting System (NAS) based on IFRS and IAS for both, commercial and non-commercial organizations (IAS Plus 2010). The responsible ministry is also responsible for monitoring the changes which are being made to the NAS according to IAS from time to time, and since then, many changes have been made to the NAS (Mustafayev 2009). The changes made so far in the NAS according to the IFRS are mainly in the policies on the presentation of financial statements, Balance sheets, stocks and costs, fixed assets and investments, cash, receivables and other current assets (Mustafayev 2009). The non-bank credit organizations act was signed by the President of Azerbaijan, according to which organizations are required to prepare the financial statements under IFRS and adopt the standards of corporate governance (ICMAP 2010). The adoption of IFRS in Azerbaijan can result in much success for the country since it has proved to benefit the economy by increasing the quality of financial reporting and attracting much foreign investment.

Emil Mustafayev researched in 2009, in which he studied the relationship between the implementation of IFRS in Azerbaijan and foreign direct investment (Mustafayev 2009). He designed a questionnaire to be filled by the auditors working in the auditing companies in Azerbaijan. The questionnaire measured the relevance of IFRS to Azerbaijan, its advantages, costs and disadvantages along with other aspects. He concluded in his research that the companies in Azerbaijan believe that “it is essential to adopt IFRS if an entity wants to attract foreign investment, be more transparent, and increase the quality of decision making” (Mustafayev 2009 p.69).

The After-effects of implementation of IFRS in Azerbaijan

The implementation of IFRS in the Azerbaijani banks can have a lot of influence on the quality of financial reporting. It can have both positive and negative impacts on the accounting system. First, the application of IFRS will increase transparency in financial reporting which is lacking in the Soviet Accounting System because of the absence of disclosure notes (Narasimham and Adhami 2008). There will be a significant increase in the quality of the financial reporting, which cannot be achieved using the policies and procedures suggested in the Azerbaijan GAAP (Mustafayev 2009).

There are some major differences between the IFRS and Azerbaijan accounting policies and procedures, so much that many times, the government regulators of accounting were unable to compare both the regulations and make them applicable due to the lack of similarities between the two (Mustafayev 2009). The potential problems, identified by Mustafayev, with the adoption of IFRS in Azerbaijan can be summed up as follows (Mustafayev 2009):

• Associated costs: The associated cost with the transition to IFRS cannot be ignored. Initially, the adoption of IFRS or NAS will require a lot of continuous training of the accounting and finance staff (CFO 2009). In addition, there is also the cost of installation of a suitable and updated information technology system which is essential to reduce the cost of the collection of financial information and the arrangement of financial statements.
• Financial Position: Implementation of IFRS can result in a change in position and performance of the finance, resulting in an unstable balance sheet and income statement, changing the financial position of the firm, increasing the difficulties for the shareholders and management in the decision making process.
• Strategic Thinking: The application of IFRS requires the concerned personnel to bring a change in their thinking about accounting, which can be hard for the Azerbaijani population because, for decades, their concept of financial reporting has been that of bookkeeping and reporting to their central government (Mustafayev 2009).

Research Methodology

Research is a meaningful search for knowledge using scientific and systematic methods (Bamberger 2000). The methodology adopted in research concludes research authentic and meaningful (Badke 2008). Information is derived through a systematic and objective method, generalization and construction of a theory come under the heading of systematic approach (Bamberger 2000). As the research progresses the development of research expands. Formulating conclusions by applying scientific procedures is the core purpose of research (Mallette and Duke 2004). Research methodology having various dynamics makes it wider in scope as compared to research methods (Mallette and Duke 2004).

Research methodology helps in developing research variables through which the source of primary and secondary data is established. Developing the nature of the study identifies the sources analysis procedure and date handling and has a direct effect on primary and secondary data (Blaxte, Hughes and Tight 2006). Qualitative and quantitative research has a vague difference between them, so it is better to consider the “methods as being located on a qualitative and quantitative continuum” (Bamberger 2000).

Research Approaches

The Quantitative Approach

Quantitative research is a scale measurement of a quantity or amount (Mallette and Duke 2004). The data used in this approach is structured and organized. The scale measurement is done concerning their magnitude for a reliable and precise result. The quantitative approach requires the random selection of data and then a sample is taken for the entire data. This approach allows the researcher to use advanced statistical formulae and tools for numerically structured data. When using quantitative data standard protocol has to be taken into account (Bamberger 2000).

The application of statistical tools enhances the scope of the research. For numerically expressed data any source of data can be used. This data provides either pre-coded categories or numerical information, providing an edge to incorporate data to a large number of subjects using standardized statistical tools (Bamberger 2000). Using this approach makes one understand the complete development of the research subject.

The Qualitative Approach

The qualitative approach deals with ordinal data expressed in terms of quality or kind showing the hidden motives and desires (Mallette and Duke 2004). As the data is qualitative definite sampling procedure is not required rather the purpose of the research determines the sampling method (Bamberger 2000). Qualitative data being unstructured and flexible allows the alteration of the format or content of the study on what is being learned in progress (Bamberger 2000), due to which this approach requires detailed observation and explanation of the data.

The study relies on the pre-coded classification of data since the data used in this approach contains descriptive textual reports with minimal categorization (Bamberger 2000). Research containing exploratory features usually adopt this approach. The risk of vagueness in this approach cannot be ignored (Mallette and Duke 2004). The approach itself is divided into a couple of categories.

The Inductive Approach

The inductive approach is applied for diverging data. Its core value is to highlight the frequent, dominant, and significant themes in the collection of data, imparting the limitations imposed by the structured methodologies (Thomas 2003). The first step is to identify a pattern after the analysis of the carried-out observations, which results in the formulation of a hypothesis heading towards a broader generalization. An inductive approach provides a more convenient and efficient medium for qualitative analysis (Thomas 2003). The results are less reliable than that of the deductive approach.

The Deductive Approach

In the deductive approach developed theories and hypotheses are tested through empirical observation (Crowther and Lancaster 2008). The deductive approach features a precise test of a developed theory. The theories and hypotheses can be formed based on past observations and research. Research having a predefined set of particular problems e.g., consultancy type can apply this approach (Crowther and Lancaster 2008). Further, the hypothesis is to be tested to decide either to support or oppose the theory/hypothesis by using the process of measurement and observation (Crowther and Lancaster 2008). Deductive research is based on authentic, logical, and generally accepted arguments. The crux of the deductive approach is to scientifically test the developed idea from an existing theory (Gratton and Jones 2004).

Data Collection

Primary Data

Primary data is the original or first-hand data collected to address the particular needs of research. Primary data is used by researchers who use secondary data to answer all their research questions (Wrenn, Stevens and Loudon 2007). Primary data is used when the research requirement is not fulfilled by the secondary data (McNabb 2004), thus the primary data is taken from sources by using questionnaires, by conducting interviews or other measurements which is specific to the research (Gratton and Jones 2004). The collected data could be quantitative or qualitative and should be properly recorded since it has a direct impact on the conclusion.

Secondary Data

The data collected from the existing sources, and which is not based on original research is termed secondary data (Gratton and Jones 2004). Secondary data has some disadvantages with it. The data is sometimes inappropriate and non-reliable for the research as it is collected from various sources (Wrenn, Stevens and Loudon 2007). The data is of low quality and requires mentioning the source from where the data is taken. Internal data sources and external data sources are two parts of secondary data (Wrenn, Stevens and Loudon 2007). The research process is controlled by dividing the data into parts. Some of its advantages are that it helps to build the hypothesis to begin the research, its collection is less costly than primary data and it helps in the gathering of primary data too.

Selected Research Methodology

As it is set out that the purpose of the present study is to evaluate the transition process in Azerbaijan towards implementation of international accounting standards therefore the most appropriate strategy for carrying out the present study is the one that is based on a qualitative approach to research. The reason for choosing a qualitative approach is the findings from the current study are descriptive and requires the interpretative skills of the researcher to present findings from the different sources chosen for this study. This study uses deductive to draw important conclusions from investigating different elements of research regarding the transition process observed in Azerbaijan. The present study makes use of both primary and secondary research to gather useful information that forms the basis of acceptance or rejection of the research hypothesis set out for this study.

Data Collection

Both primary and secondary resources have been used for achieving the research objective and aim.

Primary Research

The primary research has been carried out by the implementation of a survey questionnaire. The reason for selecting a survey questionnaire has been its ease and less time required for completion. The purpose of the survey questionnaire is to gather opinions and views of representatives from different banks operating in Azerbaijan and record their responses to present important findings on the transition process that is currently underway for convergence of accounting standards. A similar approach has been adopted by Mustafayev (2009) in his research of comparative analysis of the application of IFRS/IAS in Azerbaijan where he used a survey questionnaire to reveal opinions on benefits, costs and importance of IFRS/IAS for entities in Azerbaijan.

Elaboration of Questionnaire

The survey questionnaire is designed in such a way that it deals with different phases of the transition process and explores views of representatives from Azerbaijani banks on the differences between previous accounting standards of Azerbaijan and IFRS / IAS and how the regulatory body of Azerbaijan took participants from the banking sector on board for smooth transition and application of international accounting standards in their reporting systems. It also includes questions that are aimed at identifying the difficulties and benefits achieved by banks from the adoption of international accounting standards. Another question is regarding the competency of audit firms that perform an audit of these banks. This is important to understand to evaluate the overall readiness of the accounting and auditing firms and individuals to the implementation of international accounting standards in the banking industry. The survey questionnaire is attached to this report as Appendix I.

Sampling

The survey questionnaire is implemented by requesting representatives of fifteen (15) banks operating in Azerbaijan. The selection of representatives has been formal as written requests were sent to these banks for assigning individuals who can complete the survey questionnaire with due knowledge and understanding of the research topic. The list of banks and their representatives are provided in the following table:

Table 1: Participants of Survey Questionnaire.

Basis for Analysis

The findings from the survey questionnaire form the basis of analysis. As different phases of the transition process have been addressed through the questionnaire and opinions from the banking industry are collected therefore these findings and their description based on the interpretation and knowledge of the researcher provides grounds for important conclusions from the present study. The completion phase of the transition process is set for the year 2011 and the opinions and views expressed by the representatives of Azerbaijani banks allow us to evaluate the success of the transition process in Azerbaijan and its corporate wide acceptability.

Limitations

The research approach selected for this study is considered to be the most appropriate one and is drawn from the understanding of the previous literature on existing academic research methodologies however certain limitations are required to be mentioned for better understanding of the users of this report:

1. The approach chosen for this study is qualitative that is descriptive and dependent upon the understanding and skills of the researcher therefore there is an element of subjectivity in it.
2. Responses are collected from a particular industry of Azerbaijan that may share a similar view of the transition process and thus may form a certain degree of biasness towards the research aim.
3. The use of a survey questionnaire may have its limitations it fails to capture the non-verbal communication of respondents and also the responses may be misdirected due to a lack of understanding of the purpose of the study and its questions.
4. The time and cost of collecting data have been a major issue for the researcher who has attempted to keep them minimal.

Findings

This chapter provides findings from the primary research carried out in this study. The responses collected from participants of the survey questionnaire are included in the form of tables and descriptive discussion. These findings present a view on different phases of the transition process that has taken place in Azerbaijan towards acceptance of international accounting standards and incorporating them as the country’s National Accounting Standards (NAS).

Primary Research Findings

As prescribed the primary research in this study comprised of a survey questionnaire that was aimed at gathering views and opinions of employees working for 15 different Azerbaijani banks. Their responses to each question are presented in the form of tables and discussions as deemed suitable for presentation.

Demographic Questions

The details of banks and their representatives are provided in the research methodology chapter. All banks that have been approached through this survey have their offices in the capital city of Baku. The average number of years of experience with present employers of these respondents is 5.8 years that suggests that participants are well aware of the changes that have taken place in the accounting profession and their respective banks in Azerbaijan. This also adds to the credibility of the findings provided in this report.

Implementation Phase

The first question inquired respondents regarding the strategy used by ACAAz for the implementation of IFRS / IAS as National Accounting Standards. The majority of the responses suggest that new accounting standards have been introduced phased wise to better respond to the market reactions and concerns. Respondents were given four choices and their responses to these choices are provided in the following table:

Table 2: Implementation Strategy.

Extent of Adoption of IFRS / IAS

This question was aimed at assessing the extent of adoption of IFRS / IAS by ACAAz and it is clear from the collected responses that the majority of respondents believe that it is a complete adoption of IFRS / IAS by the regulatory body. Only two respondents thought otherwise but did not provide any reasons. The reasons for complete adoption provided by respondents imply that there was a need for attracting foreign investment into the country and it became inevitable to converge to accounting standards to those at the international level to add credibility and comparability into the financial reports prepared by Azerbaijani entities. At present both Accounting Law and Bank Law requires complete implementation of IFRS / IAS for financial reporting.

Representation of Banks

This question was aimed at inquiring about the fair representation of banks in the transition process and 13 of the responses collected suggest that banks were not involved in the implementation process. The reasons that were given for this view include those banks were not invited for their involvement in the process and only suggestions were sent from the finance department of these banks to the Central Bank of Azerbaijan regarding the transition process. It is also suggested that there is a need for a social group in the site of Central Bank which enables to discuss problems and give suggestions related to this issue. On the other hand, two respondents are of the view that banks had fair representation in the process where they were part of the Consultation Council for Accounting organized by the Ministry of Finance in 2005 and they were invited to make proposals for National Accounting Standards. Furthermore, banks did receive methodological assistance regarding IFRS implementation by the Financial Management Department of the Central Bank of Azerbaijan. In addition to this, there are other organizations such as the Chamber of Auditors of the Republic of Azerbaijan and the Association of Banks that did play important role in the implementation process.

Differences between IFRS and Present Accounting Standards

The majority of the respondents are of the view that there are many differences between IFRS and National Accounting Standards despite complete adoption. These differences are in the presentation of both balance sheet and income statement e.g., consideration of percentages in calculations on credit items in the balance sheet; storage of reserves in the profit and loss account. In addition to these, there are differences in the calculation of deferred tax assets and liabilities, rules of reserve formation for the probability of losses and recognition of expenses. Moreover, classification of assets and liabilities to the non-current and current assets and liabilities is a must under NAS whereas IFRS offers an option in this regard. There are also varied norms related to capital including adequacy, reserves, and measurement of assets according to risk level.

Year of Adoption by Banks

The Central Bank of Azerbaijan made it mandatory for banks to report according to IFRS in 2005 however the collected responses differ in the year of adoption by banks that are presented in the following table:

Table 3: Year of Adoption by Banks.

Difficulties Faced by Banks and Support

The adoption process of IFRS has been considered to be a challenging task for Azerbaijani banks and they had faced numerous problems related to the transition process. The major problem that was faced by banks during the transition period was related to the inability of their staff to deal with the new changes and the unavailability of accounting professionals who had prior knowledge and experience of reporting under international regulations. One of the respondents highlighted those banks were required to make changes to their information systems that were not an easy task and they had to incur high costs for transforming their existing systems. Another difficulty that has been mentioned in the survey results is the problem arising from reporting and amortizing of funds under the first adoption of IAS. Although all banks identified similar difficulties, they had to face during the implementation process they are also of the opinion that the Central Bank of Azerbaijan and Bank Education Center provided seminars and training sessions for banks. Also, banks’ independent auditors that are mainly international offices of major accounting firms located in Azerbaijan provide guidance and consulting to these banks.

Readjustment to Previous Financial Accounts

This question was aimed at inquiring regarding readjustments of previous financial accounts required after the adoption of IFRS by banks. All respondents agreed to this question as banks were required to restate their previous years’ accounts for comparability and completeness issues.

Fair Value Reporting

This question addressed one of the most contentious issues in accounting that is the use of the fair value of recognition and recording of a bank’s financial assets and liabilities. Detailed responses have been collected from the banks in response to this question. The majority of the respondents recognized the use of fair value accounting in their banks under IFRS that is based on deriving the fair value based on two methods according to the nature of assets and liabilities: market value and depreciated or amortized cost price. Under the IFRS rules, assets of the bank are estimated every two years according to the fair value option. Most commonly market prices are used for determining the fair value of banks’ assets and major areas have been identified as the measurement of non-current assets and intangible assets. Problems with the use of fair value accounting arise when it is not possible to determine the fair value of financial instruments. In this case, banks use the effective interest method to fix the problem. In another situation where is no active market in the country, it is complicated to evaluate intangible assets and therefore historical cost method is used.

Another response suggests that banks are required to record buildings at fair value and differences between historical cost and its market value are recorded as a reserve. One response raised doubts about its validity that implied that a particular bank does not have enough financial instruments that are affected by the implementation of fair value accounting.

Benefits from IFRS Adoption

Benefits from IFRS adoption have been widely observed by banks as they have been able to achieve the underlying objective of attracting foreign investment into the industry and organic expansion has been observed in some of the banks. With IFRS banks have been able to embark on the international forum by achieving higher comparability and transparency in their reporting and results such as an expansion of contracts with foreign partners, formation of new correspondence accounts and an opportunity to get a rating by international organizations. Another respondent suggests that despite the significant changes in the economy, real estimation of assets, liabilities and equity was achieved due to the adoption of IFRS that has been a positive sign for the long-term commitment to the international accounting standards by Azerbaijani regulatory bodies. Thus, the overall benefit has been that reporting under IFRS allows current and potential investors to evaluate the financial position and performance of the bank fairly and precisely.

Banks’ Auditors

This question is a follow on to the findings related to the support provided by independent audit firms. International accounting firms have the knowledge, skills, manpower and resources to provide services to first time adopters. All of the banks included in the survey have audit firms that have an international presence in other countries particularly where a transition to IFRS had already been made. The following list provides the name of banks their audit firms.

Table 4: List of Audit Firms.

Audit Firms’ Competency

All respondents suggested that banks’ audit firms are competent enough to deal with the adoption and implementation of IFRS in the banks’ accounting and reporting systems. However, there is one respondent from Expressbank who suggested that the audit firm is not capable enough of dealing with the process and issues arising from the adoption of IFRS.

Need for New Accounting Standard

This final question in the survey questionnaire is aimed at getting responses regarding any problems with the present IFRS and National Accounting Standards and requested any suggestions to improve it further. Only one respondent responded to this question and his comments are provided here for their importance to the present study. He commented that “IAS 39 requires loans, receivables and other financial instruments to be amortized till the end of a reporting period. In that case, at the end of the year, a reserve is created for amortization; this amount is demonstrated in the statement of comprehensive income, and accordingly, the value of an asset is decreased in the degree of a reserve amount. As there is not any method to accurately determine the amortized cost, the auditors’ approach which is based on Basel principles considerably differs from the practices and policies that banks pursue. To avoid this problem, there is a need for a new standard or an option in an existing standard”. This suggestion is consistent with the findings of the study by Mustafayev (2009).

Summary

The findings from the questionnaire reflect similar results that were drawn from the study by Mustafayev (2009). The results in the Azerbaijani banking industry are consistent with the experiences of Russia and other CIS states. There have been difficulties faced by entities however the central regulatory body has been firm in its commitment to join IASB. The benefits arising from the adoption of IFRS have been experienced throughout the banking industry resulting in greater transparency and comparability and attracting foreign investment leading to high economic activity in the industry and expansion. Most of the bank’s accounts are audited by big 4 firms or firms that have an international presence and have experience in preparing and auditing financial reports prepared under IFRS.

Conclusion

The present research has investigated different issues related to the transition process in Azerbaijan for the adoption of international accounting standards. The study has implemented a primary approach for collecting responses from representatives of banks operating in the country and explored their views and opinions on the adoption process, its difficulties and benefits that have resulted from the implementation of international accounting standards by these banks.

The primary findings suggest that the transition process in the Azerbaijani banking industry has been led by the Central Bank of Azerbaijan that have provided guidelines and support to all banks operating in Azerbaijani ensuring phase wise implementation of International Financial Reporting Standards (IFRS). The adoption process has been completed in 2005 however there are still certain differences between National Accounting Standards and IFRS that need to be removed for complete adoption by the year 2011. The primary objective of the implementation of international accounting standards has remained the possibility of bringing businesses of Azerbaijan on the international levels of transparency that could attract greater foreign investment and business opportunities in the economy. The study reveals that the banking industry has benefited from this process with higher levels of foreign investment. However, the adoption process has not been easy and there have been high costs associated with its implementation in the banking industry as they did not have enough manpower that could bring this change and also the lack of a system of information systems compatible with the change. The Central Bank of Azerbaijan, audit firms and other bodies such as Bank Education Center and ACAAz, have provided the necessary guidance to banks. The outcome of this study is supporting the research hypothesis set out for this report that is – the transition of the Azerbaijan accounting system to international accounting systems has been a successful one and banks are benefiting from this new change.

Recommendations

1. The Central Bank of Azerbaijan must attempt to get Azerbaijani banks more involved in the process and any changes that may take place in the international accounting standards to ensure the fullest commitment by these banks as it has been argued by several that without a commitment from participants it is not possible to gain advantages of the accounting standards convergence process.
2. Banks must work together and form a social group that can collect views and opinions of various banks to deal with the problems faced by banks particular smaller banks that do not have sufficient sources or dynamics to incorporate new changes.
3. Banks need to invest time and costs into their accounting and auditing departments to ensure that their staff is well trained for taking up the challenges of the implementation process.
4. With the adoption of IFRS, there is a higher level of responsibility for regulators to ensure that financial reporting by banks is according to the requirements of international accounting standards and therefore there is a greater emphasis on the oversight role of the regulators.

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Appendix I: Survey Questionnaire

How do you characterize the process of adoption of IAS in Azerbaijan?

Big Bang ……………….

Phased Introduction……………….

Piece meal Introduction……………….

Partial Introduction……………….

Is adoption of IAS altered to meet the specific needs of Azerbaijan or it is complete adoption of IAS? Please elaborate

Yes……………….

No……………….

__________________________________________________________________________________________________________________________________________________________________________________________________________________

Do Azerbaijani Banks have sufficient representation in the process of development of National Accounting Standards (NAS)? Please elaborate.

Yes……………….

No……………….

__________________________________________________________________________________________________________________________________________________________________________________________________________________

What are the major differences between IFRS and Azerbaijan’s previous accounting standards relevant to the reporting by banks?

__________________________________________________________________________________________________________________________________________________________________________________________________________________

Is your bank using IFRS to record and report its financials? Which year did it publish its first accounts based on IFRS?

Yes……………….

No……………….

______________________________________________________________________

What difficulties did your bank face at the time of first time adoption of IAS? What support and training was provided by responsible bodies?

____________________________________________________________________________________________________________________________________________

Did adoption of IAS require your bank to readjust previous year’s financials too?

Yes……………….

No……………….

Fair value reporting is one of the most contentious issues in adoption of IAS. How does it affect your banks reporting?

__________________________________________________________________________________________________________________________________________________________________________________________________________________

With adoption of IFRS what benefits have been observed by your bank?

__________________________________________________________________________________________________________________________________________________________________________________________________________________

Is your bank audited by any of the Big 4 Audit Firms?

Yes……………….

Please provide name_____________________________________

No………………. (Pls answer the next question)

Please provide name_____________________________________

Are your bank’s audit firm and its employees well versed and trained for auditing accounts prepared on the basis of IFRS?

Yes……………….

No……………….

Does your bank have need of a new standard to avoid some problems arising from reporting under IFRS?

__________________________________________________________________________________________________________________________________________________________________________________________________________________