Egyptian accounting

Egypt 's Accounting and Auditing Standards and the adoption of International Accounting Standards

Brief history of accounting in Egypt

Historically, Egyptian accounting was not capital-market oriented but rather followed the principles of macro-accounting with huge government intervention aimed at tightly controlling the economy -- and was closely connected with accounting for tax purposes. Economic liberalisation began in the mid 1990s – with aspirations aimed at creating a guided free market economy – this involved the reactivation of the stock exchange market in 1995 and a privatisation programme. The transition posed challenges for the Government, private sector institutions and accountants alike. Increasing the role of the private sector required changes to and reforms of accounting systems in order to support better decision-making, attract investments, stimulate economic development, and enhance foreign investors’ confidence in the market.

Egyptian accounting and auditing standards (1997–2002)

As part of the reform process, the Government of Egypt pursued a policy of harmonising (EAS- Egyptian Accounting Standards) with IAS, while ensuring that specific characteristics of the Egyptian operating environment were taken into account. As a result of Ministerial Decision No. 503, in October 1997 Egypt established the Permanent Committee for Accounting and Auditing Standards to issue EAS that were to be based on IAS, yet modified to suit the local arena. Although official responsibility for setting accounting and auditing standards rests with the permanent committee, the Egyptian Society of Accountants and Auditors practically assumes the main responsibility for drafting accounting and auditing standards. The society’s standard-setting committee selects international accounting and auditing standards that are applicable to the Egyptian framework. Once the committee selects an international standard, it is translated into Arabic and becomes the basis for drafting an Egyptian standard that reflects specific requirements under Egyptian laws and regulations. The draft standard is submitted to the permanent committee for discussion, finalisation and adoption. Lastly the final version of the standard is transmitted to the Ministry of Foreign Trade for issuance by a ministerial decree.

As from 1998, all listed companies in Egypt were required to comply with the new EAS. By 2000, there were 22 EAS, most of which corresponded to IAS with minor alterations. The main objective behind this approach was to enhance the quality of information issued by listed companies, improve decision-making, attract investors, stimulate economic development through increased competition and enhance the level of foreign portfolio investors’ confidence in the Egyptian capital market. By 2002, Egypt had 22 accounting standards and 6 auditing standards. ESA issued in 2000 dealt only with reporting issues and ignored the other areas of ISAs. However, in cases of insufficient EASs, ISAs automatically filled those gaps.

Egyptian accounting and auditing standards (2002–2008)

The newest Government took office in June 2004 and set a major agenda for macroeconomic and structural reform and modernisation. As part of this agenda, it submitted a program of financial reforms that was formally endorsed by the President of Egypt in September 2004. Known officially as the Financial Sector Reform Programme, its implementation stretched over the period 2005–2008. The ambitious programme represented the most far-reaching, substantive and comprehensive drive towards financial sector strengthening to be ever initiated in modern Egypt.

As the need to improve the financial reporting and disclosure system had been recognised, a new set of EAS were issued, as a part of many other reforms, pursuant to the Decree No. 243/2006 of the Minister of Investment and thus replace the old standards issued under the two ministerial decrees Nos. 503/1997 and 345/2002. These standards became applicable to all listed joint stock companies.
The new EAS have been issued to comply with economic changes and scientific and technological developments either on the business performance level of companies or on their accounting systems. The issuance of these standards was a major step in improving the application of principles of good corporate governance by listed companies.

The latest Income Tax Act No. 91/2005 requires that net profits for tax purposes be based on the accounting profit in the audited financial statements which are prepared according to EAS, after adjustments by the tax inspectors, with some tax rules also being used for financial reporting purposes.

EAS compatibility with IFRS

The 35 EAS were prepared on the basis of the 2005 IFRS. Accountants preparing financial reports refer to IFRS in cases where EAS does not address specific issues.
The main adjustments and adaptations from IAS/IFRS are (as cited from the 2008 UNCTAD report):

(A) EAS 1 “Presentation of financial statements” (corresponding to IAS 1):

(i) Profit distribution to employees and members of the Board of Directors (employee benefits) are not recorded as expenses in the income statement, rather they are recorded as dividends distribution in accordance with the requirements of local law;
(ii) This departure also affects other two standards, namely, EAS 22 “Earnings per share” and EAS 38 “Employee benefits”;

(B) EAS 10 “Fixed assets and their depreciation” (corresponding to IAS 16):
Paragraphs 31–42 of this standard on the revaluation model have been modified, as this model cannot be used except in certain cases, and when it does not contradict the laws and bylaws. Otherwise, the entity should use the cost model as provided in paragraph 30 of IAS 16;

(C) EAS 19 “Disclosure in financial statements of banks and similar financial institutions” (corresponding to IAS 30 which has been superseded by IFRS 7):
Paragraphs 44, 51 and 52 of this standard have been omitted, as they prohibit forming a general provision for loans and borrowings as a deduction from profits and losses (expense item), instead stipulating that this provision be formed as a deduction from the owners’ equity (reserve). According to the regulations of the Central Bank of Egypt and generally accepted Egyptian banking practices, however, this provision may be treated as an expense and therefore is deducted from revenue before calculating profits and losses.

(D) EAS 20 “Accounting rules and standards for financial leasing operations” (corresponding to IAS 17):
This standard is different from IAS 17 for leasing, as the Egyptian Financial Leasing Act No. 95/1995 issued by the Minister for Economics and Foreign Trade stipulates a completely
different accounting treatment to that widely used internationally (arts. 24 and 25), under which the lessor records the leased asset in his books and depreciates it, while the lessee records the value of the payments of the leasing contracts in the profits and losses as expenses in the period in which they are paid.

Egyptian Standards on Auditing

In cooperation with the Egyptian Society of Accountants and Auditors, CMA prepared Egyptian Standards on Auditing (ESA), periodic reviews and assurance services that comply in form and content with ISAs issued in 2007. The draft was discussed among stakeholders and the final set of standards was issued in Arabic on 30 June 2008, and began implementation force all audit engagements starting from 1 January 2009. The set of standards includes: a preface, the theoretical framework for assurance services, 32 Egyptian auditing standards, a standard for reviews, two Egyptian standards for assurance services, two Egyptian standards for other related services and guidance on the issues that the auditor must consider in his audit for small entities. The new set of standards will replace the old set issued in 2000.

Egyptian Accounting Standards and Corresponding IAS
Egyptian Accounting Standards
Corresponding IAS (IFRS)
EAS 1
Presentation of financial statements
IAS 1
EAS 2
Inventories
IAS 2
EAS 4
Statement of cash flow
IAS 7
EAS 5
Accounting policies, changes in accounting estimates and errors
IAS 8
EAS 7
Events after the reporting period
IAS 10
EAS 8
Construction contracts
IAS 11
EAS 10
Fixed assets and their depreciation
IAS 16
EAS 11
Revenue
IAS 18
EAS 12
Accounting for Government grants and disclosure of Government assistance
IAS 20
EAS 13
The effects of changes in foreign exchange rates
IAS 21
EAS 14
Borrowing costs
IAS 23
EAS 15
Related party disclosures
IAS 24
EAS 17
Consolidated and separate financial statements
IAS 27
EAS 18
Investments in associates
IAS 28
EAS 19
Disclosures in financial statements of banks and similar financial institutions
IAS 30 superseded by IFRS 7
EAS 20
Accounting rules and standards for financial leasing operations
IAS 17
EAS 21
Accounting and reporting by retirement benefit plans
IAS 26
EAS 22
Earnings per share
IAS 33
EAS 23
Intangible assets
IAS 38
EAS 24
Income taxes
IAS 12
EAS 25
Financial instruments: disclosure and presentation
IAS 32 superseded by IFRS 7
EAS 26
Financial instruments: recognition and measurement
IAS 39
EAS 27
Interests in joint ventures
IAS 31
EAS 28
Provisions, contingent assets and liabilities
IAS 37
EAS 29
Business combinations
IFRS 3
EAS 30
Interim financial reporting
IAS 34
EAS 31
Impairment of assets
IAS 36
EAS 32
Non-current assets held for sale and discontinued operations
IFRS 5
EAS 33
Segment reporting
IAS 14
EAS 34
Investment property
IAS 40
EAS 35
Agriculture
IAS 41
EAS 36
Exploration for and evaluation of mineral assets
IFRS 6
EAS 37
Insurance contracts
IFRS 4
EAS 38
Employee benefits
IAS 19
EAS 39
Share-based payment
IFRS 2
UNCTAD2008 Review of practical implementation issues relating to international financial reporting standards - Case study of Egypt
EAS 22
Earnings per share
IAS 33
EAS 23
Intangible assets
IAS 38
EAS 24
Income taxes
IAS 12
EAS 25
Financial instruments: disclosure and presentation
IAS 32 superseded by IFRS 7
EAS 26
Financial instruments: recognition and measurement
IAS 39
EAS 27
Interests in joint ventures
IAS 31
EAS 28
Provisions, contingent assets and liabilities
IAS 37
EAS 29
Business combinations
IFRS 3
EAS 30
Interim financial reporting
IAS 34
EAS 31
Impairment of assets
IAS 36
EAS 32
Non-current assets held for sale and discontinued operations
IFRS 5
EAS 33
Segment reporting
IAS 14
EAS 34
Investment property
IAS 40
EAS 35
Agriculture
IAS 41
EAS 36
Exploration for and evaluation of mineral assets
IFRS 6
EAS 37
Insurance contracts
IFRS 4
EAS 38
Employee benefits
IAS 19
EAS 39
Share-based payment
IFRS 2

Summary and Observations

Financial reforms in Egypt have positively impacted the adoption of International Financial Reporting Standards (IFRSs). In 2002, the World Bank concluded that significant progress had been made in eliminating differences between Egyptian Accounting Standards (EASs) and IFRSs. Back then concerns were expressed about insufficient institutional knowledge of IFRSs, lack of implementation guidelines, and weak application and enforcement.

In 2008, UNCTAD issued a report showcasing the progress that Egypt had made since the 2002 World Bank report, including the issuance of 35 EASs (Egyptian Accounting Standards), which were mostly prepared on the basis of the 2005 IFRSs. In its report, UNCTAD warned that translation of the standards and codes into Arabic has been lengthy;
which resulted in a potential gap between the set of EASs that is currently in effect and the most recent IFRSs.

The EASs are applicable to all listed joint stock companies regulated by the Capital Markets Authority (CMA). Banks fall under the jurisdiction of the Central Bank, which at the time of the UNCTAD report had not yet realized new regulations for the banking sector. Thus, banks are still required to file their reports using the old set of EASs, which is based on the 2002 IASs. The UNCTAD report notes that a draft amendment to the Company Act, which regulates all Egyptian companies, is under discussion to reach an agreement that would require all companies to observe the CMA accounting standards. In a 2008 self assessment by the Egyptian Society of Accountants &Auditors (ESAA) an action plan was identified to further the adoption of IFRSs in Egypt.

The Accounting Principles

IFRS 1: Firsttime Adoption of International Financial Reporting Standards (revised 2009)
There is insufficient publicly available information as to Egypt's compliance with this principle.
IFRS 2: Sharebased Payment (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 39 Share-based Payment. There is, however insufficient publicly available information as to the compliance of EAS 39 with IFRS 2.
IFRS 3: Business Combinations (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 29 Business Combinations. There is, however insufficient publicly available information as to the compliance of EAS 29 with IFRS 3.
IFRS 4: Insurance Contracts (effective 2006)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 37 Insurance Contracts. There is, however insufficient publicly available information as to the compliance of EAS 37 with IFRS 4.
IFRS 5: Noncurrent Assets Held for Sale and Discontinued Operations (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 32 Non-current Assets Held for Sale and Discontinued Operations. There is, however insufficient publicly available information as to the compliance of EAS 32 with IFRS 5.
IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 36 Exploration for and Evaluation of Mineral Resources. There is, however insufficient publicly available information as to the compliance of EAS 36 with IFRS 6.
IFRS 7: Financial Instruments: Disclosures (effective 2007)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard EAS 19 Disclosures in financial statements of banks and similar financial institutions differs from IFRS 7.
IFRS 8: Operating Segments (effective 2009)

There is insufficient publicly available information as to Egypt's compliance with this principle.

IAS 1: Presentation of Financial Statements (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard EAS 1 Presentation of Financial Standards differs from IAS 1.
IAS 2: Inventories (effective 2005)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 2 Inventories. There is, however insufficient publicly available information as to the compliance of EAS 2 with IAS 2.
IAS 7: Cash Flow Statements (effective 1994)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 4 Statement of Cash Flows. There is, however insufficient publicly available information as to the compliance of EAS 7 with IAS 7.
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 5 Accounting Policies, Changes in Accounting Estimates and Errors. There is, however insufficient publicly available information as to the compliance of EAS 5 with IAS 8.
IAS 10: Events after the Reporting Period (effective 2005)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 7 Events after the Reporting Period. There is, however insufficient publicly available information as to the compliance of EAS 7 with IAS 10.
IAS 11: Construction Contracts (effective 1995)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 8 Construction Contracts. There is, however insufficient publicly available information as to the compliance of EAS 8 with IAS 11.
IAS 12: Income Taxes (effective 2001)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 24 Income Taxes. There is, however insufficient publicly available information as to the compliance of EAS 24 with IAS 12.
IAS 16: Property, Plant and Equipment (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard EAS 10 Presentation of Financial Standards differs from IAS 16.
IAS 17: Leases (effective 2005)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard EAS 20 Accounting Rules and standards for financial leasing operations differs from IAS 17.
IAS 18: Revenue (effective 1995)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 38 Revenue. There is, however insufficient publicly available information as to the compliance of EAS 38 with IAS 18.
IAS 19: Employee Benefits (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 38 Employee Benefits. There is, however insufficient publicly available information as to the compliance of EAS 38 with IAS 19.
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 12 Accounting for Government Grants and Disclosure of Government Assistance. There is, however insufficient publicly available information as to the compliance of EAS 12 with IAS 20.
IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 13 The Effects of Changes in Foreign Exchange Rates. There is, however insufficient publicly available information as to the compliance of EAS 13 with IAS 21.
IAS 23: Borrowing Costs (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 14 Borrowing Costs. There is, however insufficient publicly available information as to the compliance of EAS 14 with IAS 23.
IAS 24: Related Party Disclosures (effective 2005)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 15 Related Party Disclosures. There is, however insufficient publicly available information as to the compliance of EAS 15 with IAS 24.
IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 21 Accounting and Reporting by Retirement Benefit Plans. There is, however insufficient publicly available information as to the compliance of EAS 21 with IAS 26.
IAS 27: Consolidated and Separate Financial Statements (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 17 Consolidated and Separate Financial Statements. There is, however insufficient publicly available information as to the compliance of EAS 17 with IAS 27.
IAS 28: Investments in Associates (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 18 Investments in Associates. There is, however insufficient publicly available information as to the compliance of EAS 18 with IAS 28.
IAS 29: Financial Reporting in Hyperinflationary Economies (revised 2009)
There is insufficient publicly available information as to Egypt's compliance with this principle.
IAS 31: Interests in Joint Ventures (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 27 Interests in Joint Ventures. There is, however insufficient publicly available information as to the compliance of EAS 27 with IAS 31.
IAS 32: Financial Instruments: Disclosure and Presentation (revised 2009)
There is insufficient publicly available information as to Egypt's compliance with this principle.
IAS 33: Earnings per Share (effective 2005)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 22 Earnings per Share. There is, however insufficient publicly available information as to the compliance of EAS 22 with IAS 33.
IAS 34: Interim Financial Reporting (effective 1999)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 30 Interim Financial Reporting. There is, however insufficient publicly available information as to the compliance of EAS 30 with IAS 34.
IAS 36: Impairment of Assets (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 31 Impairment of Assets. There is, however insufficient publicly available information as to the compliance of EAS 31 with IAS 36.
IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 28 Provisions, Contingent Liabilities and Contingent Assets. There is, however insufficient publicly available information as to the compliance of EAS 28 with IAS 37.
IAS 38: Intangible Assets (effective 2004)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 13 Intangible Assets. There is, however insufficient publicly available information as to the compliance of EAS 13 with IAS 38.
IAS 39: Financial Instruments: Recognition and Measurement (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 26 Financial Instruments: Recognition and Measurement. There is, however insufficient publicly available information as to the compliance of EAS 26 with IAS 39.
IAS 40: Investment Property (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 34 Investment Property. There is, however insufficient publicly available information as to the compliance of EAS 34 with IAS 40.
IAS 41: Agriculture (revised 2009)
As indicated in the 2008 UNCTAD report, the corresponding Egyptian standard is EAS 35 Agriculture. There is, however insufficient publicly available information as to the compliance of EAS 35 with IAS 41.

References

Egyptian Society of Accountants &Auditors, "Action Plan Developed by the Egyptian Society of Accountants &Auditors," December 2008. Available form International Federation of Accountants website. Accessed on January 24, 2010. (ESAA 2008)

Egyptian Society of Accountants & Auditors, "Assessment of the Regulatory and Standard-Setting Framework," Self-assessment prepared as a part of the International Federation of Accountants' (IFAC)

Member Body Compliance Program, January 2006. Available from International Federation of Accountants' website. Accessed on January 24, 2010. (ESAA 2006)

Egyptian Society of Accountants &Auditors, "Response to the IFAC Part 2, SMO Self-Assessment Questionnaire," Self-assessment prepared as a part of the International Federation of Accountants' Member Body Compliance Program, November 2006. Available form International Federation of Accountants website. Accessed on January 24, 2010. (ESAA 2006)

International Federation of Accountants website. Accessed on January 26, 2010. (IFAC website)

United Nations Conference on Trade and Development, "Review of Practical Implementation Issues of International Financial Reporting Standards - Case study of Egypt," Trade and Development Board, Investment, Enterprise and Development Commission, Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, Twenty-fifth session, Geneva, 4-6 November 2008. Available from United Nations Conference on Trade and Development website. Accessed on January 24, 2010. (UNCTAD 2008)

World Bank, "Egypt: Report on the Observance of Standards and Codes (ROSC) - Accounting and Auditing," August 2002. Available from World Bank website. Accessed on January 25, 2010. (WB 2002)

World Bank, "Egypt: Report on the Observance of Standards and Codes (ROSC) - Corporate Governance Country Assessment," March 2004. Available from World Bank website. Accessed on January 25, 2010. (WB 2004)

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