By Gobeze Dessalegn, FCCA

Director, HST

Preface

It was a pleasure participating in the 1^st National Accounting Day Conference at Sky Light Hotel on Friday 11^th February 2022, co-organized by Accounting and Auditing Board of Ethiopia (AABE) and ACCA Ethiopia office. More than 500 accounting and auditing professionals from multitude of sectors and government organs participated. It has brought together so many professionals not only to discuss on variety of burning accounting issues, but also to socialize and meet long forgotten friends.

Among issues discussed at the Conference by different panel groups include:

1. State of the Accounting Profession in Africa;
2. Regulation of the Accounting Profession in Ethiopia;
3. Professional Accountants as Business Partners in Ethiopia- Sharing Experience; and
4. Building Trust and Ethics in the Accounting profession.

The contribution and comments of the participants were also worth noting. Despite of all these, my mind started reeling away, thinking and re-thinking that something crucial and, which I think is, the primary problem of the accounting profession was left unsaid/unmentioned; the issue of users of Audited Financial Statements (AFSs); the fact that we do not really have users who read, understand, and rely on the AFS to make informed business decisions.

As per IFRS Conceptual Framework, primary users of financial statements are existing and potential investors and lenders; providers of equity and/or loan finances. Others who use financial statements, including management, employees, regulators, governments organs (including tax authorities) are classified as secondary users. The problem in Ethiopia is that we do not practically have both categories of users.

Readers of this article, particularly those out of the accounting profession might, probably rightly, wonder what I’m talking about.  In a country where thousands and thousands of accountants are crunching numbers every day and thousands of reports are issued every year (most audited by external auditors), I understand if they are perplexed.

The Primary Users

1. Most local private businesses are family owned and the owners are either not capable or not genuinely interested in reading and using the financial reports. Foreign direct investments (FDIs), though no much problem in the capability sector, are not much better in the interest field. Even global NGOs directly and officially propagate minimizing audit fees rather than getting more reliable financial reports.

The Secondary Users

1. Respective staff of the reporting entities do not have either interest in or access to the financial reports.
2. Managements of the reporting entities, those who actually use, are more interested in the management and cost accounting reports, those produced for internal consumption, than AFSs.
3. Revenue Authority is supposed to be the major user of AFSs. It is true that it requires the AFSs to be filed, then sends its own tax auditors to go through the records of the tax filers to produce tax assessment reports. The audit reports of even the most respected audit firms are practically disregarded.
4. The former regulator of the profession, Office of the Federal Auditor General (OFAG), was not receiving and reviewing the reports produced by the authorized accountants and auditors it regulates. The current regulator, Accounting and Auditing Board of Ethiopia (AABE), requires almost all reporting entities to file their AFSs annually. Given the huge number of reporting entities and limited number of its staff, I can fairly say that it’s not yet in a position to review even a representative sample of the filed reports.

Hence, no practical use. These all boil down to the fact that if there are no users of AFS in the real sense, no matter how many accountants & auditors crunch numbers every day, whether we talk all days about accounting and auditing standards, professional ethics and regulation in Ethiopia, I doubt if we can move the profession an iota of step forward.

What for if managements, regulators, lenders and taxing authorities just file the reports irrespective of who prepared and/or audited them; if investors are not interested in improving investment decisions? Why should we be surprised if a sole practitioner, as one panelist said, issue 100 audit reports in 3 months, disregarding all ethical and regulatory requirements? What would AABE do in this case? Cancel the license? No guarantee that he/she will not be replaced by a worse practitioner with new license. Why did many of us looked down to the ground when one participant commented that audits (normally involving many teams and processes) are performed with fees of 5,000 and 10,000 ETB, despite of the sky-rocketing inflation?

In this regard, let me share to the readers a personal story. I had a client and we begun the audit at fee of ETB 15,000. Every year, he comes and complains about his business not doing well. The fee started dwindling until we reached 9,000 after 3 or 4 years when, after pocketing the agreement, he smiled and said to me ‘hey, does this mean you are going to audit for me freely after few years?’ I smiled back, as it was supposed to be a joke, but my stomach was churning like hell. That was one of turning points in my professional career.

Conclusion

Although issue of users of AFSs, I believe, is the major challenges of the accounting profession in Ethiopia, particularly for those in external audit service, the fact of the matter is that I don’t have solution to suggest. I only hope that time will resolve it and it will not be too long. I hope that new generation of investors beyond the usual kiosk/family shop owners will come and evaluate their investments, existing & potential, from long-term perspective considering the investees financial performance, position and cash flows. I hope that our bankers will appreciate the past financial results and future business potential of borrowers, rather than running after the physical buildings and machines. I hope that time will come when Revenue Authorities identify, evaluate and accredit potential external auditors and rely on their reports. Then, only then, we may see light on the horizon.

TAX UPDATES

Revisions on excise tax

The New Proclamation issued on February 13, 2020, proposes to impose the tax on goods that are believed to be luxurious, hazardous to health, causes social problems as well as on basic goods which are demand inelastic. Moreover, it replaces the production cost-based assessment of the tax to the ex-factory price method of assessment. This would help to relieve the problem of unpredictability on the amount of tax the taxpayers are liable to pay. Thirdly, the new law aims to address the challenges in the collection of excise tax that emanated from the inadequacies of the Repealed Proclamation.

Scope of Application: Excise tax will be applicable on 19 groups of items and 378 goods. In terms of coverage, excise tax is broadened to include motorcycles, plastic bags, wigs and human hair, fireworks, and artificial flowers, which previously were not included in the tax net. On the other hand, some items such as laundry and dish washing machines, clocks and watches that were previously subject to excise tax were removed.

Requirement of a license

The new Proclamation introduces a new requirement that was not previously mandatory. Eligible taxpayers are required to be licensed by the tax authority before engaging in the importation and production of goods or rendering of services.

Eligibility

License requirement is applicable to those who manufacture excisable goods in Ethiopia and import excisable goods. The Ministry of Finance may further impose a requirement of license on any other activity.

Exemption:

Under the Repealed Proclamation, goods that are not included on the Schedule of taxable goods were deemed to have been exempted from the payment of excise tax. Under the New Proclamation, there are detailed rules on exemptions. The list of exempt goods is exhaustively provided under Schedule II. Goods that fulfill the requirements of Schedule II are exempted. Among others, excisable goods exported under custom control and exports of excisable service, excisable goods destroyed by the manufacturer at the presence of the officials of the Authority, and supply of goods to entities that are exempt from excise tax by law are exempted from payment of excise tax. 

In addition to this, the MoF may exempt goods and services considering economic, social and administrative reasons. The excise tax is not applicable when excisable goods are destroyed or lost due to accident or other cause in the course of removal of goods from the factory by the manufacturer or before removal, or while the goods are onboard in aircraft or vessel in their way to Ethiopia. This exemption would not  apply if the taxpayer is compensated for the damage and such compensation includes excise tax.

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Base of computation [the tax base]

The base of computation of excise tax under the Repealed Proclamation was based on goods produced locally and goods imported. The tax would be imposed on locally produced goods based on the cost of production. On the imported goods, the tax was imposed on the cost, insurance and freight (CIF) and the custom duty. Under the New Proclamation, the value on which the excise tax to be imposed will be determined based on (i) excisable value of goods or service or (ii) the quantity of goods. 

Refunds

Under the Repealed Proclamation, excise tax paid on import of inputs that are used to produce textile and textile products and vehicles assembly locally are deductible from excise tax. The New Proclamation expands this privilege to other sectors specifically to goods imported or manufactured that have been used as raw materials in the manufacture of finished goods. The excise tax paid on the raw materials will be set off against the excise tax payable on the final goods. This relief is not applicable to alcohol, tobacco and sugar products. The new Proclamation permits the refund of excise tax paid by the taxpayer when the goods have been damaged or stolen during transportation to Ethiopia or while subject to excise control, when the buyer returned the goods based on a contract of sale, or when the purchaser unable to repay due to insolvency.

Penalties

The manufacturing and importation of excisable products without having the license or manufacture of goods at a place not specified on the license entails an administrative penalty. The penalty will be to pay double of the excise tax that would have been payable if the person were licensed. The New Proclamation further provides various criminal liabilities for violation of the excise tax law.

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Getu Jemaneh

Partner | Tax and Business Support Services

Ethio–China Friendship Ave Mina Building 4th & 5th Floor

Tel: +251 115 58 51 47 | Mobile: +251 930034377

Fax: +251 115 52 83 84

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Mamo Abdi

Senior Manager |Tax & BSS

Ethio–China Friendship Ave Mina Building 5th Floor

Tel: +251 115 58 51 47 | Mobile: +251 932 518811

Fax: +251 115 52 83 84

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IFRS INSIGHTS

IAS 16 – Property plant and equipment - IMPACT OF ADOPTION

By Gobeze Dessalegn 

It is known that Ethiopia has formally adopted International Financial Reporting Standards (IFRS) as its financial reporting framework. This article intends to clarify whether revaluation of Property, Plant and Equipment (PPE), customarily known as fixed assets, is mandatory or not. This is because not only of the fact that the revaluation process requires entities to incur extra costs but also, probably most importantly, because there is inconsistency and confusion among finance executives and disagreements with external auditors whether to revalue the PPEs or not. Besides, there are very few individuals qualified to conduct the revaluation process. As a result, I thought it would be apt to accentuate the quandaries related with revaluation.

Revaluation is the positive difference between an asset's fair market value and its original cost, minus depreciation, primarily performed to reflect the current market value of the asset. This does not mean that the current market value of an asset is always necessarily greater than its carrying amount, (its cost less accumulated depreciation less any accumulated impairment).

Why do we revalue assets?

 The purpose of a revaluation is to bring into the books the fair market value of fixed assets. This may be helpful in order to decide whether to invest in another business or to prepare one or more of business’s assets for sales negotiations.

 Other uses of revaluation

• To show the true rate of return on capital employed;
• To conserve adequate funds in the business for replacement of fixed assets at the end of their useful lives
• To show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings;
• To negotiate fair price for the assets of the company before merger with or acquisition by another company;
• To issue shares to existing shareholders;
• To get fair market value of assets, in case of sale and leaseback transaction;
• When the company intends to take loan from banks/

financial institutions by mortgaging its fixed assets;

• Sale of an individual asset or group of assets; and
• To decrease leverage ratio (the ratio of debt to equity).

Is revaluation mandatory under IFRS?

In IFRS, the accounting for fixed assets is covered as provided

in IAS 16 ‘Property, Plant and Equipment’ (PPE). Apart from usual definition of key terminologies related with PPEs and the presentation and disclosure requirements, the standard specifies the recognition criteria and initial and subsequent measurements of PPEs. Whether to revalue PPEs or not is a question of subsequent measurement.

As per IAS 16, PPEs are initially (upon recognition) measured at cost. The most common malpractice in Ethiopia, however, is the meaning we associate with ‘cost’. Most accountants in Ethiopia consider cost to be only invoice price. Yet, it goes far

beyond that, including all costs that are directly attributable to the acquisition and/or construction of the asset until it is

made readily available for use. It even includes certain

borrowing costs and future costs of dismantling the asset and site restoration.

IAS 16 permits the choice of two alternative treatments in

respect of subsequent measurement of PPEs:

• The cost model (carry an asset at cost less accumulated depreciation/impairments); or
• The revaluation model (carry an asset at its fair value at the revaluation date less subsequent accumulated depreciation and accumulated impairment).

 Hence, revaluation of PPE as per IFRS is an accounting policy choice, never mandatory.

Choice of accounting policy

Accounting policy shall be chosen not arbitrarily, not because it is simple or requires lesser cost, but because it is believed that the chosen alternative results in relevant and reliable financial information to be used by readers of the financial statements to make informed decisions.

The need

We revalue Property plant and equipment (PPE) in Ethiopia not because the adoption of IFRS compels us, rather because the ever sky rocketing costs of acquiring and/or constructing property, coupled with accelerated depreciation rates (to conform with the tax laws) used by most reporting entities, leaves us no option, but to revalue voluntarily (at least for major classes of PPE such as buildings, motor vehicles and machineries, if not necessarily for all) so that our financial reports will show those relevant and reliable financial information the users so desire..

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Conclusion

Given the current market and inflation trend in Ethiopia, revaluation of land (right of use as per IFRS 16), building, motor vehicles and machinery is a practical obligation. If not done, auditors should challenge the preparers of financial statements and get reasonable assurance that the accounting policy choice is in conformity with the requirement of IAS 8 and IAS 16 Property, Plant, and equipment.

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Gobeze Dessalegn

Ethio–China Friendship Avenue

Mina Building 5th Floor

Tel: +251 115 52 76 66/67 | Mobile: +251 930 366275

Fax: +251 115 52 83 84

Thomas Mulugeta

Associate Director

Ethio–China Friendship Ave

Mina Building 5th Floor

Tel: +251 115 52 76 66 | Mobile: +251 911631923

Fax: +251 115 52 83 84