Academy of Economic Studies Faculty of Accounting and Management Information

Systems

Doctorate Thesis

Scientific supervisor Doctorate student,

Prof.Univ.Dr. Ana Morariu Tamer Moustafa Mohamed Saad

Bucharest

1

-2009-

Academy of Economic Studies from Bucharest Faculty of Accounting and Management Information

Systems

Accounting Policies Used for the

Presentation and Reporting of Financial

Statements

Scientific supervisor Doctorate student,

Prof.Univ.Dr. Ana Morariu Tamer Moustafa Mohamed Saa

2

Bucharest -2009-

Summary of thesis Accounting policies used for the presentation and reporting of financial statements

Author: Tamer Moustafa Mohamed Saad

This thesis called Accounting policies used for the presentation and reporting of financial statements prepared by Tamer Moustafa Mohamed Saad, researcher, supervised by Prof. Univ. Dr .Ana Morariu, is structured

on four chapters, containing the table of contents, introduction, objectives of

research, conclusions, bibliography and appendixes

A. Table of contents:

Introduction --------------------------------------------------------

Chapter 1: Accounting policies, theories of measurement

and disclosure of financial information in the financial

statements of the Egyptian companies analysis and

interpretation

Introduction -------------------------------------------------------------

1.1 Financial statements preparation environment-------------

1.2 Experience in setting financial statements framework --

1.2.1 the American Experience --------------------------------

1.2.1.1 The Pre (FASB) Stage --------------------------

1.2.1.2 The Post-FASB Stage -----------------------------

1.2.2. the French Experience -----------------------------------

1.2.3. the International Experience ----------------------------

1.3 Importance of the framework for preparation of

financial statements

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1.3.1 Relationship between the framework of

financial accounting & its standards ---------------------

1.3.2 Importance of the objectives in financial accounting

1.3.3 The influence of the environment in specifying the

objectives

1.4 The Egyptian framework for preparation and disclosure of

financial statements

1.4.1 Objectives of Egyptian framework for preparation

and disclosure of financial statements

1.4.2 Scope of the financial statement preparation &

disclosure

1.4.2.1 Objectives and uses of financial statements

1.4.2.2 Components of financial statements

1.4.2.3 The Concepts of Capital and its preservation

1.4.2.4 A reorganization of the elements of financial

statements

1.4.2.5 Measurement of the elements of financial

statements

1.4.2.6 Accounting information disclosure

1.4.2.6.1 Types of accounting disclosure models

1.4.2.6.2 The qualitative features of financial

statements

1.4.2.6.3 Reflections on the quality of accounting

information on the stock markets in the light of

Corporate Governance

Chapter 2: Analytical study regarding the national and

international accounting standards, the disclosure and

reporting of information in the financial statements of the

Egyptian Companies

Introduction

2.1 The importance of accounting standards

2.2 Differences among the accounting standards around the

world

2.3 The importance of setting standards for the preparation

of financial statements in Egypt

2.3.1 Difficult decision-making processes

2.3.2 Errors in the decision- making process

2.2.3 Complication of the decision- making process

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2.4 The International Accounting Standards

2.4.1 The need to provide a mechanism for the

development of accountancy itself

2.4.2 Stock markets worldwide

2.4.3 Benefits of applying the international accounting

standards

2.4.4 The spread of the application of international

accounting standards

2.5 Setting accounting standards in Egypt

2.5.1 The phases through which accounting standards

were settled with a view to preparing financial statements in

Egypt

2.5.1.1 first phase from 1992 to 1996

2.5.1.2 second phase from 1997 to 2005

2.5.1.3 third phase, 2006 to the present

2.5.2 New Egyptian accounting standards

Chapter 3

Empirical study on recommendations of improvement of

accounting standards regarding disclosure and reporting of

financial statements by companies from Egypt.

Introduction

3.1 Accounting standards setting and their relationship with

the methods used in the development of accounting theory

3.2 Legal and economic determinants of the decision

regarding the setting of accounting standards

3.3. The impact of determinants of legal and economic

models of accounting disclosure

3.4 The model of the determinants of the effects of

proposal for making the decision to erect on the model

of accounting standards and accounting disclosure

3.4.1 Influence of the field of determinants

3.4.2 Determinants influencing the scope of the

Sub determinants

3.4.3 The sphere of impact of legal and economic

determinants

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3.4.4 The impact of legal and economic determinants

3.5 Case study of the model proposed for the preparation of

financial statements of the Egyptian companies

3.5.1 Case study hypotheses

3.5.2 Data needed to test hypothesis

3.5.3 Community research and model

3.5.4 Methods of data collection

3.5.5 Methods of data analysis

3.5.6 Study of analysis of field data and testing

hypotheses.

3.5.6.1 Analysis of data related to the first hypothesis --

3.5.6.2 Analysis of the data associated with the second

hypothesis -------------------------------------------

3.5.6.3 Analysis of the data associated with the third hypothesis

3.5.6.4 analysis of the data associated with the fourth

hypothesis

Chapter 4:

Application of Egyptian accounting standards for

measurement and disclosure of financial statements valences and limits, case study- Al Ezz Dekheila Steel

company

4.1 Background information and activities--------------------

4.2 Basis of preparation------------------------------------------

4.3 Significant accounting policies----------------------

4.4 Segment reporting-------------------------------------

4.5 Projects under construction 4.6 Inventories-----------------------------------------------------

4.7 Long term loans -----------------------------

4.8 Non- taxable assets and liabilities --------------------------

4.9 Stocks -----------------------------------------------------

4.10 Trade and other receivables --------------------------

4.11 Cash and cash equivalents.. 4.12 Bank overdraft ------------------------------------------

4.13 Loans and borrowings ------------------------

4.14 Trade and other payables -----------------------------

4.15 Financial instruments-------------------------------------

4.16 Share capital and reserves---------------------------------

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4.17 Interim dividends through the year

4.18 Operating revenues ---------------------

4.19 Cost of sale --------------------------------------------

4.20 Other operating revenues-------------------------------

4.21 Selling and distribution expenses ---------------------

4.22 Administrative expenses ---------------------------------

4.24 Financial revenue--------------------------------------------

4.25 Financial expenses---------------------------------------

4.26 Revenue tax expense--------------------------------

4.27 Earnings per share ---------------------------------------

4.28 Pension and Other Post-Retirement Plans ------

4.29 Related parties ----------------------------------------------

4.30 Capital commitments----------------------------------

4.31 Contingencies---------------------------------

Conclusions and recommendations--------------------------------

Bibliography -----------------------------------------------------------

Appendix---------------------------------------------------------------

Appendix (1) : List of questionnaires--------------------------------

Index (2) : Financial Statements of Al Ezz Dekheila Steel

Company Alexandria (An Egyptian Joint Stock company) --

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B. Key terms Accounting measurement

Accounting disclosure

The International Accounting Standards

The International Financial Reporting Standards

The Egyptian Accounting Standards Egyptian Framework for preparation and disclosure of Financial Statements The Historical Costs The Current Costs The Recoverable Value The present value Financial Accounting Standards Board (FASB)

International Financial Reporting Standards (IFRS )

Company Law Segment reporting Corporate Governance Al Ezz Dekheila Steel Company

C. Thesis Main Parts Synthesis

Introduction

Accounting policies and options, assumed and adopted by the

management of the company, for financial statements represent a distinct

component, a decisive element, in preparing and presenting them, especially

if we keep in mind that recognizing the elements presented in the financial

statements represents the moment of incorporation of that respective element

in the balance sheet and the profit and loss statement, point from which the

reality regarding the information on the position and/or financial

performance of the company starts to act.

8

With a view to selecting and applying accounting policies, IAS 8

revised1, states that, in the absence of a standard, or an interpretation that

specifically applies to a transaction, event or situation, management shall use

its judgment in developing and applying an accounting policy. Accounting

is affected by the social, legal or economic characteristics or attributes of the

society. As regards the accounting reports, these practices are linked to

different factors.

For example, the size of the company is an important factor which

determines the width of voluntary reporting in most of the areas. Bigger

firms are more likely to disclose more information. Moreover, it is assumed

that subsequent improvements in disclosure of information by the trade

companies and disclosure of intellectual capital information will more likely

come from bigger and foreign owned companies, as a result, the importance

of disclosure of information to the financial community should not be

underestimated.

Theoretically, when capital markets are efficient, the information is

immediately expressed in shares quotations. The form of the information is

irrelevant, meaning that capital market participants will be indifferent if one

transaction is recognized in the financial statements or disclosed in the notes

of the accounts. The disclosure may actually be preferable to recognition

when uniform accounting practices do not report substantial differences. For

example, a uniform rule for establishing a cost can hide differences between

the companies regarding their capacity to profit from these expenses.

Moreover, the harmonization of the accounting principles can lead to

deceiving similarities among the accounting practices of different

companies. Additional disclosure may be needed to improve the comparison

among them and/ or quality.

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The financial report is a key element, necessary for the running of the

corporate governance mechanism. The accountants and auditors are the main

suppliers of information to capital markets participants. The companys

directors should be entitled to expect from the management to prepare the

financial report in accordance with the statutory and ethical duties and to

rely on the auditors competence.

Current accounting practice allows a certain freedom in choosing the

way of determination of the measurement method, recognition criteria and

even defining the accounting entity. The exercise of this choice in order to

improve the apparent performance (apparent information), known as

creative accounting, assumes an additional cost for informing the users. At

the other extreme, one can choose to hide information.

At present, Egypt encourages local and foreign investments in order to

create a more opened and accessible economy, offering more profitable and

attainable business opportunities. Egypt has tried to map out its own national

accounting standards (35) which take into consideration the environment and

cultural factors. The benefits resulting from this research refer to an interest

in the availability of comparable financial information so that opportunities

can be estimated and evaluated.

In order to examine the practical part, seven methods of evaluation are

chosen. These are: methods of measurement and recognition of inventories,

research and development costs, methods of measurement of fixed assets,

depreciation, investment in securities and foreign exchange translation.

These variables were chosen because they can significantly affect the

measurement of assets and profits, depending on the choice of treatment

made by the company.

Research methodology

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The weak mechanism of applying the law allows the existence of

major differences among the official standards of accounting and the

accounting practices. The lack of precise guidelines for the practical

implementation of these requests in accordance with both the Egyptian

accounting standards and the international ones, leads to differences between

theory and practice. The review of 2007 financial statements of 30 top

companies, together with interviews of experienced accountants, public

practice auditors, financial executors, investment analysts, university

analysts revealed data about the nature of these discrepancies, such as:

-Accounting disclosure: certain companies avoid the full reporting of

information in the published financial statements, ignoring the disclosure

requirements set by the applicable accounting standards.

-Statement of changes in equity. Despite the applicable standards, the

financial statements of many companies do not include the statement of

changes in equity.

-Segment reporting. Very few companies comply with all requirements on

segment reporting. Where segment information is presented, there is a

tendency to avoid disclosure of key information such as revenues and

expenses of segments.

-Related party transactions. Required disclosures are rarely fully provided.

The financial statements of many companies that seem to have related

parties, do not disclose information on either the existence of related parties

or related-party transactions

-Impairment of assets. Egyptian companies do not comply with the

requests regarding the adjustment of impairment of material and immaterial

assets on the balance sheet. As a fact, many Egyptian accountants are not up

11

to date with the requests or impairment tests of assets and the way to

approach such issues.

-Gains or losses due to foreign exchange conversion. Some companies do

not adhere to the requirement that foreign currency exchange gains and

losses arising from balance sheet date revaluations should be shown in the

income statement. Some companies show currency exchange gains under a

special account in the liability section of the balance sheet. Some companies

capitalize the currency exchange losses as part of fixed assets, even if all the

required conditions for such capitalization are not met.

-Inventory valuation. Very few companies comply with all the legal

requirements on measurement and reporting of inventory at the lowest price

between entry cost and net realizable value. It is common practice to

understate the figure for loss due to obsolete and slow-moving inventory

-Consolidated financial statements. Many companies do not consolidate

all the subsidiaries and special purpose entities in accordance with the

requests of The International Financial Statements and the related

guidelines. The review of published financial statements shows that more

companies that should have drafted consolidated financial statements failed

to do so.

- Assets pledged as securities. In many cases it is a practice not to disclose

in the financial statements the assets pledged for securing loans

-Leases. All the finance leases are treated as operating leases, although this

fact infringes the International Standards of Accounting regulations. Local

standards allow this practice because they comply with the legal requirement

regarding leases.

-Risk exposure and supplying data regarding loan loss provisions. Banks

and other lending institutions do not present the analysis of risk exposures

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required under IAS in the financial statements of those who expose

themselves when applying to loans. The provision of inadequate loan loss

data distorts reported profits of financially troubled financial institutions

-The system of classification of assets and liabilities. The Egyptian

Accounting Standards require presentation of working capital on the face of

the balance sheet. To avoid the appearance of negative working capital,

some companies resort to incorrect balance-sheet classification of assets and

liabilities.

-Financial Instruments. The requirements in IAS32, Financial Instruments:

Disclosure and Presentation, and IAS39, Financial Instruments: Recognition

and Measurement are not fully complied in drafting the financial statements

of corporations and institutions.

-Non compliance with legal deadlines for financial statements:

Companies are required by law to present their annual financial statements

within three months of the fiscal year-end. In addition, listed companies

must present their financial statements 45 days after the end of each quarter.

However, many companies fail to meet these requirements.

-Distorted reporting of earnings per share and understated operating

expenses. . Company Law and Tax Law grant employees the right to receive

extra financial benefits in the year when profit is distributed. Total benefits

should not exceed whichever figure is lowerthe ten percent of reported

profit or annual employee salaries of the company. These payments to

employees are not included in the income statement and are required to be

shown as distribution of profit after calculation of companys net income. As

a result, the earnings per share calculation based on a companys reported

net income provides a distorted image of earnings per share and the

operating expenses shown on the face of the income statement are too small.

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- Events after the balance sheet date Companies usually do not disclose

information on events after the balance-sheet date. Noncompliance with the

relevant accounting standards can be found even in the case of many

companies that present financial statements three to four months after the

balance sheet date.

Research objective

The aim of this research is to make an analysis of the financial

policies, theories and models which have as a result financial statements

drafted according to Egyptian Accounting Standards and the current

problems faced by financial measurement and disclosure. In order to

improve the financial reporting in Egyptian companies the following

objectives are outlined.

1. Identifying the disclosure of accounting models, as a result of

accounting policies;

2. Identifying the economical, social, political factors in order to make

relevant decisions with a view to erect accounting standards on

disclosure of financial information;

3. The opportunity to build on the experiences of issued accounting

standards, new accounting standards in Egypt.

4. The role and the importance of decisions to build on the experiences

of issued accounting standards, new accounting standards in Egypt.

5. To establish if, the proofs for erecting Accounting Standards in Egypt,

are trustworthy or not.

6. To identify the paths in organizing the groups which have an

accounting policy in Egypt, in order to draft relevant accounting

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standards and their impact of the accounting disclosure model on

financial information that evolves.

7. Establishing a model of fiscal disclosure in the light of the

determinants (decisive factors) of making the decision to build

accounting standards in Egypt.

Hypotheses of the research

This research is organized in such a manner as to treat first general

aspects and later more specific ones. For one thing, the research will

establish the measure in which accounting policies are convergent, this being

the general level of the analysis.

To be continued, the analysis of some variables which should

establish the level of convergence or divergence of accounting practices, this

representing the particular level of the analysis. Four variables will be

introduced in as independent elements which could have influence over the

conformities or differences regarding accounting practices in Egypt. This

variables are: the size of the companies, their involvement in overseas

operations, the industry they belong to and debt ratio. As a result, this

section presents the hypothesis of the research which lays down the concerns

of the research.

The hypothesis derived here are:

H 1: Egypts experiences in drafting accounting standards, a set of

parameters which shall influence the decision to build accounting

standards for organizing the accounting policy in the community.

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H 2: The determinants, the decisive factors in making the decision to

draft accounting standards, which regulate the accounting policy in

the community regarding the decision elements to develop accounting

standards models and financial reporting models applicable in Egypt

H 3: There are significant statistical moral differences among the

interested parties in organizing the accounting policy in Egypt. The

multitude of factors of interest is relevant in making a decision to

build or improve accounting standards in Egypt.

H 4: There are significant statistical differences among the interested

parties in organizing the accounting policy in Egypt. Some elements

of the determinants of the impact to make a decision, to draft

accounting standards, trigger the need to regulate the accounts policies

in disclosing financial information;

The plan of the research:

The research provides as proof of argumentation, annual reports; thus

data that is needed in order to prove the demands of the research will be

provided, such as applied accounting standards, accounting conventions,

specific practices and accounting measurements. All these are motivated by

the analysis of financial statements and disclosure of information in order to

make efficient economic decisions in the future. The most recently available

data provided were financial statements from year 2007. The companies

under research belong to different industries, being banks, insurance

companies, hotels, cement companies, food factories, investors in real estate

and financial estate.

Chapter 1

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Accounting policies, theories of measurement and reporting of financial

information in financial statements of Egyptian companies- analysis and

interpretation.

1) According to nowadays financial accounting practices, the disclosure

of accounting policies represents the interaction among some entries

which mirror the economic conditions; harmonizes some political

factors with the economic thinking represented by intellectuals,

university professors and institutes of research. International

experiences in The United States of America, France and the Shared

International Model reflect models from the international accounting

environment. However, the Egyptian experience has not reached yet

that point in which to embrace the practices of the international

accounting environment.

2) On the other hand, the results of the American experience in the area

of financial accounting mirrors efforts of coordination between the

private sector and the public one, the private sector making the most

efforts in this way. The French experience mirrors efforts of

coordination between the state and the private sector, with the state

making most efforts. The Egyptian experience in the accounting field

reflects the lack of coordination between the private sector and the

state, which would raise the standard of thinking and working in the

accounting area. Our research shows the absence of a social awareness

regarding the role of financial accounting in making decisions. This

thing has lead to a weaker institutional thinking.

3) Despite the three international experiences, which have proven the

importance of the link between law and accounting, the Egyptian

experience in the area of accounting reflects a conflict between law

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and conceptualization, on one hand, and law and accounting practice

on the other hand.

4) In the last six decades, Egypt was influenced by the following three

intellectual models in the financial accounting area:

a) The continental model through the Commercial Law;

b) The Anglo- Saxon model through schemes of accounting

education;

c) The international model through the influence had by the Auditors

and Accountants Union;

These reports reflect the absence of a general policy in the accounting

field area in Egypt- an area which suffers accounting gaps and one of

the Egypt specializations is to deal with these conditions;

5) The absence of transparency in accounting information of enterprises

from Egypt represents a source of administrative, economic,

accounting instability which aggravates the development in all the

economic and administrative areas.

6) The International Accounting Model (The Shared International

Accounting Pattern), is not suitable to become an accounting model

for a developing country, according to United Nations reports without

a regulation process.

Additional lessons from the American experiences are presented

in the followings:

1) Despite the fact that audit has developed in the private sector, the

state had a supporting role, with some exceptions in the path of this

development through The International Accounting Model.

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2) A social awareness has been registered regarding the importance of

audit, due to economical, social and political factors. This thing has

led to the proliferation of rationalization on the institutional level

of the categories of the American society preoccupied by the legal

regulation of audit and accounting work.

3) The audit has developed as an independent knowledge

methodology, in the American experience. This thing has

contributed to a reliance on the logical conclusion, depicted from

the approved studies and research in the field of audit.

The American experience has been characterized by a professional

and intellectual presence which works in controlled environment conditions

in the individual dimension which depends on the capital market as a source

of financing.

Our research has lead to a resume of the following groups

of theories and practices given by the International Experience

in the financial accounting field, of accounting policies which

apply in the financial reporting and as:

1) The International Common Sample is represented by a large

succession of success to put into agreement the two models

(Anglo- Saxon and continental) in the area of financial

accounting or at least at the theoretical level.

2) The Common International Sample is represented by an

additional example of convergence between law and accounting

in order to deal with the problem of International Commitment

in applying international standards.

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3) The International Sample and its application, represent a clear

additional example of differentiation in the accounting practice

between specialized economic entities in financial investments

on capital markets, on one part and between economic entities

and private companies which are not specialized on the other

part.

4) Trade and Development Organization subordinated to the

United Nations has brought up the problem of small economic

entities in developing countries and of low available potential,

in order to allow developing countries the application of

International Financial Reporting Standards.

The objectives of reported financial information shall be

presented below:

1) Financial statements aim to offer information regarding the

financial position, the performance and changes in the financial position of

the entity, information that can help different users in efficient decision

making. It is remarkable the fact that the main objective of accounting is

that, to analyze the past, present and to estimate the future of the entity

through its capacity, to attract cash , cash equivalents, safety and ongoing

activity. In other words, the financial information through applied

accounting policies must lead the performing management to efficient

economic decisions.

1. Financial statements prepared in this purpose cover the general

needs of most of the users. But they do not always provide all

the information that the users need in order to make economic

decisions, because the reports reflect the financial effects of

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previous events and do not necessarily provide non- financial

information.

2. Financial reports show the results of financial accountability

and verify the accountability of local resources management.

The users make decisions based on them, such as decisions

linked to keeping and selling bearer titles or naming and

replacing the managerial team.

Chapter 2

Analytical study regarding the national and international accounting

standards, the disclosure and reporting information in the financial

statements of Egyptian companies

The presentation of the experiences of Egypt in the construction of

accounting standards so far affected more than the legal parameters of the

other key factors, but also the impact between these parameters on the

decision to develop accounting standards. The decisions were resigned due

to lack of appropriate studies to ensure the validity of pre- test frame which

contains a list of key factors, which are part of the process of drafting

accounting standards. This process results from the component parts of the

resolution which will be build in order to benefit from this experience, as

well as the reference to other tests made in order to draft Egyptian

Accounting Standards. The aim of this process is that of insuring the

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conformity between the key internal and external factors, which aid at

making the decision to build accounting standards with all the amendments

comprised in the resolution. From our research, we have reached the

conclusion that not all the legal requirements were tested in order to draft

accounting standards, which means that there is a very big difference

between the legal texts which regulate the decision to draft component parts

of standards from Egypt and predominant legal parameters and that there is

no absorption of the direct impact of decisive economic factors in the

decision of establishing the components of the accounting standards

associated to them. As a result, our vision on Egypts experiences in the

process of building accounting standards is marked by the regularity of the

relation between the legal parameters and the source of accounting

standards, by erecting- as an element of the decision to draft standards. The

researcher has criticized the following aspects:

1) The absence of a context which would ensure the parameters of the

process of developing standards which follows the decision to draft

components of these accounting standards, dispersed in principles,

rules, measurement basis, conventions, specific practices necessary to

present and report financial situations.

2) A lack of transparency and of asymmetric relationship between the

legal parameters of making a decision to erect the methodology of

accounting standards and the accounting policy in organizing the

society.

3) An asymmetric relationship between the legal parameters of making a

decision to build the system of accounting standards and to form

accounting standards.

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4) An asymmetric relationship between the legal parameters of making a

decision to erect accounting standards and the methodology to

approach a work of erecting accounting standards.

5) A lack of transparency between the key economic factors in making a

decision to build up accounting standards and the priorities in the

construction of these standards.

6) New accounting standards must be adopted so that they are aligned to

international accounting standards.

The researcher, After examining the realistic parameters of the

decision-making in the construction of accounting standards testing the

Egyptian Accounting Standards in the following sections in order to reach

proposed accounting standards, the construction of key factors is need in

order to make decisions and to organize an accounting policy in the society.

This has an effect on the disclosure model of information applied, in order to

clarify the relation. Once the factors are enunciated, the disclosure model of

information is applied when there are parameters and associated conditions

with the experiences of drafting financial standards.

Chapter 3

Empirical study on recommendations of improvement of accounting

standards regarding disclosure and reporting of financial statements by

companies from Egypt.

There are moral differences which are from the statistical point of

view decisive for stakeholders in organizing the accounting policy in Egypt.

It is not easy to change an accounting model and the form of financial

reporting, as long as, there are internal and external factors with

23

contradicting interests in establishing the harmonization elements, elements

of regulation and conformity regarding the accounting policies of enterprises

in Egypt. The issue raised by the questionnaire is solved by analyzing the

moral difference among the groups we have referred to, issue that is linked

to the impact of legal parameters of some decision elements in establishing

accounting standards. Another problem is linked to the impact of decisions

to establish unique accounting norms for companies from Egypt. Moreover,

our study raises also the issue of the model of economic determinants

regarding financial statements which come off from the proposed accounting

model. Our study focused on the analysis of answers of two groups of

companies, regarding the probing of imposing a fair accounting on

community groups in order to answer the above issue. The probing elements

consisted of discharging the answers to a table which contains the values of

P (parameters) computed at the level of 5% of answers to questions, the first

P is less than the q computed (1.96) to all questions, which means the

acceptance of imposition of equal mathematical community regarding the

two groups, meaning that there is no moral significant difference between

the two groups, which points out that there is no significant difference

among answers. Thus, we rejected the fourth hypotheses, which means that

there is no difference among the groups of interest regarding the

management of accounting policy in Egypt, some elements of the

determinants of making the decision to establish accounting standards in

order to regulate the policy of accounts over the elements of the decision to

establish a model of accounting standards and of disclosure of applied

accounting.

Table

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Values (P) computed at 5%

Problem No. F (calculated) Question No. F (Calculated)

1 -1.254 9 0.055

2 0.433 10 0.792

3 -0.229 11 0.541

4 -0.170 12 0.128

5 -0.168 13 -0.150

6 -1.087 14 -0.352

7 0.405 15 -0.154

8 -0.982

We have audited the balance sheet of Al Ezz Dekheila Steel

Company Alexandria (S.A.E) dated December 31, 2006 and the revenue

statements, the statement of changes in equity and the cash flow statement of

the respective year. Management of the company is accountable for these

financial statements. Our responsibility is limited to expressing an opinion

on these financial statements that are the basis of our audit.

We conducted our audit in accordance with Egyptian Audit Standards

and in the light of applicable Egyptian laws and regulations. Those standards

require to plan and perform the audit to obtain reasonable assurance whether

the financial statements are free from material misstatement. An audit

involves an examination, or existence of proofs, evidence that come to

sustain the amounts and disclosures in the financial statements.

An audit also includes evaluating the appropriateness of accounting

policies used and the reasonableness of accounting estimates made by the

25

management, as well as evaluating the overall presentation of the financial

statements.

We have obtained the necessary data and justifications for our audit.

We believe that the audit conducted provides a reasonable basis for our audit

opinion.

In our opinion the Financial Statement and the notes we referred to

give a true and fair view, in all material respects, the financial position of the

company as of December 31, 2006, and the financial performance of its

financial transactions, the changes in equity and cash flows for the year then

ended in accordance with Egyptian Accounting Standards and complying

with applicable egyptian laws and regulations.

The company drafts the accounting statements that include all that is

required by the law and company statutes, the financial reports that

accompany them are in accordance with national legislation. The company

keeps also reports regarding the accounting costs which reach the objectives

and the management control of material and financial resources by stock

management conducted in accordance with methods in force.

The financial information from the Board of Directors Report was

drafted in accordance with Law 159 from 1981 and the provisions of this

law are in accordance with the financial reports of the company.

Chapter 4 : Application of Egyptian Accounting Standards for

Measurement and Disclosure of Financial Statements valences and limits, case study- Al Ezz Dekheila Steel

Company

The Company Al Ezz Dekheila Steel - Alexandria S.A.E. is an

Egyptian joint stock company, incorporated under the Investment Incentives

and Guarantees Law no. 43 from 1974 amended by Law 230 from 1989 and

26

replaced by the Law no 8 from 1997. It was registered at the Trade Register

under number 104918 on July 17, 1982. The Companys purpose is to

produce, forming and manufacturing of iron and steel in all its genres and

forms.

The Extraordinary General Assembly from January 2, 2006 agreed to

amend the second article of the internal regulation of the company and

according to the General Authority for Investment and the Free Areas

Decree no. 405/2 from 2006, thus changing the name of the company to Al

Ezz Dekheila Steel Alexandria (stock company).

The formalities for the amendment of the internal regulation of the

company and for the registration at the Trade Register were buttoned up in

February 2006. This amendment was published in article no 1407 from May

18, 2006.

The company was established 50 years ago according to the registration date

at the Trade Register.

Basis of preparation

1) Declaration of conformity

These financial statements have been prepared according to the Egyptian

Accounting Standards- EAS and in accordance with the Egyptian

relevant laws and regulations.

2) Basis of evaluation

The financial statements were prepared under the historical cost

convention.

3) Functional currency and presentation currency

27

The statements are drafted in Egyptian pounds, called LE, which is the

Companys functional currency.

4) Uses of estimates and judgments.

The drafting of financial statements is in accordance with the Egyptian

Accounting Standards which require for the management to make

judgments, estimates and adjustments regarding the assets and the

liabilities declared the revenues and expenses.

The estimates and their assumptions are based on a historical experience

and other different factors that are believed to be reasonable under the

circumstances, factors which form the basis of erecting judgments on

values of assets and liabilities which are obvious from other sources. The

fair results of these estimates may be different.

The estimates and the underlined adjustments are frequently analyzed.

The revisions made to accounting estimates are recognized in the period

they take place, if this affects only, that period or the respective period or

in the future, if the revision affects the current and future period.

Significant accounting policies

The accounting policies set out below have been applied consistently to

all periods presented in these financial Statements.

Foreign currency translations

Transactions in foreign currency are conducted at the exchange rate of

the date of the transaction. Monetary assets and liabilities denominated in

foreign currency from the balance sheet are converted in Egyptian Pounds at

the rates prevailing at the balance sheet date. Non- monetary assets and

liabilities that are carried at a historical cost in foreign currency are

28

converted at the rates prevailing at the date of transaction, except the

followings:

- Monetary assets and liabilities in foreign currencies agreed to be

collected or paid at a pre-determined exchange rate.

-monetary assets and liabilities expressed in foreign currency that do not

have an equivalent in Egyptian Pounds, the rate of exchange being

established by reference to the American Dollar as an intermediary rate

of exchange between those monetary units and the Egyptian Pound.

Differences coming from the reevaluation of monetary assets and

liabilities during the balance sheet period are recognized in the income

statement.

Property, plant and equipment

Costs include expenditure directly attributable to the acquisition of

items. The cost of self constructed assets include material costs and

manufacturing costs and any other costs that can be attributable to bringing

the item to working condition for its intended use and the cost of dismantling

and removing the asset.

We conducted our audit in accordance with Egyptian Audit Standards

and in the light of applicable Egyptian laws and regulations. Those standards

require to plan and perform the audit to obtain reasonable assurance whether

the financial statements are free from material misstatement. An audit

includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes assessing the

accounting principles used and significant estimates made by management,

as well as evaluating the overall financial statement presentation.

29

We have obtained the necessary data and justifications for our audit.

We believe that the audit conducted provides a reasonable basis for our audit

opinion.

In our opinion the Financial Statements referred to above together

with the notes attached thereto present fairly, in all material respects, the

financial position of the company as of December 31, 2006 and the results of

its operations and its statement of changes in the equity and cash flows for

the financial year then ended, in accordance with Egyptian Accounting

Standards and in compliance with applicable Egyptian laws and regulations.

The company keeps proper accounting records which include all that

is required by law and the statutes of the company, and the accompanying

financial statements are in agreement therewith. The company also maintains

cost accounting records that meet the purposes thereof and the inventories

count was performed by the companys management in accordance with

methods in practice.

The financial information from the Board of Directs Report was

drafted in accordance with Law 159 from 1981 and the provisions of this

law are in accordance with the financial reports of the company, at least as

regarding the information recorded there.

Conclusions of the research

The decision to conduct a study in accordance with the standards of

the community and to choose a model of disclosure of accounting policy

drafted according to legal parameters and economic conditions, making the

connection with the model of key factors in decision making, to build on

30

economic standards that are in agreement in all the decisive elements and

with the model of disclosure of accounting policy. The study was organized

in four chapters, the researcher being able to enunciate in the first part the

objectives of the research, that have been presented in the context of trying

to reach the accounting standards needed for building key factors in decision

making. They include drafting accounting standards associated with the

management of an accounting policy in the environment. The accounting

policy has an impact on disclosing accounting models and reaching the

following sub-objectives:

1) Identifying the disclosure models of accounting

2) Identifying the determinants of the effects of decision making in order

to build accounting standards with a view to disclosing accounting

models

3) Identifying the determinants of the role of decision making to build

based on experience of issued accounting standards, accounting

standards in Egypt.

4) To decide whether the evidence of building Egyptian Accounting

Standards are not random.

5) To identify the paths in organizing the groups that have an accounting

policy in Egypt in regard to determinants in decision making to draft

accounting standards as well as their impact on the accounting

disclosure model applied.

6) The creation of a model of accounting policy disclosure in the light of

the key factors determinant in the decision making process to build on

accounting standards in Egypt.

The researcher has drawn some hypotheses of the research, as follows:

31

The first hypotheses: Egypts experience in shaping accounting

standards, a set of parameters which influence the decision to build up

accounting standards for the management of the accounting policy in the

community.

The second hypotheses: the key factors influence the decision

making in drafting accounting standards in order to regulate the accounting

policy in the community regarding the construction of models of accounting

standards and disclosure applied in Egypt.

The third hypotheses: there are significant statistical moral

differences between interested parties in organizing the policy of accounts in

Egypt regarding the determinants of the importance to make a decision to

draft accounting standards that regulate the accounting policy in Egypt.

The fourth hypotheses: there are significant statistical differences

among the interest parties in organizing the accounting policy in Egypt,

some elements of the determinants of the impact to make a decision to build

accounting standards in order to regulate the policies of accounts over the

elements of the decision to build a model of accounting standards and a

model of disclosure of applied accounting.

The second chapter analyses the key factors in decision making to

build a relation with the accounting standards and the methods used in the

conceptual scheme of accounting and the relation with the key factors of

decision making to build the elements of the accounting standards. It

analyses Egypt experiences in building up accounting standards and the

parameters associated with them. The researcher of the study shows in this

part the relationship between the parameters of the legal and economic

determinants in making the decision to build the elements of the accounting

standards- it may be criteria for the studies that approach the relation among

32

the processes of building the background determinants of accounting

standards. We have reached the conclusion that Egypts experiences in

drafting accounting standards is clearly marked by Egyptians and the

regularity of relations between the legal parameters which erect the

accounting standards, being a component of the decision to develop

standards. Our research discloses the following barriers of actual accounting

standards in Egypt:

1. The absence of a frame to insure the parameters of the process of

building standards in the decision to define clearly, coherently the

elements of the standards.

2. A lack of clarity and an irregular relation between the legal parameters

of decision making, to build and to normalize a proper accounting

system in organizing the society.

3. An irregular relation between the legal parameters of decision making

to build accounting standards and the methods of approach in the

work of developing accounting standards.

4. A lack of clarity in the relation between the determinants of decision

making to build up accounting standards and the priorities in

developing accounting standards.

The third chapter presents the feature of disclosure in the accounting

policy and its relation to build the determinants of accounting standards and

the models of approach of these types of accounting disclosures associated

with the most important studies. It approaches the impact of legal and

economic determinants and of forms of accounting disclosure, as well as the

presentation of main characteristics of the model of disclosure in force in

Egypt in the light of the legal parameters and the economic determinants that

accompany them. The researcher clarifies that in this section the relation

33

between the legal parameters and the economic determinants of the model of

applied accounting disclosure, the model containing the followings:

1) The determinants that affect the legal and economic

determinants in identifying the disclosure of the applied

accounting model

2) The legal parameters that build up a model of presentation and

of financial reporting which can be incentive in case the impact

of legal determinants is taken into consideration.

3) Building the legal parameters of the model of accounting

disclosure takes the form, in case of optional reporting of legal

texts which do not bind, of supplemental comments for all the

list attached to basic elements in those reports.

4) The creation of legal determinants of the model of accounting

disclosure, which are efficient if the financial indicators have

reached a high degree of efficiency.

5) The creation of legal determinants of the model of accounting

disclosure which are stimulated if the economic parameters

associated with the capital market are efficient.

The third chapter tackles with the model proposed by the effects to

the determinants of decision making to build up the model of standards and

accounting reporting. The large area of users, the sphere and the form of

impact of legal and economic representatives of the decision to build

elements of accounting standards and to disclose the accounting model are

also dealt with in this chapter.

The fourth chapter of the research probes on field the efficiency of

the model of effects of legal representatives in decision making to build the

model of accounting standards and of financial reporting and includes a field

34

objective of the study, the data that is needed to prove the hypotheses, the

methods of data collection and analysis and the probing of hypotheses. In

this part, the researcher unfolds the following;

1)-Accepts the hypothesis, that offer the proof that Egypt is in the

phase of developing new standards, a set of parameters that

influence the decision to build accounting standards for organizing

the accounting policy in the community;

2) Accepts the second hypothesis, that shows the factors that

influence the determinants in decision making to develop

accounting standards in order to regulate the accounting policy in

the community, over the elements of decision of developing

models of accounting standards and disclosure models of

accounting information applied in Egypt.

3) The third hypotheses relates to the fact that there is no moral

significant difference from the statistical point of view among the

groups of interest in the accounting policy organization in Egypt

regarding the determinants of the importance of decision making to

develop accounting standards which regulate the accounting policy

in Egypt.

4) The fourth hypotheses relates to the fact that there is no moral

significant difference from the statistical point of view between the

groups of interest in the accounting policy organization in Egypt

regarding the elements of the decision to develop a model of

accounting standards and on disclosure of applied accounting

policy.

35

Recommendations

The results of the research have brought forward a set of recommendations

and succession of useful ideas for a future research:

1) a recommendation that the impact of the economic interest

determinants to make a decision to develop accounting standards and,

in particular, to determine the quality of standards and priorities.

2) It is recommended to observe the legal effect of parameters chosen on

the basis of accounting standards and, in particular, in determining the

method used in organizing and construction of mechanism, in its

functioning and subordination towards the mechanism..

3) The recommendation to build on a reporting model of information in

the accounting system before the development of accounting

standards, which should comply with the determinants and economic

parameters, mostly with legal ones.

4) The recommendation of identifying some already build in standards,

of reference terms, composition and methods of work, to identify the

style and the images of these standards which are in conformity with

The Capital Market Authority, Minister of Investments, The Egyptian

Institute of Accountants and Auditors, The Association of

Accountants and Auditors and other stakeholders.

36

5) The recommendation to develop some independent accounting

standards established by a committee which can be named The

Egyptian Committee of Accounting Standards or the Egyptian

Council for developing standards in the light of economic and legal

parameters in conformity with a clear approach.

6) To suggest other research that deal with the outlining of legal effects

of parameters and of sub-economic determinants of each element of

decision to develop elements of accounting standards and of

disclosure of accounting model.

7) Proposing that the further studies addressing the impact of

determinants other than the determinants of economic and legal

limitations on the elements of the decision to build the accounting

standards are conducted.

8) To suggest future studies that tackle with the impact of other

determinants than the economic and legal ones on the model of

accounting disclosure.

9) To propose further studies to probe the efficiency of the model

proposed by the researcher by other techniques than the list of

personal interviews and questionnaires proposed by the researcher.

37

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