This paper highlighted some of the main features of Bhutanese accounting environment using ‘accounting ecology’ framework developed by Gernon and Wallace, (1995) and outlined its effects on the BAS adoption process in Bhutan, in particular to how the contextual factors affect the consistent application and interpretation of BAS in Bhutan. The contextual factors in Bhutan is different from Anglo-American countries which includes dominance of SOEs and private or family owned businesses, underdeveloped capital markets, lack of qualified accounting professionals, coexistence of accounting related laws, and the absence of active market for fair valuation (including professional valuation firms). In spite of these distinct contextual factors, the AASBB under MOF took a bold step in mandating the BAS adoption process in Bhutan in 2012 (IFRS Foundation, 2016).
The government of Bhutan is in the process of accelerating socio- economic development and recognized FDI as one means to achieve it. The increasing number of companies and opening of Bhutanese economy to international investors has driven Bhutan to adopt BAS with the expectation to attract Foreign Direct Investment (AASBB, 2015). This changing nature of Bhutanese economy demanded transparency, consistency and comparability in corporate reporting, which can be achieved through adoption of high quality accounting standards. Thus, the AASBB under the MOF initiated the IFRS adoption process in 2012. The major lobbying group represents government organizations (like MOF, AASBB, Company Registrar Division, RAA, Central Bank) because these organizations are involved in preparing and enforcement and regulating the compliance of BAS. But despite initiating BAS adoption process and having a FDI policy since 2002, Bhutan still draws very less FDI among developing countries. This provides a rationale for Bhutan that adoption of IFRS and having a FDI policy, alone cannot bring in FDI as desired without necessary reforms in legislation and policy and creating infrastructure.
Culturally, Bhutan is a high power distance and collectivist society. There is significant culture difference between Bhutan and Anglo American countries where IFRS were developed. The value orientation of Bhutanese largely prioritizes collective effort to achieve group goals. This is likely to subordinate individual values for the benefit of their organizations’ goal rather than preference for independent professional judgment as required by IFRS. Further, the hierarchal system (power distance) in Bhutan accepts unequal right in an organization and subordinate expects to be directed by supervisor. This is likely to influence individuals’ professionalism. Based on the value orientation of Bhutanese people, it is likely that the principal based IFRS may not be consistently interpreted and applied in Bhutan as IFRS advocate professionalism and exercising independent professional judgment.
The capital market in Bhutan is underdeveloped with few listed companies and the ownership structure is highly concentrated with SOEs and SMEs (97.5%) owned by individual and their families. The government, private and family as the principal source of finance, the need for extensive disclosure in Bhutan may be irrelevant as required by IFRS. Because for SMEs, the adoption of BAS may not bring any benefit like increased access to international capital and reduced cost of capital, rather it will be costly and may lead to standard overload (AASBB, 2012). Further, financial statements and reporting practices in Bhutan are influenced by a number of accounting related laws. Such requirements in the law have resulted in companies preparing at least two types of financial statements for different purposes (E.g. Income tax act, 2001). This suggests the need for amendment of accounting related laws for different types of organization in order to bring uniformity with IFRS.
Findings of this study suggest that certain characteristics of the Bhutanese accounting environment may challenge consistent application of IFRS in Bhutan and hinder the comparability of financial statements across countries. The main problems include lack of human resources (qualified accountants); the absence of professional accounting organization like JICPA, ICAEW; inconsistent training and accounting education; and absence of active market and appropriate mode for fair value measurement. Further, lack of human resources amongst the regulator has resulted in difficulty in monitoring and assessing the compliance with BAS.
Implementation of IFRS requires adequate qualified professional accountants and IFRS are optimal only if compliance is monitored and enforced by efficient institutions. However, accounting profession in Bhutan is small and undeveloped and there is no adequate number of professional accountants. This is the result of absence of professional accounting organization like JICPA, ICAEW, and CPA, AUSTRALIA, which offers professional accounting program or courses. The absence of facility for professional accounting education in Bhutan has resulted in acute shortage of professional accountants with all stakeholders in Bhutan including companies, auditors, regulators and standard setters. Finding also suggest that this has hindered the monitoring and enforcing BAS in Bhutan and it is one of biggest challenge for the regulators in enforcing BAS to the companies in Bhutan.
Similarly, professional accounting services such as external audit are outsourced to firms outside Bhutan especially India, as there is no professional accounting firm in Bhutan. Out- sourcing of auditing service or relying on accounting firms in India has negatively impacted Bhutan including the non-development of accounting and auditing profession in Bhutan and poor regulation of audit quality due to difference in legal jurisdiction. Concerns are expressed over the general level of competence of Indian firms in auditing IFRS complaint financial statements. Further, the lack of proper understanding of the requirements and the model applicable to the Bhutanese context for effective fair valuation and non-existence of active market for assets and liabilities and absence of professional valuation firm in Bhutan made implementation of fair valuation difficult in Bhutan
Apart from preparing, issuing and reviewing accounting standards in Bhutan, AASBB has been providing training related to BAS in Bhutan to temporarily fill the training gap. But, there is no regular system or mechanism to provide accountants with continuing professional development and training. Thus, recruitment of skilled employees is problematic in Bhutan as there is shortage professional accountant in the market. Finding of the study suggest that with increasing difference in the demand and supply of qualified professional accountants, the time has come for Bhutan to have professional accounting organization or institute like JICPA, ICAEW to fill the demand and supply gap of qualified professional accountants in Bhutan.
In summary, it is evident that with changing nature of Bhutanese economy, the need for FDI was felt imminent to boost the economic growth and to this effect the AASBB under the MOF therefore, decided to commence BAs adoption process in Bhutan since 2012. However, the contextual differences between Bhutan and the country where IFRSs have been developed are a concern for the smooth transition to new accounting system in Bhutan. These contextual issue impediment consistent application and interpretation of BAS in Bhutan. As reported in this paper the adoption process of IFRS in Bhutan faces lots of challenges due to its contextual issues. This may raise serious concerns whether accounting standards developed or designed based on Anglo American model for advanced industrialized countries, could meet the financial reporting needs of developing countries like Bhutan.
This study suffers from some limitations. The issues raised in the paper are based on the review of prior research articles, books, government documents and interview with relevant stakeholders. The study is qualitative in nature and it is therefore, difficult to examine the issues through quantitative tools. This paper does not deliberate on the post-BAS implementation impact on corporate financial reporting system in Bhutan, as the BAS adoption and implementation process will complete in 2021.