Further, The Companies Act of the Kingdom of

Further, theSMEs represent 97.

5% of the business organization in Bhutan.  AlthoughSMEs supported the promulgation of standards in the country they seem to beless bothered in complying with the standards in true sense. This according toone interviewee is that, these entities requiring to use BAS for SMEs were lessserious in implementing it because of two distinct reasons: First, a switch to IFRS is notlikely to bring any benefits such as decrease in the cost of capital and easieraccess to the global capital market to these firms; and second, it would imposehigh implementation costs like updating accounting systems and recruiting ortraining financial staff.  Thus, BAS may not be consistently applied andinterpreted due to lack of will and support from SMEs in Bhutan. 5.5       AccountingEnvironmentThe accounting environmentencompasses accounting practices, rules or/and trends that affect and areaffected by other elements in the environment: the societal, organizational,professional and individual (Gernon and Wallace, 1995). Related legislationsand various Acts have regulated corporate governance including financialreporting, prudential requirement and compliance, listing requirement on thesecurities exchange and calculation of taxable incomefor various types of entries in Bhutan.

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AASBB, (2012) has identifiedthe following legislations to have influence on financial reporting in Bhutanfor different entities in Bhutan: 1) The Companies Act of the Kingdom ofBhutan, 2000; 2) The Public Finance Act, 2007; 3) The Audit Act, 2006; 4) The FinancialInstitutions Act, 1992; 5) By Laws of Royal Monetary Authority, 2000; 6) BhutanPostal Corporation Act, 1999; 7) The Income Tax Act of Kingdom of Bhutan, 2000;8) Financial Service Act, 2011and; and 9) The Securities Exchange Regulations,1993. Except for the Companies Act 2000, which was amendment in 2016, none ofthe legislations or Acts have been rectified and brought in line with BAS sofar. So, in event of conflict between BAS and any of the above legislations orAct, the respective legislation or Act should prevail and it has resulted incompanies preparing at least two different financial statements for differentpurpose (interviewee 5).   Forexample, the Income Tax Act of Bhutan, 2001 has its share of influence onfinancial reporting in Bhutan. The Income Tax Act, 2001 provides detail aboutthe accounting treatment for determining taxable income for corporate sectorsin Bhutan (Income Tax Act 2001, sec 17-46). Thus, the Bhutanese law requirecompanies to prepare at least two types of financial statements; one forcorporate reporting based on BAS as prescribed by Company Act, 2016 and theother for tax reporting based on Income Tax Act, 2001 (interviewee 3).  Further, one interviewee pointed that sinceTax Authority is not in compliance to BAS, the authority still requires thecompanies to depreciate their assets as per the rules on the Income Tax Act ofthe rather than the BAS 16 (interviewee 9). Thus, this impediment theconsistent application and interpretation of BAS and it suggest for maintainingconsistency of the legal and regulatory requirements in Bhutan with BAS.

Abalanced combination of capacity and institutionalized incentives for therigorous application of international standards is the key to successfulimplementation (Hegarty, 2004, pp. 1). Further, IFRS are optimal only ifcompliance is monitored and enforced by efficient institutions throughstringent regulation in place and the presence of actual liability fornon-compliance (Samaha, & Khlif, 2016). But, Bhutan does not have such abalanced combination of capacity and efficient institutions for that purposes.

The task of regulators of finical reporting in Bhutan isto regulate financial reporting of companies and to deal with non-compliancewith BAS (interviewee 9). These tasks are supposedly performed by twoorganizations in Bhutan: the Company Registrar and the Royal Monetary Authority(RMA) as the central bank.  The RMA isentrusted to regulate financial institutions as empowered by Financial ServiceAct, 2011 and By Law of Royal Monetary Authority, 2000. The Company Registraris entrusted to regulate all companies in Bhutan as mandated by Company Act,2016.

The penalty provision under the companylaw states that non-compliance company can be imposed financial sanctions orfined up to BTN 1 million and if the company repeatedly fail tocomply, it can be imposed a daily fine of BTN 10,000 until full compliance (interviewee5). But, until now not a single company has been penalized for non-complianceor for failing to meet the date line of compliance with BAS.  The lack of qualified accountant within-depth knowledge on IFRS with the regulators has hindered the task ofmonitoring and checking the level of compliance and the regulators are yet toevaluate the total compliance of BAS (Interviewee 5). Thus, monitoring andevaluating the level of compliance with BAS by the regulating authority is themost compressing issue and one of biggest challenge in enforcing BAS for companiesin Bhutan. Apart, from the regulating institutions, the auditor also has therole to play in monitoring the level and extend of compliance with BAS as it isreflected in the auditors report that the audited financial statement of thecompany has been prepared in compliance with BAS (Interviewee 8). Thisstatement is supported by IFRS foundation where in it is stated that theauditor’s report and/ or the basis of presentation footnotes states thatfinancial statements have been prepared in conformity with IFRS standards (IFRSFoundation, 2016). However, this is a challenge as most auditors are Indianfirms who lack the necessary skills and experience in IFRS as discussed indetails in the professional environment.

Fairvalue in Bhutan is being used for financial instruments; however, it is verydifficult to ascertain whether the computation is correct and as per therequirement of IFRS (interview 6). The interviewee further pointed that, fornow the companies in Bhutan may not be using the fair value accountingextensively due to lack of proper understanding of the requirements and themodel applicable to the Bhutanese context. Furthermore, “active market” ofassets and liabilities is very important for extensive use of fair valuemeasurement. But, absence of “active market” in Bhutan makes it very difficultto obtain or rely on the market information as the data are not readilyavailable or there is a time lag. As pointed out by one interviewee:  “Themarket in Bhutan doesn’t qualify as the active market, thus, the rates are not reliableand to extend not applicable” (interviewee 9).

  This has forced most companies in Bhutan toresort to using different model and methods to value their investment and giveeffect on the financials statements. Thus, it actually defeats the very purposeof having national accounting standards, which makes financial reportingreliable and comparable across companies. Further, absence of certified valuation firm in Bhutan has resultedcompanies in Bhutan to resort to internally developed mode for fair valuemeasurement and has incurred huge compliance costin absence of valuation firm in the country (AASBB, 2012). Thus, the use offair value in Bhutan is challenging given the contextual issues prevailing inBhutan.