Chapter I

Introduction

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1.1 General Introduction
The evolution of Accounting, as with environment evolution, has lead to the
appearance of mores, principles and rules engrained in practicing till some of them
became acceptable by accountants such as double entry. But many of these mores,
principles have many alternatives, and there is no agreement on following one alternative
only, this has lead the disclosure being given the same treatment in different ways. This
in turn has made it difficult to compare the companies’ financial statements; it may lad to
adducing untrue data about the finance position and the profit or loss accounts. So the
need for establishing accounting standards has become essential, by which the
comparison will be easy and it will reduce the chance of misuse of data. With this view in
end some of the provisional associations started to make standards in the local ambit.
In recent centuries the increased investment has increased the trade between the
countries, as well as the multinational companies. This makes a case for conjunction in
international economic relationships, and accounting patterns.
Political changes have increased the conjunction of such relationships which had
first appeared in the world in the ninth century and have support the enforcement of
globalization of stock exchanges.
All of that has had an influence on the evolution of accounting from two sides on
the one hand the importance of accounting data has been increased by the people who
deal with international stock exchanges from one side, and the users of accounting data
have increased locally and internationally from the other side. This lead to the beginning
of establishing accounting standards which will be flexible for local or international use.
Thus the territorial, continental and international authorities have been established to
make these standards. Enthoven said that the important steps for internationalization of
accounting have been achieved by establishing the International Accountants
Association, International Accounting Standards Committee and Europe Economic
Corporation (Enthoven, 1983:110).
Some of the undeveloped countries have started using standards which have been
issued by International Accounting Standards Committee as local standards or use it as a
base while formulating their own standards.

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 Certain fundamental Accounting assumption underlies the preparation and
presentation of a financial statement. They are usually not specifically stated because
their acceptance and use are assumed. Disclosure is necessary if they are not followed.
The accounting policies refer to the specific accounting principles and the
methods of applying those principles adopted by the enterprise in the preparation and
presentation of financial statement.
There is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate in a situation of
diverse and complex economic activity make alternative accounting principles and
methods of applying those principles acceptable.
The choice of the appropriate accounting principle in a specific circumstance of
each enterprise calls for considerable judgment by the management of the enterprise.
The primary consideration in the selection of accounting polices by an enterprise
is that the financial statements prepared and presented on the basis of such accounting
policies should represent a true and fair view of the state of affairs of the enterprise as at
the balance sheet date and of the profit or loss for the period ended on that date.
For this purpose, the major considerations governing the selection and application
of accounting policies are:-
(a) Prudence.
In view of the uncertainty attached to the future events, profit are not anticipated
but recognized only when realized though not necessarily in case. Provision is made for
all known liabilities and losses even though the amount cannot be determined with
certainty and represents only a best estimate in the light of available information.
(b) Substance over form.
The accounting treatment and presentation in financial statements of transaction
and events should be governed by their substance and not merely by the legal form.
(c) Materiality.
Financial statements should disclose all “material” items the knowledge of
which might influence the decisions of the user of the financial statement.

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 To ensure proper understanding of financial statements, it is necessary that all
significant accounting polices adopted in the preparation and presentation of financial
statements should be disclosed.
Such disclosure should form a part of the financial statements, if they are all
disclosed as such in one place, instead of being scattered over several statements,
schedules and notes.
Any change in an accounting policy, which has a material effect, should be
disclosed. The amount by which any item in the financial statements is affected by such
change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable wholly or in part, the fact should be indicated. If a change is made in the
accounting policies which had no material effect on the financial statements for the
current period, but which is reasonably expected to have a material effect in later period
in which the change is adopted, then it should be disclosed such.
The preparation of financial statements of banking companies depends upon the
understanding of the nature of banking activities, and the external factors which influence
these activities such as the laws and procedures lay down by the monetary authorities
who influence the fixing of interest rat, liquidity and the fiduciary limit which affects the
assessment of assets and liabilities.
The importance of disclosure in banking companies’ financial statements comes
from the nature of finance facilities in this sector, i.e. a broker between the saver and
investor and its relationship with other economic activities.
In Yemen there is no single statement of accounting standard which should be
followed and the law is not strict on use the international accounting standard or
disclosure and there is no authority taking care of preparing such standards.
So the law stating the accounting practice includes only general instructions, this
information has been given by the study made by ‘Arthur Anderson’ on “The Accounting
Professions in Yemen” According to him the unique Accounting system which is applied
by the public sector, includes a few accounting standards only. But the private sector
follows international accounting standards in preparing and presenting their financial
statements (Arthur Anderson, 1996, third fillet: 1)

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 In India the Institute of Chartered Accountants of India is one of the members of
The International Accounting Standards Committee (IASC) and has agreed to support the
objectives of IASC. While formulating the Accounting Standards, ASB will give due
consideration to International Accounting Standards issued by IASC and try to integrate
them, to the extent possible, in the light of the conditions and practices prevailing in
India.
As a result of this, many deficiencies have been observed in the accounting
performance. Some of these deficiencies are listed below:-
The availability of various accounting practices has lead to the processing of
similar treatment, in many different ways which complicate the comparison of the
financial statements made according to different standards.
Defrauding and cheating has lead to the loss of community trust on the
financial statements.
Hence this study seeks to clarify the importance of disclosure of accounting
policies and accounting standards by which the financial statements can be easily to
understood by their users and to achieve the following objectives:-
7. To state whether or not Yemen should set up its own standards.
8. To state whether India has to adopt International Accounting Standards (or not) in
view of globalization.
9. To ascertain the differences between Yemen and India in the filed of accounting
practices.
10. To find out whether financial statements of Yemeni and Indian companies have
enough capability to be used for comparison.
11. To find out the appropriate suggestions to improve the accounting practices in
Yemen.
1.2 Research methodology
1.2.1 Sample Technique
This study has been taking a comparative approach, comparing Indian Banking
companies with Yemen banking companies as well.

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1.2.2 Size of Samples
Since Yemen has few banking companies they have been taken as a whole with
out resorting to random sampling except Islamic banking companies as they are not in the
position of comparison with banking companies in India because their operation and
standards are so difference, so they have excluded.
Where as in the case of India, adequate Number of banking companies has been
chosen, by random sampling, out of the banking companies listed on Recognized Stock
Exchanges in India.
1.2.3 Scope of study
The study have confined to the examination of financial statements of Yemen
Banking Companies for the year ended on 31/12/2003.
In the case of India it took financial statements for the year ended on 31/03/2004.
1.2.4 Data Collection
This study has been based on primary and secondary dada.
1.2.4.1 Primary Data
Primary data has been directly collected from each respective Banking Company.
1.2.4.2 Secondary Data
Secondary data collected through documentary sources from different libraries,
magazines, Journals, in Yemen and India, rules and regulations for Banking Companies
and issues by International Accounting Standards Committee & Institute of Chartered
Accountants of India.
1.3 Study hypothesis
1- A full disclosure of accounting policies leads to a realistic and fair assessment
of financial statements.
2- International Accounting Standards formulated by International Accounting
Standards Committee are appropriate both for India and Yemen while preparing the
financial statements.