The World Bank, in a 2007 assessment of Honduran accounting and auditing practices, commended Honduras's efforts to improve financial reporting standards and noted that continued national initiatives were required for further alignment with international standards. Furthermore, the harmonization of national practices was also necessitated by the fact that Honduras is a signatory of the Dominican Republic/Central American Free Trade Agreement and was likely to become a party to a Free Trade Agreement with the European Union. The World Bank noted that to avail themselves of the benefits of these trade agreements, Honduran business enterprises needed to adopt internationally accepted rules and standards. A significant development in this direction was the enactment of the Accounting and Auditing Law, which mandates the application of International Financial Reporting Standards (IFRSs) beginning January 1, 2008, with earlier adoption permitted. The Law also establishes the Accounting and Auditing Standards Technical Board as the body responsible for the adoption of international standards. Moreover, the strengthening of auditing and accounting regulations in the financial sector was another significant improvement in the Honduran reporting framework. However, the World Bank identified a number of deficiencies. The January 2008 deadline for application of IFRSs was found to be "too ambitious." The World Bank recommended that the deadline be extended to 2011-2012. Also, it was unclear whether national Generally Accepted Accounting Principles would coexist with IFRSs or apply during the period of transition. Furthermore, the new Law requires application of IFRSs regardless of enterprise size. This means that small and medium size enterprises must also apply the international standards, but the World Bank observed that IFRSs were not designed for such entities. Instead, the World Bank argued that IFRSs should apply only to Honduran public-interest entities. At the time of the assessment, a technical assistance project financed by the Multilateral Investment Fund was working towards developing interpretations and guidelines for the application of IFRSs and International Standards on Auditing.

General Overview

A World Bank review of the accounting and auditing environment in Honduras led to the publication of a Report on the Observance of Standards and Codes (ROSC) in May 2007. International Financial Reporting Standards (IFRSs) (formerly known as International Accounting Standards, or IASs) and International Standards on Auditing (ISAs) were used as the benchmarks for assessing national standards. In the 2007 ROSC, the World Bank observed that Honduras had made "commendable" efforts to improve its financial reporting standards. However, further efforts are required to align the national requirements with the international standards. Particularly, in the context of Honduras being a party to the Dominican Republic-Central American Free Trade Agreement and the likely signing of the Free Trade Agreement with the European Union, the World Bank noted that to avail themselves of the benefits of free trade agreements, "[Honduran] enterprises will have to adopt and apply internationally-recognized rules and practices for business activities, especially standards relating to accounting and financial information that are considered to be part of a normal business relationship" (p. 4). Therefore, it was observed that aligning financial reporting standards with international standards would be instrumental in achieving Honduras's objectives of economic growth. An important step in this direction was the enactment of the Accounting and Auditing Law (A&A Law), which mandates the application of IFRSs and ISAs beginning January 1, 2008, with earlier adoption permitted. The World Bank noted that "the enactment of the A&A Law represents an important step towards improving Honduras's financial reporting and auditing practices and, thus, supports Honduras's strategic development objectives" (p. 6).

The World Bank report, however, identified a number of deficiencies in the reporting framework. The January 2008 deadline for application of IFRSs and ISAs was found to be "too ambitious," given the fact that Honduras is faced with inadequate human and financial resources. In the short term, the World Bank recommended amending the A&A Law to lay down a clear framework and extending the adoption deadline of IFRSs to 2011-2012. Moreover, the report pointed out that "Art. 22 states that once the requirement to apply IFRS and ISA comes into force in 2008, existing Honduran GAAP [Generally Accepted Accounting Principles] will continue to apply" (p. 37). Therefore, clarification is required on whether national GAAP will coexist with IFRSs or apply only during the period of transition from one framework to another. Furthermore, the new Law requires application of IFRSs regardless of the size of an enterprise, which means that small and medium size enterprises (SMEs) are also required to apply IFRSs. Honduras allows exemption from IFRSs only to small retailers which, per the World Bank, are businesses with annual revenues of less than approximately US $300. As noted in the report, "IFRS were not designed for SMEs, which make up the vast majority of companies in Honduras" (p. 7). The World Bank therefore recommended that Honduran SMEs should be allowed to adhere to national GAAP instead. According to the World Bank, IFRSs should be applicable only to public interest entities which, in the Honduran context, are banks, financial institutions, insurance companies, state-owned enterprises, and large private corporations.

Another important development brought about by the A&A Law was the creation of the Accounting and Auditing Standards Technical Board, which is responsible for the adoption of international standards. The World Bank noted that this was a "significant step in the right direction," but still identified a number or weaknesses that were likely to impede the Board in the performance of its duties. To begin with, the World Bank report observed that the Board lacked a regular source of funding, permanent staff, or offices. Furthermore, there were no clear enforcement guidelines for the Board to follow, and the rules concerning amendments to adopted IFRSs were ambiguous. The report explained that even though the Technical Board is allowed to make amendments when required, it does so in the absence of any legal authorization. The World Bank, therefore, recommended that "the Technical Board should adopt by-laws and a strategic plan in order to play an effective role as standard-setter and enforcer" (p. 29) and that the role of the Technical Board with regard to the standard-setting procedures and enforcement of the standards should be clarified. In 2006, the Board issued a draft resolution on interim accounting standards that would act as a "bridge" towards full adoption of IFRSs. However, these standards have never been adopted, because the Board decided to move straight into the adoption of IFRSs with no interim standards. At the time of the assessment, a technical assistance project financed by the Multilateral Investment Fund was working towards developing interpretations and guidelines for applying IFRSs and ISAs.

An initial attempt to codify Honduran GAAP was made in 1995, which led to the enactment of national GAAP as of 1996. Prior to the adoption of IFRSs, Honduran companies had to comply with these national GAAP. Although Honduran requirements were based on the U.S. GAAP, the former were "significantly less demanding" than IFRSs, and many aspects of financial reporting were not addressed in the national framework. Also, national disclosure requirements were not as detailed as the international requirements. The World Bank found that the 1996 GAAP were adequate for the needs of small business entities, but inadequate for large companies or companies which deal with specific transactions.

The A&A Law requires public and private companies to prepare annual financial statements. However, the World Bank found that when the A&A requirements were in conflict with Honduran tax law or local regulatory requirements, the tax law or local requirements took precedence. In addition to the A&A Law, banks, insurance companies, and other financial institutions must follow accounting requirements laid out by the National Banking and Insurance Commission (NBIC), the main regulatory body for the financial sector. Financial institutions must also follow relevant Commercial Code requirements. Should the legislation conflict with NBIC regulations, the NBIC rules take precedence. Supervision is conducted via on-site and off-site monitoring. Both, banks and insurance companies must submit financial statements monthly, quarterly, and annually to the NBIC. Additionally, NBIC-regulated companies must publish their annual and quarterly financial statements in two main Honduran newspapers. Non-compliance with any of these requirements can lead to sanctions that include warnings, fines, and suspensions. The World Bank assessment observed that NBIC-compliant financial statements were of "lesser quality," especially in the area of disclosures. However, it was noted that the insurance sector had started to familiarize itself with the international requirements. The NBIC also enforces reporting requirements for listed companies. However, the securities market in Honduras is not very active. For the long term, the World Bank recommended that the NBIC commission "an evaluation of the differences between current accounting practices among Honduran banks and IFRS" (p. 31) and suggested for the insurance sector, that the impact of adoption of IFRS 4 be analyzed.

The Honduran Association of Public Accountants (CPMCP) and the Association of University Professionals in Public Accounting (COHPUCP) are the two main self-regulated professional bodies in Honduras. Only members of these two bodies have the right to provide accounting and auditing services. The Honduran accounting profession is organized in two tiers. The upper tier includes university graduates, whereas the lower tier comprises professionals with secondary education. The World Bank noted that the majority of accounting professionals belonged to the lower tier and, therefore, the accounting profession was not regarded very highly in Honduras. The World Bank observed that both the COHCUCP and CPMCP were faced with a severe lack of resources and that the educational qualifications and experience required for membership is below international standards. However, the World Bank noted that some of these issues were being addressed. The CPMCP has its own Code of Ethics, issued in January 2005. According to the World Bank, the Code falls significantly short of the International Federation of Accountants' (IFAC) Code. The COHPUCP has adopted the latest IFAC code, and the CPMCP is listed as a member on the IFAC website.

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008.

IFRS 2: Share-based Payment (effective 2005)

EN

See IFRS 1.

IFRS 3: Business Combinations (effective 2004)

EN

See IFRS 1.

IFRS 4: Insurance Contracts (effective 2006)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, with regard to the financial sector, the report pointed out that the NBIC "issued accounting rules [that] present significant differences with IFRS 4" (p. 23). However, it was observed that the Honduran insurance industry was taking initiatives to get familiar with IFRS 4 and this could "facilitate convergence and future adoption of IFRS" (p. 23).

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

EN

See IFRS 1.

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

EN

See IFRS 1.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

EN

See IFRS 1.

IAS 1: Presentation of Financial Statements (effective 2007)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, the World Bank observed that Honduran Accounting Principle 2, Accounts Receivables "includes provisions mostly covered in the [IASB] Framework or IAS 1" (p. 40). Furthermore, Honduran Principles 4, 6 and 9 also included certain provisions covered in IAS 1. The report, however, pointed out that Honduran Principle 11, Long-term Liability, "contains provisions that are in direct contradiction with IAS 1, such as the possibility to present short term liabilities as long term when an agreement to refinance on along term basis in completed after the balance sheet date and before the financial statements are authorized for issue" (p. 40).

IAS 2: Inventories (effective 2005)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, Honduran Accounting Principle 7 Inventories was "broadly in line with IAS 2" (p. 40), but the World Bank noted that the policy of last-in, first-out is allowed.

IAS 7: Cash Flow Statements (effective 1994)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, the Honduran standard 4 Cash included provisions covered in IASs 1 and IAS 7. Further, the provisions of Honduran standard 13 "Cash flow statement" were broadly in line with IAS 7.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, Honduran standard 12 Presentation of Operating Income was "broadly in line with the older versions of IAS 1 and IAS 8" (p. 40).

IAS 10: Events after the Reporting Period (effective 2005)

EN

See IFRS 1.

IAS 11: Construction Contracts (effective 1995)

EN

See IFRS 1.

IAS 12: Income Taxes (effective 2001)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, Honduran standard 9 Accounting for Common Stock had similar provisions as those in IASs 1 and IAS 12.

IAS 14: Segment Reporting (effective 1998)

EN

See IFRS 1.

IAS 16: Property, Plant and Equipment (effective 2005)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, the Honduran Accounting Principle 3 was "broadly in line with the IAS 16," (p. 40) the World Bank observed.

IAS 17: Leases (effective 2005)

EN

See IFRS 1.

IAS 18: Revenue (effective 1995)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, the Honduran standard 15 Revenue Recognition was "broadly in line with IAS 18."

IAS 19: Employee Benefits (effective 2006)

EN

See IFRS 1.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

EN

See IFRS 1.

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

EN

See IFRS 1.

IAS 23: Borrowing Costs (effective 1995)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, the Honduran standard 10 Capitalization of interest was "broadly in line with the allowed alternative treatment of IAS 23 (recognizing borrowing costs as period expenses is not allowed). Principle no. 10 does not consider other costs than interests (e.g. finance charges within finance leases)," (p. 40) the World Bank observed.

IAS 24: Related Party Disclosures (effective 2005)

EN

See IFRS 1.

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

EN

See IFRS 1.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

EN

See IFRS 1.

IAS 28: Investments in Associates (effective 2005)

EN

See IFRS 1.

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

EN

See IFRS 1.

IAS 31: Interests in Joint Ventures (effective 2005)

EN

See IFRS 1.

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

EN

See IFRS 1.

IAS 33: Earnings per Share (effective 2005)

EN

See IFRS 1.

IAS 34: Interim Financial Reporting (effective 1999)

EN

See IFRS 1.

IAS 36: Impairment of Assets (effective 2004)

EN

See IFRS 1.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

EN

See IFRS 1.

IAS 38: Intangible Assets (effective 2004)

EN

See IFRS 1.

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

EN

According to the 2007 World Bank report, Honduras implemented the A&A Law, which mandates the use of IFRSs beginning January 2008. At the time of the assessment, with regard to banks, the NBIC accounting rules, however, differed from IAS 39, the World Bank observed.

IAS 40: Investment Property (effective 2005)

EN

See IFRS 1.

IAS 41: Agriculture (effective 2003)

EN

See IFRS 1.