1.
Restrictions on Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) involves an entity from one country investing in or establishing a
business operation in another country.
Typical Restrictions (Example: Ethiopia):
Sector Restrictions: Some industries like defense or telecommunications may be closed to
foreign investors.
Equity Limitations: Foreigners may be required to partner with locals, limiting foreign
ownership.
Minimum Capital Requirements: Higher capital thresholds may apply for foreign investors.
Land Ownership: Foreigners can lease but not own land.
Approval and Licensing: Governmental approvals may be required for FDI.
Performance Requirements: Conditions like local employment or export targets may be
imposed.
Purpose of These Restrictions:
To protect national security, support domestic industries, transfer technology, and ensure
local employment.
2. Accounting Entries and Implications on Reporting
A. General Purpose Accounting
This is used for preparing financial statements for stakeholders such as investors, creditors, and
management.
Key Aspects:
Follows IFRS or GAAP standards.
Ensures transparency, comparability, and consistency.
Uses the accrual basis of accounting.
Example Entry (Purchase of Equipment):
Equipment xxx
Cash/Bank xxx
B. Tax Purpose Accounting
This is used for preparing financial reports for government tax purposes.
Key Differences:
Different depreciation methods may be used.
Some expenses may not be tax-deductible.
Income recognition rules may differ (e.g., cash vs. accrual basis).
Implication: Tax accounting often shows lower income due to deductions and incentives.
2. Accounting Entries and Implications on Reporting
A. General Purpose Accounting
This type of accounting is used to prepare financial statements for external users such as
investors, lenders, and management. It follows standardized rules like IFRS or GAAP.
Key Features:
• Uses the accrual basis of accounting (records revenues and expenses when they occur).
• Aims for transparency and comparability of financial data.
• Generates financial statements like the balance sheet, income statement, and cash flow
statement.
Example Entry (Purchasing Machinery for $10,000):
Dr Machinery 10,000
Cr Bank 10,000
B. Tax Purpose Accounting
This accounting is used to calculate taxable income and comply with government tax
regulations. It may differ from general accounting in the treatment of revenues and expenses.
Key Differences from General Purpose Accounting:
• May use different depreciation methods (e.g., accelerated depreciation).
• Certain expenses (e.g., entertainment, fines) may not be tax-deductible.
• Income recognition may follow the cash basis rather than accrual.
Implications:
• A company may show high profits for investors but lower taxable income due to allowed
tax deductions.
• Accurate records must be maintained for both purposes to avoid legal issues and support
financial planning.
References
Ethiopian Investment Commission. (2021). *Investment Guide*. Retrieved from
[Link]
Federal Democratic Republic of Ethiopia. (2020). *Investment Proclamation No. 1180/2020*.
Addis Ababa: Federal Negarit Gazeta.
International Financial Reporting Standards Foundation. (2023). *IFRS Standards*. Retrieved
from [Link]
Ministry of Trade and Regional Integration. (2022). *Business Licensing and Registration
Process*. Retrieved from [Link]
PwC. (2022). *Worldwide Tax Summaries – Ethiopia*. Retrieved from
[Link]