Ernst & Young Sri Lanka demonstrates commitment to integrity of financial reporting

The Audit committee chairs of public interest entities, and Inland Revenue high ranking officials gathered at a forum organised by Ernst & Young (EY) at the Hilton Colombo Residence recently. EY Country Managing Partner Asite Talwatte welcomed the gathering and provided a briefing on the importance for organisations’ to drive quality financial reporting in the current volatile environment.

The primary aim of the event was to enlighten audit committees on the wider effects on the company’s financial performance and position, due to adopting Sri Lanka Accounting Standards (LKAS/SLFRS) effective 1 January 2012, and the challenges it poses to audit committees. The forum featured sharing of the experience of EY, in implementing the new accounting standards by EY Partner Manil Jayasinghe, the effect of implementation of new accounting standards on Tax by EY Partner Duminda Hulangamuwa and the perspective of the regulator by Sri Lanka Accounting and Auditing Standards Monitoring Board Director General Ajith Ratnayake.

Jayasinghe discussed the importance of improving the quality and integrity of financial statements due to the statutory obligations of directors of public interest entities. “It is vital to ensure that the management has exercised appropriate judgment in determining the right accounting choice,” Jayasinghe said. He also added that, “The application of the principles of accounting, to the fact pattern (which includes terms and conditions, legal environment and so on) of the transaction to determine the substance of the transaction is essential. For example, in order to recognise revenue, the entity is required to identify the point, at which the risk and rewards have been transferred, which may not be explicit and thus requiring judgment to determine the revenue recognition point.”

Jayasinghe sharing his experience discussed some of the key accounting issues that arose during the Sri Lanka Financial Reporting Standards (SLFRS) conversions. He said: “Many organisations faced challenges in the areas of component accounting, fully depreciated assets, accounting for long term land leases, provisioning for bad and doubtful debts, accounting for financial assets and liabilities and so on, accounting for substance over form required detail analysis, and judgment in determining the accounting treatment. For example, determination of whether an arrangement is a finance lease or an operating lease based on contractual terms and fact pattern of the arrangement.” He also commented that recasting the financial statements based on the new financial reporting standards, may impact the net assets and profitability, and he also noted that audit committees should be aware of implications on the changes in the profitability, that can have implications on the debt covenants and other key performance indicators. Audit committees need to ensure that the accounting policies adopted by the company best reflect the business of the entity.

Importance to improve integrity, transparency of financial reporting in

Sri Lanka

Jayasinghe stressed the following to be of importance to improve integrity and transparency of financial reporting in Sri Lanka. The positions taken by company directors on transactions, specially where significant judgment is used and where high degree of estimates are used, should be defensible. This cannot be emphasised more, in today’s volatile environment in which is being operated. All members of audit committees need to participate in understanding and evaluating the judgments exercised in financial reporting, in determining the most appropriate accounting.

Finally, the information that is presented should be evaluated from the ‘users’ perspective’ to ensure that the correct message gets across to the user of the financial statements. Meanwhile, Ajith Rathnayake noted that the involvement of the audit committee in developing the company’s SLFRS/LKAS strategy is essential for meeting its central fiduciary responsibilities of providing effective oversight of regulatory compliance, risk, financial reporting, and considering shareholder interest.

Moving with one global financial reporting language provides an opportunity to raise foreign funds at lower costs and investor confidence will be enhanced. Rathnayake briefed the forum on the processes of the Sri Lanka Accounting and Auditing Standards Monitoring Board, and shared the experience of the Board in contributing towards better financial reporting. He also shared some valuable case studies of departures of accounting standards in the recent times.

Duminda Hulangamuwa raised some noteworthy points from the perspective of taxes in relation to fair value adjustments, point of revenue recognition, changes in provision for bad and doubtful debts and so on. When a question arose as to the view taken by the Inland Revenue, the representatives from the Inland Revenue Department commented by saying “A document regarding these matters will be out in the near future.”

It was evident at the forum that audit committees play a valuable role in enhancing the quality of financial information that is presented to the stakeholders. It was clear that this requires revamping of the financial reporting strategy as the challenge is to stay on top of the frequent changes in financial reporting as well as the innovative business transactions that take place in the ever volatile market. It was clear that in order to achieve this objective the processes and systems of the organisation needs to be aligned.