E&Y share insights to refining financial reporting in Sri Lanka

Year 2012 will herald a new era for financial reporting, and will enhance the governance and financial reporting of Sri Lankan entities to higher levels.

The Institute of Chartered Accountants of Sri Lanka has issued accounting standards that are applicable for financial periods beginning on or after 1 January 2012, (SLFRS) equivalent to the globally recognised International Financial Reporting Standards (IFRS).

Throughout Asia and other parts of the world, including United States of America is making their way towards this change. Several experts have given their views on the subject to relating to the necessity and impact of adopting International Financial Reporting Standards equivalent to Sri Lanka Financial Reporting Standards, comprising of SLFRS and LKAS.

Manil Jayesinghe, Partner Ernst & Young speaking on the benefits of Sri Lanka converting to SLFRS/IFRS, said: “Sri Lanka is at a very critical stage, with the post war opportunities streaming in from around the globe. We have evidenced a substantial increase in the number of investors in the country and it will continue to grow. With such a backdrop, there is no doubt that the adoption of a common accounting language will contribute immensely.”

With the adoption of SLFRS:

nInvestors will have a much better ability to understand financial reports. Therefore Sri Lanka will be in a better position to compete with the rest of the world.

nAnalysts will be able to compare our financial information more easily and comfortably with similar companies across the globe.

n It creates a level playing field for Sri Lankan companies when competing with the global market, and as a result will benefit from relatively lower cost of capital.

Mark Seddon, Managing Partner, FAAS services – Asia Pacific shared his view on challenges faced in Europe when conversion to IFRS took place. Many organisations initially believed that converting to IFRS could largely be confined to finance or the accounting policy function and therefore charged this group with responsibility for delivering the change agenda.

It took some time before it became obvious that the implications of IFRS extended well beyond Finance and touched all facets of a business.

Leadership had to step up the messaging around the importance of this change and empower a senior executive to lead who had line of sight across an organisation, could engage the business effectively, and was capable of transforming accounting speak into operational impacts and issues that the business could relate to, be they at the product/front office level, systems, process and control functions, or geographical.

Driving change, delivering a consistent message across an organisation and being able to identify matters quickly and effectively, for example, timelines slipping, or resources need bolstering, were met with varying degrees of success.

Many organisations under invested in the program management team and paid the price with missed deadlines and overspend, also the level and extent of training that is required across an organisation was underestimated.

Training can take many forms and typically the format, content and timing will vary from the Board down through the organisation. More often than not most delivered training very early on and did not refresh it throughout the life-cycle of the project or did not tailor it to the needs of the different audiences.

Sanath Fernando, Partner Ernst & Young, said: “One of the biggest challenges to all concerned is the interpretation of standards. SLFRS encompass principle based standards which means the financial information is more likely to reflect the substance of arrangements and there is less opportunity for abuse.

However there are cases where there are legitimate needs for interpretations to promote consistent and comparable financial reporting. The challenge is achieving a balance between making interpretations when they are needed, but not becoming too rule-based and losing the benefit of principles-based standards.”

He also added, “Companies will need to make a gigantic effort upfront to understand the changes that it will face in terms of Accounting, Business processes and IT. Transactions will need to be captured at the initiation of the transactions.

 It will pose an organisation wide cultural change that will encompass almost all of the divisions. Companies will have to put a lot of effort into educating and training staff on the impacts on the financial reporting of the organisation.”

Markets like Hong Kong faced a lot of tactical issues causing significant costs as financial institutions did not fully consider IT changes in the early stages of the project during the initial adoption in 2005.

Yin Toa Lee, Partner Ernst & Young Financial Services Leader – Far East, said: “Organisations were comfortable with the current IT systems and were not willing to admit that they will require strategic modifications especially to the front-end business related systems on the initial adoption of IFRS.

This resulted in the increase in human labour involved in the preparation of financial statements at the back-end where time is being spent doing the numbers as opposed to analysing them for reasonableness.”

With the trend to empower finance as the trusted advisor to businesses, IFRS automation would be a necessity, markets like Korea has learned.

This leads us to the question, what processes should a company go trough to adopt these standards effectively and efficiently? The global conversions have shed light on the following ground rules:

n Training and awareness is a key element in the conversion process. This should commence from the Boards and Audit committees and flow down to the operational management.

n An advisor with necessary skill and competence to be selected.

n Each company must set up a steering committee to analyse the issues, discuss the alternate accounting options and determine the accounting option that is most strategically suited to the entity. All such decisions must be ratified by the Boards and Audit committees.

n A strong project Manager is required to ensure that the project receives the due attention it requires in obtaining information and that key milestones are met without undue delay.

nProgress updates to the Boards and an Audit committee is imperative.

n Coordination between all departments is key to the success of the project.

nDevil is in the detail   All organisations must undergo a contract review process to identify the substance behind the transactions.

The terms and conditions needs to be evaluated in order to determine the accounting treatment that should be reflected in the financial statements.