Sustaining IFRS adoption

Friday, 23 August 2013 00:00 -     - {{hitsCtrl.values.hits}}

By Shabiya Ali Ahlam A visiting official of the International Accounting Standards Board (IASB) on Wednesday expressed that Sri Lanka has done well in adopting the International Financial Reporting Standards (IFRS) since their introduction in January 2012. IASB Board Member and SME Implementation Group Chairman Darrel Scott stressed the need for continued learning so that the changes that come along while adopting the IFRS are faced in a seamless manner. “Taking up IFRS, companies will be faced with both challenges and opportunities and it is important to be ready to handle them,” he told a CFO Business Forum titled ‘Sustaining IFRS Adoption’ which took place this week in Colombo. Opportunities and challenges Starting with opportunities, he said that the IASB welcomes at any given time feedback on the standards that are imposed. “With active participation and by sharing experience, companies can certainly help drive the agenda of the IASB,” Scott expressed. Moving on to the challenges, he pointed out two which according to him should be addressed tactfully. The first is the development of the necessary infrastructure to accommodate mandatory standards while the second is corporate memory. “It is important to make sure that you know enough about the standards. Since you certainly haven’t learnt everything, you must understand that the IFRS is a learning process that must continue. These standards aren’t static and CFOs need to make sure they are updated with the current activities,” he told participants. The objective of the forum being to keep the CFOs informed on the recent activities of the IASB, Scott pointed out few current issues. Disclosures overload The first being disclosures, he noted the current presentation of financial statements are rather “heavy”. Opining that disclosure overload is an issue faced by many institutions, he said: “Looking at last year’s financial statement of HSBC, it was over 400 pages and that is a lot. The reason for this overload is that companies allow the accumulation of financial information.” Scott added that another reason for this overload is the complexity of information. This according to him compels companies to disclose every single item. “The issue is that with heavy financial statements it becomes difficult for the target audience to understand what is happening and eventually they will start to lose sight on the important elements,” he emphasised. Acknowledging that accounting is the language of financial market, he stressed the need to communicate financial performance and information in an understandable manner rather than simply going over a “checklist”. Touching on risk disclosures he pointed out that many companies simply search for what auditors prefer and “copy” certain terminologies to the report. Displeased with this, he said: “It is important to note that auditors are technically sound and not everyone else is. So it is absolutely necessary to ensure that all stakeholders understand disclosures,” The IASB having noted the disclosures overload issue after several meetings that took place last year, Scott said the institution has accepted that it has a leading role to play in this regard. He revealed that having assessed the situation, the IASB has decided to work towards a disclosure framework while aiming at enhancing risk disclosure of banks. However, Scott pointed out few concerns there were brought to light with regard to risk disclosure of banks. “It was noted that there were difficulties in understanding the business models, related risk measurement and reporting, whereas it was also identified that there was a lack of timely reporting and granular disclosures in credit exposures,” he revealed. Scott also said financial reporting needs to be value added. “Looking at a cash flow statement, for me it is meaningless piece of paper. What we need is to look beyond this statement.” Keeping materiality in mind, he said it is important to identify information that is relevant before presenting it in a financial statement. “I wouldn’t want to see every single transaction. Instead, what I am far more interested in is knowing how the assets are managed,” Scott noted. Good judgment He opined that the second issue revolves around making good judgment and therefore good estimates. Stressing that good judgment is essential for accounting, Scott said: “We believe that good accounting needs more judgment and not less. When looking at the facts and situations, only what is relevant should be taken into account.” He explained that what makes judgment difficult is that estimates are often made in isolation and therefore it is important for CFOs and CEOs to keep track of the facts considered so that in the future the same are taken into account. “When there is a change of CFO, it must be understood that each brings in a new interpretation to the scenario. If not documented, it complicates the situation to a great extent,” Scott added. Moving on, he identified control as the next important factor as it is imperative to understand what can and cannot be managed. Scott suggested that this can be achieved by ensuring those employed are well qualified. “CFOs do not get involved in all day-to-day activity and they are dependent on subordinates. It is mandatory for them to be equipped with the technical tools so that control on diverse elements can be gained,” he advised. Introducing of new standards To avoid falling into the trap of taking up new standards later and facing the consequences, Scott emphasised the need to start early. “In the project curve it is difficult in the beginning. I would say so since first uninformed optimism will be experienced. Going further informed pessimism will be felt which will eventually turn to informed optimism when the process is better understood,” he shared. Furthermore, pointing out the need for effective communication between preparers, auditors, regulators, and investors, Scott revealed five new standards that will be introduced by the IASB during the next few years. The new standards will be the IFRS 9, 10&11, 12 and 13. Starting with the IFRS 13, he said that while it does not change the scope of ‘fair value,’ it aligns the thinking approach and processes. Although this has sparked many debates, he said that implementation support will be extended by the IASB. For the IFRS 12, which is on the disclose standards where it targets structured vehicles, he observed that the initial concerns is the area of over disclosure and safety accounting. On the IFRS 10 and 11 which is on control, Scott noted this to be about review at individual investment level. “For most entities it is easy analysis and when looking at the initial indicators, the total number of consolidated entities is the same,” he said. Speaking on the IFRS 9, he said that the adoption is broken down to three phases which are; classification and measurement, impairment and hedging. Scott revealed that the implementation of the IFRS 9 has been postponed till the second phase, which is the impairment stage, is reached. “Due to this, the IASB will not be able to make this standard mandatory till 2016. Nevertheless, we allow and highly encourage early adoption,” he added. Having completed the presentation Scott was questioned on a number of aspects with regard to the standard itself and the issues he pointed out earlier on. With the ending of the relief period of the IRFS 7, which is about the significance of financial instruments to an entity and the nature and risk arising from those financial instruments, it was questioned that from a banking point of view how this burden can be eased. To this Scott responded by saying never follow what is done in other countries since the banking environment is different from one region to another. “Allow the risk department to do their job and don’t include meaningless information that has nothing to do with your organisation. Just because your competitor has a 20 page report, doesn’t mean you have to have 21 pages,” he told participants. With regard to bulky financial statements, it was questioned if the regulators are to be blamed for this since it is they who come up with the checklist. To this Scott fully agreed and said that it was true no regulator has ever criticised a company for disclosing too much. “We will be engaging in this dialogue with the regulators soon. The IASB is working closely with regional bodies to increase awareness on this regard. Sometimes we find that people operate in fear of what the decision might be, and that is not correct. If the regulators are not on board, it is of no use in trying to address this issue,” he said.