IFRS compliance creates uniformity

Prasad POLWATTE

Sri Lanka has agreed to implement IFRS compliances (International Financial Reporting Standards) from January 1, 2012. Thus, many significant accounting and presentation changes could be expected from December 31, 2012 financial statements. Further, encompassing the presentation of comparative figures of December 31, 2010, and December 31, 2011. Due to the extensive disclosure requirements the complementing number of pages of annual reports of leading international financial institutions have already increased by 100 percent.

This undoubtedly is a nightmare to most accounting professionals as evidenced from the number of participants at IFRS seminars conducted by professional bodies during the past two years.

As a result, highly paid consultants are sought after by most companies creating lucrative business for practising accounting firms.

Uniform system

It is mandatory for accounting professionals to follow accounting standards in the preparation of financial statements. Further, accounting is becoming a profession like medicine and engineering and requiring the application of globally acceptable standards.

In recent years there has been vast growth in the provision of international capital, for investments coupled with the international securities offered.

Thus, requiring financial statements that could be easily read and understood by stakeholders in other countries.

At present, financial reports prepared for shareholders and other users are based on standards that vary widely from country to country and some even within a country.

Accounting reports, therefore, lack comparability. This can cause high preparation cost to a multinational in preparing its consolidated accounts, as stakeholders will want a uniform system of assessing financial performance of their operations in different countries.

Evolution of international accounting standards setting bodies

A mechanism for achieving the harmonization of international financial reporting practices emerged with the establishment in 1973 of the International Accounting Standards Committee (IASC).

This standard-setting body was established as a result of an agreement by representatives of the professional bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the UK, Ireland, and US.

The IASC has grown considerably since its establishment in 1973. Its members now consist of all the professional accountancy bodies that are members of the International Federation of Accountants (IFAC).

The IASC and IFAC now have over 140 members in over 100 countries. IASC develops International Accounting Standards (IAS) which will contribute to the improvement of financial reporting and to encourage their use in the preparation of financial reports (CPA 108 - Reporting and Professional Practice).

The International Accounting Standards Board (IASB) was founded in 2001 as the successor to IASC. The IASB is an independent accounting standards setter based in London and it is responsible for developing IFRS.

The Sri Lanka Accounting Standards LKAS and SLFRS are issued by The Institute of Chartered Accountants of Sri Lanka (ICASL) with the permission of the IASC and IASB respectively.

The standards termed LKAS (Sri Lanka Accounting Standards) are largely based on the International Accounting Standards of the former IASC and standards termed SLFRS (Sri Lanka Financial Reporting Standards) are based on the International Financial Reporting Standards of the IASB. From January 1, 2012 onwards, eight standards from SLFRS and 29 standards from LKAS will become applicable.

IFRS compliance global trends

All listed companies in UK, Europe, Australia and Philippines adapted IFRS from January 1, 2005. Canada implemented from January 1, 2011. US companies adapt US-GAAP (Generally Accepted Accounting Principles) in preparation of their financial statements. Despite the high priority agenda of both the US based Financial Accounting Standards Board (FASB) and the IASB in eliminating differences in financial reporting, many differences exists.

Thus, financial statements of overseas subsidiaries and branches of US companies are converted to US-GAAP format for consolidation purposes. Further, large economies such as China and India are not fully geared for IFRS compliance.

Japan has anticipated 2015 for IFRS compliance. Thailand and Vietnam have not announced.

Some IFRS with substantial Implications on financial statements

Financial institutions may have extensive disclosure requirement from the following:

SLFRS 7 - IFRS 7: Financial Instruments: Disclosure.

(a) The significance of financial instruments for the entity’s financial position and performance; and

(b) The nature and existence of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks.

LKAS 32 - IAS 32: Financial Instruments: Presentation.

The objective is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the user, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.

LKAS-39 - IAS 39: Financial Instruments: Recognition and Measurement.

To establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.

Cross-border ownership culture on financial reporting

At present, the Finance Department has the overall control on financial statements preparation activities, and financial statements are prepared from the finalized trial balance by the Finance Department staff. Further, Finance Department fixes timelines to complete transactions posting pertaining to all units and thereafter general ledger trial balance to be extracted for financial statements preparation.

However in IFRS, accounting treatment, this is decided at transaction execution point by a business process employee who is a non finance professional. Thus, the whole cross-section of the organization will be involved in financial reporting activity.

Thereby, the scope of financial reporting transcends territories of the finance department and requiring to be monitored by a high powered steering committee. The customer oriented mindset of the operations and production staff towards achieving their divisional targets will render the task of deriving their commitment in accounting issues very difficult.

Thus, establishing a cross-border ownership culture on financial reporting will be a challenging task for the IFRS compliance steering committee.