IFRS convergence, moving towards global consistency

International Financial Reporting Standards (“IFRS”) convergence is not just another accounting transformation; it may very well be a paradigm change for business itself KPMG Partner in Sri Lanka and IFRS Head for KPMG Middle East and South Asia region Reyaz Mihular said.

Global outlook

Companies in over 100 countries already follow IFRS when preparing financial statements. IFRS based financial statements are a requirement in the majority of these countries and permitted by the others. A further number of countries are presently exploring conversion and convergence plans which could enable IFRS to potentially become a consistent global platform for financial reporting.

Business opportunity

The move to IFRS based standards opens new opportunities for businesses facilitating easier access to capital markets, promoting global consistency, reaching wider stakeholder groups and simplifying financial processes. The changeover should not be seen as a complexity but instead perceived as a business opportunity.

The transition

We are part of a global village and it is difficult for any country to function in isolation. Even giant economies such as India and China have embraced IFRS. In my view one of the main reasons for IFRS convergence is that “accountants need to talk a common language”.

The transition is happening because today’s global context requires accounting statements that can be universally understood. When there is universal understanding and acceptance it would lead to greater transparency and comparability which in turn provides increased assurance and comfort to stakeholders.

Local outlook

Foreign Direct Investment (FDI) plays a major role in Sri Lanka’s development plans. In order to attract increased FDI we must attempt to create a conducive environment in all aspects of the economic environment. This includes having globally consistent financial reporting.

My experience has been that investors prefer investing in familiar environments.

When operating in unfamiliar environments they are likely to consider the comfort gap and factor in a return to compensate for the additional risk or sometimes not invest at all.

If the environment is familiar there is no gap and hence no premium. Considering on going operations, consolidation becomes much easier and less costly under IFRS which is globally consistent.

Rationale

IFRS contributes to reporting financial performance as true to its economic circumstances. Some of the traditional standards have been challenged and refined standards developed over the years.

This has significantly contributed to the advancement of accounting standards and the entire accounting profession. For example the traditional “Historical Cost” is not reflective of the current day circumstances. It is very rare for someone to consider selling a company or a land at its cost or net book value.

IFRS moves the Balance Sheet closer to real market values and is thus more realistic. I also believe that IFRS brings better substance into financial statements and improves presentation of financial performance through fair value based reporting.

Advantage

There are many positive outcomes which could be realized through a successful transformation.

These include; convenient access to global capital markets, eased cross-border stock-exchange listings, ability to attract and provide transparency to, international investors, joint venture partners and lenders comparability and benchmarking with international peers and best performing global companies avoids multiple reporting for companies with global operations having subsidiaries and associates in Sri Lanka can be used as a trigger to streamline and improve financial reporting policies, processes and IT systems

Difference from traditional accounting

IFRS is much broader than traditional accounting standards. The standards place a business perspective to the entire financial reporting process.

We no longer report on past performance but assess impacts in volatile markets and report proactively in a more timely and realistic manner.

IFRS is not just another set of accounting standards or a revision to an existing standard.

It has become a business imperative which influences processes, people, systems, perspectives and the way in which we communicate business performance.

The involvement of business decision makers is also fundamental when preparing financial statements based on IFRS as the process involves considering financial statement impacts before making key business decisions.

Preparation in Sri Lanka

The convergence of Sri Lanka Accounting Standards (“SLAS”) with IFRS is a transition which has been under careful consideration for a few years.

The new standards will be adopted in Sri Lanka as SLFRS and LKAS. I believe necessary planning has taken place at professional institution and regulatory level. Considering the adoption, some of the larger companies have been proactive in the process.

We are currently working with a number of such banks and conglomerates who have already prepared financial statements according to these standards and are better prepared for the transition.

The main advantage for them is the availability of comparators which could be used when applying the new standards in financial statements.

They would also have their systems and processes better realigned to meet the new reporting requirements. As the 2012 time line approaches it is advantageous for directors and financial managers to prepare themselves and their organizations for preparing financial statements according to the new standards.

Our experience has been that countries where establishments have been better prepared have had a smoother transition and embraced the standards. Even if bottlenecks are experienced these could be resolved prior to the timelines imposed by regulators and professional bodes.

The challenge and complexity often arises when companies are not adequately prepared or wait until the deadline to make the transition.

This is a dangerous scenario because they may not be adequately prepared and changes to financial reporting processes and systems will invariably take reasonable time to perform.

Adoption

The adoption will often require a gap analysis of key impact areas and also assessing the changes to systems, processes and training requirements for people. The extent of impact would depend on the nature of the organization and the complexity of transactions involved.

Depending on the scenario, consideration would need to be made in areas such as financial instruments, impairment, investment property, intangible assets among many others.