IFRS, an accounting essential

As International Financial Reporting Standards (IFRS) gain rapid acceptance across the globe (with over a 100 countries adopting it), it was recently announced by the Institute of Chartered Accountants of Sri Lanka (ICASL) that Sri Lankan banks too would be required to adopt the international standard by January 1, 2012.

The ICASL has taken action to adopt the (IFRS) by issuing a Sri Lanka Financial Reporting Standards (SLFRS) and Sri Lanka Accounting Standards (LKAS) for annual financial periods.

USA, Canada, India and Japan are some countries which are currently in a transitional process to IFRS. Though the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS) have been followed by Sri Lanka, standards issued after 2005 have not been adopted immediately while developing Sri Lanka Accounting Standards (SLAS).

According to the paper Convergence with IFRS in India by The Institute of Chartered Accountant of India, the benefits with converging with IFRS are many and similar for any country that adopts it correctly. For the economy, a marked increase growth of international business, by encouraging international investing would be likely.

On the investor front, investors are now looking to information that is more relevant, reliable, timely and comparable across the jurisdictions. Financial statements prepared using a common set of accounting standards help them better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards.

What it spells for the industry, as a whole is that it will be able to raise capital from foreign markets at lower cost if it can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards.

And for the men behind the operation: convergence with IFRS benefits accounting professionals in a way that they will be able to sell their services as experts in different parts of the world. The thrust of the movement towards convergence has come mainly from accountants in public practice. It offers them more opportunities in any part of the world if same accounting practices prevail throughout the world.

According to the statement by ICASL, all existing IAS's and IFRS's will be adopted from January 1, 2012 to comply with international accounting standards in all material respects in order to bring 'more credibility' to financial reporting in Sri Lanka.

For many banks, convergence with IFRS is expected to have a significant impact on their financial position and financial performance, directly affecting key parameters such as capital adequacy ratios and the outcomes of valuation metrics that analysts use to measure or evaluate performance.

However, in addition several challenges on the path to convergence, that are applicable to all companies, [0]financial institutions in Sri Lanka are faced with a very short deadline. With the adoption of the new SLFRS, companies are required to apply SLFRS One (First time adoption of SLFRS), the key principle being a full retrospective, application of all accounting standards in effect as of the closing balance sheet date.

Doing so will mean that the financial statements of a company for 2012, will reflect the financial position and performance of as if that entity has always reported its financial statements, using the new SLFRS. Other key issues foreseen in adopting SLFRS include: 28 existing accounting standards will be revised, 12 new standards will be issued and about 26 IFRICs will be in force beginning January 1, 2012. IFRSs has evolved over the years and will continue to evolve due to the complexities of the operations that companies deal in. From 2012 onwards, Sri Lanka will envelope such changes no sooner the changes are issued. Hence, being complaint with SLFRS as of now, is a moving target.

As the new accounting framework matures, there will continue to be changes in accounting practices in the next decade. Corporate and financial institutions will need to keep up-to-date on IFRS-related developments to ensure compliance with accounting requirements in the future as well.