Introduction to IFRS

Discussion topics
History and Evolution of IFRS Financial Reporting Principle based IFRS Impact of key Standards IFRS Heat map Process of Conversion to IFRS Conversion challenges and opportunities IFRS Conversion insights / lessons learned

History and Evolution of IFRS

IAS/IFRS* : Major force in world accounting

What is IAS / IFRS?
Single set of high quality, global accounting standards To increase transparency in financial reporting To enhance comparability of financial information For local banks with global aspirations, exchange listing More effective/consistent quality of compliance & audit Sole responsibility rests with IASB Pronouncement aims to be country neutral

Why IAS / IFRS ?

Who develops IAS /IFRS ?

.. And since when ?

Standards issued after Apr01,2001 designated as IFRS Now Mandatory for European Union listed companies
* International Accounting Standards Board (IASB) International Financial Reporting Standards (IFRS)
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Momentum for a Global GAAP

Facilitates Accounting and Reporting Enhances Transparency and Comparability

Global GAAP

Reduces Cost of Capital

History
IASB (International Accounting Standards Board) / IASC (Committee) was formed in the early 1970s, about the same time as the FASB Early IAS standards allowed many options Efforts were made to harmonize standards in the early 1990s Some early adopters came from countries with multinational companies but few local accounting rules (e.g., Switzerland, Australia) IASB was restructured in 2001 and began issuing IFRSs (International Financial Reporting Standards) in 2003

Evolution of IFRS
2000 and Prior 2001 to 2005 2006 to 2007 Future
IASC IASB

ACCOUNTING STANDARD SETTERS

IAS Core Standards Program

Norwalk Agreement

Memorandum of Understanding

IASB/FASB?

FASB

IOSCO CESR
INTERNATIONAL REGULATORS

EU Mandate

CESR Equivalency?

European Commission

Brief about International Financial Reporting Standards (IFRS)

IFRS are standards and interpretations adopted by the International Accounting IFRS Standards Board (IASB) Principles based standards IFRS focuses on IAS IFRS
Increased use of fair values Getting the balance sheet right Substance over form Fewer choice of accounting alternative
SIC

IFRIC

IFRS in the world

IFRS gaining momentum throughout the world as a single, consistent accounting framework Move toward IFRS is strong
Europe: 2005 Australia Brazil: 2010 Canada: 2011 India 2012 -2014 Thailand 2013 Indonesia 2011 Korea 2011 China 2011

What is the status of IFRS acceptance in countries relevant for you?

Statutory reporting requirements Tax reporting requirements
Source IASB

Global IFRS reporting trends

IFRS Drivers and Potential Benefits
Enhances transparency/comparability Eases flow of capital globally, thus possible reduction in cost of capital Facilitates accounting and reporting

US GAAP 250 200 150 100

IFRS

Japan

China

Canada

Other

IFRS quickly picking up share of Global F500 companies More than100 countries have moved to or base their local standards on IFRS IFRS will become the predominant GAAP in the near future
50 0 2004 2005

2006

2010 - Accounting Standards Applicable

Serial No.
1

SLAS No.
3

IAS/ IFRS No.

1

Standard
Presentation of Financial Statements Inventories Cash Flow Statements Accounting Policies, Changes in accounting Estimates & Errors Events after the Balance Sheet Date Construction Contracts Income Taxes PPE Leases Revenue Employee Benefits

2
3

5
9

2
7

4 5 6
7

10 12 13
14

8 9
10 11

18 19
29 16

8 10 11 12 16 17 18
19

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

24 21

20
21

20 30
42 26 27

31 44 34

35
41

36
37 45 40

23 24 26 27 28 29 31 32 33 34 36 37 38 39 40 41

Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Accounting and Reporting by Retirement Plans Consolidated and Separate Financial Statements Investments in Associates Financial Reporting in Hyperinflationary Economies Interest in Joint Ventures Financial Instrument - Presentation Earnings per Share Interim Financial Statements Impairement of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instrument - Recognition and Measurement Investment Property Agriculture

Serial No. SLAS No. IAS/ IFRS No.

Standard

30

N/A

IFRS 1 IFRS 2 IFRS 3

First-time adoption of IFRS Share-based Payment Business Combination

31

N/A

32

25

33

N/A

IFRS 4

Insurance Contracts

34

38

IFRS 5

Non current Assets held for sale and discontinued opeartions

35

N/A

IFRS 6 IFRS 7 IFRS 8 IFRS 9

Exploration for and Evaluation of Mineral Resources. Financial Instruments-Disclosure Operating Segments Financial Instruments

36

46

37

28

38

N/A

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IFRS for SME

Calendar for IFRS Conversions

The Standards for IFRS conversions are fluid and evolving Dates for converting consolidated Financial Statements to IFRS are set by ICASL The example below illustrates the relevant dates for companies with a closing year end of December 31 and a conversion date of December 2012 This would require Balance sheet for 2010 to be prepared in accordance with IFRS

Opening IFRS balance sheet* Date of transition to IFRS

Reporting date

1/1/2011

12/31/2011

12/31/2012

IFRS Comparatives

1st IFRS Financial Statements

* For a December year-end, adopting IFRS in 2012 with one year comparative

Financial reporting

Where IFRS fits in?

Financial Markets

Information flow IFRS Financial Statements

Economic decision, Stewardship and accountability

Corporations

Financial position Financial performance Useful to users in making economic decisions to buy, hold or sell OR

Investors
Capital gain

Dividend

Investing Decision (Real)

Provide Return

Dividend Decision

Objectives of Financial Reporting

Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Directed towards users who provide resources to the entity but lack the ability to compel the entity to provide them with information

A Hierarchy of Accounting Qualities

Users of Accounting Information

Decision Makers and their Characteristics (For Example understanding or prior knowledge)
Benefit > Cost

Pervasive Constraints
User-specific qualities

Understandability
Decision Usefulness

Primary Decisionspecified Qualities

Relevance

Reliability

Timeliness Ingredients of Primary Qualities

Predictive Value

Verifiability

Representational Faithfulness

Feedback Value Comparability (Including Consistency) Materiality Neutrality

Secondary & Interactive Qualities Threshold for Recognition

IFRS Conversion Risks

Recognition/interpretation risk
Principles Vs practice

Measurement risk
Management judgements and estimates

Presentation risk
Offsetting, aggregating, headings, total subtotal

Market information risk

Market data as input into financial model

Users perception risks

Knowledge gap, expectation gap
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Interpretation/Recognition risks
G A A Principles Vs G A A Practice IFRSs are principle based standards
A principle is a general statement, with widespread support, which is intended to support truth and fairness and acts as a guide to action.

Practitioners of IFRS are required to interpret the principles Often the same principle in IFRS is practiced differently by practitioners due to:
Knowledge Experience Countries - Legislation - Culture - Language
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Measurement risks
Management estimation Expected value Probability Present value Fair value Complex mathematical model Actuarial valuation

19

Presentation risks
Presenting income or expense in: profit or loss other comprehensive income Offsetting of: income and expense assets and liabilities Aggregating and de-aggregating Selective use of: headings, total, and subtotal

20

Market information risks

Availability of market data Dependent on counter party (banks) Dependent on valuers Credit rating agencies Financial data providers Active and inactive market Which market? (if two markets exist) Central bank

21

Users perception risks

IFRS financial statements only for Knowledgeable users (Framework) Do they understand how value derived? What you see is what you get? Owner manage users

22

Principle Based IFRS Inherent risk in using IFRS

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Principle Based Standards

Principles-based accounting standards are based on a conceptual framework, consist of a clear hierarchy of overriding principles and contain no bright-line or anti-abuse provisions. Such an approach requires the use of judgement by preparers, auditors and regulators. The key to true and fair financial reporting is the balanced exercise of judgement.

Risks arising from practicing IFRS

GAAPrinciple Written in black and white Some country has enforcement of statute Issued by Standard setter such as IASB / ICASL Any change to the principle will have to go through due process such as Exposure Draft
GAAPractice
Not written in black & white No bright line Evolve through practices by business community and accountancy profession Can change over time without notice The GAAPractice is the result of interpreting GAAPrinciple GAAPractice may not always be right But it often has strong influence Often dictated by Big 4

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How preparers would practice the following:

Near-term Insignificant less likely
Probable More likely than not

Short term
More than insignificant

Long-term Significant

Likely

More likely
Possible More likely that no

Indefinite useful life Most Useful life Transfer

Finite useful life More Economic life

Classification
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How preparers would practice the following:

Faithful Expected Intent Extent Effectively Condition Indicative Simultaneous AndOr Best Pro-long use judgement Consider Often Frequent Usually Generally Sometimes Say More often than not SubstantialS ubstantively Significant Materiality Major

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INTERNAL CONTROLS
Estimates Judgments
Accounting Choices
Projections

Accounting Standards
Recognition, Measurement pressentation and disclosure

Econo mic Activity / Transaction

Capture the transaction source documents

Record the transactions prime entry books

General ledger

Financial statements

Laws and Regulations Companies Act, Finance Co Act. Accounting & Auditing Standards Act, Inland Revenue Act, CBSL Regulations, Corporate Governance etc

INTERNAL CONTROLS
Audit Committees: Evaluating the Quality of Financial Information

Financial Reporting Process

To effectively evaluate the quality of financial reporting, the CEO should understand the financial reporting process.

Management financial reporting and internal control

Internal audit assess internal control Design & Application

Independent audit attest to fairness of financial statements Audit Committee oversight of the process and participants

Audit Committees: Evaluating the Quality of Financial Information

Financial Reporting Process

Oversight & Review Monitoring Ownership Risk Function

Board of Directors Audit Committee Regulatory Authorities

External Auditor

CEO

Sales & Marketing

Human Resources Treasure & Cash Management

Financial Reporting Function

CFO

Internal Audit
Risk Management

Purchases & Inventory

COO CIO

IT

Tax

Risk Function

Business Units

Acquisitions & disposals

Processes
Audit Committees: Evaluating the Quality of Financial Information

IFRS Will Have Wide-Ranging Business Impacts

Not just Finance Front Office, research, credit Non-executives Access to knowledge and tools Policies and procedures Finance function efficiency Finance and Operations transformation Impact of accounting on taxation considered irrelevant by IASB Impact on tax strategies Data collection Structured products Inland Revenue Fair value Debt vs. equity Review of hedging strategies Hedging documentation Day One profit recognition Observability of market prices Embedded derivatives Reserving policies SPEs

Covenant renegotiation Valuation of earn outs Demand for valuations Impact of consolidation of SPEs Clients appetite for existing structured financial products Viability of transactions due to treatment on own balance sheet Ability to assess client suitability and credit

Control environment Training and knowledge Business and franchise

Tax planning
Financial instruments Oversight and project management Investor relations

Fragmented processes/systems resulting from IFRS tactical solutions Data capture Hedging Loan provisions Segmental reporting Financial Statements presentation

Processes and Systems

Management information

Business Impact of IFRS

Employee benefits

Complex project management Audit Committee involvement Non-executive understanding and oversight Resources and budgets

Key performance indicators Management reporting Underlying infrastructure Reconciliation to reported results IFRS alignment

Share based payments Pension arrangements and funding Retirement benefit costs Alignment of remuneration and bonuses

Early education Underlying business performance Volatility of earnings and equity Hedging strategies Re-benchmarking relative to global peer group

Dispelling the myths .

Adopting SLAS will be like any other accounting project. Simple as DIY The accounting department needs to establish how to apply the rules and communicate that We should not include senior management too muchit is enough for them to know the basic regulations Our systems are flexible enough making changes for a new accounting standard will be manageable. We have good Book Keeping guys

New SLAS cannot be that different from what we are doing now

I can not understand the rush We have until the end of 31. March XX

The Way Forward

NOT Just a Technical Accounting Exercise

Performance reporting

Executive compensation

Employee long-term incentive plans

Share based payments

Key performance indicators and investor relations

Financial accounting and reporting

Fixed assets Leases Intangibles Impairment Forex

IFRS business impact

Tax planning and structured products

Systems, policies, procedures, and controls
Pensions Financial instruments Share-based payments Impairment

SPEs Debt/equity classification and split accounting

Treasury management
Hedge accounting

Valuation models

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Thank You