A new set of financial reporting rules

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financial, reporting, middle east, gcc 

Among the new rules, Revenue Recognition Standard (IFRS 15) establishes a framework for determining when revenue should be recognized and how it should be measured. The other one, IFRS 9, is addressing the accounting for financial instruments and contains classification and measurement of financial instruments, impairment of financial assets and hedge accounting. It will replace IAS 39, when it becomes effective in 2018.

“Imagine two companies with identical activities in different parts of the world – one showing a profit and the other a loss, due to different accounting policies set by the different standard setters. This is exactly the challenge we are facing today with regard to financial reporting. Financial Reporting is undergoing major changes throughout the world in order to try to overcome the above limitation”, said Mr. Bahemia.

 

Trasparency – a response to financial crisis

According to Mr. Bahemia, at the global level, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), which are the two biggest international bodies regulating the financial reporting realm, have been working together to achieve convergence of IFRS and US generally accepted accounting principles (GAAP). A common set of high quality global standards remains a priority of both the IASB and the FASB.

“International Financial Reporting Standards are a set of accounting standards developed by the IASB that is becoming the global standard in the preparation of public company financial statements”, said Mr. Bahemia. He highlited Integrated Reporting (IR) as another recent topic that promises to shape the future of financial reporting. “IR is a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term”, explains Mr. Bahemia

“The main focus of the IASB after the financial crisis has been to improve the quality of financial statements through more transparent financial reporting. The financial crisis has showed us that there was – and in some cases, that there still is – little visibility on the risks that companies are exposed to. Transparency is one of the main and most important principles guiding regulators in their response to the financial crisis. Though there is a clear need for better regulation, I think we should not create the impression that we can legislate for every possible scenario. The IASB cannot develop IFRS capable of capturing all the necessary disclosures for all companies around the world. Companies and auditors need to apply judgment on the basis of principle-based standards such as the IFRSs to provide investors with high-quality financial information that are clear and empower them in the decision-making process”, said Mr. Bahemia.

 

Saudi Arabia an exception

Talking about GCC region, Mr. Bahemia explained that all the GCC countries except Saudi Arabia, have fully adopted the International Financial Reporting Standards. “Financial reporting in Saudi Arabia is governed by ‘The Saudi Organization for Certified Public Accountants (SOCPA)’.

In 2012-3, SOCPA approved an IFRS convergence plan. Currently, all banks and insurance companies listed on the Saudi Stock Exchange and regulated by Saudi Arabian Monetary Agency are reporting under IFRS. All other listed entities in the Kingdom of Saudi Arabia, as well as unlisted entities, must follow accounting standards generally accepted in the Kingdom of Saudi Arabia as issued by the SOCPA. Under the transition plan, listed entities will report using the “national standards that are closely converged with full IFRSs. For reporting in Saudi Arabia, IFRSs as issued by the IASB would be modified in three possible ways: adding more disclosure requirements; removing optional treatments; and amending the requirements that contradict Shariah or local law, taking in consideration level of technical and professional preparedness in the Kingdom. All listed companies in Saudi Arabia will have to fully adopt IFRS (as modified above) for accounting periods commencing on or after January 1, 2017 and non-listed companies, one year later.”

Talking about the dates of implementation of new standards, Mr. Bahemia is highlighting that the changes to IFRS in general will be applicable in the GCC region as soon as these have been published by the IASB. “However, IASB issues specific guidance at the time of the release of the Standards giving clarity about the effective dates of implementation of those specific Standards. To give an example, IFRS 15 is effective for financial periods beginning 1 January 2017 and IFRS 9 is effective for financial periods beginning 1 January 2018. However both Standards allow for early adoption opportunities”, he said.

 

Not following new rules – a severe financial reporting lapse

Explaining possible repercussions of not following the new rules, Mr. Bahemia said that the financial statements are in accordance with IFRS, all standards and interpretations issued by the IASB at the time of preparing the financial statements where applicable should be applied.  “The effect of not following the new rules would be that the audited financial statements of the entities concerned would not be in accordance with IFRS. From an audit perspective this could result in either a qualified opinion or even a disclaimer in some cases depending on the materiality of the item in question. A qualified opinion or disclaimer is viewed as a severe financial reporting lapse on the part of the reporting entity’s management. Financial analysts, regulators, creditors such as banks, and the general public are likely to question the credibility of management and raise questions on the entity’s corporate governance practices. In the long term, this may also likely to affect the share price of the entity”, warns Mr. Bahemia.

 

Not a straight forward exercise

financial, reporting, middle east, gcc
Muhammad Bahemia, a Deloitte & Touche ME partner, Qatar

Implementation of the new rules brings benefits, sad Mr. Bahemia, and the key arguments for IFRS adoption worldwide is globalization. “The globalization of business and finance has led to the successful mass adoption of IFRS in over a hundred countries. The US is the largest of the few remaining hold-outs”, underlines Mr. Bahemia, adding comparability, cost efficiencies and improved corporate governance to the list of benefits. The companies that report on IFRS compliant financial statements can easily compare their performance and financial position with other reporters that have adopted IFRS. “A common reporting language across borders also helps many other stakeholders including independent financial analysts, rating agencies, research community and regulators to analyze and predict market and industry trends”.

As for the cost efficiency, he explained that a number of forward-looking global conglomerates are already preparing for conversion or reporting under IFRS, as this provides them with substantial savings and cost efficiency across the Group. Groups of companies operating in different jurisdictions would benefit from having to prepare financials under national accounting policies for each entity and reconcile the same to IFRS for group reporting. And for improved corporate governance, Mr. Bahemia said that complying with full IFRS strengthens corporate governance within the capital markets.

“Adopting IFRS or revised standards is not a straight forward exercise. It is a process that should be planned carefully as it normally involves restating prior years. Three years is the most frequently cited as the necessary lead time to adopt any new Standard. Typically, this is due to the fact that all the new Standards being released by the IASB are very comprehensive updates to the financial reporting landscape within the areas of application, thereby requiring a large scale multi-disciplinary effort from reporting entities.

Some of the key implementation challenges are coordinating finance, risk, IT and other teams and resource constraints affecting the financial reporting team and the availability of support from the various business departments. Basically a one-size fits all approach to implementing IFRS Standards does not work, therefore reporting entities need to work a plan for their own organization depending on the size of the organization, complexity of operations, industry, etc. Other additional implementation challenges are effects of the Standard on regulatory reporting, development of IT Systems and internal management reporting practices.

For SMEs, the key implementation challenge of full IFRS is the monetary costs, lack of technical expertise and manpower effort required in large scale implementation which is often too cumbersome and complex for the SMEs to manage within their limited resources. The IASB has however issued in July 2009 a set of standard for SMEs which is less complex yet built on an IFRS foundation. The purpose of the standard is to simplify the implementation for small and medium companies”, concluded Mr. Bahemia.

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