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Synthesis - IFRS
Synthesis - IFRS
Submitted by:
Rose Jean A. Pernito
Submitted to:
Ms. Dynnith F. Suaberon, CPA, MBM
Instructor
May 2015
TABLE OF CONTENTS
I.
B. Overview of IFRS
C. Methodology....7
II.
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18
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III.
IV.
References
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This study intends to find out the different issues and challenges faced by
different countries that decided to adopt IFRS and how they overcome it. It focuses
only to the developing counties identified by Bloomberg (A major global provider of
24-hour financial news and information including real-time and historic price data,
financials data, trading news and analyst coverage, as well as general news and
sports.) seven cases, seven different studies from seven different countries, namely,
India, Brazil, South Africa, Pakistan and Turkey.
their accounting policies and practices. Despite the difficult process Anderson (1993)
said a set of international accounting standards will allow new horizons of evolution
due to the fact that comparative analysis of the rates of returns established based on
the balance sheets and profit and loss account between the companies being in
competition become relevant.
The comparison, as the basic form of economical judgment can be
realized only if the accounting system is unique for all the companies involved in the
analysis. Also harmonization is absolutely necessary because national standards of
financial statements are virtually useless; financial markets in more regulated
countries are threatened with a loss of market share; and multinational corporations
must prepare multiple reports for different nations they do business in (Nobes and
Parker, 1991). In order to accomplish this target the accounting profession
developed the solutions like getting a single set of international accounting
standards such as IFRS because it rapidly gaining acceptance as over 100 countries
have recently moved to IFRS reporting and even the U.S. Securities and Exchange
Commission (SEC) is considering allowing U.S. firms to prepare their financial
statements in accordance with IFRS.
C. Methodology
The study has been conducted mainly on the basis internet source,
literature survey and secondary information. Various journals and research papers,
diagnostic study reports and articles have been surveyed in making this study. Few
qualified accountants have been consulted with in order to have their thoughts on
the problems and solutions in this regards.
The main practical challenges that arise in implementing IFRS have been
identified through the country case studies. It is important to note that although for
the purpose of the country case studies efforts have been made to select countries
in a manner that allows for coverage of diverse regions, economic systems and
approaches to IFRS implementation, the case studies contained in this paper do not
necessarily represent the whole range of issues in this area. An in-depth and
detailed analysis of these issues could be a subject of further research and
discussion especially it is not a monetary-based paper.
In 2007, India has decided to converge with IFRS. ICAI started the
process of developing a complete set of accounting standard that are converged
with IFRS - which will be known as Indian AS.
ICAI noted these concerns: (1) IFRS is more principle-based than Indian
GAAP. More choice under IFRS will mean the increased need to use professional
judgment that will require a fundamental change in mindset for Indian accountants;
(2) Initial transition will be a challenge given differing recognition and measurement
criteria for assets and liabilities; (3) Specific accounting areas that will be more
complex included business combinations and financial instruments. Many of the
problems associated with them arise from the greater use of fair value accounting
under IFRS.
Yet, Indian Accounting Standards are based on IFRS but have some
carve-outs. Nevertheless, Indian officials have indicated that they plan to move to full
IFRS eventually. In a recent speech, the IASB pointed out, Indian Minister of
Finance Arun Jaitley said there is an urgent need to converge the current Indian
accounting standards with IFRS to achieve a prosperous trade over country borders.
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Leasehold
With regard to leaseback operations, IFRS stipulates different approaches
depending on the circumstances of the transaction. If the transaction results in a
finance lease, any profit should be deferred and amortized over the lease term. If it
results in an operating lease, the profit or loss should be recognized immediately. In
Brazil, profit obtained by the lessee on the sale of the leased asset must be
recognized at the time of the transaction. Tax regulations prohibit deferral of such
profit.
Government grants
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Business combinations
In Brazil, there is no legal obligation to assess the fair value of assets and
liabilities when a business combination takes place. It is usually done for
management purposes, to determine the value of the asset which is being
restructured. By contrast, this is mandatory in IFRS.
Moreover, with respect to business combinations in Brazil, the legal form
is more important than the essence of the transaction. IFRS principally require an
assessment of the essence of the deal and consider practically all business
combination transactions as acquisitions, unless it is impossible to identify the buyer.
Investments in associates
In order to apply the equity method to investments in associated
companies, Brazilian accounting standards require ownership of 20 percent or more
of the associated companys capital. IFRS stipulate that if an investor, directly or
indirectly, holds 20 percent or more of the voting power of the investee, it is
presumed that the investor has significant influence and the equity method must be
used.
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Gone are the days when Brazil seemed destined to always remain the
country of the future, said Hans Hoogervorst. Speaking at the recent IFRS
conference in Sao Paulo he continued, For Brazil, the future is now. And IFRS,
have been a significant factor in this change. Brazil has enthusiastically embraced
IFRS and has reaped the benefits.
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Another important thing is the Brazilian legal culture has heavily influenced
on the countrys system of accounting is its new Corporate Act, contained in bill No.
3741/2000 and on which consultations have been conducted in the congress for
over five years, proposes substantive changes in the formal structure used for
developing the countrys accounting standards. The law is expected to abandon the
current scope of prescriptive accounting rules and will instead take on an authorizing
role.
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diversity in practice that cannot be resolved through the above structures such as
operating leases and black economic empowerment (BEE) transactions are
channeled to the Accounting Practices Committee that have been referred to IFRIC.
In respect of South African dividends tax, a dual tax system for companies
was introduced by the South African Income Tax Act 1993, comprising a normal tax
levied on taxable income and a Secondary Tax on Companies (STC). STC is a tax
levied on dividends declared by South African companies and is based on the
amount by which a declared dividend exceeds dividends previously received. Since
this is a South African-specific issue, the APB issued South African GAAP Standard
AC 501 (secondary tax on companies) to clarify the accounting treatment of STC on
the basis of the principles of IAS 12 on income taxes.
A black economic empowerment (BEE) is a formal process followed in
South Africa to uplift black South Africans. The accounting issue in South Africa
deals with the situation where entities issue equity instruments to black South
Africans or entities controlled by black South Africans at a discount to fair value to
achieve targets for the empowerment of black people. In terms of guidance in IFRIC
8 on scope of IFRS 2 it is clear that IFRS 2 on share-based payment applies to such
BEE transactions where the fair value of cash and other assets received from BEE
partners is less than the fair value of equity instruments granted to the BEE partner.
APB issued AC 503 (accounting for BEE) transactions to clarify whether a
BEE equity credential should be recognized as an intangible asset or as an
expense. The conclusion reached is that BEE equity credentials should be
expensed, except where the cost of the BEE equity credentials is directly attributable
to the acquisition of another intangible asset. The main reason for expensing the
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However, the Central Bank of Nigeria (CBN) had directed all banks to
comply with IFRS in 2010. The legislation (Financial Reporting Council of Nigeria
Act, 2011) is to create an enabling environment for the implementation of IFRS and
to guarantee credible financial reporting regime in both private and public sector
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Adopting to IFRS has a huge cost outlay which include the cost of training
personnel to understand the new global standards, cost of acquiring new accounting
packages that are needed for the implementation, cost of discarding former
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accounting packages that are not compatible with IFRS. In this case, it includes the
cost of starting new invention (IFRS) and abandonment of the former (SASs).
IFRS is less prescriptive than SAS. For instance, SAS 10- Accounting by
Banks. Some standards in IFRS differ considerably from the local GAAP which
constitute another challenge that is being faced in the process of converging to IFRS
by Nigerian banks. IFRS demands more disclosure requirements than SAS and also
differ in application and interpretation. Implementation of IFRS has increased the
need within the organization to gather analyze and report more data for compliance.
However, owing to the fact that IFRS being a principle based standards,
allows companies to utilize only the methods they wish, thus allowing the financial
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Pakistan has adopted most but not all International Financial Reporting
Standards (IFRSs) for mandatory application by listed companies, banks and other
financial institutions and Economically Significant Entities (ESE), even when these
are not listed. The major issues that Pakistan faced during the adoption of IGFS is
the differences between accounting system since there are accounting policy that
permitted by IFRS that Pakistan has not yet adopted and modified. IFRS are usually
adopted as issued by the International Accounting Standards Board (IASB) and
generally include any further revisions thereof.
However, some differences are worth noting: (1) Pakistan has not adopted
IFRS 1 First-time Adoption of International Financial Reporting Standards; (2) IAS 39
Financial Instruments: Recognition and Measurement; (3) IAS 40 Investment
Property; (4) IFRS 7 Financial Instruments: Disclosures have not been adopted for
banks and other financial institutions regulated by the State Bank of Pakistan (SBP).
SBP has prescribed its own criteria for recognition and measurement of financial
instruments for such financial entities. Those standards do apply to other companies
not regulated by the SBP.
Pakistan has not also adopted (5) IFRIC 4 Determining whether an
Arrangement contains a Lease; (6) IFRIC 12 Service Concession Arrangements. (7)
Power sector companies have been exempted from the requirements of IAS 21 The
Effects of Changes in Foreign Exchange Rates to the extent of capitalization of a
foreign exchange loss.
Since the regulators of the corporate and financial sectors and ICAP that
represent the accounting profession of Pakistan are of the firm view that financial
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All types of leases are accounted for as operating leases according to CMB
rules.
Disclosure issues
According to the CMB rules the applicability of related parties is limited to
shareholders, subsidiary and equity investments whereas related parties are more
broadly defined in IFRS.
rules.
Statement of changes in shareholders equity is not required by the CMB rules.
CMB rules on format of the statement of cash flows do not require a breakdown
of cash flows by type of activity.
transparency and comparability. These users will find themselves at ease while
making investment decisions with the help of comparable and consistent financial
data.
One of the urgent issues in Turkey is to solve the multi-institutional
structure of the accounting environment. There should be one accounting standardsetting body for all entities. A related issue is the enforcement of Turkish accounting
standards. Until the draft commercial code is enacted, the Turkish Accounting
Standards Board does not have any power to enforce the adoption of Turkish
accounting standards by all companies.
This study also recommends that significant amounts of training and
education for financial statement preparers and small and local auditing companies
are needed. A lesson learned from the initial implementation is the insufficient
understanding of accounting standards. Generally, accounting standards do not
address the full details of application that requires judgment from the management
of entities. Turkish accounting standards involve a great deal of management
judgment. As significant judgment is exercised in applying the accounting standards,
incomplete comprehension of standards would lead to lower-quality financial
information.
Since Turkey is a code law country, laws need to be changed in order to
enforce an accounting standard. The Turkish experience regarding the process of
enacting the new commercial code is an excellent example. Well-known lawyers and
accountants from the country have been working on the draft code for more than six
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years. Therefore, countries that intend to implement IFRS should have their
transition plans ready well ahead of launching IFRS.
G. A study about Malaysia
Malaysian Accounting Standard Boards (MASB) chairman, Dato' Zainal
Abidin Putih, announced that Malaysia will be converging with IABs International
Financial Reporting Standard (IFRS). In order to educate, train and inform all the
relevant stakeholders in tandem with fast approaching deadline to converge, which
is for the earliest year-end financial reporting date, December 31, 2012 many
initiatives were lined up by MASB and the Malaysian Institute of Accountants (MIA).
MASB issued the third accounting framework to be applied in Malaysia
and this new accounting framework is the IFRS dubbed as Malaysian Financial
Reporting Standards Framework (MFRS). The issuance of MRFS is vital to show
and prove the Malaysian commitment and also it becomes a solid guideline for all
entities that are administered by Securities Commission of Malaysia.
Mohammad Faiz Azmi stated in forums that the Malaysian story of
convergence has been a slow and steady approach and even though its slower it
is expected to put Malaysian entities in a better position as the problems and
challenges faced by Malaysian companies are far much reduced compared to other
countries that adopted the big bang approach for instance, in South Korea where
the accounting standard setters and regulators agreed on full adoption of IFRS
(Nazatul Izma, 2009; Suh, 2011).
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The challenge for full adoption of IFRS in Malaysia is that under MFRS 1,
if the cost of complying with MFRS exceeds the benefits to the users of financial
statements, IASB would grant exemptions. Therefore, this would create a bias
system amongst non-private entities in Malaysia that are supposed to apply MFRS
as the criterion for full-adoption.
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Mohammad Faiz Azmi indicated that Malaysia will not require the IFRS for
SMEs to avoid an under converged version used by SMEs due to the lack of
human resources to implement new IFRS based regulations. Therefore MASB is still
uncertain about how exactly they should deal with the issue related to SME and
IFRS.
MFRS uses fair value accounting and this valuation method has an effect
on the tax liability of an entity and how fair value will change the amount of tax
deductible expenses and the taxable amount will not only affect the tax paid by the
entity but also the tax collected by the Inland Revenue Board (IRB). Besides the tax
regulatory issues, Securities Commission Malaysias requirement will also affect the
distributable profits for dividend payment and also the amount of realized and
unrealized profits and these computations complication on tax might not be in line
with the requirements of regulatory bodies.
However, this issue must be solved and consistent with the new financial
reporting system. Then, Mohammad Faiz Azmi mentioned that MASB is working with
enforcers to amend the Financial Reporting Act (1997). This study assumes will be
useful to allow in making amendments to accounting standards in Malaysia if there
are any substantial issues that MASB disagrees with IASB.
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The researcher points out certain key areas that require close attention
while dealing with conversion to IFRS. It has to be realized that this conversion is not
just the any technical exercise. Even after the later gets introduced, the preparers,
users and auditors will continue to encounter practical implementation challenges.
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The
rapid
development
of
global
financial
markets
demands
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IV. REFERENCES
Nyor, T. (2012, June 2). Challenges of Converging to IFRS in Nigeria. International
Journal of Business & Information Technology, 2, 26 31
Hanefah, H. and Singh, J. (2012). Convergence Towards IFRS in Malaysia: Issues,
Challenges and Opportunities. International Journal of Business, Economics and
Law, 1, 43-47
FINANCIAL
REPORTING
STANDARDS.
United
Nations
http://articles.economictimes.indiatimes.com/2014-03-11/news/48118262_1_ifrs
iasb-revenue-recognition-standard
http://www.iasplus.com/en/jurisdictions/asia/pakistan
http://www.bloomerg.com
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