14 March 2007

Ghana: Country Adopts International Financial Reporting Standards (IFRS) - Some Thoughts


Manchester — Last January saw the launch of International Financial Reporting Standards (IFRS), the standards and concepts on which preparation and reporting of financial information is based. IFRS is significant for the fact that it marked the harmonisation of accounting standards of various countries who sign up to it and gives a common template for financial reporting, in other words it give a common language across international boundaries. IFRS will replace the Ghana National Accounting Standards (GNAS), the accounting standards upon which financial reporting has been based since 1993 and the rules on which accounting has been taught. The launch by the finance minister Mr Kwadwo Baah-Wiredu is of great significance, as a chartered accountant himself, he knows well the importance of accounting standards.

Coming just 2 year after the end of the transition period in Britain and at a time of marking 50 years of nationhood it is worth ticking as one of the milestones we have achieved as a nation (early days though). The successful transition to IFRS will add us to the global elites in financial reporting. It will also help puncture a swollen notion by some people that it might take forever for the so called third world countries to take on IFRS.

History of International Accounting Standards/International Financial Reporting Standards The International Accounting standard Committee (IASC) was established in 1973 to formulate International Accounting Standards (IASs). The IASC grew in authority during the 1970s and 1980s, but two recent events have been specially important:

* The International Organisation of Securities Commissions (IOSCO) endorsement of International Standards. Until sometime the US had not shown any interest in International Accounting Standards, actually the US Securities and Exchange (SEC) and the US Financial Accounting Standards Boards (FASB) have been consistently critical of the International Accounting Standards Board's output and always maintained that it believed US Generally Accepted Accounting Practice (GAAP) were far more rigorous, until the tumble of corporate America. The fall of American corporate giants such as Enron, Xerox, Tyco, WorldCom to mention a few was directly or to a greater proportion due to the financial reporting regime or the reporting standards on which accounting was based. Since then America has taken a legislative approach to financial reporting and corporate governance with the introduction of the Sarbane-Oxley(sabox) Act. It also broke the defences and excuses of adopting other accounting standards and sobered them into supporting IASs.

* The EU requirement for all listed European companies to prepare their consolidated accounts in accordance with International standards

International Harmonisation International harmonisation is the use of common formats for published accounts with a common conceptual framework. This project has been on the table for a long time. But this agenda had always been hampered by numerous barriers to harmonisation. The most prominent are language, different purposes of financial reporting, different user groups, different legal systems, lack of strong accountancy bodies and cultural differences and. The last of the above list is worth flagging and commenting on.

A cultural difference is a huge barrier to harmonisation. Culture pervades into every aspect of a peoples' way of live including how business is done and how financial information is reported. In most Islamic countries the concept of interest charging is illegal and inconsistent with accepted practice. What is acceptable is a range of sharia-compliant financial solution, the 'Amanah' banking products are examples of this. In situations like these it would be difficult to apply a universal accounting standard.

Benefits of International Harmonisation The initiators of harmonisation in financial reporting standards had always sung loud the benefits it will bring. Such benefits are what Ghana stands to gain with the successful implementation of IFRS. Firstly, it will boost the confidence that foreign investors will have in our financial reporting. IFRS enable financial information to be compared anywhere in the world. Investors need to compare results of different companies internationally, particularly with the growth of global investing and emerging markets.

Of greater benefit will be an easy or if you like a better access to foreign funds. The adoption of IFRS will enable Ghanaian companies to easily list on most stock exchanges to raise more long-term capital without being hindered by the stringent reporting requirements of most stock exchanges. Further more, there will be easier consolidation of foreign subsidiaries and associates. Until now one of the pain of foreign companies with subsidiary in Ghana or Ghanaian companies with subsidiary abroad (not many though) is the translation of the subsidiary's financial results from Ghana, prepared under GNAS into the requirement of the parent company using the financial reporting standards of the country of the parent company for consolidation purposes. IFRS makes this a problem of the past.

Practical application issues The GNAS has been the reporting standard for all companies, big and small for some time. The proposals so far coming out from the Institute of Chartered Accountants (ICA), the implementing agency suggest that all companies; big and listed companies, State-Owned Enterprises (SOEs), Ministries, Departments and Agencies and even Small and Medium Scale Enterprises (SMEs) are all put under the transitional arrangement, though I should say they come under different transitional regime; with listed companies, government business enterprises, Banks, Insurance companies, security brokers, pension funds and public utilities expected to use the IFRS in meeting reporting deadline of 31 December 2007 and all other entities including SMEs given two years to 2009.

I am not sure whether roping everyone (including SMEs) in to adopt IFRS is a good idea. Why can't we have a two-tier system where listed companies and for that much all other entities except SMEs adopt IFRS and SMEs are allowed to continue with GNAS or adopt IFRS by their own volition. This seems to have been the approach of most of the countries adopting IFRS. Experts believe that IFRS suited bigger companies but international demand has led the IASB to develop SME IFRS, which it's currently designing.

According to the Financial Management, the magazine for Chartered Institute of Management Accountants (CIMA), some UK accountants claim that IFRS aren't based on sound principles, that they tend to become rules-based rather than principles-based or that they are too complex. Standards based on unsound principles might well be forces into a rules-based approach to cover this weakness - and the resulting rules are likely to become complex if the problem is complex.

Perhaps the long-running problems with IAS 32 and IAS 39 over financial instruments are an illustration of this. As a result, critics argue that IFRS may be too complicated for SMEs and most non-listed companies.

On the other hand, these issues are not to discourage this brilliant initiative, I am all for IFRS. Countries such as Estonia are applying IFRS to all entities, so it's difficult to see why Ghanaian firms can't accept the same conditions.

Transition Following on from various briefings since the launch of IFRS on January 23 it's clear that there is no transitional period for most companies; listed companies, government business enterprises, Banks, Insurance companies, security brokers, pension funds and investment banks and public utilities are to have immediate use of IFRS with reporting deadline of December 2007 whilst all other companies have up to 2009.

This might not be a practical arrangement; even the first category of companies, mostly blue-chip companies with enough resources to adopt IFRS will need about two year period of transition. The coming weeks and months will see stakeholder consultation by ICA and other players such as the State Enterprises Commission on the modalities of migrating from the current system to the new system. This will take us close to the end of the year. Companies will need the following year to adjust systems and actually get t ready. Companies will need to translate their accounts prepared under GNAS of the year prior to the year they go live with IFRS using IFRS standards to enable them get opening balances for the year they are actually using the new standards. That is why it seems impractical that come 31 December 2007 companies will be reporting with IFRS. Ghana runs January - December accounting year which means that most companies have ran January 2007 accounts already with GNAS.

Recommendations Firstly, I recommend that Ghana Stock Exchange (GSE) makes reporting with IFRS part of its listing regulations on a 'comply or explain' basis. IFRS. The concept of comply or explain means that listed companies will have to comply with all provision of IFRS in their financial reporting but will have to explain if they found it prudent to differ in any occasion.

I suggest ICA take a second look at the time to migrate to the new system. I recon a 2009 start for the first set of firms I talked about earlier and a 2010 for all others. This would give managements of companies enough time to get prepared for the new process. Retraining of finance staff to have adequate capacity for the new system is a must for most companies.

Thirdly, as I touched on earlier, a two-tier reporting standards system will be appropriate. All entities except SMEs adopt IFRS whilst the option to adopt it or not be left open to SMEs.

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