IFRS Adoption in Nigeria & Optimizing the Gains of Global Investment Climate

Akintola Williams DeloitteDecember 2012

Presented by

Uwadiae Oduware

IFRS is an International Financial Reporting Standard issued by the International Accounting Standards Board (IASB), an independent organisation registered in the United States of America (USA) but based in London, United Kingdom. They pronounce financial reporting standards that ideally would apply equally to financial reporting by public interest entities worldwide.

Between 1973 and 2000, international standards were issued by the IASB's predecessor organisation, the International Accounting Standards Committee (IASC), a body established in 1973 by the professional accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom and Ireland, and the U.S. During that period, the IASC's pronouncements were described as International Accounting Standards (IAS). Since April 2001, this rule-making function has been taken over by a newly constituted IASB.

The IASB describes its pronouncements under the label "International Financial Reporting Standards", though it continues to recognise (accept as legitimate and adopted by them) the IAS issued by the defunct IASC.

The adoption of IFRS in over 120 countries is an issue of global relevance among various countries of the world

due to quest for uniformity, reliability and comparability of financial statements of companies. Nigeria has joined the League of Nations reporting IFRS and is currently in her second phase of IFRS implementation with phase one drawing to a close on 31 December 2012 when all listed and significant public entities are expected to produce first IFRS financial statements. No doubt, the world economy is wearing a distress look following the global economic crises which led to the collapse of many viable institutions in some countries with its attendant alarming rate of unemployment. “The financial crisis has shown how difficult it is to retain investor confidence when investors are uncertain about the information available to them. By providing reliable and internationally comparable financial information, IFRSs are a very important fundamental of our market economy. I believe that the bedrock of support for our work is an understanding of this public interest of IFRSs”. -Hans hoogeRvorst, Chairman IASB.

With the adoption of IFRS in Nigeria, a lot stands to be gained from the seemingly distressed global economy. With successful implementation of IFRS, Nigeria will benefit economically by receiving a boost on foreign direct investments (FDIs).

Introduction

The IASB describes its pronouncements under the label "International Financial Reporting Standards", though it continues to recognise (accept as legitimate and adopted by them) the IAS issued by the defunct IASC.

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A boost on foreign direct investments (FDIs)

Accounting is generally known as the “language of business” since it assumes the medium in which the performance and position of corporate entities are communicated to the outside world. With the adoption of IFRS, the language of business is now one that is generally known and understood by most international investors. Accounting provides information by translating events into financial statements under certain rules which define the way in which firms transactions are disclosed and reported, and these are enclosed in IFRS. Information is needed by investors to make informed investment decisions. Accounting information becomes meaningless, difficult to interpret and costly to obtain where the financial statements are prepared on the basis of different national accounting standards or framework and this hinders foreign investments. With IFRS, there has been improvement in transparency and comparability of financial information in different countries. As a result this empirical evidences, investors' confidence will be enhanced and will result in high flow of foreign direct investments into Nigeria.

The growing adoption of IFRS across Africa region has been one of the reasons for the growth in FDI into the region. The United Nations Conference on Trade and Development (UNCTAD) in 23 October, 2012 edition of its publication ' Global Investment Trends', noted a global decline in global FDI inflows for the first quarter of 2012. Within this global drop, Africa reported a growth of 5%.

Within the African region, South Africa suffered a significant fall in FDI inflows due to slower economic growth. North Africa led the way – particularly Egypt as FDI flows to the region increased by three-quarters.

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The Federal Government formally announced its adoption and launched the roadmap for its implementation on 2nd September 2010. The approval is seen as a milestone for Nigeria as it becomes a member state among those countries that have adopted IFRS.

The roadmap for implementation, which is in three phases, mandates listed and significant public interest entities to prepare their financial statements using applicable IFRSs by December 31, 2012 while other public interest entities are under obligation to adopt IFRS for statutory purposes by December 31, 2013. Third phase however, requires Small and Medium Enterprises (SMEs) to compulsorily adopt IFRS as statutory reporting by December 31, 2014. However, micro-entities that do not meet the IFRS for SME's criteria, has been required by FRC to report using the Small and Medium-Sized Entities Guidelines on Accounting (SMEGA) Level 3 issued by the United Nations Conference on Trade and Development (UNCTAD).

At a seminar organised by the Nigerian Accounting Standards Board (now transformed into FRC), the former Minister of Trade and Commerce Martins-Kuye noted that the decision by government to adopt the global standards was due to its immense benefits, adding that apart from assurance of useful and meaningful decision on investment portfolio in the country, there would also be attraction of Foreign Direct Investment (FDI).

He noted that convergence would also create easier access to external capital; reduction in the cost of doing business across borders by eliminating the need for supplementary information from Nigerian companies; easier regulation of financial information in the country, and also enhance knowledge of global financial reporting standards by tertiary institutions, amongst others.

Response by other regulators

?? In 2010, the Central Bank of Nigeria (CBN), in a bid to integrate the banking system into the global best practices in financial reporting and disclosure, commenced partial adoption of the International Financial Reporting Standards (IFRS) in the Nigerian banking system. The move, according to the CBN, was to enhance market discipline and reduce uncertainties which limit the risk of unwarranted contagion.

? The National Insurance Commission (NAICOM) set up a sub-group in 2011 to design a uniform approach to implementation of IFRS in the insurance sector.

? The Federal Inland Revenue Service (FIRS) last week issued a draft information circular No 2012/ date October, 2012 on the Tax Implication of the Adoption of the International Financial Reporting Standards.

? To achieve full adoption of the IFRS in Nigerian financial industry, the Nigeria Accounting Standard Board (now FRC) inaugurated a Roadmap Committee of Stakeholders on its adoption. Members of the Committee are Nigerian Accounting Standard Board (NASB), Federal Ministry of Finance (FMF), NDIC, SEC, NAICOM, PENCOM, Federal Inland Revenue Service (FIRS), and Institute of Chartered Accountant of Nigeria (ICAN).

Developments in Nigeria

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FG to adopt IPSAS in January 2013

The Office of Accountant-General of the Federation and the Financial Reporting Council of Nigeria sometime in May 2012, declared their resolve to collaborate in promoting the use of accounting standards in the public sector. The Accountant-General of the Federation, Mr. Jonah Otunla, at a stakeholders' workshop held in Abuja on the roadmap for the adoption of the IPSAS in Nigeria made public the intention of the Federal Government.

IPSAS are a set of high quality, independently developed accounting standards aimed at meeting the financial reporting needs of the public sector.The standards are developed by the International Public Sector Accounting Standards Board, which is an arm of the International Federation of Accountants Committee (IFAC).

Otunla at the workshop said the adoption of the standards was long overdue, as other countries of the world, including African countries like Benin Republic, Ghana and Kenya, had long adopted them.

He said when adopted, users of government's financial statements would see more transparency, accountability and integrity in the statements.The accountant-general explained that the standards would also build confidence of donor agencies, improve service delivery, enhance public-private partnership, and boost peer review mechanism of financial reports among the three tiers of governments and governments of other countries. Other benefits of the adoption are better access to financing through either bond releases or international financing from organisations such as the International Monetary Fund and the World Bank.

He said, “The IPSAS cash basis will be implemented with effect from the 2013 financial year, while IPSAS accrual

basis will come into operation in 2015”.

At the end of the implementation process, the Office of the Accountant General for the Federation hopes to deliver to the nation, a Standardised Uniform Chart of Accounts, Budget and General Purpose Financial Statements that will meet international best practices as required by IPSAS.

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The management and personnel of companies believed and continue to emphasize that IFRS is all about accounting and its implementation lies with the finance function of companies.

But at large, IFRS is just more than accounting; rather it is all about the following:

? The way and manner in which an entity conducts its business after giving consideration to its accounting and financial reporting implications.

? It has a regulatory implication which is not limited to capital adequacy for bank, and solvency margins for insurance, but it considers capital management for all entities.

? It also has a tax implication based the divergence of the tax reporting of transactions as against the financial reporting of the same transactions.

? There are implications to Human Resources Management and Accounting in terms of Employees' Benefits.

? There is equally a legal perspective to IFRS, as this will guide companies on the implication of the contents of some contracts, as they will be treated based on the overall economic substance of the transactions and not merely based on its legal content or form (e.g. Contract management).

? It equally affects the way and manner of Treasury Management vis-à-vis Risk Management of Asset-

conception of IFRS by Management and Staff of Companies in Nigeria

The IPSAS cash basis will be implemented with effect from the 2013 financial year, while IPSAS accrual basis will come into operation in 2015”.

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Liability Matching and measurement of financial instruments; and of its implication on the financial position and financial performance (i.e. bottom-line) of companies.

? There is an Information technology impact of IFRS in terms of software applications with flexibility to report IFRS-based transactions and movements, vis-a-vis the dynamics of continuous improvements and changes to IFRSs. It has impact the chart of accounts that need to be adopted by companies for IFRS Reporting.

? There is also an impact as regards processes and control of transactions within an organization.

As we approach the first reporting date for listed and significant public interest entities and it is imperative to review current status of compliance with IFRS reporting in Nigeria. Based on insights from my colleagues in the IFRS specialist group, I made a quick ranking (5 as highest and 1 as lowest) of the visible sectors in IFRS transition in terms of compliance and risk rating. My personal observation is as scheduled:

Industry Compliance Ranking

IFRS Adoption in Nigeria- Pervasive Issues

I have observed events over the past twenty four months and have identified certain issues that seem to be pervasive in about seventy percent of my sampled population:

IFRS 1 ExemptionsIn order for Nigeria Companies to successfully and smoothly transit to IFRS (by adopting IFRS), the International Accounting Standard Board (IASB) through the issue of IFRS 1 provided a guide along with other IFRSs on the practical applications of IFRS for a first-time adopter.

The basic requirement of IFRS 1 on the adoption of IFRS as at the transition date is as follows:

? Recognition of all assets and liabilities whose recognition is required by IFRSs;

? De-recognition of items as assets or liabilities if IFRSs do not permit such recognition;

? Reclassification of items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with IFRSs; and

? Application of IFRSs in measuring all recognised assets and liabilities.

The basics of the application of IFRS in the preparation and presentation of 1st IFRS financial statements is to retrospectively apply the relevant IFRSs to all transactions and balances as at the transition date.

The Regulators and Companies should be aware that IFRS 1 has provided some soft-landing to First-time adopter of IFRS on the retrospective application of IFRSs in order to pre-empt the cost of adopting IFRS to outweigh its benefits and also in situations where it

Sector Ranking Complexity/Risk

Banking 5 High

Multinationals - oil and gas 4 Medium

High (entities with derivatives)

Multinationals – other sectors 3 Medium

Insurance 2 High

Manufacturing 2 Medium

Consumer Business 2 Low

Pension Funds 2 High

Construction 2 Medium

Telecommunication and Technology

1 High

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proves impracticable to applying some IFRSs retrospectively.

IFRS 1 provides the following as an exception to retrospective application of IFRSs:

? Six (6) Mandatory Exceptions? Nineteen (19) Voluntary Exemptions

Mandatory Exceptions on retrospective application of IFRSs:

IFRS 1 requires that on the basis of the consideration by the IASB, the following items do not require retrospective application of relevant IFRSs:

? Estimates;? De-recognition of financial assets and financial

liabilities;? Hedge accounting;? Non-controlling interests;? Classification and measurement of financial assets;

and? Embedded Derivatives

Voluntary Exemptions on retrospective application of IFRSs:As an option to retrospective application of IFRSs, the following are items of which an entity can elect not to retrospectively apply relevant IFRSs.

The management of most reporting entities are reluctant to embrace change

? Business combinations;? Share-based payment transactions;? Insurance contracts;? Deemed cost;? Leases;? Employee benefits;? Cumulative translation differences;? Investments in subsidiaries, associates and jointly

controlled entities;? Assets and liabilities of subsidiaries, associates and

joint ventures;? Compound financial instruments;? Designation of previously recognised financial

instruments;? Fair value measurement of financial assets or

financial liabilities at initial recognition;? Decommissioning liabilities included in the cost of

property, plant and equipment;? Financial assets or intangible assets accounted for in

accordance with IFRIC 12 Service Concession Arrangements;

? Borrowing costs;? Transfers of assets from customers; and? Extinguishing financial liabilities with equity

instruments.? Severe hyperinflation? Joint arrangements

The management of many organisations have not considered the significance and benefits of the provision of IFRS 1 on the mandatory exceptions and voluntary exemptions of retrospective application of IFRSs for a first-time adopter.

These exceptions and exemptions posit greater benefits to companies in the restatement of balances of its assets and liabilities, including equity at a more reliable amount, such as the option to recognised property, plant and equipment, intangible assets and investments properties at fair value as at transition date, which will

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certain key requirements of IFRS. This has made providing the necessary disclosures required for IFRS reporting an arduous task.

Lack of sufficient technical expertise

Some companies accountants lack the required skill for IFRS reporting. The average accountant in most entities lacks understanding of advanced financial management techniques for instance financial instruments valuation, impairment analysis, forecasting etc. This has slowed down the reporting process.

Lack of documented risk management framework

Except for entities in the Banking sector, most entities lack a documented risk management framework that helps to identify, assess and disclose the risk exposure of the Company. This has led to haphazard information on the necessary IFRS disclosures.

Inertia for change

The management of most reporting entities are reluctant to embrace change. Reluctance to change is pervasive across entities especially those that perceive the IFRS reporting framework as costly and time consuming. This has resulted in a laid back attitude amongst staff on IFRS matters and also contributed substantially to most organizations starting the IFRS conversion process very late.

Lack of cooperation from non-finance units

Lack of co-operation of other departments' outside the finance unit has also been a challenge for some entities. The robustness of IFRS reporting requires all units (legal, admin, operations, human resources, technical units, treasury, etc) of an organization to contribute to the reporting process; lack of it has a negative impact on IFRS adoption.

The average accountant in most entities lacks understanding of advanced financial management techniques for instance financial instruments valuation, impairment analysis, forecasting etc. This has slowed down the reporting process

be considered a surrogate to cost (which is termed “Deemed Cost”).

Furthermore, such benefits of voluntary exemptions and mandatory exceptions include;

? The recognition of the cumulative actuarial gains or losses on defined benefit obligations (in an Employee Retirement Benefit Scheme) in retained earnings at transition date (instead of retrospective application), and

? The prohibition of retrospective application of estimates made under NGAAP to IFRS at transition date (except where it is to correct errors or as a result of change in accounting policy, such as adopting discounted basis rather than un-discounted basis).

Entities that are reporting IFRS for the first-time as required by IFRS 1 requires its first IFRS financial statements to include at least:

? Three statements of financial position

? Two statements of profit or loss and other comprehensive income (statement of comprehensive income)

? Two statements of cash flows,

? Two statements of changes in equity, and

? Notes to the Financial Statements (including statement of reconciliation of NGAAP balances with IFRS Balances as at Transition date and the 1st IFRS Comparative date)

Unsophisticated accounting systems and poor record keeping

For most companies, the inability to provide accurate historical and necessary data necessary for performing

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Robust accounting systemLack of robust accounting system that can accommodate dual reporting in the comparative year for a first time adopter has been a major challenge. The transition process for IFRS reporting requires entities to report Nigerian GAAP and IFRS in the comparative year, however most entities system is incapable of this dual reporting function hence resulting in significant effort in reconciling Nigerian GAAP accounts to IFRS.

Tax implicationsThe tax considerations associated with the conversion to IFRS are complex. The complexity arises from the computation of deferred tax effect of IFRS adjustments on the financial statements. Under IFRS, the basis for computation of deferred tax is different from that of SAS. IFRS requires the use of the balance sheet liability method, which focuses on temporary differences; SAS tilts towards the income statement method, which focuses on timing differences. The balance sheet liability method which requires full provision for deferred taxes is more complex compared to the income statement method.

Post-employment benefitsUnder IAS 19, Employee Benefits, accounting for a defined benefit plan using projected unit cost method involves complex discounting and actuarial valuation of defined benefit obligations at the end of every reporting period. Under NGAAP, most entities have used less scientific computations as they rely on simple excel based computations in making provisions for employee obligations. Thus at transition date and subsequently when entities are required to provide actuarial valuation of gratuity, they are often unwilling to engage actuaries. Another major concern raised by entities that are willing to engage actuaries is the fact that their choice is restricted.

Others are:

?Delays in the release of regulatory guidance.

?General apathy towards technical research.

IFRS Adoption in Nigeria –Specific issues - Manufacturing

Impairment of assets: The adoption of IFRS in Nigeria has brought about the need for review of assets for impairment. IAS 36 requires that impairment review be carried out at the end of every reporting period and that assets be subjected to impairment test if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The determination of recoverable amount of an asset is the crux of impairment testing and the process is often not straight-forward. This may require lots of assumptions and judgments on the part of management. Impairment test is not optional for any entity reporting on the basis of IFRS. Many entities are looking for ways to avoid this requirement due to the cost implications of the exercise.

Identification and consolidation requirement of Special purpose entities: Based on the provisions of IFRS 10 and SIC 12, special purposes entities are created to accomplish a narrow and well defined objective e.g securitization of financial assets. The standard requires the consolidation of entities that are controlled by another entity. Consequently financial institutions must consolidate all such entities controlled by them. A typical example is an employee share trust where an SPE is set-up, loan is advanced to SPE to purchase own equity of the entity on behalf of its staff. Entities will no longer be allowed to exclude this from entities that they control under IFRS.

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Consolidation of investments where investor has less than 50% control: Under previous GAAP financial institutions were able to avoid consolidating certain investments because they did not own up to 50% of the voting power of the entity. Under IFRS this would no longer be the case because the ownership of voting power is not the only consideration in determining control. Therefore entities may consolidate investments where they do not own 50% in voting power. Also based on IAS 27 entities may also not consolidate when they have more than half of the voting power of the entity but the onus now lie on the entity to prove and clearly demonstrated that such ownership does not constitute control.

Loans Obtained at below market rateIAS 20 specifically states: “The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan is recognized and measured in accordance with IAS 39 - Financial Instruments: Recognition and Measurement (or, when adopted, IFRS 9 - Financial Instruments). The benefit of the below-market rate of interest is measured as the difference between the initial carrying value of the loan

determined in accordance with IAS 39 (or, when adopted, IFRS 9) and the proceeds received”

On receipt of such loans, an entity is expected to initially recognize it at fair value being a financial instrument (financial liability). Fair value is determined by discounting the cash flows associated with the loan using an imputed market interest rate (e.g. prime lending rate or market rate specific to the arm's length transaction of obtaining external borrowings or the prevailing rate of interest existing on a refinanced loan by way of government assisted or subsidized loans) on the date the loan is obtained.

The difference between the proceeds received from the government assisted/subsidized loan and the fair value of the loan is the government grant which is deferred and amortized to profit or loss on a systematic basis over the periods in which entity recognizes as expenses the related costs for which the grant is intended to compensate.

The problem here is in identifying the appropriate market rate to use.

“The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan is recognized and measured in accordance with IAS 39

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IFRS Adoption in Nigeria – Specific issues - financial institutions

1. Measurement of Unquoted equity classified as Available for sale assets: Financial Assets classified as Available for sale are to be measured at fair value and fair value differences accounted for in other comprehensive income. The challenge with unquoted equity is that they are not quoted in an exchange and as such the fair values of the instruments are not easily determinable from the market except valuation techniques are used to estimate the values of such unquoted instruments. The standards allows the use of income approach like the discounted cash flow methods, market approach like price multiple methods and other present value methods. However, the standard does not allow the use of net asset method which financial institutions have been using under NGAAP. Financial institution would have to train staff and develop competencies in this area especially for investment entities;

2. Ability of the system to determine effective interest rate of financial instruments carried at amortized cost: Banks are known to charge certain fees on loans like processing fees, monitoring fees, management fees etc. depending on the bank. Some of these fees which are integral part of the effective interest rate are charged once and taken to the bank's income statement. The treatment under IFRS for such fees is different. The position of IAS 39 is to spread such income over the entire life of the loan. IAS 39 seeks to achieve this through the use of the effective interest rate. The challenge here is the sheer inability of some entities to match fees charged on individual loans to each loan in the portfolio and the inability of current systems to determine the effective interest rates per loan which makes it impossible to recognize the fee income on loans evenly over the loan life. Also, some entities

are forced to recognize such fees on portfolio basis due to the inherent limitation of the system to generate IFRS compliant data. Consequently, banking systems must be aligned to determine the effective interest rate based on the expected cash flows (payment pattern) from each individual loan. Interest income which until now was recognized based on the contractual rate on these loans would then be recognized using the applicable effective interest rate.

3. Measurement of collective impairment loss for loans and advances to customers and banks based on the incurred loss model: there appears to be a challenge in the aspect of collective impairment as IFRS requires that loans should be assessed for impairment individually for significant loan and/or collectively for non-significant loans. In assessing loan for impairment collectively, historical and statistical data are required in carrying out this process. For example, entities in some countries especially in Europe adopt the use of probability of defaults and loss given defaults parameters in estimating impairments on loans and receivables. Banks would definitely encounter issues in estimating these risk parameters if they have not had a good collection of data for both their past due assets and defaulted assets. Some judgment would be required here in order to estimate impairment on loans.

4. Estimation of cash flows for loans that form part of the portfolio for specific impairment: once a loss event have been identified and there are expectations as a result of the impairment trigger that all contractual cash flows pertaining to that financial asset would not be recovered, the entity would have to classify the asset or loan as impaired. The bank has to estimate the recoverable cash flows from the loan on a discounted basis using the original effective interest rate. This is the area that

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poses the greatest challenge on impairment for most banks because most banks do not have the business process to support the collection of such data. For collateralized loans, the estimated cash flows that should be used to calculate any impairment should reflect the cash flows that might result from foreclosure, less cost of obtaining and selling the collateral. Therefore banks must ensure that collateral records are updated and the collaterals perfected for them to qualify as cash flow recoverable for impairment computation. The time and cost involved in realizing the collateral should also be taken into account.

5. Recognition and measurement of stand-alone derivatives and embedded derivatives: Aside the requirement of the standard for financial institutions to recognize stand-alone derivatives in the books and measure at fair value, financial institutions will need to consider whether embedded derivatives reside in financial instruments and even in other contracts other than financial instruments. So aside instruments with convertible options, embedded derivatives can be found in any contract such as a lease, an insurance contract, or sale or a purchase contract. The challenge extends beyond searching for all embedded derivatives. Once an embedded derivative has been found, it must then be determined whether the embedded derivative needs to separately accounted for under IAS 39.

6. Recognition and measurement issues relating to liability/equity classification and compound instruments: Financial institutions are required based on the provisions of IAS 32 and IFRS 1 to consider the substance of the contract in classifying an instrument as equity or liability. This requirement is a major shift from the recognition principles under NGAAP. Now contracts that have the form of equity but because in substance a party who issues such instrument cannot avoid the outflow of cash or another financial instrument, the contract is treated as financial liability. However, there are other cases where a contract has both elements of equity and financial liability. These instruments are known as compound instruments and entities are required to separate the equity component which is a residual

component from the liability and account for them separately.

7. Classification of financial instruments vis-à-vis management investment intention for holding the instruments: Under IFRS, management would be required to determine the classification for all financial instruments they are carrying. The expectation is that financial instrument classification must be management driven so that it can be aligned to strategic investment plans of the entity. Management must be ready to determine which financial instrument would be held to maturity and which specific investments are to be traded. Where decision has be made to classify as HTM, management must ensure that they truly have the intention and ability to hold to maturity to avoid tainting the portfolio in future periods. Consequently, a process, control and system must exist that would enable management monitor these instruments in their various classes so that reclassification rules are not broken;

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Area Challenges experienced First Time Adoption of IFRS (IFRS 1) Most applications do not have multi-ledger accounting functionality i.e. inability to do dual or multiple

GAAP financial reporting. This is required during the comparative reporting period of the IFRS transition. Configuration is required around the creation of 2 ledgers in the system for adjustments between the local GAAP and IFRS but most application systems are not flexible enough to adapted for this purpose.

Property, Plant and Equipment (IAS 16)

The demands of PPE under IFRS created new challenges to the Fixed Asset module of application system which include the following to: · Breaking down and recognizing asset components. The asset module must be able to class assets by

main class and sub-classes. This functionality will assist in asset componentization. · Ability to calculate residual values. · Ability to account for assets impairment as detailed by IAS 36. · Integrate and separate new sub-groups for property, plant and equipment. · Running multiple/parallel depreciation calculations within the fixed assets (PPE) module to handle the

separate/significant components of PPE with different useful lives. Impairment of Assets (IAS 36) Most application systems cannot do impairment of assets. In order to achieve this, systems must be able

to recognize the carrying amount and recoverable amount of impaired assets so as to automatically calculate and generate the impairment loss. Alternate solutions include: · A middleware, which can integrate with the core financial application, can be employed to do assets

impairment. · Reconfigure the calculation engine of the existing application to capture and process impairment of

assets (provided the application is custom-built). Financial Instruments Disclosures, Presentation, Recognition and Measurement (IFRS 7, IAS 32/39)

Experience has shown that virtually all financial applications do not meet the burdens of this new IFRS requirement (financial instruments recognition and measurement). Significant challenges to existing application systems include: · Calculation engine would have to be modified to utilize effective interest rate (EIR) method for loans

& advances, and other financial instruments related products for interest recognition/computation. · New complex impairment calculation for financial instruments. · The chart of accounts has to be re-configured to classify financial instruments appropriately for

accurate reporting. · Calculating fair values for derivatives. · Measuring at fair value of all financial instruments. · Measuring quantitative information about exposure to risks (liquidity risk, market risk and credit risk)

arising from financial instruments. · Interaction of system with market data and archives set up for historical data · Tracking equity changes with respect to available-for-sale assets. · Split accounting for compound instruments and embedded derivatives. · Accounting for cash flow and fair value hedges. · Alternatively, a system with an extensive capability to capture information for calculating the

amortized cost of loans / financial instruments using the effective interest method may be considered. This may be in form of a middleware that can integrate with the banking application.

Chart of Accounts Systems without multi-dimensional analysis capability will be difficult for re-configuration/re-mapping of the chart of accounts. In order to have a seamless IFRS reporting on the information system, the structure of the chart of account must have capability for setting up GLs by major-classes and sub-classes so that the GL can be managed appropriately without unnecessarily having a unmanageable lines

Database capacity building for extensive IFRS disclosure requirements.

Some current systems do not have the capability for database expansion and fine-tuning with respect to future business requirements. Increased reports and data requirements may affect system performance; therefore, adequate provision must be made for database expansion.

Reporting Capabilities It has been revealed that the report module of non-ERP applications (mostly legacy systems) are close-ended i.e. it is almost impossible to design new reports. In some cases where there is need to generate and design new reports, external expertise might be consulted if there is no internal skillset. It is imperative that systems give opportunity to be able to design new reports that can address IFRS reporting requirements. In other cases, some entities deploy reporting tool for producing reports. And some of these reporting tools include Business Objects, Business Intelligence, flexible query tools, etc.

Experience have shown that some entities run applications that can be regarded as book-keeping software and in other cases, the applications are under-utilized even though they have some capabilities that can support IFRS.

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IFRS & Information Systems

The readiness assessment

In the report of the Committee on Road Map to the adoption of IFRS in Nigeria (paragraph 7), certain guidelines for effective transition to IFRS for preparers, users, of financial statements, educators, regulators, and other stakeholders were enunciated. At this point in time it is desirable to conduct a self-assessment of the level of accomplishment by all stakeholders. This high-level readiness assessment is designed to assist in assessing how well prepared we are as stakeholders for

transition to IFRS, and to identify areas for further improvements. The assessment focuses on 11 key elements that are critical success factors in the IFRS transition process as contained in the Roadmap on FRC website. Each element is to be assigned a score from “1” (getting started) to “5” (fully implemented). Select the place on the “1” to “5” continuum that best describes your assessment of the current situation.

IFRS transition readiness assessment

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Elements in the Roadmap

Transition readiness requirement 1 2 3 4 5

Action plan The action plan and its logistical framework of targeted activities should be completed within the specified period of time. This should include creating awareness on the potential impact of the conversion, identifying regulatory synergies to be derived and communicating the temporary impact of the transition on business performance and financial position. This will require organizations to: · Know the issues in the Accounting and Reporting. · Recognize that in Business you manage what you can measure. · Make systems and processes amenable and sustainable to IFRS environment. · Equip principal key factors (People)

Public sensitization There should be concerted efforts by all regulators, led by Financial Reporting council (FRC), to adequately sensitize stakeholders. This should include creating awareness on the potential impact of the conversion, identifying regulatory synergies to be derived and communicating the temporary impact of the transition on business performance and financial position.

Secure passage of Financial Reporting Council Bill

There is a need to bring all financial reporting issues under one umbrella body for an effective transition to IFRS based financial reporting regime. All stakeholders should therefore work to facilitate the passage of the FRC bill.

IFRS for SMEs: Consultation with NACCIMA

In order to ensure that Small and Medium Sized Entities in Nigeria effectively transit to IFRS for SMEs, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), National Association of Small and Medium-sized Entities (NASME), et c. should be involved in the entire process.

Creation of a Centre of Excellence

In order to achieve effective training and capacity building needed for effective implementation of IFRS, an IFRS Centre of Excellence should be established. This is a training school entirely dedicated to the teaching and learning of IFRS. The programmes are expected to be designed in a way that will ensure that classroom sessions are blended with real life examples.

Creation of a dedicated website

There is no dedicated website on IFRS and related matters in Nigeria. It is therefore necessary to have a dedicated website that will be a repository of information particularly as it relates to financial reporting issues in Nigeria.

Update of Information Technology (IT) systems and Chart of Accounts

Transiting to IFRS will require changes in systems and processes to make them amenable and sustainable in an IFRS environment. This demands assessing systems and processes to determine the possible impacts on financial reporting and consolidation systems. It also requires determining changes required to source systems to provide the additional data and implement new procedures to support the business under IFRS reporting.

Distinguishing regulatory requirements from the pronouncement of a Standard

Regulatory bodies should clearly distinguish their regulatory requirements from provisions of financial reporting standards to avoid conflict and ensure credible financial reporting.

Role of the FRC after adoption of IFRS

There may be accounting issues that impact significantly on the Nigerian economy that would require standardization. FRC is expected to bring such important accounting issues to the notice of IASB for inclusion in the technical agenda. The FRC should henceforth participate effectively in the activities of IFAC, National Standards Setters, Twinning arrangements of the IASB on agenda projects and the work of the IFRIC.

Update syllabus of training institutions

To sustain the efforts of FRC in ensuring content validity of accounting curriculum in Nigerian tertiary institutions, there is a need to constructively engage NUC, NBTE, professional accountancy bodies and tertiary institutions in an effort to upgrade their accounting curriculum. This should be done as a matter of urgency before the full transition to IFRS.

International Public Sector Accounting Standards (IPSAS)

Although the IPSAS are based on the IFRS developed for private sector, they are adapted to the requirements of the public sector. It is in the interest of Nigeria to adopt IPSAS as soon as possible. Before the passage and assent of the FRC bill, the FRC in conjunction with Office of the Accountant General of the Federation (OAGF) should commence the transition to IPSAS without delay.

15

Score Board

IFRS are in the Transition readiness

low range of #1 or #2

You may need to accelerate your transition plan to ensure that the transition timeline is met.

mid range of #3

You still have work to do to ensure that you meet the transition timeline and that the transition to IFRS is implemented in a controlled manner.

higher range of #4 and #5

Congratulations, you are on the way to a measured, timely, and well implemented transition.

Conclusion The adoption of a high quality set of harmonised accounting standards fosters trade and FDI since the improvement of accounting information, in turn, fosters financial transparency and comparability, and reduces information asymmetries and unfamiliarity among agents in different countries. IFRS has been recognised as a global reporting framework. It is wishful thinking to expect a reversal of events in over 120 countries that either require or permit its use. There is no doubt that conversion to IFRS in Nigeria is a huge task and a big challenge; its revolutionary impact requiring a great deal of decisiveness and commitment. It is in the best interest of Nigeria to adopt IFRS.A countrywide intensive capacity building program to facilitate and sustain the process of adoption is needed as early as possible. The IFRS ship is already making its way around the world as a single set of high quality global accounting standards.

Nigeria is a significant donor to the International Financial Reporting Standards Foundation. Total contributions of all donor countries in 2011 towards standard setting activities was GBP20.50million. There is need for the country to ride on this global reporting platform and investment.

It is imperative to note that for Nigeria to reap the full benefits of IFRS adoption, the Government must put in

place an enabling political environment as no country can achieve economic development in an atmosphere of violence and political unrest.

References

1. DeGregorio, J. (2003). The role of FDI and Natural Recourses in Economic Development. Working paper No. 196. Central Bank of Chile, Santiago

2. Garkovi, M. & Levin, R. (2002). Does FDI accelerate economic growth? University of Minnesota, Working paper, Miinesota.

3. Kumar, A. (January 30, 2007). Does Foreign Direct Investment Help Emerging Economies? Economist's View. FRB Dallas. Retrieved: http://economistsview.typepad.com/economistsview/2007/01/frb_dallas_does.html

4. Okpala Kenneth Enoch ( 2012). Adoption of IFRS and Financial Statement Effects: The Perceived Implications on FDI and Nigeria Economy. Australian Journal of Business and Management Research, Vol.2 No.05 [76-83]

5. Oyetayo, E.O., Arogundade, K.K., Adebisi, S.O. & Oluwakayode, E.F. (2011). FDI, Export and Economic Growth in Nigeria. European Journal of Humanities and Social Sciences. 2(1), 66-86.

6. Report of the NASB Roadmap to Adoption of IFRS Nigeria 2010

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Oduware is the partner-in-charge of IFRS implementation in Deloitte West & Central Africa (WeCA) and member of the Deloitte IFRS specialist group responsible for Deloitte WeCA providing on-call IFRS technical advice to a number of clients and Deloitte audit teams. He is a regular facilitator at IFRS seminars and also runs a regular column called “IFRS Watch” on the Guardian Newspapers every Wednesday.

He is a faculty member with the Members Education and Training Department of the Institute of Chartered Accountants of Nigeria (ICAN) and also a member of education committee of International Association of Financial Engineers.

Oduware acts as a technical resource to Financial Reporting Council (FRC), Nigeria Insurance Commission, (NAICOM), Economic and Financial Crime Commission (EFCC), Securities and Exchange Commission (SEC) and technically supports other regulatory agencies. He is a Fellow of the Institute of Chartered Accountants of Nigeria and also holds MBA in Banking and Finance and MSc in Finance from the University of Leicester, United Kingdom.Oduware will have overall responsibility for the engagement, as the training coordinator, and will provide direction to our team.

Tel: +234 (1) 2717834 Mobile: +234 (0) 8056018887 Email:ouwadiae@deloitte.com