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: ROADMAP TO IFRS ADOPTION IN NIGERIA, CONVERSION FROM SAS TO IFRS AND THE CONCEPTUAL FRAMEWORK/FOUNDATION OF IFRSs STANDARDS

Titus E. OsaweAssistant Director, Monitoring, Enforcement and Notifications Dept.Financial Reporting Council of Nigeria

Content1. Background Information on Global Convergence2. Conceptual Framework for Financial Reporting3. Nigerian Roadmap to IFRS4. Briefs on First-Time Adoption5. Highlights of Steps involved in Conversion6. Over all Implications of IFRS Adoption7. Pitfalls to avoid.

BACKGROUND INFORMATION

• What is IFRS?A series of single set of high quality , understandable and enforceable global accounting standards developed and published by the IASB to be used byentities in preparing general purpose financial statements and other financial reporting.

International Standards• Standards

+ IAS 1-41 (29 still applicable)+ IFRS 1 – 9

• Interpretations+ SIC 1-32 (11 still applicable)+ IFRIC 1-19 (three withdrawn)

IAS & SIC

IFRS & IFRIC

Generally IFRS = IASs + IFRSs with their interpretations

IASC; 1973-2000

IASB; 2001 - DATE

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A Changing Global Financial Reporting Environment

•Globally there is a remarkable movement towards a single financial reporting language – International Financial Reporting Standards (IFRS)

•Currently (by the end of 2011), about 150 jurisdictions permit or require the use of IFRS

•In Africa – Ghana, South Africa, Egypt, Kenya, Morocco(Banks;p), Namibia, Togo (p), Niger (p), Nigeria (Re: 2012)

•Regulatory trend• International Accounting Standards Board (IASB) and the Financial Accounting

Standards Board (FASB) have reaffirmed convergence efforts

• Greater cooperation amongst regulators on IFRS application issues

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Benefits and Drivers of IFRS

IFRS:Uniform

GlobalAccountingLanguage

Reduced cost of financial reporting

for global companies

More room for management’s

judgment and truer reflection of economic reality with principles-

based GAAP

Industry perception of

market leadership

Improved transparency and

comparability for investors and

rating agencies

Ability to understandinteraction with

strategic initiatives to generate value

from synergies

Streamlined M&A activity

Increasing demand for public accountability and transparency by all

stakeholders

Facilitate comparison

between public entities

More efficient access to capital

for global corporations

Ability to analyse impact on

tax-related issues

Need to attract international investors

and to enable easy monitoring of overseas

investments.

THE IASB’S CONCEPTUAL FRAMEWORK

• The conceptual framework aims at providing a sound foundation for future accounting standards that are principles –based, internally consistent and internationally converged.

• The Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. Its purpose is to:– Assist IASB in developing accounting standards and assist preparers of

financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS

– Assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with IFRSs

– Provide those who are interested in the work of IASB with information about its approach to the formulation of IFRSs

• The framework was first published in July 1989 and adopted in April 2001.

• In July 2006 IASB produced a discussion paper-preliminary views on an improved conceptual framework for financial reporting.– The paper covers the first two chapters of a proposed

conceptual framework:• Chapter 1: The objective of financial reporting• Chapter 2: Qualitative characteristics of decision-useful financial

reporting information

• In September 2010 the IASB approved the Conceptual Framework for Financial Reporting 2010 (the IFRS Framework), dealing with these first two chapters.

Project set-upThe Council are conducting the project in 8 phases. Phase A was completed in September 2010. Phases B, C, and B the project are currently active

Phases TopicsA. Objectives and qualitative characteristics – Project completed 28/09/2010 as announced by the joint working group of IASB and FASB;B. Definitions of elements, recognition and derecognition - Last worked by joint group in October in October 2008;C. Measurement – Still developing Preliminary views as at July 2010D. Reporting entity concept – ED published 11/03/2010, exposed till 16/07/2010;E. Boundaries of financial reporting, and presentation and disclosure – last revisions was, February 2008;F. Purposes and Status of the framework – last revisions February, 2008; G. Application of the framework to not-for-profit - last revisions February, 2008; H. Remaining issues, if any - last revisions February, 2008;

• In the absence of a Standard or an Interpretation that applies specifically to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable.

– In doing this, IAS 8 (Accounting Polices, changes and Accounting Estimates and Errorsrequires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses as contained in the IFRS Framework.

• The Framework consists of several sections or chapters, following on after a preface and introduction. These chapters are as follows:

– The objective of financial statements– Underlying assumptions– The qualitative characteristics of financial statements– The elements of financial statements – Recognition of elements of financial statements– Measurements of the elements of the financial statements– Concepts of capital and capital maintenance

Objectives of General Purpose Financial Reporting

• To 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, which includes decisions about the accountability of the entity’s management

Users Of General Purpose Financial Reporting

The Conceptual framework groups these into primary and other users

• Primary users are present and potential investors, lenders and other creditors.

• Other parties include prudential and market regulators.

Users Information Needs• Primary users use the information to make decisions

about buying, selling or holding equity or debt instruments and providing or settling loans or other forms of credit.

• The primary users use the information to assess an entity’s prospects for future net cash inflows and to judge how effective and efficient management has discharged their responsibilities of using the entity’s existing resources.

• Other parties, including prudential and market regulators, may find general purpose financial reports useful, but the reports are not primarily directed to regulators or other parties

Economic Resources And Claims

• A reporting entity’s economic resources and claims are reported in the statement of financial position

• Information about the nature and amounts assists users to assess an entity’s– financial strengths and weaknesses; – liquidity and solvency, and – its need and ability to obtain financing.

• Information about the claims and payment requirements assists users to predict how future cash flows will be distributed among those with a claim on the reporting entity.

Qualitative Characteristics of Financial Statements

Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. They are majorly categorised as:

• - Fundamental qualitative characteristics- relevance and faithful representation and

• The enhancing qualitative characteristics that distinguish more useful information from less useful information -comparability, timeliness, verifiability and understandability.

Relevance• Relevant financial information is capable of making a difference in

the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. The predictive value and confirmatory value of financial information are interrelated

• Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity’s financial report

• Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements

Faithful Representation

• General purpose financial reports represent economic phenomena in words and numbers, To be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent.

• This fundamental characteristic seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error.

• Information must be both relevant and faithfully represented if it is to be useful

Comparability

• Information about a reporting entity is more useful if it can be compared with a similar information about other entities and with similar information about the same entity for another period or another date.

• Comparability enables users to identify and understand similarities in, and differences among, items

Verifiability

• Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent.

• Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation

Timeliness

• Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions

Understandability

• Classifying, characterising and presenting information clearly and concisely makes it understandable.

• While some phenomena are inherently complex and cannot be made easy to understand, to exclude such information would make financial reports incomplete and potentially misleading.

• Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information with diligence

Information Irrelevance And Faithful Representation

• Enhancing qualitative characteristics (either individually or collectively) render information useful if that information is irrelevant or not represented faithfully

Cost Constraint On Useful Financial Reporting

• Cost is a pervasive constraint on the reporting entity’s ability to provide useful information in general purpose financial reporting.

• Reporting such information imposes costs and those costs should be justified by the benefits of reporting that information.

• The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities.

• The IASB will consider whether different sizes of entities and other factors justify different reporting requirements in certain situations.

Constraints on Relevant and Reliable Information

• Timeliness– If there is undue delay in the reporting of information it may lose

its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information

• Balance between benefit and cost– The benefits derived from information should exceed the cost of

providing it• Balance between qualitative characteristics

– In practice a balancing, or trade-off, between qualitative characteristics is often necessary. Generally the aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements

The Reporting Entity- This is currently a discussion paper.

• The conceptual framework describes rather than precisely define a reporting entity as a circumscribed area of business activity of interest to present and potential equity investors, lenders and other capital providers.– Examples of reporting entities are:

• Sole trader• Corporation• Trust• Partnership• Associations, and• Group

The Parent Entity Financial Reporting

• Two issues considered here are:– The parent company approach to consolidated financial statements.– Whether parent only financial statements and consolidated financial

statements meet the objective of financial reporting and whether both are needed.

• IASB preliminary conclusion is:– That consolidated financial statements should be presented from the

perspective of group reporting entity not, the parent company shareholders

– That the consolidated financial statements meet the objective of financial reporting, but that parent only financial statements maybe presented provided they are included in the same financial report as consolidated financial statements.

Underlying Assumptions

• Accrual basis– In order to meet their objectives, financial statements are

prepared on the accrual basis of accounting

• Going concern– The financial statements are normally prepared on the

assumption that an entity is a going concern and will continue in operation for the foreseeable future

Elements of Financial Statements• Financial statements portray the financial effects of transactions

and other events by grouping them into broad classes according to their economic characteristics

• These broad classes are termed the elements of financial statements

• Elements directly related to the measurement of financial position in the balance sheet are assets, liabilities and equity

• The elements directly related to the measurement of performance in the income statement are income and expenses

• The statement of changes in financial position usually reflects income statement elements and changes in balance sheet elements

Financial Position

• An asset– A resource controlled by the entity – As a result of past events and– From which future economic benefits are expected to flow to the

entity• A liability

– A present obligation of the entity– Arising from past events– The settlement of which is expected to result in an outflow from the

entity of resources embodying economic benefits.• Equity

– Is the residual interest in the assets of the entity after deducting all its liabilities

Performance

• Profit is frequently used as a measure of performance or as the basis for other measures, such as return on investment or earnings per share.

• The elements directly related to the measurement of profit are income and expenses. The recognition and measurement of income and expenses, and hence profit, depends in part on:– The concepts of capital

– Capital maintenance used by the entity

Income and Expenses

Income• Increases in economic benefits during the accounting period

in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants

Expenses• Decreases in economic benefits during the accounting period

in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Capital Maintenance Adjustments

• The revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity

• While these increases or decreases meet the definition of income and expenses, they are not included in the income statement under certain concepts of capital maintenance

• Instead these items are included in equity as capital maintenance adjustments or revaluation reserves.

Recognition Of The Elements Of Financial Statements

• Recognition is the process of incorporating in the financial statements– An item that meets the definition of an element; and– Satisfies the criteria for recognition

• An item that meets the definition of an element should be recognised if:– It is probable that any future economic benefit associated

with the item will flow to or from the entity– The item has a cost or value that can be measured with

reliability.

Measurement of the Elements of Financial Statements

• Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement

• Bases of measurement include:– Historical cost

– Current cost

– Realisable (settlement) value

– Present value

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NIGERIAN ROADMAP TO IFRS ADOPTIONAdoption of IFRS in Nigeria: a trip down memory lane

• What is SAS? Just like the IASB’s pronouncements (developing & publishing) of IFRS the NASB (now FRC) issues prescribeds and pronounce accounting rules to be used by entities in preparing general purpose financial statements, to ensure transparency and compatibility.

• 32 SASs developed and published so far• 7 Industry Specific Standards• 1 SORP- Statement of Recommended Practice on Employees’

Retirement and Termination Benefits for Public Sector Entities

• In the earlier years, NASB’s SAS had many similarities with IASB’s standards. (but the SASs never matched the pace of the IASs in terms of review and updates)

Adoption of IFRS in Nigeria: a trip down memory lane

• Adaptation was reiterated in Nigeria between 2002 – mid 2008.

• Closer harmonisation of SAS with IFRS took place in 2007 with the release of SASs 25, 27, 28, 29, 30.

• Strong signals from CBN, SEC, NSE and other regulators suggesting adoption of IFRS.

SAS vs. IFRSSAS IFRS

Principles based Principles based

Primary statements Accounting Policies Accounting Policies

Balance sheet Statement of Financial Position

Profit and loss account Statement of Comprehensive Income

Statement of Cash Flows Statement of Cash Flows

N/A

Statement of Changes in Equity

Notes Notes

Value Added Statement N/A

Five Year Financial Summary N/A

Measurement Basis -Historical Cost-Net Realisable Value-Revalued Amounts-Fair Value

-Historical Cost-Net Realisable Value-Revalued Amounts-Net Present Value-Fair Value

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Adoption of IFRS in Nigeria

• A Road map committee was inaugurated on October 22, 2009.

• The Road Map committee’s report was submitted January 26, 2010.

• The Federal Government took a decision on July 28, 2010 to adopt IFRS effective January 1, 2012 .

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IFRS Competence

2010

2011

Alignment with other initiatives and training for appropriate personnel

2012

2013

Realisation and standardisation of statutory reporting

Reporting Date:Other PIE’s

Transition Date: Other public

interest entities (PIE’s)

• Awareness • Assessment• Legislative changes• Training• Planning/ Impact analysis• Transition adjustments/

Opening BS (listed & SPE’s)

• Transition adjustments

• Prepare IFRS Opening Statement of Financial Position (SFP)

• “Dry Runs” for Listed & SPE’s

• Prepare comparative figures

• IFRS/ Quarterly reporting by listed & SPE’s

• Audit procedures• Investor

communications• PIE’s prepare

opening SFP & comparative figs

• Dry Runs” for PIE’s• SME’s commence

transition planning

• IFRS/Quarterly reporting by PIE’s

• Audit procedures• PIE Investor

communications• Compliance

monitoring for Listed & SPE’s

• SME’s prepare opening SFP & comparative figs

• PIE/SME Investor communications

• “Dry Runs” for SME’s

Roadmap to IFRS conversion

Transition Date:Listed &

Significant Public Entities (SPE’s)

Reporting Date:(Listed & significant

public entities)Transition Date:

SME’s 2014

Reporting Date:SME’s

• IFRS reporting by Other SME’s

• Audit procedures • Investor

communications• Compliance

monitoring

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Significant public interest entities

• This means • government business entities, • all entities that have their equities or debt instruments listed and

traded in a public market i.e. • a domestic or foreign Stock Exchange or • an Over the Counter market, including local and regional markets

• such other organisations, though unquoted, are required by law to file returns with • regulatory authorities and this excludes private companies that routinely

file returns only with Corporate Affairs Commission and the Federal Inland Revenue Service. Examples of entities meeting these criteria include financial and other credit institutions and insurance companies.

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Other Public Interest Entities

• This refers to those entities, other than listed entities (unquoted, private companies) – which are of significant public interest because

• of their nature of business, • size • number of employees • their corporate status which require wide range of stakeholders.

– Examples of entities meeting these criteria are • large not for profit entities such as charities and pension funds and

may include publicly owned entities • other entities where there is a potentially significant effect on

financial stability.

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Adoption of IFRS in Nigeria:Challenges

Length of time

Level of preparedness of all the stakeholders: Regulators

IFRS Skills

Cost (IT, training etc.)

Challenges

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BRIEFS ON FIRST TIME ADOPTIONSummary of First-Time Adoption Dates – Nigeria

NB: You must identify where you belong in the Nigeria Roadmap

date of transition Comparative First IFRS reporting

date information

1 Jan 2011 31 Dec 2011 31 Dec 2012 (Dec 31, 2010)

transition period/ First IFRS reporting period

dual reporting period

Opening IFRS Last financial statements First IFRS Financial

balance sheet in accordance with previous Statements GAAP other than IFRS

Some relevant definitions

Date of transition to IFRSThe beginning of the earliest period for which an entity presents

full comparative information under IFRS in its first IFRS financial statements

Opening IFRS statement of financial position An entity’s statement of financial position at the date of transition to IFRS

First IFRS Reporting PeriodThe latest period covered by an entity’s first IFRS financial

statements

Deemed CostAn amount used as a surrogate for cost or depreciated cost at a

given date

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Scope of IFRS 1 - Application

Apply IFRS 1 in:

An entity's first IFRS financial statements • The first annual financial statement in which an entity adopts IFRS

by an explicit and unreserved statement of compliance with IFRS

Each interim financial report that it presents (under IAS 34) for part of the period covered in its first IFRS financial statements

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IFRS 1 - First-time Adoption

IFRS 1 requires an entity to use the same accounting policies in its Opening IFRS Statement of Financial Position and throughout all periods presented in its first IFRS FS

Apply IFRSs that are effective at the end of its first IFRS reporting period i.e. December 2012 in preparing and presenting Statement of financial position for December 31, 2012 Statement of comprehensive income for December, 2012 Statement of Changes in Equity – December 31, 2012 Statement of Cash flows – December 31, 2012 All Comparatives for December 31, 2011

(Entity may apply new IFRSs that have been issued but not mandatory at the end of its reporting period as long as early application of such in permitted)

First time application of IFRS- The first set of IFRS financial statements must have :-

• Primary statements:•Three Statements of financial position (“Balance sheets”)•Two Statements of comprehensive income (“Income statement”)•Two Statements of changes in equity•Two Statements of cash flows

• Notes:•Three periods presented for the balance sheet notes which are impacted at opening balance sheet date. •Reconciliation: Equity from SAS to IFRS at Opening balance sheet and comparative period •Reconciliation: Total comprehensive income from SAS to IFRS for comparative period

IFRS 1 - First-time Adoption

Ignore transitional rules in other IFRSs, when adopting IFRS for the first time (e.g. transitional provisions in IFRS 2 and 3)

IFRS 1 contains all the first-time adoption rules. Each new IFRS may update IFRS 1

Beware: Be sure to be working with the right version of IFRSs

HIGHLIGHTS OF STEPS INVOLVED IN CONVERSIONSeven Key points to note in your conversion

1. As it relates to Nigeria roadmap identify your relevant year

2. Generally - comply retrospectively with IFRS in force at the reporting date Particularly:

Recognise all assets and liabilities required by IFRS Derecognise assets and liabilities not permitted by IFRS Reclassify all assets, liabilities or component of equity in

accordance with IFRS Measure all recognised items according to IFRS

3. There are optional exemptions and mandatory exceptions to retrospective application

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4. Apply all mandatory exceptions in IFRS 1 5. Consider optional exemptions 6. Reconcile7. Disclose

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OVERALL IMPLICATIONSImplication on Financial reporting

• New Assets coming onto the balance sheet

• Potential for greater volatility from increased use of fair value

• Increased use of management judgment• Transition elections and exemptions - potential

impact on retained earnings • Significant increase in disclosures

• Improved annual reports and accounts in terms of quality and quantity

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Implication on financial reporting (contd.)

• Transparent and comparable data• Implications for debt covenants and other

legal requirements• Additional valuation costs• The entity’s business process (all aspect of the

organisation). Complete change of system, process and people.

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PITFALLS TO AVOIDDon’t think it’s not an enterprise-wide issue.

• Poor stakeholder management

• Last minute implementation from poor planning

• Late engagement of business units – where data is captured; or

– where customers are impacted

• Not embedding accounting solutions into underlying systems

• Internal reporting backing into legacy GAAP

• Slow to move on developing and retaining resources

• Push down of centralized accounting decisions without appropriate consultation

• Underestimation of data required and support processes to get them

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Thank you.