IFRS IMPLEMENTATION: THE JOURNEY SO FAR – A REGULATOR’S PERSPECTIVE

by

OBAZEE JIM OSAYANDE

Introduction

• ‘Being the managers of other people’s money rather than their own, it cannot be expected that they [managers] should watch over it with the same anxious vigilance which [they would] watch over their own. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a

company”An inquiry into the Nature & Causes of the Wealth of Nations, Adams Smith (1776)

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• “The country’s economy depends on the drive and efficiency of its Companies. Thus the efficiency with which their Boards discharge their responsibilities determines Britain’s competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance”

Sir Adrian Cadbury: (Cadbury Report 1992, para. 2.5).

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“As a Professional in today’s world, you need to develop anticipatory skills because you

cannot afford to be consistently reactionary. This way, you can handle issues with increased confidence and flexibility. Otherwise, you become defensive,

competitive and resentful”Jim Obazee, 2013

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Economic transformation is a time of re-negotiation.

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During periods of economic transformation:

Economic Institutions are strengthened and new onescreated.

Economic Institutions are institutions set up topersuade the legal foundations of an economy.

They dictate what individuals must or must not do (duty), whatthey may do without interference from other individuals(privilege), what they can do with the aid of the collective power(right) and what they cannot expect the collective power to do intheir behalf (restrictions).

These institutions are imposed but are expected toproduce induced institutions as outcomes.

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These institutions are under the control of thoseentities charged with the task of common good(Executive, Legislature and Judiciary).

The entities, themselves, issue set of rules with theobject of paramentarising individual and behavior inparticular realms of economic activity.

The FRC Act, 2011 is a transformation instrumentwhile the Financial Reporting Council (FRC) is aneconomic institution.

Expected outcomes are change at work and correlatedevolved behavioral patterns.

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• The Financial Reporting Council of Nigeria (FRC) is a unified independent regulatory body for Accounting, Auditing, Actuarial, Valuation and Corporate Governance practices in public and private sectors of the Nigerian economy.

• The body is also to address current institutional weaknesses in regulation, compliance and enforcement of Standards and the development of robust arrangements for monitoring and enforcing compliance with financial reporting standards in Nigeria.

• The implementation of the FRC Act is expected to lead to increased management credibility, more long-term investments, lower cost of capital, improved access to new capital and higher share values.

• For investors and lenders, better disclosure provides more relevant information for making sound investment decisions and risk assessment respectively. This is especially so because merchants do not have a country.

Section 11The objects of the Council shall be to:(a) protect investors and other stakeholders interest ;(b) give guidance on issues relating to financial reporting and corporate

governance to bodies listed in sections 2 (2) (b), (c) and (d) of this Act;

(c) ensure good corporate governance practices in the public and private sectors of the Nigerian economy ;

(d) ensure accuracy and reliability of financial reports and corporate disclosures, pursuant to the various laws and regulations currently in existences ; and

(e) harmonize activities of relevant professional and regulatory bodies as relating to Corporate Governance and Financial Reporting.

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OBSERVATIONS FROM THE NEW FINANCIAL REPORTING REGIME IN

NIGERIA

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GOVERNMENT INTENTIONS/NATIONAL POLICIES• Accountability.• National statistics and proper planning: Registration

of Professionals/Entities• Enhanced Perception: Inspection of Accounting firms

and other professionals providing assurance, attestation of Financial Statements and Corporate Governance reports. (The Council is currently registering professionals and issuing FRC Registration certificates to individual professionals. Organisations (including Not for Profit).

• Quality control: Inspection of Organisations, Accounting firms and Assurance providers.

• Transformation: All inclusive Code of Corporate governance.• Wealth creation, employment generation, etc.

Nigeria: a desirable investment destination JUST LOOK AT THIS!.

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Who suggested this investment or donation?

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TREND IN ACCOUNTING• Three key objectives for financial statement presentation state that

information should be presented in the financial statements in a manner that:

Portrays a cohesive financial picture of an entity’s activitiesthe relationship between items across financial statements should be clear and that items in an entity’s financial statements complement each other as much as possible.

Disaggregates information so that it is useful in predicting an entity’s future cash flowsthis requires financial information that is disaggregated into reasonably homogeneous groups of items. If items differ economically, users may wish to take that into account differently in predicting future cash flows.

Helps users assess an entity’s liquidity and financial flexibility. 14

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• The first phase of the adoption of International Financial Reporting Standards in Nigeria has started producing enhanced perception for Nigeria.

• The FRC is currently carrying out IFRS readiness test for entities in the second phase (Other Public Interest entities including Not-for-Profit Organisations).

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IFRS Readiness test1) Nine months unaudited IFRS Financial

Statements. This is an interim report from a filing entity. We are looking for the application of IAS 34 and IFRS 1.

2) Full set of comprehensive IFRS Financial Statements. to comply with IAS 1 (Presentation of Financial Statements), At least one year of comprehensive prior period financial statements and information is expected to be presented.

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3) Transition Date-Opening Statements of Financial Position: For first time adopters of IFRS the Opening Statement of Financial Position is the IFRS financial position (i.e. IFRS balance sheet) as at date of transition. This make the statement of financial position at first IFRS reporting date to be three (IFRS 1) while subsequently ones will be two (IAS 1) .

4) IFRS Implementation GAP Analysis. A detailed gap analysis helps us to identify how the IFRS transition impacted the flow of financial information, including where IT systems were upgraded or changed. For the purpose of impact assessment, it is expected the Gap analysis report should be structured basically into high impacts, medium impacts and low impact areas. This is expected to be done on account balance basis via IFRSs (IAS 1-IAS 41 and IFRS 1-IFRS 313 (including IFRICs and SICs) vis-à-vis your N-GAAP. 18

5) Accounting Policy manual. The accounting policy manual should detail how financial information flows into the financial statements from strategic decisions of the Board and also serve as the basis for the notes in the financial statements.

6) Approved IFRS accounting policies/IFRS 1 policies option: IFRS 1 provides six mandatory exceptions and twenty voluntary exemptions to retrospective application of IFRS at transition date, which an entity can opt for. We are looking for the consideration and judgment by management and the role played and ultimate approval by the Board of the entity.

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7) Evidence of approval of IFRS accounting policies by the Board and Statutory Audit Committee. Approvals of the policy manual by the Board and Audit Committee show that they understand the new reporting regime and are responsible for the reporting processes as well.

8) IFRS specific training programs for Board members and Audit Committee members. Under IFRS, entities are provided with latitude of options, alternatives and judgments in the aspect of taking some decisions which includes policy options, transition exemptions, measurements bases, assumptions and estimations etc., that might have significant effect on financial performance, financial position and the ability to generate future cash flows by the entity. Extensive skills and knowledge will be required.

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9) Description of models used for impairment test, valuations, actuarial measurements and insurance policy holders liabilities.IFRS requires that management judgments and valuations and measurements be supported by adequate basis of deriving/arriving as the assigned values or estimate. Actuarial valuations, amortized cost valuations and fair valuations of financial instruments and Revaluations (from Estate or property valuation Experts registered with the FRC) that carries the expert’s certification report (which must include details of estimates and assumption used).

10) Company approach for consolidation subsidiaries that are yet to adopt IFRS.

11) Evidence of registration with the FRC.12) Accompanying letter from the external auditors attesting to these

documents.21

Some observations• Other than the Deposit Money Banks, the other financial institutions have

weak financial reporting. A significant number of them did not pass the IFRS readiness test.

• Except for NAICOM’s effort, not more than 20 Insurance companies would have been able to submit their 2012 financial statements (prepared using IFRS) to NSE. This was largely the cause of their late filing.

• Single practice is a huge avenue for fraudulent financial reporting; be it a professional firm or professional service entity. If you have a licensed individual professional accounting service provider, there will be no second partner audit quality review and if you have a one-man professional service entity, he will never prepare reliable financial statements for the entity he or she manages. Accordingly, professional bodies should withdraw practicing license given to individuals and license firms. Regulators should ensure that their licenses are operated on institutional platforms.

• Government Business Entities’ financial reports are poorly monitored. This is what is giving room for poor financial reporting amongst a number of them.

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ISSUANCE OF REGULATIONS AND DIRECTIVES

The following Sections of the FRC Act make reference to issuance of regulations and/or directives:

• S. 7 (2) The Council shall have powers to do all things necessary for or in connection with the performance of its functions:

(f) Require management assessment of internal controls, including Information Systems controls with independent attestation;

(g) Require code of ethics for financial officers and certification of financial statements by CEOs and CFOs;(h) Require entities to provide real time disclosures on material changes in financial conditions or operations; and(i) Pronounce forfeiture, by CEOs and CFOs, of certain bonuses received from the company and profits realized from the sale of company shares owned by them, where the company is required to prepare an accounting statement.

• Nigeria is the first country, globally, to require attestation to published financial statements with individual and joint liability by relevant external auditors. Every partner in-charge of any audit is required to append his or her FRC Registration number after the signature mark of the firm of accountants he or she is associated with.

• Attestation of the financial statements of Government Business Entities and the resultant sanctions shall assist the country in keeping faith with the on-going fight against corruption.

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S. 8 (1) The Council shall:(e) Advice the Federal Government on matters relating to accounting and

financial reporting standards. (i) Monitor and promote education, research and training in the fields of

accounting, auditing, financial reporting and corporate governance;

(q) Develop or adopt and keep up-to-date auditing standards issued by relevant professional bodies and ensure consistency between the standards issued and the auditing standards and pronouncements of the International Auditing and Assurance Standards Board.

S. 8 (n): Receive qualified reports together with detailed explanations for such qualifications within 30 days from the date of such qualification. Such reports shall not be announced to the public until all accounting issues relating to the reports are resolved by the Council.

(2) The Council may issue rules and guidelines for the purpose of implementing auditing and accounting standards. (repeated verbatim in S. 53.)

Corporate GovernanceThe United Nations Development Programme (UNDP: 1997) defines ‘governance’ as • “The exercise of economic, political and administrative authority to manage a

country’s affairs at all levels.• It comprises the mechanisms, processes and institutions, through which citizens and

groups articulate their interests, exercise their legal rights, meet their obligations and mediate their differences”.

• The term “governance” can be thus be viewed in a variety of ways as: It invariably suggests the “act of decision-making” by a distinct and empowered

authority that has accountability responsibilities for such governance based on empowerment.

Governance can be related to a nation-state, a community, a municipality, a process, or a corporate entity and its entire external and internal structures.

It is concerned with how societies, governments and organizations are managed and led and in particular, how they structure and order their affairs, make critical decisions, exercise powers, manage their relationships and account for their stewardship.

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National Steering Committee

• The Committee noticed the underlisted as corporate governance key challenges:• Insider dominated Boards (Private and Public Sectors)• Non-independent or Affiliated Corporate Boards (Private and Public Sectors)• Absence of minority voice on Boards• Minorities helplessly widely dispersed.• Very inadequate Minority Shareholder Protection (MSP).• Significant resistance to the concept of independent non-execs• Inadequate board monitoring and supervision of the executive• Compromisable External Audit Function• Compromisable and ineffective Audit Committees • Flagrant abuse of Section 359 (3): Executive Directors on Audit Committees• Easily repressible Internal Audit Function• Easily repressible Chief Governance Compliance Officers.

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• Basis of Board Composition: perceived preference for personal friendship, compatibility, group-think, non-adversarial relationship and homophile, rather than global current emphasis on independence, diversity, robust engagement, competence, courage and non-fluctuating integrity.

• Resistance to best practices attributable to related party transactions, insider self dealings and tunneling.

• Inadequate whistle blowing apparatus.• Shadow Executive Directors.• Shadow Non-Executive Directors.• Regulatory Institutions do not subscribe to corporate governance.

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• Section 44(3) Where the directors disclose the extent of

compliance with Code of Corporate Governance in the annual report, require an auditor to report separately whether the disclosure is consistent with the requirements of the Code.

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CONCLUSION The FRC shall commence audit quality inspections. It should be noted that the FRC is

currently seeking membership of the International Forum of Independent Audit Regulators (IFIAR). This will be a booster to the capacity of the Council to monitor audit quality.

We are convinced that the national Code of Corporate governance will be operational in the first quarters of this year. This will also strengthen the compliance with Section 44 (3) of the FRC Act and enhance the inflow of Foreign Direct Investment and steer greater interest from local investors.

The required platform for the implementation of Internal systems/Information systems control with independent attestation, in accordance with Section 7 of the FRC Act shall also be laid.

We are also confident that the much awaited IFRS Academy shall at the last commence its operation. We shall also begin to monitor the education and training in the field of the correlated standards that the Council is also set up to oversee.

We shall also progress in the implementation of the national road map to the adoption of IFRS and shall also firm up directives on the implementation of the International Public Sector Accounting Standards (IPSAS) .

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2014 is a year for imagination

‘Imagination is more important than knowledge. Knowledge is limited to all we now know and understand, while imagination embraces the entire world, and all there ever will be to know and understand’ .Let us leave here imagining and ready to actualise the financial reporting regime we saw in our dream and imagination.

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THANK YOU•

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