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The Accounting and Auditing Board of
Ethiopia (AABE)
www.aabe.gov.et International Public Sector Accounting
Standards (IPSAS)
Dawit Mengistie
June, 2017
Addis Ababa, Ethiopia
Presentation outline
Background
– The what and why of Financial reporting?
– Regulatory framework in Ethiopia
IPSAS Implementation Road Map
AABE Five Year Strategy
The Ethiopian Regulatory Framework
Financial Reporting Proclamation 847/2014
Council of Ministers Regulation 332/2014
Directives to be issued by AABE
IPSAS
Adoption Road Map
Overview of IPSAS
IPSAS is a globally-accepted set of accounting standards and interpretations established by:
– International Public Sector Accounting Standards Board (IPSASB)
IPSAS assist preparers of financial statements produce and present:
– high quality
– transparent, and
– comparable financial information
IPSASs are designed for use by Public sector including Non-profit oriented entities.
IPSASs are principle based
Background Scope of IPSAS Conversion – Conversion will touch
almost every aspect of the organization. Its impact is
profound!
And conversion to IPSAS does not end with the
publication of the first set of IPSAS compliant
financial statements.
Necessary preparation including changes in
accounting policy, IT system, process, etc. must
precede conversion to IPSAS
Implementation of ISAs – immediate and no road
map needed.
• Early education
• Underlying business performance
• Volatility of earnings and equity
• Hedging strategies
• Re-benchmarking relative to global peer group
Management information
Employee benefits
Tax planning
Financial instruments
Control environment
Operations
Oversight and project
management
Training and knowledge
Processes and systems
doners relations
Business impact of
IPSAS
• Key performance indicators
• Management reporting
• Underlying infrastructure
• Reconciliation to reported results
• IPSAS alignment
• Share based payments
• Pension arrangements and funding
• Retirement benefit costs
• Alignment of remuneration and bonuses
• Impact of accounting on taxation considered irrelevant by IPSASB
• Impact on tax strategies
• Data collection
• Structured products
• Inland Revenue
• Fair value
• Debt vs. equity
• Review of hedging strategies
• Hedging documentation
• Day One profit recognition
• Observability of market prices
• Embedded derivatives
• Reserving policies
• SPEs
• Policies and procedures
• Finance function efficiency
• Finance and Operations transformation
• Covenant renegotiation
• Valuation of earn outs
• Demand for valuations
• Impact of consolidation of SPEs
• Clients’ appetite for existing structured financial products
• Viability of transactions due to treatment on own balance sheet
• Ability to assess client suitability and credit
• Fragmented processes/ systems resulting from IPSAS tactical solutions
• Data capture
• Hedging
• Loan provisions
• Segmental reporting
• Financial Statements presentation
• Not just Finance
• Front Office, research, credit
• Non-executives
• Access to knowledge and tools
• Complex project management
• Audit Committee involvement
• Non-executive understanding and oversight
• Resources and budgets
Statement of Adoption
Ethiopia adopt IPSAS as issued by the International Public Sector Accounting Standards Board (IPSASB).
A three phase transition over a period of three years for reporting entities.
Effective and meaningful adoption may be derailed if any of the milestones and timelines is ignored.
“voluntary” adoption before the mandatory date permitted. BUT What Does ROSC AA 2007 Review Result Showed ??
ROSC 2007 Review Result of FSs
focused on issues of presentation and disclosure only (not recognition and measurement issues)
sample of 35 financial statements from financial institutions, public enterprises, share companies, etc.
review result revealed that there were significant differences between the actual accounting practices and IFRS/IPSAS requirements
conclusion the actual accounting practice in Ethiopia differ from IFRS/IPSAS.
IPSAS - What is it?
IPSASs are a single set of accounting standards which specify how certain transactions and other events should be reported in financial statements.
The main purpose of these standards is to maintain stability and transparency throughout the financial world.
Financial Reporting: Why is it Important?
No transparency => no trust
No trust => no grant/donation
No grant/donation=> no social service
No social service => no community
development
Accounting & Auditing as part of Governance
Sound governance and effective institutions are essential to achieve shared prosperity and sustained reductions in poverty.
Public accountability and proper governance contribute to better delivery of public services, support competition and growth, including through cooperation with public service entities.
Quality information helps the government properly analyse risks and play their essential roles in resolving the complex and interconnected challenges in variety of sectors, including in health, social protection and education.
Users of Accounting & Financial Reporting
Donors
High-Quality Financial Reporting: 3 Key Dimensions
Standards are Just one Piece of a Complicated Puzzle
Financial Reporting is not just about the Standards
All supporting pillars are important and need to be strengthened
TRUST
Ensuring Compliance with Reporting Obligations
Ensuring Compliance with Reporting Obligations -Challenges
Making the reporting available to the public
Powers of the regulator/supervisor
– To investigate
– To remedy or sanction
Organization of the regulator
– Sufficient resources
– Cooperation between regulators
Market discipline
Suitability of the standards
Ensuring Compliance with Reporting Obligations - Monitoring audits
Monitoring audits
Who will guard the guardians?
Public oversight
– Monitoring and inspections
– Investigations
– Sanctions
The Regulator
Independent
Competent
Transparent
Preconditions for Effective Regulation
Comprehensive and well defined accounting and auditing principles and standards.
Legal requirements for the preparation and publication of FS according to those principles and standards.
Enforcement system for preparers of FS to ensure compliance with accounting standards
Corporate governance arrangements and practices that support high-quality corporate reporting and auditing practice, and
Effective educational and training arrangements for accountants and auditors.
Voluntary Adoption reporting entities are not allowed to make
such unreserved reference to IPSAS unless they fully comply with all the requirements of the IPSASs applicable to their circumstances.
reference to IPSAS by reporting entities prior to the mandatory requirement date shall be considered as “voluntary” adoption and treated accordingly.
such claim by reporting entities and their auditors shall be scrutinised strictly and any infraction shall be dealt with firmly.
Mandatory Adoption of IFRS and IPSAS
PHASE 1: Significant Public Interest Entities - Financial Institutions and public enterprises owned by Federal or Regional Governments Hamle 1, 2009 the date for adoption of IFRS.
PHASE 2: Other Public Interest Entities (ECX member companies and reporting entities that meet PIE quantitative thresholds) and IPSAs for Charities and Societies Hamle 1, 2010 the date for adoption of IPSAS
PHASE 3: Small and Medium-sized Entities Hamle 1, 2011 the date for adoption of IFRS-SME
2007/08
2008/09
2009/10
2010/11
20011/12
Transition Date: Significant PIEs
Transition Date: Other PIEs
Reporting Date: Significant PIEs
Transition Date: SMEs
Reporting Date: Other PIEs
Reporting Date: SMEs
•Awareness
•Assessment •Amendment of laws, regulation and directives
•Training
•Planning/impact analysis
•Transition adjustments/ opening BS for sig. PIEs
•Transition adjustments
•Prepare IFRS opening SFP
•Dry Runs for “significant PIEs”
•Prepare comparative figures
•IFRS/Quarterly reporting by sig. PIEs
•Audit procedures
•Stakeholders communications
•Other PIE’s prepare opening SFP & comparative figs
•Dry Runs for other PIEs
•SME’s commence transition planning
•IPSAS/Quarterly reporting by other PIEs
•Audit procedures
•Stakeholders communications
•Compliance monitoring for sig. PIEs
•SMEs prepare opening SFP and comparative figs
•Stakeholders communications
•Dry Runs for SMEs
•IFRS reporting by other SMEs
•Audit procedures
•Stakeholders communications
•Compliance monitoring for Other PIEs
Alignment with other initiatives and training for appropriate personnel
Realisation and standardisation of statutory reporting
IPSA
S C
om
pet
en
cy
2007/08
2008/09
2009/10
2010/11
2011/12
IPSAS Implementation
Roadmap
Disclosure Requirements by REs
Prior disclosure of the effects of IPSAS adoption starting from two years prior to adoption
– Preparation plans for IPSAS adoption and the progress
thereof
– Different accounting treatments that are expected to
have a great impact on the entity
– Quantified information about anticipated effects on
financial position & performance
– Changes in the consolidation scope - increase or
decrease in the no of branches to be consolidated or
description and reason of why it is not possible to
provide such information.
Monitoring Preparation for
IFRS/IPSAS Adoption
• During the preparation period AABE
undertakes survey of reporting entities
that are subject to mandatory IPSAS
application
• Survey results will be utilized to plan
and execute appropriate intervention
measures to facilitate timely adoption.
Reporting Requirement on Audit organizations
• audit organizations to prepare and submit business reports starting from 2008/09 describing the status of their own preparation for the adoption of IPSAS by their clients.
• E.g. teams and staff members dedicated to the firm's preparation for IPSAS adoption, education sessions
• AABE will analyse the reports and examine how organizations are preparing for the adoption of IPSAS.
• AABE will direct the organizations that lacked sufficient preparation to place adequate efforts in the preparation
• Result of report examination will be used as input in the selection of audit organizations for quality review
IPSAS Roadmap Implementation Task Force
A joint public and private-sector task force for efficient implementation of the Roadmap
Goal of TF- to deal with issues arising from adoption and to support the stabilisation of the adoption process.
Focus of TF - identifying and providing recommendations for the amendment of the accounting infrastructure including the related laws, regulations and directives.
the Task Force may establish different working groups, as required, to deal with specialist areas
Identify and submit recommendation for amendment of Laws and Regulations contradicting FRP.
Tax Law
Revision of the regulatory requirements for financial Institutions
Clarifying regulatory requirements from the pronouncement of a Standard
Activities of the IFRS & IPSAS Roadmap Implementation Task Force during Preparation Stages
Preparatory work for the Implementation of the Roadmap
Public sensitization and awareness
Training and Education
–AABE to organise a series of workshops and training programmes
– IFRS/IPSAS Training Centre
Creation of a dedicated Website
IPSAS Implementation
Challenges and Lessons Learned
Not an Easy TASK
there should be no doubt that conversion to IPSASs is a big task and challenging;
practical challenges that may be faced as a result of implementing the IPSAS need to be identified and addressed in order to benefit fully from the introduction of IPSAS
adequate preparation & planning, both at a national and organization level is the critical success factor;
its profound impact requires a great deal of decisiveness and commitment;
Practical Challenges
1. Potential knowledge shortfall,
2. Accounting Education and training,
3. Limited Training Resources,
4. Tax system effect,
5. Legal system effect,
6. Enforcement and Compliance mechanism,
Potential knowledge shortfall (Level of Awareness)
the transition plan to IPSAS and its implications for preparers and users of FS, regulators, educators and other stakeholders need to be effectively coordinated and communicated.
do a lot of sensitisation and awareness raising on the potential impact, communicating the temporary impact of the transition on business performance and financial position.
Accounting Education and Training – Capacity-related issues
inadequate technical capacity among preparers and users of FS, auditors and regulatory authorities
Small number of accountants and auditors who are technically competent in implementing IPSAS.
further compounded by short period given for the actual implementation - not long enough to train a good number of competent professionals.
further compounded by the wide gap between accounting education and accounting practice
Weak (none existing) professional accountancy bodies
Limited Training Resources
Professional accountants are required to ensure successful implementation of IPSAS.
Along with these accountants, government officials, financial analysts, auditors, tax practitioners, regulators, lecturers, preparers of financial statements and information officers are all responsible for smooth adoption process.
Training materials (and trainers) on IPSASs are not readily available at affordable costs in Ethiopia to train such a large group which poses a great challenge to IPSAS adoption.
Legal System Effect
Inconsistencies may exist between the Financial Reporting Proclamation, and other existing laws that provide some guidelines on preparation of financial statements.
IPSAS does not recognize the presence of these laws and the accountants have to follow the IPSAS fully with no overriding provisions from these laws.
law makers have to make necessary amendments to ensure a smooth transition to IPSAS.
Strategies to address the challenges Nationwide intensive capacity building program to
facilitate and sustain the process of adoption is needed as early as possible. (IFRS Academy)
Raise awareness of professionals, regulators and preparers to improve the knowledge gap.
Improve the legal framework of accounting and auditing to protect the public interest. Identify inconsistencies and propose amendment of the various laws and regulations.
Strengthen the institutional Capacity of AABE to monitor and enforce accounting and auditing standards and codes.
Strategies to address the challenges
Support the establishment of strong PABs. Strengthen professional education and training. Develop internationally recognised national professional
qualification (CPA(E)) Enforce CPD requirements
Facilitate the revision of university accounting curricula to enable students to gain exposure to practical IPSAS application.
Take measures to strengthen capacity of regulators to enable them to effectively deal with accounting and financial reporting practices of the regulated entities.
Work with other regulators to identify and achieve regulatory synergies
Important IPSAS related questions to consider
Four Areas:
1. Initial considerations
2. Financial reporting considerations
3. Conversion project considerations
4. Nonfinancial reporting considerations
Key Questions – Initial consideration
Should we be first mover (adopt voluntarily)?
How can our organization take advantage of opportunities presented by the conversion to IPSAS?
What are the most significant risks associated with converting to IPSAS?
How will converting to IPSAS affect our stakeholders and what should be done to manage their expectations?
Key Questions – Financial Reporting considerations
How will converting to IPSAS impact external financial reporting?
What will be the impact on management reporting?
How will management address the need for comparative financial information prepared under both the current system and IPSAS?
What are competitors and industry peers doing?
Has the Project Team/management considered that PIEs are required to apply IPSAS throughout their group structures?
How will IPSAS impact tax reporting and tax filings?
Key Questions - Conversion project considerations
What will converting to IPSAS mean for the org’n?
How do we plan to approach the conversion to IPSAS and how ready are we to do this?
What are the key areas that need to be addressed during the conversion?
What can we learn from the conversion experiences of others?
What is the timeline for our IPSAS conversion project, what resources will be required and how much will it cost?
Key Questions – Nonfinancial Reporting considerations
Other than financial reporting, which other operational areas will be affected by the conversion?
Can our current IT systems handle the business’ revised data collection requirements under IPSAS?
Other than financial reporting integrity, what are the other implications for boards of directors?
What IPSAS training programs are management planning to provide to finance personnel?
How should we use a third party advisor? What is the role of our independent auditor?
A Holistic Approach to IPSAS Conversion Project Management?
Planning and implementing IPSAS conversion ensuring that all linkages and dependencies are established between accounting and reporting, systems and processes, people and operation.
The conversion needs to effectively address the challenges and opportunities of adopting IPSAS to all aspects of your business.
IPSAS
IPSAS
IPSAS
IPSAS
Accounting gap
analysis
IT/process impact
assessment
Tax impact analysis Systems/process
conversion strategy Reporting gap
analysis
Alternative
accounting
treatments Initial IPSAS
awareness
training Financial and
business impact
assessment Management
presentations
Measures to reduce
potential volatility
IPSAS project
plan and budget
IPSAS
Accounting and Reporting The first key area to tackle
It involves a diagnostic and in-depth analysis of the differences between current financial reporting framework and IPSASs
Undertaking accurate and comprehensive upfront assessment of the impact of IPSAS and the “Gap analysis” is critical success factor for the conversion.
It is essential that this is undertaken for your specific entity, even if the sectoral issues are deemed to be similar.
Systems and Processes A major effect of converting to IPSAS will be the
increased effort required throughout the org’n to capture, analyse and report new data to comply with IPSAS requirements.
Making strategic and tactical decisions relating to information systems and supporting processes early in the project helps limit unnecessary costs and risks arising from possible duplication of effort or changes in approach at a later stage.
Some entities take the opportunity of an IPSAS conversion project to streamline the existing systems and processes.
From Accounting Gaps to Information Sources
The foundation of the project is to understand the IPSAS to current reporting framework differences.
The initial analysis needs to be followed by determining the effect of those accounting gaps on internal processes, information systems and internal controls.
What the org’n need to determine is which systems and processes will need to change and translate accounting differences into technical system specifications.
One of the difficulties org’face in creating technical specifications is to understand the detailed end-to-end flow of information from the source systems to the general ledger and further to the consolidation and reporting systems.
People
The success of the project will depend on the people involved. There needs to be an emphasis on communications, engagement, training, support, and senior sponsorship, all of which are part of change management.
Training should not be underestimated and entities often don’t fully appreciate the levels of investment and resource involved in training.
Although most conversions are driven by a central team, you ultimately need to ensure the conversion project is not dependent on key individuals and that the business-as-usual operations can be performed when the project ends.
Training tends to be more successful when tailored to the specific needs of the entity.
Audit Committee/Board of Directors
Ensure that Management:
Is sensitive to the issues/timelines and has the appropriate resources and skills to conduct an IPSAS conversion
Has considered reporting implications and impacts on all areas of the business
Has a conversion plan to meet the requirements, including appropriate controls required to manage through the period of change and maintain reporting integrity
Ongoing monitoring
Roles and Responsibilities
Management
Form IPSAS Project Team
Implement and manage the conversion process by active supervision and communication with the IPSAS Project Team
Project Sponsorship
Roles and Responsibilities
IPSAS Project Team
Formed by management to:
Manage budget, resources and timelines
Ensure compliance to IPSAS standards
Coordinate all aspects of the conversion (people, process, technology) across business units
Roles and Responsibilities
Internal Audit
The “eyes and ears” of the Audit Committee / Board of Directors
Assess the overall project governance (e.g., risk assessment of the conversion)
On-going monitoring of the project benchmarks, deliverables and meeting of expectations
Business Process Advisors
Conduct ongoing business process, pre-implementation and post-implementation reviews to evaluate aspects of the convergence implementation (i.e., controls around key business process and systems changes)
Roles and Responsibilities
External Auditors
Communicate with management and internal audit on risk impacts associated with changes to impacted processes and internal controls
Measure success from a financial reporting perspective
Roles and Responsibilities
IPSAS Implementation Key Risk Areas
Financial Reporting and Disclosures
Financial and Business Processes and
Controls
Management Reporting
IT Systems
Conversion Project Management
Overall Change Management * Risk/impact assessment across each of these risk areas will vary between reporting entities and should be assessed individually.
Key risks of an IPSAS conversion project?
Vision and direction
Unresolved or uncertain strategy from the IPSAS diagnostic
Lack of clear project scope and requirements
No assessment on business impact or priority
Poorly defined critical success factors
Unclear governance and oversight
Lack of management support
Key risks of an IPSAS conversion project?
Planning
Project planning function not completed in adequate
detail
Skills/resources in place inadequate for project needs
Unrealistic and incomplete timelines
Accounting policies selected not compliant with IPSAS
rules
Inadequate risk assessment and determination of
project risks
Key risks of an IPSAS conversion project?
Execution
Unidentified transition issues impact critical deliverables
Poor communication between project team and end users
Insufficient business unit involvement
Conversion project interdependencies not recognized
Financial reporting disclosure requirements inaccurately or not completely identified
Key risks of an IPSAS conversion project?
Business acceptance
Ineffective deployment strategy
Lack of business impact of IPSAS
Unresolved problems and disputes
Incomplete operating and maintenance information
Insufficient user satisfaction
Scale and volume of defects
No project close-out
Global sourcing conflicts
Key risks of an IPSAS conversion project?
Measuring and monitoring
Ineffective project management systems
Insufficient project monitoring and reporting
Lack of continuity in project staff
Poor communication with stakeholders
Lack of control in change order process
Ineffective decision making and resolution of issues
Poor quality management and assurance plans
Changing design and scope
Lessons learned: typical pitfalls Rapid start to implementing work without a structured
assessment Time to complete and/ or resources are underestimated:
“We will just switch to IPSAS” Accounting rules are seen as “pretty similar”, but small
differences can matter a lot. Impacts of IPSAS conversion are not addressed with
stakeholders – Lack of clarity about strategies for selecting the various
accounting options – Inability to provide information on all areas impacted by
IPSAS (e.g. to analysts)
Lack of sufficient communication with auditors
Key take away Understand the IPSAS impact early in the
project lifecycle –accounting, process, people and IT
Complexities not to be underestimated –it cannot be done in isolation
Not just a finance project –adopt a holistic approach
Post conversion activities –the hard work may just be beginning –develop a sustainable approach
Questions or
Comments?
Thank you