TRANSITION TO IFRS A GENERAL OVERVIEW AND ROADMAP www.pkf.com Content • • • • • • www.pkf.com Introduction Structure of IFRS Significance of IFRS Benefits of IFRS Transition/Implementation issues Conversion plan & milestones Introduction • • • • • www.pkf.com On 28 July 2010, the Nigerian Federal Executive Council (FEC) approved January 2012 as the effective date for the convergence of accounting standards in Nigeria (SAS or NGAAP) to International Financial Reporting Standards (IFRS) The FEC also directed the Nigerian Accounting Standards Board (NASB) to take further necessary actions to give effect to the decision On 3 September 2010, NASB announced a staged implementation for significant public interest entities by January 2012; other public interest entities by January 2013 and SMEs by January 2014 IFRS is the collection of financial reporting standards developed by the International Accounting Standards Board (IASB), an independent International Standards setting organisation The aim of IFRS is to provide “a single set of high quality, global accounting standards that require transparent and comparable information in general purpose financial statements Structure of IFRS • IFRS comprise: – – – – IASs (written by the IASC from 1973 to 2000; amended by IASB) = 31 IFRS (written from 2001 by the IASB) = 9 Standards Interpretation Committee (SIC)’s interpretations = 11 IFRIC’s interpretations = 19 IASs, IFRSs, SICs, IFRICs all have full authority • • www.pkf.com There is also a FRAMEWORK document for the preparation and presentation of Financial Statements which describes the principles underlying IFRS. (the framework has no direct authority but is relevant in selecting accounting policies under IAS 8) IFRS are considered a “principle based” set of standards in that they establish broad principles as well as dictate specific treatments Significance of IFRS • • • The convergence of SAS to IFRS will introduce an almost entirely new basis of reporting for many companies There can be significant differences in reported profits/net assets between NGAAP and IFRS For example, in a recently published financial statement of a Nigerian Bank (a member of an international banking group), the difference are: – – www.pkf.com Net profit Total assets » IFRS N’billion NGAAP N’billion 16.9 392.3 14.6 351.2 Benefits of IFRS • • • www.pkf.com Improved comparability of reported financial information by entities Easier access to foreign capital funding and cross-border stock exchange listings More effective management of enterprises and efficient processes since IFRS reporting is performance based • More transparent financial information to all stakeholders • Optimisation of tax planning Transition to IFRS • • • www.pkf.com Transition to IFRS is one of the biggest challenges that the Corporate entities in Nigeria will face in the next 3 to 5 years IFRS is used in over 100 countries. By the end of this year 2011, most countries will either require IFRS or at least permit IFRS The status of implementation by Top Ten global capital markets: USA US GAAP, adopting IFRS from 2014 Japan Converting to IFRs UK IFRS France IFRS Canada Converting to IFRS Germany Hong Kong IFRS IFRS Spain IFRS Switzerland Australia IFRS or US GAAP IFRS Implementation issues & strategy • • • A successful conversion to IFRS will not happen overnight because the process represent much more than a change in accounting rules The convergence of NGAAP and IFRS will introduce an almost entirely new basis of reporting for many companies. The scope of the changes goes beyond accounting and financial reporting. Yes, IFRs will affect the GL and financial statements, but it will also impact: – Internal policies; – Processes and controls; – IT systems and infrastructure; – Other organisation areas, such as Legal, Risk management, taxation, investors relation, etc • www.pkf.com it is therefore essential that everybody is involved from the beginning Implementation issues & strategy www.pkf.com Constituency Involvement Board •Allocate budget and understand business impact Management •Sponsor IFRS conversion and secure resources •Realign performance measures to IFRS Investor relations •Educate analysts and investors; manage external stakeholders communications Finance •Modify accounting policies, financial statements and reporting packages to conform to IFRS •Conduct training and support information gathering and consolidation Business operations •Provide data to meet new accounting and disclosure requirements •Understand IFRS impact on transaction structure IT •Plan and implement ”quick fixes” and required system modifications to enable IFRS reporting on a sustainable basis Subsidiaries •Implement process changes to enable IFRS reporting Implementation issues & strategy • • The first step in the conversion process involves planning and assigning responsibilities to manage potential problems Other steps to follow are: – Gap analysis – Map NGAAP to IFRS and establish areas of significant difference in reporting/disclosure requirements – Establishment of external and internal reporting requirements – Create accounting manual (or modify existing manual) – Adapt IT systems and software – Evaluation of contractual agreements – Budgets and forecasts prepared under IFRS requirements – Project team and work plan www.pkf.com Conversion plan and milestones • In view of the complexity of conversion/first-time-adoption, an early start is recommended to allow for a smooth transition 2010 2011 2012 Nigerian SAS fin stmt Historical data for IFRS financial reporting • www.pkf.com IFRS financial statements IFRS financial statements To overcome the challenges of comparative figures, it is advisable that entities begin preparatory work from 2010 financial year end. Conversion plan and milestones The strategy to achieve a seamless transition to IFRS is a phased approach to implementation Phase 1 Phase 2 Phase 3 www.pkf.com • • • • • • • Mobilise core team Perform gap analysis Impact assessments Identify training needs Plan conversion path Project budget Present results to management • • • • • Mobilise finance functions and It IFRS training Build tools (policies, fin. Stmts, reporting packages) Convert systems First trials • • • • • • • Mobilise business Convert budget Dry run Opening balance sheet Comparatives Manage business on IFRS basis Cutover to IFRS Conversion plan and milestones • The first phase is critical. The objective is to scope the main impact areas and plan the conversion path. The key questions to address are: What are the key accounting and disclosure differences between NGAAP and IFRS? What is the estimated impact on the bottom-line results, if reported under IFRS? What is the impact on systems and processes? Who is impacted by the conversion and what are their communication and training needs? What is the likely impact of conversion on resources? www.pkf.com Work plan and conversion milestones • We suggest: Work Streams Acconting & reporting Systems & processes Buiness impacts www.pkf.com Phase 1 (Assess) Phase 2 (Design) Phase 3 (Implementation & Parallel Run) Q1/2011 Q2/2011 Q3/2011 Conversion plan/budget approved by Board Full dry run (B/S, PL, disclosures) for Y/E 2010 & 11 IFRS chart of acct finalised Impact on systems assesment/prop osed functional design IFRS conversion plan & resource budget presentation Q4/2011 Practical IFRS training completed Q1/2012 1st IFRS financial published Key success factors • • • • • • • • www.pkf.com Obtain clear sponsorship of the project by the Management Board Follow a systematic methodology and minimise impact on day-to-day operations Define and agree on clear project responsibilities and deadlines Make necessary management decisions promptly (with the help of position papers) Communicate potential business impacts to investors or other stakeholders as soon as possible Deploy efficient tools and templates for data gathering Liaise with external advisors early and set up joint project team Involve professionals with the right experiences relating to IFRS, NGAAP, Processes, etc Pitfalls to avoid !!! • • • • • • www.pkf.com Jump starting the process without a structured gap analysis, impact assessment and clear conversion plan Underestimation of time and number of resources needed to complete the project Thinking that “accounting rules are similar” – IFRS is a different ballgame Impact of IFRS conversion not addressed upfront with stakeholders Lack of sufficient and early communication with auditors and regulators No project team leader/manager