IMPLEMENTING INTERNATIONAL STANDARDS IN A DEVELOPING
COUNTRY: A CHALLENGE AND AN OPPORTUNITY
By: Russell Guthrie, IFAC Director, Quality Assurance and Member Body
Relations
Institute of Chartered Accountants of Nigeria
Lagos, Nigeria – May 11, 2007
Good afternoon ladies and gentlemen, distinguished guests. Before I start
my remarks, may I offer my sincere thanks to the Institute Chartered Accountants
of Nigeria for inviting me to present at this event. It is a privilege and a pleasure
to be here. I also bring you warm greetings from IFAC President Fermin del
Valle and IFAC Chief Executive Ian Ball.
I principally will speak about the challenges and opportunities in
implementing international standards but would also like to cover a few other
topics towards the end of my remarks.
Over the past several years, we have witnessed the increasing pace of
convergence of national standards with international standards. When people
speak about convergence there is often agreement at the conceptual level that
convergence is a good thing. This thinking is often described in terms of the
benefits that the successful implementation of a single set of international
accounting standards should have:
■ Greater comparability of financial information for investors;
■ Greater willingness on the part of investors to invest across borders;
■ Lower cost of capital;
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■ More efficient allocation of resources; and
■ Higher economic growth.
I personally believe convergence is a good thing and a worthy objective.
But in the recent years, this rush to embrace international standards has also
highlighted some of the serious challenges that exist to achieving this goal.
First, many countries, particularly developing countries, have embraced
IFRS in new legislation or regulation often at the prompting of the international
and donor community. However, this adoption into law has often been done
without adequate consideration of the scope of its application. The laws have
often been written such that IFRS is required to be applied to all entities which
are required to prepare financial statements for statutory purposes. This has
obviously created an enormous burden on Small and Medium Enterprises as well
the Small and Medium Practioners who supply audit services to these
companies. In fairness, this may have also been a result of the lack of an
international alternative set of standards for SMEs.
You will of course be aware of the current IASB-SME project that is
currently in Exposure Draft which seeks to create a simplified set of accounting
standards for non public interest entities. IFAC believes this is a very important
project and indeed, represents an opportunity for the entire international
community to provide their input and opinions.
On February 15 the IASB published for public comment the 254 page
Exposure Draft (ED) of its International Financial Reporting Standard for Small
and Medium-sized Entities (IFRS for SMEs). At the same time the IASB also
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issued its Basis for Conclusions as well as Draft Implementation Guidance,
comprising Illustrative Financial Statements and Disclosure Checklist. The
deadline for comments is October 1, 2007.
The stated objective of this project is to develop an IFRS to meet the needs of –
and intended for use only by – SMEs.
But how has the IASB defined an SME?
SMEs are defined as entities that (1) do not have public accountability and (2)
publish general purpose financial statements for external users. Examples of
such external users include owners who are not involved in managing the
business, existing and potential creditors (such as lenders and vendors),
customers, and credit rating agencies.
An entity has public accountability (and therefore should use full IFRSs) if:

it has filed, or it is in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of
issuing any class of instruments in a public market; or

it holds assets in a fiduciary capacity for a broad group of outsiders, such as a
bank, insurance company, securities broker/dealer, pension fund, mutual fund
or investment bank.
While the IASB has not specified a quantified size test, jurisdictions adopting the
IFRS for SMEs may add one.
Why has the IASB developed a financial reporting standard for SMEs?
The IASB gives a number of reasons:
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First to provide a simplified, self-contained set of standards that are appropriate
for smaller, non-listed companies while still based on full IFRSs, with
modifications based on user needs and cost-benefit considerations. Second to
remove choices for accounting treatment, eliminate topics that are not generally
relevant to SMEs, and simplify recognition and measurement, thereby allowing it
to shrink the volume of the standard by over 85% compared to full IFRSs. Third
to enable investors, lenders, and others to compare SMEs’ financial
performance, financial condition, and cash flows while, at the same time,
reducing the burden of preparing SME financial statements. Fourth to provide
emerging economies with an internationally recognized basis for financial
reporting, helping to significantly raise standards in many countries whilst offering
a clear upgrade path to full IFRS compliance. Fifth to ensure that the IFRS for
SMEs results in general purpose financial statements on which an auditor can
give an opinion as to fair presentation (or true and fair view) of financial position,
performance, and cash flows. Sixth to redraft and simplify the language using
plain English where possible so as to help SMEs prepare their financial reports.
And finally, to develop a standard that will be suitable for, and easily applied by,
even the smallest of SMEs – the so-called micro-entities with just a few
employees.
A rigorous due process has been followed during the 3 years developing the
ED. Starting in September 2003 the IASB surveyed world accounting standardsetters on the key issues. Then in June 2004 it published a Discussion Paper,
Preliminary Views on Accounting Standards for SMEs. The responses formed
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the basis for the Staff Questionnaire on Possible Recognition and Measurement
Modifications for SMEs issued in April 2005. Over 100, including IFAC,
responded to each of these documents. In October 2005 respondents, including
IFAC, had the opportunity to present to the IASB their views, in public roundtable meetings, on possible recognition and measurement simplifications.
The project has also been discussed at over 30 public Board meetings and 6
Standards Advisory Council meetings.
Intent on getting input from various stakeholders a Working Group was formed.
The Working Group comprises over 30 representatives of users and preparers
drawn from all over the world. The members provide views and comments on
specific issues that are presented to them. The Working Group has met 3 times
and provided written comments on an internal draft of the ED. The Working
Group will meet again to consider comments on the ED and make
recommendations to the IASB.
The ED was developed by extracting the fundamental concepts from the IASB
Framework for the Preparation and Presentation of Financial Statements and the
principles and related mandatory guidance from IFRSs with appropriate
modifications in the light of needs of users of SME financial statements and costbenefit considerations. While drafting the standard staff had in mind a typical
SME with about 50 employees. In the interests of making the document standalone, there is no mandatory fallback to full IFRSs for topics not addressed in the
standard.
What are the modifications from full IFRS?
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The modifications are of 3 broad types:
First, IFRS topics not relevant to a typical SME are omitted, with crossreferences to the IFRS if needed. These include:

General price-level adjusted reporting in a hyperinflationary environment;

Equity-settled share-based payment (the computational details are in IFRS 2
Share-based Payment);

Determining fair value of agricultural assets (look to IAS 41 Agriculture, but
the ED also proposes to reduce the use of fair value through profit or loss for
agricultural SMEs);

Extractive industries (look to IFRS 6 Exploration for and Evaluation of Mineral
Resources);

Interim reporting (look to IAS 34 Interim Financial Reporting);

Lessor accounting finance leases (finance lessors are likely to be financial
institutions who would be ineligible to use the IFRS for SMEs anyway);

Recoverable amount of goodwill (SMEs would test goodwill for impairment
much less frequently than under IAS 38 Intangible Assets, but if an SME is
required to perform such a test it would look to the calculation guidance in IAS
38); and

Earnings per share and segment reporting, which are not required for SMEs,
and Insurance contracts (insurers would not be eligible to use the IFRS for
SMEs).
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Second, where full IFRSs provide an accounting policy choice, only the simpler
option is in the IFRS for SMEs. An SME is permitted to use the other option by
cross-reference to the relevant IFRS. These include:

Cost-depreciation model for investment property (fair value through profit or
loss is permitted by reference to IAS 40 Investment Property).

Cost-amortization-impairment model for property, plant and equipment and
intangibles (the revaluation model is allowed by references to IAS 16
Property, Plant and Equipment and IAS 38).

Expense borrowing costs (capitalization allowed by reference to IAS 23
Borrowing Costs).

Indirect method for reporting operating cash flows (the direct method is
allowed by reference to IAS 7 Cash Flow Statement).

One method for all grants (or an SME can use any of the alternatives in IAS
20 Government Grants and Disclosure of Government Assistance).
In adopting the IFRS for SMEs, an individual jurisdiction could decide not to allow
the option that is cross-referenced to full IFRS.
Third, recognition and measurement simplifications, including:

Financial instruments:
o There are 2 categories of financial assets rather than 4. This means there
is no need to deal with all of the intent-driven held to maturity rules or
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related 'tainting', no need for an available for sale option, and many other
simplifications.
o There is a clear and simple principle for de-recognition - if the transferor
has any significant continuing involvement, do not derecognize. The
complex 'pass-through testing' and 'control retention testing' of IAS 39
Financial Instruments: Recognition and Measurement are avoided.
o Much simplified hedge accounting.

Goodwill impairment - an indicator approach rather than mandatory annual
impairment calculations.

Expense all research and development cost (IAS 38 would require
capitalization after commercial viability has been assessed).

The cost method for associates and joint ventures (rather than the equity
method or proportionate consolidation).

Less fair value for agriculture - only used where 'readily determinable without
undue cost or effort'.

Defined benefit plans - a principle approach is used rather than the detailed
calculation and deferral rules of IAS 19 Employee Benefits. The complex
'corridor approach' is omitted.

Share-based payment – only the intrinsic value method.

Finance leases - simplified measurement of lessee's rights and obligations.
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
First-time adoption - less prior period data would have to be restated than
under IFRS 1 First-time Adoption of IFRSs.
In order to ease the burden on preparers the IFRS for SMEs will be updated, of
required, approximately once every two years via an 'omnibus' exposure draft.
And it is organized topically, rather than in IAS/IFRS statement number
sequence. It has 38 sections and a glossary.
What then are the next steps?
The exposure period ends on October 1, 2007. The IASB plans to issue a
final IFRS for SMEs in the second half of 2008. During the exposure period the
IASB will conduct round-table meetings with SMEs and small firms of auditors to
discuss the proposals. The IASB also intends to undertake field visits and/or field
tests of the proposals in the ED.
So what role is IFAC playing in the IASB’s SME project?
At its last meeting the IFAC Board indicated its strong support for this
project and vowed to assist the IASB in various ways so as to secure an optimal
outcome.
First, IFAC will respond to the ED. The response will take a global public
interest perspective. The IFAC SMP Committee has been asked to lead the
drafting and as it does will consult with relevant stakeholders including other
IFAC committees and regional accountancy organizations.
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Second, IFAC, through its SMP Committee, will assist the IASB in the
conduct of these field tests. Once the field test kit is made available by the IASB,
the SMP Committee will circulate and otherwise promote its use.
Third, IFAC has encouraged its member bodies and regional accountancy
organizations to contribute to the debate by responding to the ED and
participating in IASB orchestrated roundtables and field tests. I strongly
encourage the Institute to both participate in the field test and respond to the ED.
Finally, IFAC recognizes that often the users and preparers of SME
financial statements do not get involved in the international standard-setting
process for accounting, assurance and ethics. Hence IFAC, through its
communications vehicles and other outreach efforts, is actively encouraging such
groups to participate.
Now let me focus on the SMP Committee’s work in this area. We have
been closely following the project ever since it started back in 2003. We helped
draft the IFAC responses to the aforementioned Discussion Paper and Staff
Questionnaire. And SMP Committee Staff had the opportunity to participate in
the IASB public round-table meetings. In addition, two of our members sit on the
IASB SME Working Group that offers guidance to the IASB.
We are looking for a globally applicable SME standard, consistently
implemented. The guidance must ease the compliance burden on SMEs and
ensure that the benefits from using SME financial reports exceed the costs of
preparing, disseminating and using them. The release of the ED marks a
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significant milestone for the global accountancy profession. The project has
come a long way from humble beginnings.
On the basis of our preliminary review we have identified various issues that
we feel need addressing when IFAC and individual member bodies respond to
the ED. These include:

Scope – the standard is intended for entities that do not have public
accountability but prepare general purpose financial statements for external
users. We wonder whether a more positive definition of the scope of the
standard, in other words which entities are expected to use it, is appropriate.

Users and user needs – we wonder whether the ED should specify the
intended users of SME financial statements and their information needs.

Cost-benefit – we feel that this deserves elevation within the conceptual part
of the ED so as to ensure that the benefits from using the resulting financial
statements prepared exceed the costs of preparing, disseminating, and using
them?

Micro-entities – we suspect the standard is geared more towards larger
SMEs, despite the IASB stating that it was drafted with a typical 50 employee
entity in mind. As a consequence the standard may too complex for the
smallest entities. This has inspired us to undertake a research project that I
will explain in a few moments.
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
Stand-alone – the ED contains a number of cross references to the full IFRS,
some for options and others for topics not addressed. This may detract from
the object of the standard being self-contained.

Measurement basis – there is much use of fair values; we wonder whether
historic cost should take precedence.

Recognition and measurement simplifications – we are looking at the
case for additional simplification in a number of areas including the area of
impairment of non-financial assets, leases, share-based payment, deferred
taxes, financial instruments, discontinued operations and assets held for
resale, and business combinations
What then are the next steps? The exposure period ends on October 1,
2007. The IASB plans to issue a final IFRS for SMEs in the second half of 2008.
Again I encourage individuals and the institute to seize on this opportunity to let
their voice be heard in this important debate.
Another challenge in implementing international standards is just that –
the implementation. The adoption of international standards is the easy part.
Often the practical implementation challenges have been greatly underestimated.
These include:

Revisions to university curricula, text books

The retraining of the university professors

Development of practical training and CPD courses

Dessmination – actually getting the standards into the hands of
practioners
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
For many countries, the translation of standards is an enormous
burden, both financial and technical
Other challenges exist that are not often readily apparent. There can be
resistance to change the way things are done to achieve this ideal. These
challenges are not of a technical nature. They are a result of cultural issues,
differences in theoretical models and political aspects that have a great deal of
influence in this process.
It is worth mentioning whether or not the concept of convergence should
have the same scope and significance for all the different sets of standards.
The criteria of convergence should be the most restrictive and demanding
in the case of accounting standards. Accountancy is a language and
globalization of financial activity increasingly demands a common language.
In the case of the other standards, like for example those of auditing,
ethics, or quality control, the focus may be different. In these cases, the priority
should be to assure the appropriate level of quality in each of these areas. In
order for the national standards to be regarded as being in compliance with the
international standards, they should include all of the requirements and guidance
of the latter. Accordingly, additions could be permitted as long as they are
consistent with said requirements and guidance or if the additions are derived
from national laws or regulations and are also consistent with the precepts of the
international standards. Within these types of standards, it is more difficult to
think about eliminations required by conflicts with national legal or regulatory
standards. But if conflicts do occur, an adequate replacement should be found.
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The independent Public Interest Activity Committees of IFAC are working
to issue guidelines in relation to these questions.
Beyond the fact that audit, ethics, and quality control standards can be
seen as best practices, it is still true that uniform global standards would be
healthy and would facilitate efficient action by all particpants in the financial
reporting supply chain. Especially, in the case of the independence standards,
the existence of diverse national standards, some with transnational implications,
generate unnecessary difficulties for professionals in practice, without the
existence of a clear benefit for the public interest. Something similar occurs with
the regulatory and oversight systems, the convergence of these systems would
also contribute significantly to global efficiency.
With regard to the auditing standards, there are also voices demanding
differential standards. Nevertheless, the situation here is different. What prevails
is the desired degree of assurance, and in consequence, for the same desired
level of assurance it is difficult to sustain that there could be two distinct
processes. However, it is possible to simplify the execution of determined
procedures when dealing with less complex entities.
Accordingly, the Small and Medium Practices Committee of IFAC is
developing an explanatory guide for implementing the International Standards on
Auditing (ISAs) on SME audit engagements [and has planned to launch the guide
in 2007]. Preserving the concept that an audit is an audit, this guide will provide
the tools to facilitate the tasks of the auditors in SMEs.
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I should mention here that Nigeria is ably represented on the SMP
Committiee by Mrs. Ibironke M. Osiyemi.
Finally, I want to mention another important challenge with respect to the
use of international standards. If international standards are to be truly
applicable to all countries then representation within the international standard
setting processes must be attainable for countries. Obviously this presents
enormous hurdles – financial and indeed often political – for developing nations.
The IFAC Developing Nations Committee seeks to increase the voice of
developing nations in the international standard setting process by commenting
on EDs and raising the profile and needs of developing and emerging
economies. Nigeria is represented on the DNC by Mr. LATEEF OWOYEMI. IFAC
has also introduced a pilot program for 2008 which will subsidize a portion of the
costs for individuals from developing nations appointed to IFAC boards and
committees. These initiatives are of course only a start but I do believe that there
is an opportunity in the coming years for developing economies to leverage off of
the awareness that has been created over the past few years and to keep the
pressure on international standard setters to develop standards with input from
and applicability to developing nations.
So it is clear there are a number of challenges to implementing
international standards – but within each challenge there are opportunities as
well. I encourage the Institute and you as individuals to seize these opportunities
and help identify solutions to challenges that we face as a profession.
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Thank you ladies and gentlemen for your attention and your warm
hospitality.
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