Top forum highlights importance of IFRS

By Cheranka Mendis

 Sri Lanka in its current growth trajectory must focus on transparent playing grounds creating an even field of growth of sustainability and development.

The country and its financial institutions and banks must focus its energies on better financial reporting and regulation starting with the application of International Financial Reporting Standards (IFRS) which has been given an implementation deadline of 1 January, 2012 by the CBSL.

Senior Minister of International Monetary Cooperation Dr. Sarath Amunugama speaking at the inauguration of a two day workshop on the implementation of IFRS organised by Sri Lanka Banks’ Association along with Financial Architects and Providence Network and Solutions stated that the discussion on the said subject is important on three levels.

Acknowledging that the financial environment has changed dramatically within the past five years, Amunugama stated that heightening of surveillance and global interest on transparency has augmented in the market pushing forth a wholly integrated financial institutional systems. He pointed out that with the global downturn the interest in reporting systems increased. “The US banking crisis developed due to the corruption crept into its financial houses. This caused many big names such as Lehman Brothers to collapse while others were thrown close to it. Governments that proclaimed a hands off position had to step in and bail out the economy from further crisis,” he recalled.

Even though a similar crisis in Sri Lanka would not have the same effects on the global market, the country should focus on the functionality of banks and financial institutions. “Crisis here would not head towards a world crisis; we cannot be that ambitious,” laughed the Minister, “however the lack of confidence stemmed from such crisis can have a knock on effect to bring down the house of cards.” Transparent reporting must be adhered to, he said.

With the country heading to positivistic outlook riding on good performance indicators in 2010, the banks must play a bigger role in supporting the economy, he said. With the over eight per cent growth recorded in 2010 along with strong foreign reserves, rupee holding strong and lessening inflation the state has entered into a number of major PPPs to support the expectations. “The public spending programme is on target. There is sufficient FDIs and investment; however we must do much more,” Amunugama noted, “unless our reporting systems are clear and accurate in the growth process, growth would not be sustainable.”

Banks must play an important role, he said. They must leverage the assets so far created. The question arises whether the banking system should move towards scaling up its ratings and bond issues without depending exclusively on the deposit base. “Raise more; increase banking capital on record and find other sources of capital.” To see a balance between growth and inflation, banks cannot stick to the old text book theories and should adopt new strategies such as good reporting. He warned that following the text book theories would only lead to growth and technological intensification with unemployment or Zero Population Growth (ZPG) creating situations as currently experienced in Spain, Portugal and very soon Italy, Amunugama assured.

The Minister also cautioned that a possible ‘information crisis’ may loom ahead. Acknowledging that the local stock exchange is burgeoning one, he stated that we must now look at the “inner works” of the system- who is investing, is it more retail or profit taking etc. “Information coming from banks and blue chip companies should have a mechanism to make financial institutions more credible,” sustainability, continuity and development all depends on reporting systems, he said.

With the economy advancing the middle class of the country is also growing, Amunugama said. “For this category they need more information. He also commented that with the healthy boost added in by the middle class, people stop should whining and complaining and seize the new opportunities opening in every corner. “We should not be confounded by old and traditional ‘colonised’ thinking. Instead we must embrace a positive approach,” he said, “it is not about the old school but the new spirit that must be concentrated on to go forward.

Partner at Ernst & Young Manil Jayasinghe speaking on the IFRS system added that the proper compliance would result in organisations witnessing a reduction in the cost of capital, enhancing efficiency, increase in transparency and establishing global reporting and “financial language in the future.” This would become a positive tool for Sri Lanka creating access to information across borders to all stakeholders and investors. This would allow the parties to make informed decisions through standards which have been listed and prepared with an investor in mind and not just accountants, he said.

Jayasinghe noted that Sri Lanka currently adheres to a 2004 version of IFRS, with 28 new standards to be revised and 12 new standards to be implemented, and that when it happens the effect will be tsunami-like, with many changes to take place.  In preparation for the conversion the banks will need to be acquainted with its current stand, and then begin to strategize the short, medium and consistent solutions. He noted that formulation ‘short term’ ones only will not have a major impact on the long run of the business. “The short time table will no doubt cause stress. Know the gaps, and go about bridging those gaps in the most time sufficient manner.” As for how quickly Sri Lanka can converge to the new standard, Jayasinghe stated that for proper implementation, Sri Lanka would require two to three years, but with its given time line, the country would have to settle for a ‘quick fix’.

He however assured that a ‘ray of hope’ lies for all banks depending on how fast they start working on implementing IFRS. “Banks need to adopt a clear strategy and treat it like a project. Leadership from the top is essential. You’ll need a dedicated team on the project that includes individuals from departments across the board as well as external experts and auditors.”