Better accounting standards key to woo investors

The Board of the Institute of Chartered Accountants of Sri Lanka (ICASL) has approved a policy that Sri Lankan Financial Reporting Standards will be fully compliant with International Financial Reporting Standards by 2011. Central Bank of Sri Lanka, in its ‘Road Map Monetary and Financial Sector Policies for 2011 and Beyond’ report, released in January 2011, has included the initial steps to facilitate the adoption of international standards.

The reports states that changes would take place to Sri Lanka Accounting Standards (SLAS) 44 and 45 on financial instruments corresponding with International Accounting Standards of 32 and 39. Already work is under way to implement these changes starting from January 2012. Following are the excerpts of an interview held with European Banking Federation Chief Executive Guido Ravoet exploring the EU experience in implementing IFRS:

 Q:  What is the basis of IFRS?

 A:  IFRS are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known by its older name of International Accounting Standards (IAS).

IAS was issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS.

 Q:  When was IFRS introduced in EU and how was it implemented?

 A: Although the decision was taken several years before, officially the regulations came into effect in 2002. It was for listed companies on a consolidated basis. It was open-ended and the member states were free to go further and ask the non-listed companies to be IFRS. It was also available for implementation on subsidiary levels as well. Europe took the lead in successfully implementing IFRS standards compared to rest of the world.

 Q :  Was there a deadline for this process?

A:Yes, the deadline was 2004. The implementation was an important change for the listed companies and their financial reporting. I heard that it will be shorter for Sri Lanka but doable.

Q: Did you experience any serious issues during the implementation?

A:In general, the companies did not have any major problems in implementation. But the banks had some issues as they were following IAS 39, which was fixing the classifications and measurements of financial institutions. There were some adjustments from the IASB to settle the matters.

But we still have an issue for hedge accounting. This means in European legislation, this specific rule is not endorsed. So we have exceptions for hedge accounting. We have a new project – IFRS 9 with regards to financial instruments, accounting and reporting. It finds more adapted framework for banks. But because of the (financial) crisis in 2007/08 the critics substantiated that we were right.

In the meantime the recent agreement for banks, the IFRS 9, accepts not full value but a mix measurement regime combining the historic cost appreciation. Basically the assets and liabilities in banking book in the traditional activity of a bank will still be at historic cost evaluated. The assets and liabilities in the trading book of a bank have to be assessed at fair value. This is what the European Banking Federation asks. We are happy with the new results.

Q: What will be the responsibilities of Sri Lankan banks with IFRS coming in?

A: Banks have the same advantage seen with other companies to apply cross border comparable accounts and also using high quality accounting standards. If Sri Lankan banks want to further develop to support the fast growing economy I think that they will have to raise capital also from foreign investors in addition to local investors. So, foreign investors will ask comparable statements and accounts.

So, in the interest of all banks in Sri Lanka, regardless of the size, they will need more capital according to the new Basel benchmarks. It is important for all companies in Sri Lanka to adopt IFRS in time to come to provide high quality information for investors and comparable standards.