Sri Lanka converges with IFRS

The dawn of 1 January 2011 brought a whole new dimension to the corporate financial reporting in Sri Lanka.

In line with the global trend in enabling a common language for financial reporting process, the Institute of Chartered Accountants of Sri Lanka has taken steps to adopt International Financial Reporting Standards (IFRS) by issuing Sri Lanka Financial Reporting Standards (SLFRS) and Sri Lanka Accounting Standards (LKAS) for annual financial periods beginning on or after 1 January 2012.

The timetable for this far reaching activity is short. Who will be most affected? The short answer is that just about every entity that operates locally and internationally will be, if only because even if companies themselves are not moving to international standards, some of their biggest competitors are (or will be).

First time adoption of Sri Lanka Financial Reporting Standards (equivalent to IFRS)

With the adoption of the new Sri Lanka Financial Reporting Standards, entities are required to apply SLFRS 1 – First time adoption of Sri Lanka Financial Reporting Standards.

The key principle of SLFRS 1 is full retrospective application of all accounting standards in effect as of the closing balance sheet date. Doing so will mean that the financial statements of an entity for 2012 will reflect the financial position and performance of as if that entity has always reported its financial statements using the new SLFRS.

As a result the following complexities will surface in 2012:

•    Preparation of the last three years balance sheets based on the new/revised standards; i.e. Balance sheets as at the closing of 2010 and 2011 are required to apply the new SLFRS for the purpose of comparatives for the year 2012.
•    Retrospective application of accounting policies for the three years preceding 2012 financial year end
•       Availability of information to re-measure balances under new accounting principles, in complying with the new SLFRS.
• Ability of IT systems to generate information required for the measurement of account balances and for disclosure purposes.
•    Business processes to be re-engineered to capture necessary data.

Asite Talwatte, Country Managing Partner of Ernst & Young comments: “With the introduction and recent amendments of many standards, there is an intensifying    need for changes in accounting and reporting, business processes as well as IT systems. For example, LKAS 23 borrowing costs requires borrowing costs to be capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. Thus, Management will need to carefully assess the new requirements which are inevitable and modify the systems to capture and record the relevant data as required.”

A glimpse of key issues

LKAS 32 Financial Instruments: Presentation, LKAS 39 Financial Instruments: Recognition and Measurement and SLFRS 7 Financial Instruments: Disclosures deal with presentation, recognition and measurement and disclosure aspects of financial instruments, in a comprehensive manner.

LKAS 32 requires the issuer to classify instruments as a liability or equity on initial recognition along with a split of convertible financial instruments into its equity and liability components for accounting purposes.

As per LKAS 39, all financial assets are to be classified into four categories namely, Fair Value through Profit & Loss (FVPL), Available for Sale (AFS), Held to Maturity (HTM) and Loans & Receivables (L&R) and all financial liabilities are to be classified as FVPL or other liabilities.

Adding views on the introduction of LKAS 32 Financial Instruments: Presentation and LKAS 39 Financial Instruments: Recognition and Measurement, Manil Jayesinghe, Head of Ernst & Young’s Assurance says: “According to the new standards, the initial and subsequent measurement of financial instruments will significantly change with fair value coming into play.  Also, LKAS 39 requires a provision for impairment to be recognised as soon as there is a risk that the initial value of an asset may not be recovered.  These changes will have a significant impact on a company’s financial statements.”

Some of the key issues foreseen in adopting SLFRS

Converging with IFRS will entail that 28 existing accounting standards will be revised, 12 new standards will be issued and about 26 IFRICs will be in force beginning 1st January 2012. A few common issues that may affect the companies in Sri Lanka are seen in the table.

When will the process be over?

IFRSs have evolved over the years and continue to involve due to the complexities of the operations that companies involve in. From 2012 onwards Sri Lanka will envelope such changes no sooner the changes are issue. Hence, being complaint with Sri Lanka Financial Reporting Standards becomes a moving target.

As the new accounting framework matures, there will continue to be changes in accounting practices in the next decade. Companies will need to keep up-to-date on SLFRS-related developments to ensure compliance with accounting requirements in the future as well.