Sri Lankan banks in the transition towards IFRS compliance

Today, more than 100 countries worldwide have adopted the International Financial Reporting Standards (IFRS). This global trend in enabling a common language for financial reporting process started first in Europe, and still continues in India, Canada, the USA, and Japan also currently being in the transition phase towards IFRS. Some Asian countries such as Indonesia and Thailand have nearly finished the adoption process.

In Sri Lanka, the Institute of Chartered Accountants of Sri Lanka (ICASL) also approved a policy to adopt 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 IFRS Standards were created for all organisation and companies across industries. However, they pose severe challenges to some industries more than others. A burden will be put on the professionals involved in financial reporting for the banking and financial sector: a thorough understanding of IFRS is indispensible in this function as its application is more complex in any other industry.

As in all the other countries, Sri Lankan banks will need to invest in internal resources to perform the transition.

Business processes need to be re-engineered, specific IT systems need to be installed to manage the required data and information, calculations and reporting. Knowledge and flexibility will be key to ensure compliance with accounting requirements in the future as well, given that there will be changes in accounting practices in the next few years.

Despite of the significant effort and costs associated with the change from local standards to IFRS, the benefits for banks are huge. They include improved transparency, easier comparison, increased shareholder value and correct management information, together with consistency of reporting across jurisdictions and sectors.

IFRS implies improved transparency. Many of the so called ‘off balance sheet items’ will now be found on strictly regulated balances. This new transparency will create awareness externally, but internally, within the bank, correct values will lead to a more firm and prudent banking.

With these new standards, comparison between companies is facilitated.

 They will be more comparable, and by consequence, more informative on the healthiness of the firms. One of the buzzwords of IFRS, and IAS 39 more in particular, is “shareholders value”. As a consequence of the improved transparency and comparability, shareholders will gain more clarity about their investment, upon which they can take sound investment decisions.

This is expected to boost share prices for the strong-performing Sri Lankan companies; if there’s more transparency, then Sri Lankan banks should be more attractive to overseas investors.”

Finally, for many financial institutions the introduction of IAS 39 gives them the opportunity to revise their – often outdated- systems currently responsible for the reporting process.

As IAS 39 introduces a new way of accounting, it gives the financial institutions the chance to switch to a modern system and perform a data cleansing exercise to have more accurate results.

These are just some advantages with the introduction of the IAS/IFRS standards in Sri Lanka which will give the financial institutions the opportunity to become more transparent and to become an international player both on the market penetration side as on the investor side of the company.