Feature Article of Tuesday, 2 August 2011
Columnist: Zori, Solomon George
In my most recent article on Ghana`s adoption of IFRS (see 25th July Issue of BFT, page 5), I did indicate that there are enormous benefits regarding the adoption of IFRS. Although the International Accounting Standards Board, the self-acclaimed global standard setter, has received wide spread criticisms about the development of a single set of accounting standard across the globe, one thing critics all agree on is that, there is the need for the provision of high international accounting quality for users. For example, imagine an investor from Qatar is considering investing in Ghana and has no idea how financial statements are prepared and with what standards they are prepared with. It is difficult for this investor to make financial and investment decisions based on local or regional accounting standards. Hence the move towards IFRS has been largely greeted as a sign of making cross border investments and capital allocation easier. However, many African countries have been unable to document these benefits of adopting IFRS owning the fact that, these standards were developed in the West and for that matter, with a view of solving western problems. In some sense, this argument may sound plausible and in other context this may seem misplaced as it is generally believed that IFRSs are principle based standards and hence the use of judgment to fit the context within which it is used make sense.
Reasons for which international difference in accounting standards are obvious, but for the sake of clarity, let me rather state the obvious. It’s been argued that the extent of economic development within a country plays a major role as to whether it will adopt international standards or develop its own standards. Thus-as countries become more ‘wealthy’ they tend to develop their own accounting standards (which can be costly, I will advance arguments as to why this may be the case). Less developed countries often adopt accounting standards issued by the IASC (which may, or may not actually be relevant to the information needs of the local people). Furthermore the nature of the domestic business ownership and financing systems can influence the accounting standards used within a country. For example, in countries which have companies that rely relatively more on equity capital (funds from many ‘outsiders’) there is a tendency to provide greater disclosures than in countries with companies that rely relatively more on debt capital. Another clear example of why international difference in accounting exits is colonial inheritance. Chances are, colonial inheritance or history of a country association with a colonial master will impact the accounting standards employed.
A commonly mentioned reason for international differences in accounting is tied to the broad notion of ‘cultural difference’. Culture itself could be expected to influence other things, such as legal systems, tax systems, and how businesses are formed and financed, which will in turn influence the types of information demanded. A simple example will be the case of Islamic finance where the notion of charging interest on loans is unacceptable in the Arab world hence the reason for non-adoption of IFRS. Sources of aid or finance might also influence the accounting standards used. For example, an international funding organization (such as the World Bank, IMF) might require that particular accounting rules be used as a condition of providing funds to a country. Evidence point to the fact that the World Bank and the European Union continue to exert pressure on developing countries to adopt IFRS in order to qualify for funding and aid.
Nevertheless organizations such as the IASB are either ignoring the literature which suggests that there is a need for different countries to adopt different accounting approaches (due to issues such as differences in culture, religion, financing systems, economic development and so forth) or they believe that the advantages that accrue as a result of harmonization of international standards out-weigh the need to consider cultural, religious and other differences. In many respects, wealthy countries turn to shy away from IFRS for reason of the loss of power to set their own accounting standards, whilst developing countries turn to adopt IFRS without any major changes. Some of the reasons for this may be attributable to the huge costs associated with the development of such standards, the edge to join the international harmonization train, to facilitate the growth of foreign direct investments, to enable the accounting professionals to emulate well established professional standards, conduct and ethics and finally to legitimize the status of a country as a full fledge member of the international community for example, the IFAC, i.e the International Federation of Accountants of which the Institute of Chartered Accountants Ghana has been a part since 90s . Having said this, a rich set of literature pioneered by Nobes and Paker, Peiera, Larson, Abu Rahaman all argue that there is little evidence that the claimed benefits of international standards to developing countries are quite obvious.
In the recent annual report of the IASB, the outgoing chairman, Sir David Tweedie said that ``Europe’s experience of 25 sovereign nations, each with their own national accounting standards, simultaneously switching to IFRSs should offer some comfort to other jurisdictions concerned about their own transitional arrangements. Recent research has shown that, in addition to raising the quality of financial reporting across Europe, switching to IFRSs has delivered improvements in financial reporting even for those countries such as the United Kingdom with advanced financial reporting requirements. In the wake of Europe’s decision, Australia, Hong Kong, New Zealand and South Africa quickly moved to the adoption of IFRSs, followed in 2007 by China, which did not adopt on a ‘word for word’ basis but whose requirements are now very close to IFRSs. In 2008 Israel, 2009 Chile, and 2010 Brazil adopted IFRSs to be followed by a host of other countries in the next two years, namely, Canada, Korea, Malaysia, Mexico, Singapore and Taiwan. The tipping point is then achieved, and the world has in effect committed itself to global financial reporting standards.`` This seem suggest that, it doesn’t really matter any longer if the rest of the world moves to IFRS or not, as the world’s most powerful nations are now applying IFRS, or will soon require IFRS, it has come to stay as the global financial accounting language and hence, it was prudent that the Institute of Chartered Accountants Ghana made the frantic effort to adopt the International Financial Reporting Standards.
In a more Ghanaian context, I provide below an extract of some differences between IFRS and the Ghana National Accounting Standards.
Key Item IFRS Ghana National Accounting Standards 1 Framework for the preparation of financial statements Includes a detailed framework for the preparation and presentation of financial statements. A revised Framework has been published in 2010 September Jointly by the IASB and the FASB. (Please see the Conceptual Framework of the IASB) Several Aspects of the framework were omitted. Particularly, the Qualitative characteristics of financial Statements were not visible in GNAS 2 Statement of changes in equity Requirements to include statement of Changes in Equity This is not required under GNAS. However, the Companies code requires the disclosure of Capital Surplus and Income Surplus which could include some of the items to be included in the statement of changes in Equity 3 Changes in Accounting Policy IAS 8 specifically deals with changes in accounting Policy GNAS requires that the effect of certain changes in accounting policies should be included in the extraordinary items in the current period 4 Minority Interest. (Now Non-controlling interest) IAS 27 requires non-controlling interest to be separately disclosed for both parent and subsidiary on the face of the income statement and the statement of financial position GNAS omits the IAS disclosure of minority interest on face of income statement 5 Deferred income tax. IAS 12 requires recognition of deferred tax assets and liabilities for all temporary differences. In contrast, the GNAS requires deferred tax assets and liabilities to be created only for timing differences relating to depreciation 6 Borrowing costs. IAS 23 requires full disclosure Disclosures are omitted from the GNAS regarding the accounting policy adopted for borrowing costs and the capitalization rate. 7 Accounting for Agriculture IAS 41 provides extensive guidance on how to account for agriculture and biological related assets. GNAS does not have a substantive standard on Accounting for Agriculture 8 Accounting for Intangibles The basis of recognition and measurement of intangible assets (IAS 38 Intangible Assets) differs depending on whether they are purchased individually or acquired through a business combination, or whether they are internally generated. There is no substantive accounting standard dealing specifically with accounting for intangibles i.e, measurement and recognition except goodwill in business combinations, but requires disclosure for Goodwill, patent, trademarks and similar assets. 9 Accounting for discontinued operations IFRS 5 specifically provides guidance on the treatment of discontinued operations. It requires separate disclosures for discontinued operations. There is no substantive standard that provides detailed guidance on discontinued operations 10 Accounting for Investment Property IAS 40 deal with investment property and treats changes in value on investment property directly in the statement of comprehensive income. No substantive standard specifically for investment property, however GNAS 23, accounting for investments requires that investment property be accounted for as long term investments or as Property Plant and Equipment. Increases in fair values are credited directly to equity as a revaluation surplus and not income as in IFRS but a decrease is charged to income. 11 Consolidated financial Statements: (a)Negative goodwill immediately recognized as a gain in the income statement (a)Treated as deferred income and recognized as income on a systematic basis over a period not exceeding five years unless a longer period, not exceeding twenty years from the date of acquisition can be identified. (b)Goodwill is not amortized but reviewed annually for impairments (b) Goodwill is amortized over its useful life using straight-line basis unless another amortization basis is deemed more appropriate. Sources: World Bank, Own research. This is only illustrative but not exhaustive.
I should note that although IFRS has become mandatory for public entities, in some instances, certain legislative provisions may lead to a significant departure from some IFRSs. In the 2009 and 2008 annual report of the Bank of Ghana, they indicated that , ``the financial statements, including comparative year information, are prepared in accordance with the Bank of Ghana Act, 2002 (Act 612), Financial Administration Act, 2007 (Act 654), International Financial Reporting Standards (IFRS) and the Companies Code, 1963 (Act 179) except where the application of the Bank of Ghana Act, 2002 (Act 612) leads to non-compliance with IFRS.`` Some of the reasons for this departure in non-compliance with IFRS include; the treatment of net foreign exchange difference; and Net foreign exchange differences on holdings of gold. This is not a peculiar case among banking entities and I believe that going forward, a revamp of the IFRS adoption process will yield positive results in reducing such departures. Summarily, whatever the challenges are in adopting IFRS, I believe that a conscious effort by all institutional functions will provide a robust foundation to providing quality accounting information. Particularly, the legal interpretations of IFRSs need a careful thought as it forms the basis for enforcement. Undoubtedly, what matter most is not the adoption of IFRS but its enforcement. There are concerns that a weak enforcement environment for IFRS in Ghana is as good as not adopting IFRS. In all honesty, I believe that should we aim to benefit from the international harmonization of our accounting standards, there should be both preventive and punitive measures to ensure that accountability is well achieved. Solomon George Zori The Author is a Doctoral Fellow in the area of Accounting and Taxation