IFRS: Achieveable or Impractical



Debate continues to rage over the future of accounting in Ethiopia. After Ethiopia proclaimed the adoption of Integrated Financial Reporting Standard (IFRS) till 2020, many big companies and corporations are on the way to adopt the standard in a bid to reform their auditing methods and to easily function in the global economy. But, none of the companies have implemented IFRS so far, except the Commercial Bank of Ethiopia (CBE)- although some are progressing towards its application. Insufficient skilled labour, radical changes from current practices and under-resourced institutions to enforce standards are the major challenges that deter organisations to go in line with the scheduled period, as SAMSON BERHANE, FORTUNE STAFF WRITER, reports.


For one of the pioneer accountants, Getachew Kassaye, incorporating International Financial Reporting Standards (IFRS) would make life a lot easier for his team and his stakeholders.

“It will help us to set up a purified account,” the auditor, with almost five decades of experience, noted. “Investors with an  IFRS statement will also benefit while looking for loans and partners abroad.”

Getachew has been auditing dozens of institutions using the Generally Accepted Accounting Principles (GAAP), a set of rules, standards and practices used throughout the accounting industry, for decades.

“Unlike IFRS, the financial reporting in GAAP differs from country to country,” he said. “Hence, the new system will help companies to fit in with the rest of the world.”

The system is set collectively by the IFRS Foundation and the International Accounting Standards Board with the aim of providing a universal language for business affairs and make business accounts comprehensible and comparable across boundaries.

Its introduction was linked with the boom in international trade and acquisitions throughout the world, resulting in the harmonisation of accounting standards and later, its convergence in the 1990s.

It is known for providing information on financial reports and enables its users to make better decisions, according to Getachew, the auditor.

Fully practised in Europe for the past 16 years, 115 countries around the world have adopted IFRS including China, Japan, Russia and Australia. Even the US- an ardent supporter of GAAP- has allowed businesses to replace their accounting systems with IFRS.

The standards can be applied to entities that exist in different types of economies from well developed and industrialised nations, emerging economies to developing countries like Ethiopia.

Ever since Ethiopia proclaimed the complete adoption of IFRS until 2020, many big companies and corporations are beginning to adopt the standard and restructure their auditing methods and to easily function in the global economy.

Hoping that five years is a reasonable period to implement IFRS, the government has established the Accounting & Auditing Board of Ethiopia (AABE) to foster the realisation of the new standards in line with the audit law of the country. Since then, it has been providing training and workshops to create awareness on the implementation of IFRS.

“If companies voluntarily implement the system in advance, the transition will be smoother,” Gashe Yemane, director of the Board, told Fortune a month ago.

Additionally, many are hopeful that it will have a positive impact on the external auditing market.

“It is a cure for the riddled auditing profession with sub-standard works, unaccountable practices and race-to-the-bottom price competitions,” said Abdulmenan Mohammed, an expert with 15 years of auditing experience in England and Ethiopia.

Nonetheless, none of the companies except the Commercial Bank of Ethiopia (CBE) have entirely implemented IFRS so far. CBE  introduced the standard two months ago through KPMG Consulting. The system was applied a year ahead of the scheduled period.

In the same vein, all banks and insurance companies through their associations have hired PricewaterhouseCooper (PWC) to adopt the standards starting from this year’s reporting period.

Public enterprises and financial institutions will be the first to prepare their financial statement in accordance with full IFRS beginning from this fiscal.

These institutions were expected to partially execute IFRS in the past fiscal year. But many are still in their infancy, while some including Berhanena Selam Printing Enterprise, the first modern printing press in Ethiopia, are struggling to achieve the long-anticipated standard.

Founded a century ago, the Enterprise has hired Grant Thornton with a cost of 2.7 million Br as a consultant for the adoption of the new standard.

“It helps us to identify our real stand in the industry and give honest figures to our business partners and clients,” said Mulugeta Leulseged, IFRS project manager of Berhanena Selam. He cited the case of the Enterprise’s building that costs below one Birr under GAAP and escalated to millions of Birr after its revaluation using IFRS.

“Giving a true and fair view in financial statements will be possible under the new standard,” he said.

Mulugeta also aspires that the new system will give the Enterprise a competitive edge in building the confidence of lenders.

“We will be better off in accessing finance due to the clear financial outlook after its application,” he said.

Apart from enterprises, public interest entities such as Ethiopian Commodity Exchange (ECX), member companies and organisations that meet the quantitative thresholds, charities and societies will be the second implementers in the coming fiscal year.

The last phase executors will be small and medium enterprises, whose annual turnover is above one million Birr, till 2020.

Despite the blossoming viewpoint of the system, there are gloomy pictures.

An auditor with three decades of experience and one of the founding members of Ethiopia Professional Association of Accountants & Auditors, whose name has been withheld upon request, claims that fully implementing IFRS is impractical considering the existing situation in the country.

“No country including the US has succeeded in implementing full IFRS in five years,” the auditor commented. “It cannot be achieved unless it is customised.”

Another auditor and a financial analyst echoes the outlook of the auditor, but from a different perspective.

“Customisation would have been much better than outright full adoption. Some of the standards that are irrelevant and complex in our context, should have been replaced by local norms,” said Abdulmenan, who is familiar with the system for over a decade. “Over time, the country could move to full adoption.”

Many countries throughout the world have tailored IFRS to fit their context due to dissimilarity in the political and economic setting across countries like Kenya, which adopted IFRS in 2005.

Besides tailoring the norms, the progress of some entities is also worrying.

One of this year’s implementer, the Ministry of Public Enterprise (MoPE), is jointly working with the Board by forming a committee to apply the IFRS within the scheduled period. Despite the Ministry’s efforts, the path to adopting the system has been challenging.

“Some enterprises have not even hired a consultant,” said a supervisor working at the Board.

Agreeing with the supervisor, Netsanet Wondirad, an adviser for Corporate Finance & Governance at the Ministry, links the problem with the financial background of the entities.

“Majority of the enterprises have not settled their accounts accurately for about three years. It thus becomes cumbersome for us to go in line with the schedule,” he said.

In another area, lack of market information coupled with insufficient skilled labour, radical changes from current practices and under-resourced institutions to enforce standards caused difficulties in realising IFRS.

“The cost of adopting the system is another obstacle as there was no domestic company that has implemented this system locally,” Netsanet said. “I doubt that we can adopt the system within the scheduled period.”

As some of the accounting standards will entirely change the financial position and performance of entities due to variation in the treatment of assets, liabilities and income, getting adequate evaluators is also a headache for implementers. There are around five companies that give valuation service in the country.

Developing the curriculum in line with the new standard is also an area yet to be probed by the government. As of now, most universities and colleges use GAAP as a guideline.

“Taking this into account, we are presently preparing the curriculum with the Ministry of Education and experts from Addis Abeba University,” said Gashe, the Board’s director, a month ago in an interview with Fortune.

Despite the challenges, Solomon Gizaw, former partner of Deloitte Ethiopia and managing director of HST Consulting, thinks that focusing on large public interest entities will help the government achieve its dream.

“Implementing IFRS across all entities has its drawbacks,” he underscored. “except for financial institutions, the size should be taken into account. Implementation in small entities will be costly.”

 



By SAMSON BERHANE,
FORTUNE STAFF WRITER

Published on Oct 22,2017 [ Vol 18 ,No 913]


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