Our last article sought to address the role and expectations
of the external auditor in an environment focused on building
trust and confidence for the benefit of all free market participants.
However, underpinning the auditorsand more broadlythe
accountants role, are well articulated standards guiding
Specifically what we are speaking of here are auditing and
accounting standards that guide the actions and conduct of
the professional accountant in the execution of his duties.
Accounting bodies across the world have in the recent past
intensified their efforts to strengthen their standards in
response to the initiatives of governments and regulators.
This weeks article seeks to address the changes being
driven by the International Federation of Accountants (IFAC)
and the International Accounting Standards Board (IASB) as
they pertain to auditing and accounting standards respectively.
Corporate governance drives changes in auditing standards
The IFAC, a global oversight body for the accountancy profession,
is aggressively pursuing high quality practices by the worlds
In the Caribbean, the professional accounting firms are required
to comply with the standards issued by IFAC (ie International
Standards on Auditing).
Today, IFACs activities centre on the following core
Emphasising the importance of ethics;
Developing high quality international standards and promoting
convergence to these standards; and
Supporting organisational performance of members and other
A number of the changes we are seeing today are in direct
response to the weaknesses revealed by countless corporate
As stated by the president of IFAC, Graham Ward, in a recent
speech, these failures have resulted in an increased
understanding of the value delivered by professional accountants,
both in business and in professional practice and the critical
role they play in keeping organisations honest and ensuring
In seeking to ensure that external auditors deliver on this
role, the IFAC has issued a number of additions and amendments
to the ISAs which become effective in 2005. Additionally
IFAC has issued a number of exposure drafts for comment and
anticipate that these will be issued later this year.
What these changes undoubtedly mean is an expansion in the
scope of work of todays public accountant, not only
in the developed international markets but also in the Caribbean.
Application of these standards will make the financial statement
audit a significantly more valuable but costly mechanism to
businesses and their shareholders.
The enhanced standards have been designed to address the following
Auditors responsibility to consider fraud in an audit
of financial statements
Assurance engagements (including framework)
Special consideration in the audit of small entities
The auditor report on a complete set of general purpose financial
Are Caribbean CFOs ready for adoption of IFRS?
Financial statements prepared and issued by Caribbean entities
must comply with standards issued by IASB.
In early 2004, the IASB finalised and published a number of
new accounting standards IFRSs, and at the end of 2003 also
took the opportunity to improve/amend certain existing accounting
To be exact, the IASB issued four new IFRSs, and revised no
less than 17 existing IASs (See Appendix).
For clarification purposes, it should be noted that international
financial reporting standards now encompass all of the IASs,
IFRSs and the related standing interpretations and guidance.
For the most part, entities that prepare IFRS compliant financial
statements will begin to feel the impact of these changes
for accounting periods beginning on or after January 1, 2005.
For those entities that choose to adopt the new and revised
standards before their effective dates, the impact could be
felt as early as 2004.
The responsibility of quickly coming to terms with these changes
and assessing their impact on the entitys financial
statements normally falls on the shoulders of its chief financial
officer and the finance/accounting department.
Given the volume of information to be reviewed, the responsible
persons will, no doubt, be asking themselves: How should this
monumental task be approached? The answer is: It depends.
There is no right or wrong method
of approaching the task, and the most effective method for
one entity may not be appropriate for another.
Whatever method is chosen, from a practical perspective, the
following points should be considered:
1. It is useful to bear in mind that the larger and more complex
the operations of the entity, the greater the impact the new/revised
standards will have on that entity. To be more specific, if
the entitys operations include any of the following,
the impact is likely to be greater:
Mergers and acquisitions;
Consolidated financial statements;
Insurance contracts; or
Complex financial instruments;
For those entities which are not impacted by any of these
areas, their financial officers can breathe a sigh of relief,
since the impact will likely be far less severe;
2. Entities should begin with an overview of what is new,
what has changed and what the impact on the financial statements
is likely to be.
Probably the most efficient way to gain this understanding
is to review the introduction to each of the new/revised standards
contained in the 2004 IFRS Handbook.
The introduction, normally comprising three to five pages,
provides a brief overview of the new standards and the key
changes that were made to existing standards.
3. Having gained a better understanding of the specific requirements
of each standard and the impact on the financial statements,
entities should then consider the following:
When does the new/revised standard become effective for the
entity, and what do the transition rules require? The transition
rules can be complex and should not be ignored;
What impact will the new/revised standards have on the entitys
interim reporting? This is an important consideration for
all publicly quoted entities (and their group companies) that
publish interim results in accordance with IFRS;
Can the entitys current reporting systems provide the
information necessary to apply the new/revised standards?
Depending on the entity, the nature and quantity of information
required for financial statement disclosure purposes can be
extensive, and could require systems changes;
Does the new/revised standard require the involvement of experts?
This may be necessary for standards which require certain
types of valuations (eg valuing employee share options, and
determining the fair value of an acquired companys assets
and liabilities in a business combination)
4. The last step in the process is often the most challenging,
Each entity should have a documented implementation plan,
which should include each area of the financial statements
that will be impacted, the persons responsible for execution
and follow up, and the timeline for completing the process.
If applicable, an entitys internal auditors and audit
committee should also be informed and kept appraised of the
Finally, the entitys external auditors should also be
involved in the process, since they will likely possess an
in-depth understanding of the entitys operations and
how the new/revised standards will impact the financial statements.
Entities that approach these IFRS implementation challenges
in a proactive manner can significantly improve the efficiency
of the financial statement close process at the end of their
In future articles we will take a closer look at certain specific
standards, focusing on their key requirements, the challenges
of implementation and discuss the impact that their application
will likely have on the entitys financial statements.
Next Week: Peter Gittens, director of EYCs Financial
Reporting Group will address specific standards applicable
Nicholas Gomez is the leader of Assurance & Advisory Business
Services at Ernst & Young Caribbean (EYC). EYC is a regional
firm providing assurance, tax and business advisory services
to a diverse portfolio of clients. This article forms part
of a series presenting on governance issues and emerging best
practices in the Caribbean context.
of new and revised standards
Ref # Standard Name Effective Date
Accounting periods beginning
on or after (except IFRS 3, 36 & 38)
IFRS 2 Share-based Payment January 1, 2005
IFRS 3 Business Combinations Immediately if agreement date
after March 31, 2004, with limited retrospective application
IFRS 4 Insurance Contracts January 1, 2005
IFRS 5 Non-current Assets Held for Sale January 1, 2005 and
Standards Revised as Part of the Business Combinations Phase
IAS 36 Impairment of Assets From the same date
IFRS 3 is adopted
IAS 38 Intangible Assets From the same date
IFRS 3 is adopted
Standards Revised as Part of the Improvements Project
IAS 1 Presentation of Financial Statements January 1, 2005
IAS 2 Inventories January 1, 2005
IAS 8 Accounting Policies, Changes in January 1, 2005
Accounting Estimates and Errors
IAS 10 Events after the Balance Sheet Date January 1, 2005
IAS 16 Property, Plant and Equipment January 1, 2005
IAS 17 Leases January 1, 2005
IAS 21 The Effects of Changes in January 1, 2005
Foreign Exchange Rates
IAS 24 Related Party Disclosures January 1, 2005
IAS 27 Consolidate and Separate January 1, 2005
IAS 28 Investments in Associates January 1, 2005
IAS 31 Interests in Joint Ventures January 1, 2005
IAS 32 Financial Instruments: January 1, 2005
Disclosure and Presentation
IAS 33 Earnings Per Share January 1, 2005
IAS 39 Financial Instruments: January 1, 2005
Recognition and Measurement
IAS 40 Investment Property January 1, 2005
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