Thursday 23rd June 2005


Enhancing standards

Accounting changes occurring at a dizzying pace

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By Nicholas Gomez

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 auditor’s—and more broadly—the accountant’s role, are well articulated standards guiding the profession.

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 week’s 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 world’s accountants.

In the Caribbean, the professional accounting firms are required to comply with the standards issued by IFAC (ie International Standards on Auditing).

Today, IFAC’s activities centre on the following core areas:

Emphasising the importance of ethics;

Developing high quality international standards and promoting convergence to these standards; and

Supporting organisational performance of members and other regulatory bodies

A number of the changes we are seeing today are in direct response to the weaknesses revealed by countless corporate failures.

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 accountability.”

In seeking to ensure that external auditors deliver on this role, the IFAC has issued a number of additions and amendments to the ISA’s 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 today’s 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 areas:

Quality control

Auditor’s responsibility to consider fraud in an audit of financial statements

Audit risk

Assurance engagements (including framework)

Audit planning

Special consideration in the audit of small entities

The auditor report on a complete set of general purpose financial statements

Are Caribbean CFO’s 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 standards (IASs).

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 entity’s 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 entity’s operations include any of the following, the impact is likely to be greater:

Mergers and acquisitions;

Consolidated financial statements;

Share-based arrangements;

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 entity’s 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 entity’s 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 company’s assets and liabilities in a business combination)

4. The last step in the process is often the most challenging, ie, implementation.

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 entity’s internal auditors and audit committee should also be informed and kept appraised of the implementation process.

Finally, the entity’s external auditors should also be involved in the process, since they will likely possess an in-depth understanding of the entity’s 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 financial year.

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 entity’s financial statements.

Next Week: Peter Gittens, director of EYC’s Financial Reporting Group will address specific standards applicable to

Caribbean enterprises

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.

Summary of new and revised standards

Standard Ref # Standard Name Effective Date

Accounting periods beginning

on or after (except IFRS 3, 36 & 38)

New Standards

IFRS 2 Share-based Payment January 1, 2005

IFRS 3 Business Combinations Immediately if agreement date after March 31, 2004, with limited retrospective application if before

IFRS 4 Insurance Contracts January 1, 2005

IFRS 5 Non-current Assets Held for Sale January 1, 2005 and Discontinued Operations

Standards Revised as Part of the Business Combinations Phase I Project

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

Financial Statements

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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