IFRS2 tax

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The Chartered Institute of Taxation of Nigeria (CITN)

Seminar on IFRS Adoption in Nigeria

Topic: An overview o IFRS and Challen es osed to

Professionals

By Mr. Taiwo Oyedele, Partner PwC – FCTI, FCA, FCCA, CISA

April 2011

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Course Objectives

At the end of this course you will be able to:

• Understand IFRS and the conversion process

• Determine the specific issues and challenges posed to professionals

and how to address them

• Outline the steps required to minimise the impact and ensure asmooth local GAAP to IFRS transition

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Content

• Overview of IFRS

• IFRS conversion phases• The conversion roadmap• Applying IFRS for the first time

•

Key i erences• Potential challenges• Strategies for effectiveness• Conclusions• Case Study

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Overview

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Overview

• The business world is becoming more global hence the need for aglobal accounting language

• IFRSs have been developed primarily to meet the information needsof shareholders, lenders and other investors

• Nigerian companies have and will continue to raise capital from

omestic an glo al markets• Market expectations and competitive pressures call for more

transparency and better disclosures by Nigerian companies,especially banks

• Nigerian subsidiaries of multinationals already report under IFRS• Some Nigerian companies report in accordance with IFRS – GTB,

Oando etc

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Overview

• IFRS stands for International Financial Reporting Standards issued

by the International Accounting Standards Board (IASB).• Body was previously known as International Accounting Standards

Committee issuing International Accounting Standards (IAS).

,- International Accounting Standards (IASs);

- International Financial Reporting Standards (IFRSs);

- Interpretations of the International Financial Reporting

Interpretations Committee (IFRICs) formerly the StandingInterpretations Committee (SICs); and

- IASB Framework for the Preparation and Presentation of Financial Statements

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Overview

By comparison, Nigerian GAAP is made up of the following:

• The Companies and Allied Matters Act (CAMA) LFN 2004

• Accounting Standards Board (NASB)

• Other local legislation and industry specific Guidelines such asBOFIA, Prudential Guidelines, Insurance Act and SEC Rules

• International best practice (optional)

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Overview – IFRS is gaining ground

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Require or permit IFRS Converging/converting to adopt IFRS Pursing convergence but no plan to adopt yet

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Overview - IFRS in AfricaMorocco

Algeria

Libya

Tunisia

WesternSahara

Mauritania

Senegal

Gambia

Guinea-Bissau

Guinea

Mali

Burkina Faso

Niger

Chad

Sudan

Egypt

Eritria

Djibouti

Somalia

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Countries that require or permit IFRS

Countries seeking convergence with theIASB or pursuing adoption of IFRS

Countries with no current plans toconvert to IFRS

LeoneLiberia

D'Ivoire Ghana

TogoBenin

Nigeria

Cameroon

Eq Guinea

Gabon

Cent African

Rep

Congo,DR

Congo, Rep

Kenya

Uganda

RwandaBurundi

Tanzania

Mozambique

Malawi

Zambia

ZimbabweMadagascar

Angola

Namibia

Botswana

South Africa

Swaziland

Lesotho

Mauritius

Reunion

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Overview – key drivers of IFRS Increasing

demand for publicaccountability and

transparency by all stakeholders

Industry

erce tion of

Improved

transparency andcomparability for investors andrating agencies

More efficientaccess to capital

for globalcorporations

Need to attractinternational investors

and to enable easy monitoring of overseas

investments.

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The UniformGlobal

AccountingLanguage

Reduced cost of financial reporting

for globalcompanies

comparison

between publicentities (IPSAS)

More room formanagement’s

judgment and truerreflection of economicreality with principles-

based GAAP

market leadership

Ability to analyseimpact on

tax-related issues

Ability to understandinteraction with

strategic initiativesto generate value

from synergiesStreamlined M&A

activity

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Overview – key drivers of IFRS Pros and cons of adoption

Pros

• Cost/benefit – easier accountingrules, simplified format, low ongoing cost

• Harmonisation of rules with

Cons• Initial conversion cost• May in fact give more information

than private entities providecurrently under local GAAP (e.g.Comparatives)

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overseas entities applying IFRS(especially if foreign owned)

• Will enable investors, lenders to better compare financialperformance of private entities

• May better meet user’s needs

• “One-stop shop” of accountingrequirements which is only updated every 2 to 3 years

• Will it be accepted by users? (willthey – particularly local users –understand it?)

• Legal, tax and financialimplications of differences

• Will need training and/or technicalsupport on IFRS (especially in theshort-term)

• Simplification does not necessary mean better

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IFRS Conversion Phases

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IFRS Conversion Phases - GovernmentPhase I

Diagnostic

Tasks• Analyse differences betweencurrent SAS and IFRS by industry especially forregulated institutions

• Qualitative assessment of

Phase II

Regulatory framework

Tasks• Change relevant legislation• Change of chart of accounts and reporting

requirements• Adjust regulators manuals and analytic

models

Phase III

Post implementation

Tasks• Develop supervision missionunder IFRS environment

• Monitor changes in IFRS andmarket practice

• Ongoing training

Slide 13First Time Adoption of IFRS March 2011

differences on financialstatements and statutory benchmarks or minimumrequirements.

• Education, awareness andtraining

Objectives

• Understand impacts inaccounts and benchmarks

• Assess level of difficulty andcomplexity on theimplementation process

• Detail transition plan

• p n

• Realign tax and corporate laws with IFRSimplementation

• Realign stock exchange rules• Training and awarenessObjectives• Prepare all documentation for IFRS

implementation by industry • Minimise effects on corporate tax revenue• Minimise effects on reserves available for

distribution• Contribute to the improvement of

disclosure requirements and corporategovernance

Training and capacity building

Objectives• Sustain benefits from the

transition process• Enforce IFRS

implementation

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IFRS Conversion Phases - Organisations

Phase 1 - Preliminary study and

project set-up (assess impact anddetermine strategy)

Phase 2 - Detailed analysis and issue

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(established IFRS policies andprepare initial financial results)

Phase 3 – Post implementation,alignment of reporting operationalgaps (IFRS as the primary financiallanguage)

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IFRS Conversion Phases - Key considerations

PROCESS SYSTEMS PEOPLE

• Mana ement re ortin • Communication strategy •

IFRS

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• Budgeting process• Business decisions

• Accounting manuals, packs

• Chart of accounts

• Bases of valuations

• Training needs assessment

• Development &implementation of anextensive training plan

• Evaluation of training results• Project support• Launch and buy-in activities

• Resource / skills to managethe change

• Embedding knowledge – new policies and processes

• Performance support• Post implementation support

systems changes• New systems required – e.g. valuation

• Data gaps

• Extensible BusinessReporting Language - XBRL

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The Conversion Roadmap

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Conversion roadmap

Slide 17January 2011Tax Implications of IFRS Conversion

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Conversion roadmap

Listed & significant public entities (SPEs)

• Entities with listed securities (domestic and foreign stock exchanges)

• Government business entities e.g. NNPC

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• Unquoted entities required by law to file returns with regulatory authorities (excluding returns with CAC & tax authorities) e.g.private banks and insurance companies

Transition Date:2010

Reporting Date:2012

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Conversion roadmap

Other public interest entities (Other PIEs)• Unquoted or private entities which are of significant public interest

because of their nature of business, size, number of employees ortheir corporate status which require wide range of stakeholders.

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• Examples are large not for profit entities such as charities andpension funds and may include publicly owned entities and otherentities where there is a potentially significant effect on financialstability.


Reporting Date:2013

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Conversion roadmap

Small and Medium-size Enterprises (SMEs)

• Entities that have no public accountability whose debt or equity instruments are not listed; and

• Not in the rocess of issuin such instruments for tradin in a ublic

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market; and• Do not hold assets in a fiduciary capacity for a broad group of

outsiders; and• Annual turnover not more than N500 million or such amount as may

be fixed by the CAC; and• Total asset not more than N200 million or such amount as may be

fixed by the CAC; and

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Conversion roadmap

Small and Medium-size Enterprises (SMEs)

• No Board member is a foreigner; and

• No member is a government or a government corporation or agency

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or its nominee, and

• The directors among them hold not less than 51 percent of its equity share capital.


Reporting Date:2014

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Conversion roadmap

Transition date – To Dos

• Awareness

• Planning (people, systems &

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process

• Training

• Assessment & impact analysis

• Transition adjustments

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Conversion roadmap

Reporting date – To Dos

• Interim reporting based on IFRS (Listed entities and SPEs)

• Statutory audit

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• File IFRS returns (CAC, FIRS, SEC, CBN, NAICOM etc)

• Investors communication

• Compliance monitoring

• Training

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Conversion roadmap

Intervening period – To Dos

• Consultations and stakeholders engagement (NASB, FIRS, OtherRegulators, Investors etc)

• Accountin olicies manual review and chan es

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• Chart of accounts and mapping

• Prepare IFRS opening balance sheet (statement of financial position)

• Prepare comparative figures

• Conduct “Dry Runs”

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Conversion roadmap

Intervening period – To Dos

• Legislative changes

• Communicate transition to

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• Present a reconciliation of shareholders’ equity and net income between N-GAAP and IFRS

• Training

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Conversion roadmap

Post conversion – To Dos

• Monitor changes in IFRS and market practice

• Sustain benefits from the transition process

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• Supervision, monitoring and enforcement of IFRS implementation

• Capacity building and support – establish experts units at the NASB,CBN, NDIC and NAICOM to tackle new or revised standards

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Conversion roadmap

Example _ Timeline for SPEs with Dec 31 st Year End

• Transition adjustments 1 Jan 2011

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• Comparative figures

• First IFRS financial statements

• Published audited IFRS financials

31 Dec 2011

31 Dec 2012

30 June 2013

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IFRS adoption period Year ended31 December 2012

Use IFRS standardsin force at thereporting date

IFRS comparative period Year ended31 December 2011

Conversion roadmapSPEs’ IFRS opening balance – over 3 months ago

Today

2012

31 December 20121st IFRS

Annual report(+ comparatives)

= Reporting date

Opening IFRSBalance Sheet

(1 January 2011)= Transition Date

2013

31 Dec2011

2011

5 April2011

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Applying IFRS for the first time

PwC 29

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Applying IFRS for the first timeThe first set of IFRS financial statements

Key principle:

• Full retrospective application of all IFRS standards in effect as of the first IFRS reporting date.

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• xp c an unreserve s a emen o comp ance w ,compliance is either 100% or nothing else – there is no middleground.

• A company’s first set of IFRS financial statements should present its

financial position and performance as if the company had alwaysreported using IFRS .

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Applying IFRS for the first timeExceptions to full retrospective application

Five mandatory exceptions

• Estimates• Derecognition of financial

assets and financial

Voluntary exceptions relate to:• business combinations;• share-based payment transactions;• fair value or revaluation as deemed

cost for certain non-current assets;

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• Hedge accounting• Non-controlling interests

• Classification andmeasurement of financialassets

• separate financial statements;• compound financial instruments;• deferred income tax;• service concession arrangements;

• extractive activities;• lease arrangements;• decommissioning liabilities; and• derecognition of fin instruments

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Key Differences

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Key differencesTopic NG-GAAP IFRS

Financialstatementpresentation

• Income statement• Balance sheet• Cash flow statement• Value added statement• Accounting policies• Notes

• Statement of comprehensive income(including Income statement)

• Statement of financial position (balance sheet)• Statement of changes in equity • Statement of Cash flows• Accounting policies• Notes

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• Significant management estimates and judgments

Property Plant andEquipment

Measured using costmodel

Measured using cost model with detailedguidance regarding:• Componentisation• Useful lives• Residual values• Impairment calculations and identifying

CGUs

Related Parties Limited disclosure butexpected

Detailed guidance on identification of relatedparties and detailed disclosure of related partiesand transactions

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Segment reporting More on geography • Operating segments based on management’s view • Threshold for reportable segments is results or

assets of an individual segment should be 10% ormore of all segments.

• If the aggregate revenue of all reported segmentson this basis is <75% of total, then more segmentsrequired until 75% threshold is reached.

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IFRS 1 – First timeadoption of IFRS

Not applicable Provides guidance and requirements on thetransition to IFRS. Also provides relief for certainitems in the preparation of the opening balance sheet

Financialguarantees

Disclosed ascontingent liabilities

Requires financial guarantees to be recognised attheir fair value

Scope of consolidation

General principles Investments under control are consolidated. SPEs arepotentially also consolidated

Employee benefits General expense anddisclosures onpensions

• Complex criteria of accounting• Recognise the undiscounted amount of short-term

employee benefits

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Risk managementdisclosures

Limited disclosure of foreign exchange andcredit risk

Disclosures required for:• Credit risk and• Liquidity risk • Price risk • Capital risk management• Risk management

Leases Based on generaluidelines - O eratin

• Currently Similar but updates to IFRS e.g. IFRIC 4 will lead to onl Finance Leases hence more items

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and Finance leases

coming unto balance sheet

• Fair value and amortised costs used in valuations• Certain transactions / contracts containing hidden

leases which needed to be accounted for

Impairments No specific standard • Carry out impairment test based on trigger vent• IFRS 36 – Impairment on Non-financial assets• IAS 39 – Impairment on financial assets

Financial assetclassification and valuation

Classifications include:• Cost• Amortised cost

Classifications include:• Amortised cost• Fair valueThis is driven by the business model and nature of theinstrument.

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Key differences

• Companies may have to includequalitative impact analysis of IFRS implementation in their2010 financial statements

1.1.11 31.12.11

Shareholders’ equity inaccordance withNGAAP

Impairment of assets

Fair value ad ustments

Communicating the change

• Present in the 2011 accounts areconciliation between currentGAAP and IFRS:

◦ Shareholders’ equity as of

1.Jan.2011 and 31.Dec.2011◦ Net income as of

31.Dec.2011

Intangible assetsNon current assets

Revenue recognition

Consolidation

Deferred taxes

(...)

Shareholders’ equity inaccordance with IFRS

Impact of IFRS adoption

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Key differences

What do we have to do differently?

• Amend relevant reporting legislation, regulations and tax rules

• Keep separate tax books / maintain parallel books of accounts?

,

• Preparation and presentation of financial statements

• Measurement bases for assets and liabilities

• Revenue recognition

• Disclosure requirements, nomenclature and format

• Impact on audit of tax and tax compliance

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Potential Challenges

PwC 39

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Potential Challenges – summary of key impacts

p a c

t

H i g h

Taxes Leases PropertyPlant and

equipment

LiabilitiesVs Equity

Revenuerecognition

Consolidation/De-recognition/

Business

combination

InvestmentProperty

Segmentreporting

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Implementation Effort Required/Complexity

F i n a n c

i a l S t a t e m e n

t s I

Low High

L o w

RelatedPartiesRisk

Managementdisclosures

HedgeAccounting

Reporting&

Disclosure

Benefits

EmbeddedDerivatives

FinancialInstruments:Valuation &Recognition

Impairments

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Potential ChallengesPractical issues

• First time adoption (IFRS 1) challenges – certain minimumrequirements must be met

• Low level of awareness and limited availability of quality training

• Group entities (parent vs subsidiaries in different categories)

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• Changes in legislation required (CAMA, ISA, BOFIA, CITA etc)

• Transition guidelines including fiscal filters

• Knowledge gap (professionals, regulators & preparers)

• Early adoption issues

• Tight deadline and implications of non-compliance

• Capacity building before, during and post conversion

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Strategies for Effectiveness

PwC 42

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Strategies for effectiveness• Be proactive. Carry out a detailed plan, develop a budget, set KPIs and develop

a conversion strategy which should be agreed and properly documented

• Consider using a project team with a clear timetable of action points attachedto individuals with appropriate authority to ensure accountability

• Set clear milestones and request regular progress reports

• ppo n a sen or personne poss y e nance rec or o carry

out the oversight function and project monitoring• Involve external professionals to leverage best practice

• Consider exchange programme or secondment for key staff to countries whereIFRS is already in place

• Report regularly to stakeholders (board, shareholders, regulators etc)• Use the conversion opportunity to reassess accounting, tax and corporate

reporting processes and consider how to optimise value and other benefits

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Conclusion

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Conclusion

• IFRS is driving the revolutionary world of accounting with over 100 countrieseither requiring or permitting its use.

• There is no doubt that conversion to IFRS is a huge task and a big challenge.

• Its revolutionary impact requires a great deal of decisiveness and.

• It is a new world order in corporate reporting that will alter the financialreporting landscape and tax practice in Nigeria.

• Considering these factors, professionals must be prepared to learn, unlearnand relearn in order to minimise any negative impact while maximising the

benefits associated with IFRS adoption – short, medium and long term.

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“ In a time of drastic change it is the learners whoinherit the future. The learned usually find

themselves equipped to live in a world that nolonger exists.

Eric Hoffer, U.S. philosopher.

The views and opinions expressed in this presentation are those of the author and do not in any way represent the views of the author’s employer or theChartered Institute of Taxation of Nigeria. You should not act upon the information contained in this publication without obtaining specific professionaladvice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. Theauthor does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in relianceon the information contained in this publication or for any decision based on it.

Thank you

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Case Study

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Documents

IFRS2 tax