The Institute of Chartered Accountants of Sri LankaNational Conference 2011

October 2011

Quest for BalanceIFRS – Theory, Practice and Transition

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Quest for Balance

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© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Objective

• One global set of standards for high-quality financial reporting

• Why?• Common language• More understandable• Better comparability• Greater access to global capital• Greater trust in financial information• Lower cost of capital

• However – must balance competing demands and address challenges

Update on Global IFRS4

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Key features

• Accounting for the substance of transactions• Multiple element arrangements• Embedded features - leases/derivatives• Contractual rights and obligations

• Heavy use of current values• Fair values – financial instruments, biological assets,

business combinations, • Current estimates – actuarial assumptions in pensions

& insurance; cash flows in impairment testing• Comprehensive disclosures

• Financial risks; Operating segment information; Related party transactions

Update on Global IFRS 5

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Challenges

• Breadth of business impacts

• Application of “global” standards in “local” environments

• Alignment of regulatory impacts• Global interpretation/local enforcement► Loss of sovereignty and influence(?) over financial

reporting► Local pressures

• Conflicting objectives

Update on Global IFRS6

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

IFRS – a ‘business’ issue

• IFRS is not just an “accounting” issue – it is a major “business” issue

• Implications for functions, stakeholders, contractual arrangements, processes & systems etc.

• Requires engagement across the business• Treasury; Human Resources; Investor Relations; IT;

Internal Audit; Finance; Boards and Audit Committee

Update on Global IFRS7

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Business impacts

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Therefore.......

• Transition is a strategic issue – Board, Audit Committee and Executive involvement needed

• Pervasive effect across the organisation

• Change management processes required• Project management/work streams• Stakeholder engagement• Training & implementation

• Opportunity to enhance existing processes/systems

Update on Global IFRS9

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Application of Global Standards Global Local

• Application

• Regulation & enforcement

• Interpretation?

• Adaptability

• Standards

• Standard-setting & due process

• Interpretation

• Consistency

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© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Balancing conflicting objectives

• Principles• Reporting for capital

markets• Transparency• Acceptable diversity

• Global consistency

• Rules• Use of reports for

regulatory/tax purposes • Confidentiality• In-country comparability

• Local practices

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© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Theory - “in” practice

• Revenue recognition in multiple element arrangements

• Leases embedded in supply/service contracts• Equity reclassified as debt and vice versa• Fair value of biological assets, investment property,

financial instruments,• Determining fair value in emerging markets• Loan loss provisioning• Depreciation and component accounting of property,

plant & equipment• Disclosures

Update on Global IFRS12

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Strive for balance

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Thank you