With the deadline for the International Financial Reporting Standards (IFRS) drawing nearer, (January 1, 2012) many banks have awoken to the complex reality that the new standards pose: changes in financial reporting presentation, new valuation rules and additional disclosure requirements being the tip of the iceberg.
In an interview on the topic of IFRS, Manil Jayeinghe, Partner at Ernst and Young addresses some of the key concerns that local banks face and what they can (and should) do to ensure a successful implementation of IFRS.
Q: A concern that’s been raised by the Sri Lanka Banker Association is the ‘complexity’ behind IFRS. Could you give us an insight as to how complicated the new standard is?
A: Accounting standards are really not all that complicated; complications arise when applying principals to the substance of the standard. The business environment today is so much more complex. The way we interpret and analyze features of contracts will change and our attitude towards interpreting and analyzing those contracts will need to change.
In Sri Lanka we follow international accounting standards but up until five years ago we haven’t kept up to mark.
Q: And why was that?
A: one reason is that they felt they didn’t have the knowledge so we kept delaying and then the gap started to widen. IFRS is not a new standard, and there are many standards that we have yet to adapt to – some of them as old as 2004. Also, the war scenario didn’t help: we were not really focused on the economy, hence we lagged.
Q: Do you think that banks have sufficient time to implement IFRS?
A: The banks should have been working on it ages ago, and now they’re at a crunch. However, this can be sorted out with the right resources. There will be a cost involved: for example in bringing in consultants and experts, the changing of systems (IT) as well as changes to management and training but the bank’s success depends on how good or bad a bank’s current system is.
Q: What would the process involve?
A: There are currently 40 standards: depending on the nature of a bank’s business the relevant standards need to be applied. The standards are likely to bring in some volatility (when it comes to employee benefits, like share options, there will be an impact when fluctuations arise in the profits of an organization that have profit-based incentive schemes).
Q: What should banks be focusing on?
A: There are three areas; identifying the gap – the currents account versus what needs to get done, then fixing it by getting the right resources and lastly changing ones outlook on standards. An bank’s business process, organization and technology interlinks: the biggest mindset change people will have to grapple with, is that in the past they thought these standards were a technical thing, but now the standard had to be applied to the whole process.
Q: Would you say that international banks have got a head start?
A: Yes, they may have made some progress with the ground work done by global offices. For local banks, I believe a critical area that will affect them is that they will have to go back to historical data: do they have that historical data captured and granulated? (one cant go back and recreate data, especially data as comprehensive as credit card and customer-base details and not as a product/service as a whole).
Q: What are the risks faced by banks in IFRS implementation and how should they manage them?
A: There are so many risks for banks, this new application can change the way we are used to reporting and seeing standards. There are six to seven areas in which a bank can face impact (employees, share holders, taxation etc.) so basically they have to prepare to exercise a certain amount of judgment because none of the transactions have black and white answers.
Q: Would there be any fines imposed on banks should they not meet the 2012 deadline?
A: That depends on the regulators; there was a working group. If you ask me whether banks are 100% ready my answer would be a definite no, but we have to start somewhere. It’s like a moving goal post; there are already two more standards out and by the end of this year, there are more to come. It never ends, but it will be easier to catch up once bank’s get the right mindset into place. What’s important is that we need to stop looking at these standards as a chore, the end result we want is to make better reports so that the big economic decision makers out there, make better economic decisions.