The Chartered Institute of Taxation of Nigeria (CITN) Seminar on IFRS Adoption in Nigeria Topic: An overview of IFRS and Challenges

posed to Professionals
By Mr. Taiwo Oyedele, Partner PwC FCTI, FCA, FCCA, CISA April 2011

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 a smooth 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 differences Potential challenges Strategies for effectiveness Conclusions Case Study

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Overview

Overview
The business world is becoming more global hence the need for a global accounting language IFRSs have been developed primarily to meet the information needs of shareholders, lenders and other investors Nigerian companies have and will continue to raise capital from domestic and global 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). Essentially, IFRS comprises of four types of documents: - International Accounting Standards (IASs); - International Financial Reporting Standards (IFRSs); - Interpretations of the International Financial Reporting Interpretations Committee (IFRICs) formerly the Standing Interpretations 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 Statements of Accounting Standards (SAS) issued by the Nigerian Accounting Standards Board (NASB) Other local legislation and industry specific Guidelines such as BOFIA, Prudential Guidelines, Insurance Act and SEC Rules International best practice (optional)

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Overview IFRS is gaining ground

Require or permit IFRS

Converging/converting to adopt IFRS

Pursing convergence but no plan to adopt yet

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Overview - IFRS in Africa

Tunisia Morocco Algeria

Western Sahara Libya Egypt

Mauritania Mali Niger Senegal Gambia GuineaBissau Guinea Sierra Leone Liberia Cte D'Ivoire Ghana Togo Benin Ethiopia Cent African Rep Cameroon Kenya Gabon Eq Guinea Congo, Rep Congo, DR Uganda Rwanda Burundi Burkina Faso Chad Sudan Djibouti Somalia Nigeria Eritria

Countries that require or permit IFRS Countries seeking convergence with the IASB or pursuing adoption of IFRS Countries with no current plans to convert to IFRS

Tanzania

Angola Malawi Zambia Madagascar Zimbabwe Namibia Botswana Mozambique Mauritius Reunion

Swaziland

Lesotho South Africa

Overview key drivers of IFRS

More efficient access to capital for global corporations Increasing demand for public accountability and transparency by all stakeholders

Improved transparency and comparability for investors and rating agencies Industry perception of market leadership

Need to attract international investors and to enable easy monitoring of overseas investments. Facilitate comparison between public entities (IPSAS)

IFRS:
The Uniform Global Accounting Language

More room for managements judgment and truer reflection of economic reality with principlesbased GAAP Reduced cost of financial reporting for global companies

Ability to analyse impact on tax-related issues Ability to understand interaction with strategic initiatives to generate value from synergies

Streamlined M&A activity

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Overview key drivers of IFRS Pros and cons of adoption

Pros Cost/benefit easier accounting rules, simplified format, low ongoing cost Harmonisation of rules with overseas entities applying IFRS (especially if foreign owned) Will enable investors, lenders to better compare financial performance of private entities May better meet users needs One-stop shop of accounting requirements which is only updated every 2 to 3 years Cons Initial conversion cost May in fact give more information than private entities provide currently under local GAAP (e.g. Comparatives) Will it be accepted by users? (will they particularly local users understand it?) Legal, tax and financial implications of differences Will need training and/or technical support on IFRS (especially in the short-term) Simplification does not necessary mean better
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IFRS Conversion Phases

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IFRS Conversion Phases - Government

Phase I Diagnostic
Tasks Analyse differences between current SAS and IFRS by industry especially for regulated institutions Qualitative assessment of differences on financial statements and statutory benchmarks or minimum requirements. Education, awareness and training Objectives Understand impacts in accounts and benchmarks Assess level of difficulty and complexity on the implementation process Detail transition plan
First Time Adoption of IFRS

Phase II Regulatory framework

Tasks
Change relevant legislation Change of chart of accounts and reporting

Phase III Post implementation

Tasks Develop supervision mission under IFRS environment Monitor changes in IFRS and market practice Ongoing training Objectives Sustain benefits from the transition process Enforce IFRS implementation

requirements Adjust regulators manuals and analytic models Establish IFRS experts units Realign tax and corporate laws with IFRS implementation Realign stock exchange rules Training and awareness Objectives 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 corporate governance

Training and capacity building

March 2011 Slide 13

IFRS Conversion Phases - Organisations

Phase 1 - Preliminary study and project set-up (assess impact and determine strategy) Phase 2 - Detailed analysis and issue resolution / Initial conversion (established IFRS policies and prepare initial financial results) Phase 3 Post implementation, alignment of reporting operational gaps (IFRS as the primary financial language)

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IFRS Conversion Phases - Key considerations

IFRS
PROCESS SYSTEMS PEOPLE

Management reporting Budgeting process Business decisions Accounting manuals, packs Chart of accounts Bases of valuations

strategy Accounting and consolidation Communicationassessment Training needs systems changes New systems required e.g. Development & valuation

Data gaps Extensible Business

Reporting Language - XBRL

implementation of an extensive training plan Evaluation of training results Project support Launch and buy-in activities Resource / skills to manage the change Embedding knowledge new policies and processes Performance support Post implementation support
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The Conversion Roadmap

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Conversion roadmap

Tax Implications of IFRS Conversion

January 2011 Slide 17

Conversion roadmap Listed & significant public entities (SPEs)

Entities with listed securities (domestic and foreign stock exchanges) Government business entities e.g. NNPC 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 or their corporate status which require wide range of stakeholders. Examples are large not for profit entities such as charities and pension funds and may include publicly owned entities and other entities where there is a potentially significant effect on financial stability.

Transition Date: 2011

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 process of issuing such instruments for trading in a public 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 or its nominee, and The directors among them hold not less than 51 percent of its equity share capital.

Transition Date: 2012

Reporting Date: 2014

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Conversion roadmap Transition date To Dos

Awareness Planning (people, systems & 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 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, Other Regulators, Investors etc) Accounting policies / manual review and changes 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 stakeholders 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 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 31st Year End
Transition adjustments Opening balance sheet Comparative figures First IFRS financial statements Published audited IFRS financials 1 Jan 2011 1 Jan 2011 31 Dec 2011 31 Dec 2012 30 June 2013

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Conversion roadmap
SPEs IFRS opening balance over 3 months ago
IFRS comparative period Year ended 31 December 2011

IFRS adoption period Year ended 31 December 2012

Today
2011 2012

Use IFRS standards in force at the reporting date

2013

5 April 2011

31 Dec 2011

Opening IFRS Balance Sheet (1 January 2011) = Transition Date

31 December 2012 1st IFRS Annual report (+ comparatives) = Reporting date

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Applying IFRS for the first time

PwC

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Applying IFRS for the first time The first set of IFRS financial statements
Primary statements: Three Statements of financial position (Balance sheets) Two Statements of comprehensive income (Income statement) Two Statements of changes in equity Two Statements of cash flows Three periods presented for the balance sheet notes which are impacted at opening balance sheet date. Reconciliation: Equity from NGAAP to IFRS at Opening balance sheet and comparative period Reconciliation: Total comprehensive income from NGAAP to IFRS for comparative period
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Notes:

Applying IFRS for the first time The first set of IFRS financial statements
Key principle: Full retrospective application of all IFRS standards in effect as of the first IFRS reporting date. Explicit and unreserved statement of compliance with IFRS, compliance is either 100% or nothing else there is no middle ground. A companys first set of IFRS financial statements should present its financial position and performance as if the company had always reported using IFRS.

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Applying IFRS for the first time Exceptions to full retrospective application
Five mandatory exceptions Estimates Derecognition of financial assets and financial liabilities Hedge accounting Non-controlling interests Classification and measurement of financial assets Voluntary exceptions relate to: business combinations; share-based payment transactions; fair value or revaluation as deemed cost for certain non-current assets; cumulative translation differences; 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 differences
Topic
Financial statement presentation

NG-GAAP
Income statement Balance sheet Cash flow statement Value added statement Accounting policies Notes

IFRS
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 Significant management estimates and judgments Measured using cost model with detailed guidance regarding: Componentisation Useful lives Residual values Impairment calculations and identifying CGUs Detailed guidance on identification of related parties and detailed disclosure of related parties and transactions
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Property Plant and Equipment

Measured using cost model

Related Parties

Limited disclosure but expected

Key differences
Topic
Segment reporting

NG-GAAP
More on geography

IFRS
Operating segments based on managements view Threshold for reportable segments is results or assets of an individual segment should be 10% or more of all segments. If the aggregate revenue of all reported segments on this basis is <75% of total, then more segments required until 75% threshold is reached. Provides guidance and requirements on the transition to IFRS. Also provides relief for certain items in the preparation of the opening balance sheet Requires financial guarantees to be recognised at their fair value Investments under control are consolidated. SPEs are potentially also consolidated Complex criteria of accounting Recognise the undiscounted amount of short-term employee benefits
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IFRS 1 First time adoption of IFRS Financial guarantees Scope of consolidation Employee benefits

Not applicable

Disclosed as contingent liabilities General principles

General expense and disclosures on pensions

Key differences
Topic
Risk management disclosures

NG-GAAP
Limited disclosure of foreign exchange and credit risk

IFRS
Disclosures required for: Credit risk and Liquidity risk Price risk Capital risk management Risk management
Currently Similar but updates to IFRS e.g. IFRIC 4 will lead to only Finance Leases hence more items coming unto balance sheet Fair value and amortised costs used in valuations Certain transactions / contracts containing hidden leases which needed to be accounted for Carry out impairment test based on trigger vent IFRS 36 Impairment on Non-financial assets IAS 39 Impairment on financial assets Classifications include: Amortised cost Fair value This is driven by the business model and nature of the instrument.
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Leases

Based on general guidelines - Operating and Finance leases

Impairments

No specific standard

Financial asset classification and valuation

Classifications include: Cost Amortised cost

Key differences Communicating the change

1.1.11 31.12.11

Companies may have to include qualitative impact analysis of IFRS implementation in their 2010 financial statements Present in the 2011 accounts a reconciliation between current GAAP and IFRS: Shareholders equity as of 1.Jan.2011 and 31.Dec.2011 Net income as of 31.Dec.2011

Shareholders equity in accordance with NGAAP Impairment of assets Fair value adjustments Intangible assets Non current assets Revenue recognition Consolidation Deferred taxes (...) Shareholders equity in accordance 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? Record keeping, chart of accounts and mapping 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

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Potential Challenges summary of key impacts

High

Investment Property

Taxes

Leases

Consolidation/ De-recognition/ Business combination

Property Plant and equipment

Financial Statements Impact

Employee Benefits

Revenue recognition

Liabilities Vs Equity

Segment reporting

Impairments Embedded Derivatives Financial Instruments: Valuation & Recognition

Risk Management disclosures

Related Parties

Low

Hedge Accounting

Reporting & Disclosure

Low

Implementation Effort Required/Complexity

High

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Potential Challenges Practical issues

First time adoption (IFRS 1) challenges certain minimum requirements must be met Low level of awareness and limited availability of quality training Group entities (parent vs subsidiaries in different categories) 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

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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 attached to individuals with appropriate authority to ensure accountability Set clear milestones and request regular progress reports Appoint a senior personnel (possibly the FC / CFO / Finance Director) to 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 where IFRS 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 countries either 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 commitment. It is a new world order in corporate reporting that will alter the financial reporting landscape and tax practice in Nigeria. Considering these factors, professionals must be prepared to learn, unlearn and 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 who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.
Eric Hoffer, U.S. philosopher.

Thank you
The views and opinions expressed in this presentation are those of the author and do not in any way represent the views of the authors employer or the Chartered Institute of Taxation of Nigeria. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The author 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 reliance on the information contained in this publication or for any decision based on it.

Case Study

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Case study
TECO Limited is a trading company which has been operating in Nigeria for many years. As a company incorporated in Nigeria, TECO prepares its accounts annually to 31st December under Nigerian GAAP, essentially based on Statements of Accounting Standards issued by the Nigerian Accounting Standards Board, for statutory reporting purposes including filing of returns with the Federal Inland Revenue Service. In January 2011, TECO was acquired by DIVA Corporation Plc, a company incorporated and tax resident in France. The Consolidated Financial Statements of DIVA Plc and its subsidiaries are prepared annually to 30th June in accordance with International Financial Reporting Standards (IFRS). The Federal Government of Nigeria, in a bid to improve transparency of financial reporting and attract foreign investments among other benefits, has announced a mandatory conversion to IFRS with different conversion dates for different categories of entities between 2012 and 2014. Questions 1. Discuss the categories of reporting entities for conversion purposes as contained in the IFRS conversion roadmap issued by the Federal Government of Nigeria. 2. In your opinion, which category does TECO fall into and why? 3. Based on your response to (2) above, state the mandatory transition and reporting dates for TECO and two activities each to be performed under each of the dates identified. 4. In your opinion, is there a need for TECO to early-adopt IFRS? Why or why not? 5. What are the challenges TECO is likely to face in the IFRS transition process and what are your recommendations to minimise the impact?
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